Reducing a debt load has never been easy in trying economic times. Just ask the world's leaders and central bankers. Even playwrights have had something to say about it.

"Neither a borrower nor a lender be," was the sage advice of Lord Polonius in William Shakespeare's "Hamlet."

The concept of paying off debt is basic enough for any of us to understand, but we generally must use some child psychology on ourselves to turn it into practice.

If personal debt is taking a serious toll on you and your family, analyze your predicament carefully and choose one of two proven solutions:

-- Identify your debt that requires the highest interest rate, and pay it down first because it makes obvious financial sense in the long run. Paying far too much high interest in the current weak economy is irrational.

-- Instead, decide to pay off whatever debt has the smallest balance so that you will be motivated by seeing some quick progress. Then proceed to knock off one loan after another. Small, gradual victories that let you pat yourself on the back are better than no victories at all.

"When you pay off a card, give yourself a very small celebration, such as going out to dinner to acknowledge what you've accomplished," suggested Ray Ferrara, president and CEO of ProVise Management Group LLC in Clearwater, Fla. "I tell clients that I can't guarantee them an investment return, but I can guarantee that when they pay off a credit card they save the 16 or 17 percent in interest."

View personal debt as something to actively work on rather than just a casual budget item.

"People must stop viewing the regular paying of interest as an acceptable part of their budget," said Kim McGrigg, manager of community relations for Money Management International in Denver. "They should instead consider it money that is taking away their ability to invest and grow their wealth."

Debt has become ingrained in our society.

The total debt of U.S. consumers is $2.43 trillion, and U.S. revolving debt (primarily credit cards) is $793 billion, according to a July report by the Federal Reserve. Meanwhile, the default rate on consumer credit cards was 5.64 percent in July, according to Standard & Poor's/Experian.

"The big mistake many people make is that they don't match their assets to their liabilities," explained Ferrara, who advocates a regular program of automatically dedicating money toward paying down debt to make it more manageable.

For example, there's nothing wrong with buying a car using home equity money versus a higher-interest car loan, Ferrara said. However, you also must have the discipline to actually pay off that home equity loan in a systematic fashion rather than let it go on for years or even decades. It makes no sense to use long-term money to pay for a depreciating asset, and your payments on a car should never extend beyond four or five years, he said.

"People must focus on their cash flow and their ability to create working assets over their lifetime," advised Marilyn Capelli Dimitroff, president of Capelli Financial Services Inc., Bloomfield Hills, Mich. "Debt is one area over which we do have some control because we can control how much we spend."

Capelli Dimitroff considers credit cards the "silliest" debt of all in today's economy. With savings accounts paying so little and rates on credit cards sometimes as high as 19 percent, it is clear that you must do everything you can to pay off high-interest debt, she said. Furthermore, you get no tax break on credit card debt as you do for the interest expense for a mortgage or a home equity loan.

"Do not charge on credit cards at the same time you're trying to pay them off," she said firmly.

If you can find a credit card with a lower rate, that's fine, she added, but look at more than simply the rate because annual fees are also important. Since every time you apply for credit it can negatively affect your credit score, you shouldn't just keep opening and closing accounts in order to chase rates, she said.

If you have a good credit record with your card issuer, try asking it to reduce your card's interest rate charge because it may do so in order to keep a valued customer. Call and ask to speak to someone with such authority. Meanwhile, a good way to rein yourself in is to only carry one credit card with you at any time.

Total up your entire debt load.

Long-term debt, such as a mortgage, ideally should be no more than 35 percent of gross income. If short-term debt totals more than 20 percent of your gross income, you have a significant problem and should immediately begin to whittle it down. Go over your receipts and statements carefully to determine exactly what you are charging up. Sometimes you may barely realize where all the money went because you spent it so quickly and effortlessly.

High unemployment has given everyone the jitters lately, but carrying a heavy debt load can turn those jitters into depression. You must employ some child psychology on yourself.

 

 

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Personal Finance - Reducing Debt Load Key to Financial Health

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