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Debt: Assess the problem
The Chatzky Program, Step 1: First you have to know what you owe.
May 17, 2005: 4:38 PM EDT
By Jean Chatzky, MONEY Magazine
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NEW YORK (MONEY Magazine) - Until very recently, Tina and Brian Sturlaugson, who live with their three kids in Everett, Wash., knew that they were in debt (the bills each month were overwhelming) and they knew why they were in debt (Brian, 44, lost his job as a help-desk analyst last June, which cut their income in half).

What they didn't know was how bad the problem was.

"If I say I didn't want to know, does that make sense?" 32-year-old Tina, a Web site developer, asked me. "I'm scared to figure out where we are. Not knowing somehow makes you feel better."

Unfortunately, not knowing how much you owe, to whom and at what interest rates, also allows you to spend as if your debt doesn't exist, as the Sturlaugsons did during the holidays.

According to research by RoperASW, although 69 percent of Americans can make their rent or mortgage payments, and 85 percent can buy what they need, only 38 percent can pay off their credit cards each month, and only 28 percent say they have enough saved to weather a financial hardship.

But getting out of debt is doable, and over the next several months, we'll tell you how to do it. Let's begin.

Step 1: Understand why you're in debt

It's basic psychology: If you don't fix the underlying problem, conquering the symptoms will do you no good in the long run. You'll repeat the same behavior and end up in the same debt hole again.

Maybe, like Brian, you're one of the 2.4 million Americans who've lost a job since 2001. Maybe you didn't get the raises you were counting on. Maybe you bought or rented more house than you could afford, or got divorced and tried to maintain your standard of living, or had a health scare.

Maybe it's a combination of these factors -- or something else entirely. The key is to know where your financial weakness is coming from.

Step 2: Recognize how serious the problem is

With my prodding, Tina spent a weekend figuring out how much was coming in each month, how much was going out, and where it was going. "It took hours," she recalls. "I cried."

She calculated their net monthly income at $4,634 and their average spending (including the mortgage, a consolidation loan, a home-equity line of credit and minimum payments on five credit cards) at about $5,800. "It's even worse than I thought it was," says Tina.

But going through the numbers also showed her the possibilities.

Her credit cards are at fairly high interest rates, so she'll try to reduce those. She can spend less on auto and homeowners insurance and long-distance service, and swap from premium cable to basic. And she'll ask her son's preschool for financial aid.

The family's goal for the next few months is to trim their expenses to equal their income.

Brian will graduate from a training program for medical transcriptionists in June and -- they hope -- will soon be back in the work force.

By paring their spending now, they'll be able to make rapid progress on their debt then. And that prospect feels good. Says Tina: "I should have done this years ago."

Editor-at-large Jean Chatzky appears regularly on NBC's Today. Contact her by e-mail at  Top of page