6 ways to be a grown-up about debt
Stop kidding yourself: No plan will work until you change the way you think about money.
NEW YORK (Money Magazine) -- Until last fall, Jessica Jaquez-Trejo and Willy Trejo seemed to be living an idyllic life. The El Paso couple had good jobs - Jessica, 30, teaches reading at an elementary school; Willy, 32, is a product engineer - and together earned a comfortable $90,000 a year.
They'd recently bought a three-bedroom home near their extended family. Best of all, two years after a doctor told Jessica that she would never be able to have children, the couple were preparing to celebrate their son Willito's first birthday.
So it came as a shock to Jessica when Willy, who handled their finances, told her they couldn't afford the $500 party she was planning. Says Jessica: "I thought he was just being cheap."
In fact, he was being realistic.
Only three years earlier the couple had been nearly free of debt, but now they were drowning in it. In addition to the $76,000 they owed on their mortgage and the $30,000 in loans for their two cars, they owed $19,000 on eight maxed-out credit cards and another $9,000 in student and personal loans.
And things were getting worse.
Struggling to pay even the minimums,Willy was late on a Visa bill; his already high interest rate of 18 percent was jacked up to 32 percent as a penalty. In the end, Willy reluctantly agreed to a scaled-down party for Willito.
But the following week, when Jessica needed money to buy shoes for the baby, Willy, upset, told her that they didn't have any. "Put a balloon on his feet for socks," he said, "and cake on his chest for a shirt."
There they were, earning nearly six figures but unable to spare $20 for baby clothes. The debt is "really overwhelming," says Willy. "I feel like I'm carrying a very big load."
It's a burden more and more Americans share. Since 1990, average credit-card debt has more than doubled, to $9,159, according to CardTrak.com. And it's not just young couples like the Trejos, buying their first homes and starting a family, who are in over their heads.
The amount owed by people of retirement age has nearly doubled over the past few years as well. Blame easier access to credit, sure, but also today's "I want what he's got, gotta have it now" mentality.
There's no shortage of repayment plans, but you'll never dig out unless you also change the attitude toward money that contributed to your getting into debt in the first place.
These strategies should help.
Admit that you're the problem
Sometimes the reason you piled up debt is big, obvious and out of your control, such as a medical emergency or a layoff. But often it's a series of smaller expenses that seem like reasonable indulgences at the time but eventually add up to trouble.
The Trejos, for example, charged the furniture for their new home. Then there was the trip they took to Phoenix in 2005. And the takeout food or restaurant meals (nothing fancy, mind you) that they eat a few times a week.
Suddenly they were nearly $20,000 in the hole. "Little things got out of hand," says Jessica.
The bottom line: It's probably not your luck that's at fault, it's your Disneyland ideas about the lifestyle you can afford. "People are still trying to keep up with the Joneses, but they don't know how much in debt the Joneses are," says Gail Cunningham of Consumer Credit Counseling Service of Greater Dallas.
Play tricks on yourself
The next step, of course, is to stop the behavior that got you into trouble. Don't count on your willpower. Take the credit cards out of your wallet and lock them in a drawer to create a physical barrier between you and spending.
That way you create a cooling-off period during which you may decide that your must-have purchase is something you can live without. For big purchases, save money in labeled envelopes and delay buying until you have the cash required.
Make success simple(r)
Once you've put a brake on going further into debt, start making a dent in the amount you already owe. You're far more likely to make steady progress if you have a specific game plan to follow, rather than, again, just relying on willpower.
The best strategy, if there's a wide spread in the interest rates on your debts: Pay off your highest-rate debt first, making the maximum monthly payment you can afford on that card and paying the minimum required on the rest.
As the interest buildup on that card goes down, you'll automatically start paying down principal faster. Repeat the process with the next highest rate card and so on.
If the rate spread among your loans isn't big, pay off your smallest debt instead. The results feel more meaningful, and you'll get a psychological boost from paying off a card completely. "It encourages good behavior," says financial planner Scott Cole in Birmingham.
Beware the easy out
To save on interest charges, the Trejos paid off all their cards last December with an 8.39 percent home-equity loan of $32,000. But while the strategy looks good in theory and is working for them so far, you want to be cautious about using low-rate home-equity financing to pay off plastic.
Lower finance charges won't solve your debt problems if you don't also change your behavior. And unlike credit-card debt, home-equity debt puts your house at risk.
If you backslide on credit-card repayment, you'll end up worse off than before, owing money on both your cards and your home.
Get help if needed
Rather than fight the battle alone, get help from a credit counselor, who can provide a firm hand on your shoulder, guiding you, devising a repayment plan and maybe negotiating lower rates with creditors.
To find a legitimate agency, contact the Association of Independent Consumer Credit Counseling Agencies (aiccca.org) or the National Foundation for Credit Counseling (www.nfcc.org) and steer clear of up-front charges of more than $75.
Think outside the debt
Finally, as bad as your debt may be, don't use it as an excuse to ignore the rest of your financial life. Set a little money aside for an emergency fund so the next time life knocks you for a loop, you won't start borrowing again to recover.
Put a token $25 a paycheck into your 401(k) to get in the habit of saving. Willy and Jessica are, in fact, contributing to their retirement plans and setting money aside for emergencies (adding to the $9,000 they have left from their home-equity loan after paying off their cards and personal loan).
They've cut up all their credit cards but one, which is tucked away in a drawer. The tension over the birthday party has given way to new optimism about their finances.
"We're talking every day about expenses," says Jessica. "I think our future looks much better."