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Dear Liz:

I feel like, financially, my life is a complete mess. Through bad decisions and bad circumstances I have horrible credit and no savings. I can't get a bank account and feel like my future is completely hopeless.

I'm 27 and hoping to one day get married, have a family, blah blah blah, but don't see that as a viable option. I've long given up the idea that magic will come along and fix my situation and I know what I have to do is save money, but I'm kind of at a loss as to how to get started. What do you do when you've messed up everything so badly?

I have a steady job with a decent income ($34,000 a year in Tennessee) and pay $300 in rent, $360 per month for my car (why, hello, bad credit), $200 for car insurance, $250 for student loans, $50 utilities and whatever I can manage toward my past credit card debts.

What would you recommend my next step be? I'm working to clean up my ChexSystems report (some bad info there) so I can at least get a savings account.

-- Susan

Dear Susan:

You're a little young to be throwing in the towel on your future happiness. Heaven knows other people don't let crappy finances get in the way of marrying and having kids.

But you're smart to want to take control and clean things up now. You won't be able to fix your money problems overnight, but you should be able to improve your situation dramatically within just a few years.

Let's start where most money problems begin: your spending. I'm guessing your after-tax income -- your gross pay minus income and payroll taxes -- is somewhere around $2,400 a month.

If that's the case, the most you should be spending on "must-haves" such as rent, utilities, transportation, groceries, insurance and minimum loan payments is about $1,200, of 50% of your after-tax income. The expenses you've just reported add up to $1,160, and that doesn't include food, phone service or health insurance.

Image: Liz Weston

Liz Weston

(A "must have" is any expense you can't easily put off without consequences. For more, read "The 50/30/20 budget fix.")

One of the easiest ways to correct a budget imbalance is to make more money -- something that will come in handy when you're trying to deal with old debts, as well. If overtime is a possibility, you can volunteer for more hours or look for a side gig that can bring in some extra cash.

You also should take a look at your expenses. What you pay for rent and utilities is enviably low, so let's look at some other possibilities.

Your car. Bad credit not only makes your car loan expensive, but you also may be paying more in insurance, since insurers in most states base your premiums in part on your credit. If you have any equity in your car, you might consider selling it and buying something cheaper. If you owe more than the car is worth, your best solution is probably to keep making payments until you have some equity. Then you can either refinance (assuming your credit is better by then) or sell. Also, review your insurance to make sure you're getting every discount to which you're entitled.

Your student loans. The good news is that federal student loan debt is quite flexible. If you're unemployed or having a tough time financially, you can get deferrals or a forbearance to give you a break from making payments (although interest still accrues on your debt).

Another option, which may make more sense in your case, is to consolidate your federal student loans into one loan with a longer payback period. Opting for a 20-year payback period instead of a 10-year can significantly reduce your monthly payment. If you owe $25,000 and are paying it back on a standard 10-year plan, for example, your payment would be about $287. Consolidating to a 20-year plan would drop that payment to $191. The drawback is that if you take the full 20 years to pay off this debt, you'll pay a lot more in interest overall. If you have other, higher-rate debt, however, it can make sense to pay the minimums on your federal student loans for a while so you can throw more money at the more troublesome debts.

Your credit card debt. You didn't mention how much debt you have, or how close you are to paying it off. Here's a general rule of thumb: If your credit card and medical bills total half or more of your income, or it would take you more than five years to pay off these debts, it's time to talk to a bankruptcy attorney. Too many people struggle too long with unpayable debts, and it doesn't make much sense to continue throwing money at these bills if you're going to wind up in bankruptcy court anyway.

If your situation is less dire, you should consider settling these debts so you (and your creditors) can move on. Any credit card debt that's been turned over to a collection agency is usually a good candidate for settlement. The bad debt has already done its damage to your credit scores, and settling it won't inflict more pain. The collector typically paid pennies on the dollar to buy the debt, so you can start by making a lump-sum offer of 30% and negotiate from there.

Before you pay anything, you should get the collector's assurance, in writing, that any unpaid portion of the settled debt won't be sold to another collector and that the collection agency will delete the collection account from your credit reports. You still may face a tax bill on the "forgiven" portion of the debt, so make sure to set aside some cash to cover that. You can learn more about settling debt from Debt Collection Answers and the Get Out of Debt Guy.

If the debt is still in the hands of the original creditor, settling it for less than you owe likely would cause more damage to your battered credit scores. At the very least, you should ask the creditors about setting up a debt-repayment plan at the lowest possible interest rate. Another option is to sign up with a legitimate credit counselor's debt management plan. (You can get referrals at the National Foundation for Credit Counseling.)

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Once you have a handle on your debt, you can move forward in rehabilitating your finances. Some steps to take:

Look for a "second chance" bank account. People who have mishandled their checking accounts typically wind up on the ChexSystems blacklist for five years, which makes getting a regular bank account tough. But some credit unions and banks offer "second chance" accounts that may have withdrawal limits or higher monthly fees. Chase, Wells Fargo and PNC Bank are among the bigger banks that offer this option. Don't sign up for overdraft protection, and make sure to save a chunk of each paycheck.

Get a secured credit card. Secured cards give you a credit line based on a deposit you make at the issuing bank. A secured card that reports to all three credit bureaus can help you rehabilitate your credit.

Start saving for retirement. Don't be so eager to pay off your past that you forget about your future. If your job has a 401k or 403b plan, you should be contributing to it -- ideally enough to get the full company match, if any. If not, you should be contributing to an individual retirement account -- traditional or Roth. Don't delay this important step thinking you'll make up for lost time "later." Your expenses are unlikely to go anywhere but up as you get older, especially if you have kids, so make saving a habit now.

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