Review: Money Girl’s Smart Moves to Deal with Your Debt

Every Sunday, The Simple Dollar reviews a personal finance or other book of interest. Also available is a complete list of the hundreds of book reviews that have appeared on The Simple Dollar over the years.

Whenever I stumble across a free opportunity to download a good electronic book, I usually do so. I archive it with the intent of looking at it at a later date, and sometimes I do just that, digging through that folder to see if there’s anything good in there.

As I mentioned earlier this week, my wife, Sarah, gave me a Kindle (an electronic book reader) as a Valentine’s Day gift, so this gave me the opportunity to dig back through my folder of archived free books. I loaded an awful lot of them onto my Kindle, and Money Girl’s Smart Moves to Deal with Your Debt by Laura D. Adams happened to be one of them.

This book isn’t still free – it’s now $1.99 on the Kindle store – but it’s got enough worthwhile information on it that I still consider it a spectacular bargain for many people. Who, exactly? Let’s dig through what’s in the book.

STEP 1: Assess Your Finances
The first step towards getting your debt situation under control, in Adams’ eyes, is to create wha che calls a “Personal Financial Statement” (PFS). A PFS is basically a balance sheet, where you list all of the significant assets you hold, as well as all of your debts. When you add up all of your debts and subtract all of your assets, you should wind up with a number which represents your net worth. Good financial choices, in general, improve your net worth, and poor ones decrease your net worth. You can thus use this PFS as a way to judge the life moves you’re making. Adams also gives advice on valuing all of your assets, such as using a blue book value for your car, and the need for updating this PFS very regularly (and comparing it to past balances).

STEP 2: Make a Debt Reduction Plan
Once you have that, the next step is to develop a debt reduction plan. In other words, take that list of debts from your PFS and determine how exactly you’re going to eliminate them. Adams distinguishes between good and bad debts (using the term “dangerous” to distinguish the bad ones) and lumps credit cards and all short-term debts into the bad portion, encouraging people to pay those off first, and leaving others (like mortgages and student loans) in a second pile to be dealt with once the first ones are gone. Within each pile, prioritize: Adams suggests primarily organizing by urgency (are there any that are late?) and then by interest rate, with the highest rate getting paid off first.

STEP 3: Reduce Your Short-Term Debt
The first step to take here is to look for assets (on the top part of your PFS, from step one) that you can sell or eliminate in order to wipe out the worst short-term debts, giving you some breathing room. Downgrade your car, for example, and use the proceeds to eliminate some very nasty debts. Once you’ve figured out what you can sell to help with the debts, focus on negotiating your way out of debts. Try to get your rates reduced by calling the credit card companies. If you have debts in default, call them up and offer to settle for less than what you owe. You can also try juggling rates by using balance transfer offers, which will almost always result in some significant rate reduction on your high-interest debts.

STEP 4: Reduce Your Long-Term Debt
The big step here is to refinance your home mortgage if you’ve not done so. If you have a fixed rate mortgage over 5%, you should strongly consider a refinancing. The first step in this process should be to ask your lender for a loan modification, however, as banks are often quite interested in doing so at this point. You might also want to switch to bi-weekly payments for your loans, paying half of your monthly payment every two weeks. This simple step can have a huge impact in reducing your overall debt. A final suggestion is to consolidate your student loans, ideally to a fixed rate loan (because they’re so low right now).

STEP 5: Create a Spending Strategy
From there, turn your attention to how you spend money. Keep an ongoing list of where every dime you spend goes, and try to categorize them into sensible categories. Then, look at the categories that are non-essential and try to put a reasonable cap on them that pushes you to save a little without drowning the life you enjoy living. There’s a balance to be achieved here.

STEP 6: Eliminate Expenses and Save More Money
From there, strive to cut any expenses that you can. Look at all of your regular bills and ask yourself if there are any that can be eliminated or significantly trimmed, such as a satellite bill or a cell phone bill. Ask yourself if there are one-time things you can do to reduce other bills, like installing a programmable thermostat or putting in some energy efficient light bulbs. The more you can eliminate or reduce your expenses, the more money you’ll have to eliminate short term (and, hopefully, long term) debts.

STEP 7: Reduce Your Taxes
The biggest tip is to be aware of any and all credits and deductions available to you. I find that the easiest way to do this is to use a computer program like TurboTax when doing your taxes, which identifies credits and deductions that are available for your situation. Another great tactic is to start doing some tax-deferred retirement savings. If you open up a 401(k), you’ll be putting in pre-tax money, which means that the total amount of income you have that can be taxed will be lowered, lowering your federal, state, and local taxes.

STEP 8: Manage Your Credit Score
The first step is to check out your credit report using the free tools given to us by the federal government. Make sure you know and understand everything on that report, and if you don’t, make the effort to figure the unknown items out. Such a report can clue you in to any identity theft that may be happening, as well as give you a good indication of what your credit score will look like (few bad things means a good credit score). The better your credit score, the better your insurance rates are and the easier it’ll be to get good rates on consolidation loans and the like.

STEP 9: Protect Yourself
You should always be on the defensive about identity theft. Be very careful before sharing any of your identity with others, particularly companies that aren’t well established. Another thing to consider is bankruptcy if you’ve tried the above tactics and still can’t get your head above water. Bankruptcy sounds devastating, but it at least gives you a chance of escaping from your mistakes over the course of several years rather than continuing to drown.

STEP 10: Stay Out of Debt Forever
The book offers a short coda here encouraging people to stay on this new path even when their debt goes away, channeling their money instead into building streams of revenue that will eventually lead them from having to work and giving their life a great degree of freedom.

Is Money Girl’s Smart Moves to Deal with Your Debt Worth Reading?
This book is heavily tied into the Money Girl podcast, one of many podcasts under the Quick and Dirty Tips podcast collective. Each of these podcasts is just a short burst of advice and information on a specific topic. They usually last just a few minutes, focus on a very specific topic in a friendly and entertaining but non-personal manner, and are released very regularly – much like an audio form of many blogs out there.

As you’d might expect, Money Girl’s Smart Moves to Deal with Your Debt basically uses this exact same philosophy in book form. It’s short. It focuses on a handful of specific points in fairly brief chapters, using a friendly and entertaining but non-personal approach. It gets the point across for someone who is in a hurry and might be reading such things on the subway on their way to work, for example.

If you’ve ever wanted to drop some personal finance sense on a young professional who is the type who has their hours overstuffed and finds that the only time they have to read is using their Kindle or other reading device on the subway on the way to work, this is going to be absolutely perfect for them. In fact, I would probably just go ahead and gift this book to them right now on their Kindle, so it’ll pop up for something for them to read. (You can, of course, read it on PCs and tons of different mobile devices).

It is just what you’d expect it to be. It’s not deep and meaningful, like Your Money or Your Life. It’s not deeply personal, either, like my own recent book. It’s just the facts, short and friendly, and for many people, that’s just what they need.

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