Drowning in debt; what about retirement?

NEW YORK (Money) -- Question: My wife and I are self-employed. In addition to a mortgage of just under $400,000, we have a home equity line of credit on which we've borrowed $41,000, credit-card debt of $25,000, plus two car loans.

Servicing all this debt is preventing us from saving enough for retirement. We're thinking of refinancing our mortgage so we can pay off the other debt, but I'm wondering whether this is just robbing Peter to pay Paul. What should I do here? - Peter L., Portland, Oregon

Answer: First of all, while paying for all that debt is certainly preventing you from saving enough for retirement, it's not your real problem. Your underlying problem is that you're spending too much money. The fact that you owe so much shows that you're living a lifestyle beyond what you can actually afford on your income.

So before you do anything, I think you and your wife have got to take a step back and re-assess your overall financial situation. You can start by seriously addressing this question: How did you get in this mess?

Do you give in too easily to big splurges like lavish vacations or are you too eager to spring for all the latest electronic gadgets and gizmos? Do you spend more time in glitzy restaurants than your kitchen? Or maybe it's just the accumulation of a bunch of decisions that add up to living beyond your means.

Whatever the case, it seems to me the first thing you've got to do is resolve to change the way you live - that is, spend less than you make, not more. Unless you do that, this refinancing maneuver will be little more than a short-term fix.

If you continue to spend more than comes in, the extra bucks you find in your budget by refinancing (I hesitate to even use the word "savings" to describe the difference between your old loan payments and your new ones) will soon go to financing your lifestyle. And it won't be long before you'll have more credit-card debt, another line of credit, more car loans - and a bigger first mortgage.

So my advice is that you and your wife take a few days to figure out how you can re-arrange your lives to rein in your spending. If you make that commitment, then I can see how refinancing your first mortgage can make sense. And, of course, the better the rate you get on your new mortgage, the better off you'll be. (To find the most competitive rates and get other useful info on choosing a loan, check out our Loan Center.)

Remember, though, refinancing is not a total reprieve. You'll still owe as much as you did before and you'll have that debt hanging over you a long time. But to the extent refinancing lengthens the repayment period and lowers your interest rate, you will get some more breathing room and free up some dollars in your budget.

If you and your wife apply those new dollars to any of the different types of retirement accounts available to the self-employed, you'll be heading in the right direction (see "Retirement plans for the self-employed").

What you need to avoid, though, is getting into a situation where you're funneling dollars into your retirement accounts while at the same time racking up more debt because you haven't reined in your spending. Ultimately, you want to arrange your lives so that you can fund your retirement accounts with more than just the bucks freed up from the refinancing. You want to create real savings too, which means spending less than you make today and investing those savings so you'll have something to live on tomorrow.

All of which is to say that there's no way that you can refinance yourself into a comfortable retirement. The sooner you admit that and change your lifestyle that you live below your means, the sooner you'll be on the road to true financial security.

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