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.