A How-Not-To on Debt

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The first rule for living life in the black is: Don't spend more than you earn. Easier said than done.

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About 10 years ago, Joe Paretta, an English professor at Lafayette College in Pennsylvania, found himself about $12,000 in debt on his credit cards. He hadn't lost his job or bought a new house or faced a health crisis. But little by little, over about four years, he had built up a debt that was out of control.

"I wasn't making a lot of money, but I was irresponsible," said Paretta, 44, who used his unhappy experience to write a how-not-to book, Master the Card. "I was using a credit card habitually, and when I got the bill at the end of the month, a lot of times I didn't even remember what I had bought. I was making minimal payments, and I was satisfied."

Until he wasn't.

He got no wake-up call, nor did he hit bottom. Rather, Paretta said, "I felt like I was the middleman with my own money. I was getting my paycheck and paying the credit-card company."

So he decided to change things. First, he figured out "to the penny" what he owed. He started paying down his debt, which took about five years. When he got married, he helped his wife reduce hers. Now he has no outstanding balance on his credit cards.

Americans' devotion to debt has been paralleled, and aggravated, by their lack of interest in saving.

Mortgages, home-equity loans, credit-card debt, and student loans--these all pile up. According to Consumer Reports, credit-card users shouldered a median debt of $3,793 last year. College graduates in 2009 who borrowed money for school owed an average of $24,000, according to the Project on Student Debt at the Institute for College Access & Success. And that understates their debt load, because it doesn't count the loans that their parents took out.

It's no mystery how this culture of debt came about. Years of easy-to-get credit and mortgages--way too easy--along with persistently low savings rates meant that many American households were regularly spending more money than they earned.

What's the solution? Paying down debt, unfortunately, is a lot like losing weight. It isn't fun, and it means making some daunting choices. "Cutting back is inconsistent with popular American culture," said Barbara Dafoe Whitehead, director of the John Templeton Center for Thrift and Generosity at the nonprofit Institute for American Values.

The initial step is often the toughest: taking a hard look at the numbers and figuring out where the money goes. "Surprisingly few people do that in any systematic way," Whitehead acknowledged--including herself. "I try to save receipts and look at everything, but then I rationalize that I'm too busy."

Next is the biggie: Don't spend money you don't have.

This is Mary Hunt's No. 1 rule. Hunt, who runs the website DebtProofLiving.com, is the author of a forthcoming book 7 Money Rules for Life. Her advice: Don't put something on your credit card unless you know you have the money in the bank. This simply isn't how most people think, she said, but unless you spend less than you earn, rules "Nos. 2 through 6 won't help."

No. 2: Save 10 percent of everything you earn.

No. 3: Give some money to charity. This helps to check your sense of entitlement, Hunt said, reminding you that what you think of as needs are usually wants.

No. 4: Anticipate your expenses. "You may spend less than you earned," she pointed out, "but Christmas is coming, and you didn't save a dime for it."

No. 5: Tell the money where to go. Don't let friends influence you to shell out $150 on a Friday night--which adds up to $600 a month.

No. 6: Watch your credit score and protect it. A low credit score, Hunt cautions, can cost you $100,000 over a lifetime in higher insurance rates, mortgages, and car loans. Some employers even look at credit scores in deciding whom to hire, she said, because "they don't want someone who can't manage their money."

No. 7: Never borrow more than you know you can repay.

Hunt also offers rules of thumb on borrowing. For starters, she advises, never take out an auto loan that lasts longer than three years. That's when cars typically start to need repairs, so you would be paying for your car and for fixing it simultaneously.

Of course, for some people--especially the unemployed and underemployed--simply cutting back won't be enough. No matter how carefully they budget, their debts will overwhelm them. In that sort of fix, Paretta suggested, "you should contact your credit-card company and tell them your situation and see if they can work with you." At a minimum, negotiate for a lower interest rate.

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Alina Tugend writes the Short Cuts column for The New York Times.

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