Drowning In Debt?

In 1757, Ben Franklin wrote, “Better to go to bed supperless then wake up in debt.”

That sage advice from the renowned philosopher, inventor, statesman, and millionaire still rings true today in a nation that’s both generally overweight and deeply in debt as it charges into the thick of the busiest shopping season of the year.

Credit cards continue to fund a major portion of most shopping trips, according to the Commerce Department, with spending growing faster than income for more than three years.

Deeper in debt
More and more Americans are turning to debt to pay for lifestyles their current income can’t support. Bombarded with advertisements for expensive automobiles and big-screen TVs, more than 1.5 million Americans filed for bankruptcy each of the past two years. For Americans who aren’t getting a big boost from workplace raises, easy credit offers a way to get ahead, at least for the moment.

Credit card debt now averages $8,000 per household, and that number includes households with no credit card debt at all. Households that do have credit card debt carry closer to $12,000, according to University of Rochester professor Robert Manning, author of Credit Card Nation.

There are other clouds on the horizon. As a result of a decade-long refinancing boom coupled with looser down-payment requirements, we hold less equity in our houses than at any time in history–just 56 percent on average. All this has happened as our average savings rate has slowed to 1 percent from 11 percent over just a generation, says Harvard University professor Elizabeth Warren, co-author of The Two-Income Trap.

Ways to cut expenses
But there are ways to take control of spending and reduce your debt. You may have to give up some conveniences, but you can make progress.

Start out by making a budget and sticking to it. You can quickly reduce costs by $50 to $300 a month.

How? Brown-bagging your lunch at work at a cost of $1 rather than eating out at $8 can save you $35 a week or about $150 a month. Invested with a 7 percent return, the savings would grow to more than $70,000 in 20 years.

Stop spending money on high-cost, low-priority items, such as eating out or picking up take-out. Put your health club membership on hold and take brisk walks, or borrow workout DVDs from the library and exercise at home with a friend.

Pay down your mortgage by making one payment every two weeks rather than once a month. You could pay off a 30-year mortgage in about 23 years.

Ask your credit card company to reduce your interest rate. This works half the time. Ditto for the car, although you probably won’t be able to if you owe more than your car’s resale value, which you can get from Kelley Blue Book, available at most libraries or online at www.kbb.com.

Consider getting rid of the second car, which will save on insurance, maintenance, and gas, for up to $100 a month.

Start saving now
Once you’ve found the “extra” money, arrange with your bank to tuck away a certain percentage of each paycheck. This takes little discipline or effort and overrides human nature to spend.

Without some type of spending plan, you are more likely to let others decide for you what you buy. Come up with short- and long-term financial goals, then incorporate them into a simple spending plan.

A spending plan is not a recipe for a happy marriage or partnership, but it certainly gives you one less thing to argue about. Take a walk down to the local family court and you will see what can happen to otherwise happy couples when spending is out of control.

Begin saving for retirement now. You will be old before you know it and may wish to retire to a lifestyle of your choosing, rather than the only one you can afford.

You don’t know if you’ll have a job tomorrow. Gaps in employment are virtually assured. Gaps in bills to pay are not.

You can take control of your money. Start with a spending plan and get expenses in line with income.

Debt counselor
If you lack the discipline to stick to a plan, consider a consumer credit counselor or a debt settlement counselor.

A consumer credit counselor acts as an intermediary between you and your unsecured creditors to arrange a debt-management plan. The plan can include a freeze on finance charges, negotiated lower interest rates, and an end to calls and letters from bill collectors. You must pay all the debts and the agreed-upon interest over one to five years. Consider the National Foundation for Credit Counseling at (800) 388-2227 or online at www.nfcc.org.

A debt settlement counselor negotiates with creditors to reduce your interest payments to zero and settle your debt for 30 to 60 cents on the dollar. The term “paid at a discount” will be on your credit record for seven years, and it will be two to four years before you can get a new credit card, a mortgage, or a business loan.

ORDER A FREE CREDIT REPORT

Many Kentuckians for the first time can get free copies of their credit reports.

Credit reports contain payment histories, loan balances, and other personal and financial information used by lenders, insurers, employers, and landlords.

To get your free report, go online to www.annualcreditreport.com, call toll-free (877) 322-8228, or write Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281.