Is Debt Getting in the Way of Your Future?

Pay It Down! : From Debt to Wealth on $10 a Day
by Jean Chatzky

Jean Chatzky has been working with viewers of NBC's Today show for a yearlong series on how to get out of debt once and for all. Her method, both on TV and in this book, is simple yet powerful: the key is saving just $10 a day that you currently waste. It doesn't sound like much - a movie ticket or lunch for two at McDonald's - but $10 really can take you from debt to wealth in just a few years. And because it doesn't feel like an impossible goal, people are more likely to stick with Chatzky's plan than an extreme regimen of spending cutbacks.

Chatzky is focusing on debt because it's the single biggest threat to our financial health. The average American family has sixteen credit cards and high-rate debt of more than $8000, not even counting car loans and mortgages. They pay more than $1000 a year in interest alone. Debt makes people feel depressed and overwhelmed, leaving them without enough money for the truly important things in life - education, retirement, owning a home, feeling secure. Chatzky, one of America's most popular personal finance experts, writes in down-to-earth, woman-next-door language about how to get started right away, without giving up the things that truly give you pleasure. She offers practical, accessible strategies to help readers find the money to pay off their bills, lower their interest rates, and improve their credit scores.

Featuring real-life examples of people featured on her Today show series, Pay It Down can transform debtors into future millionaires.

Getting Ahead and Staying Ahead

52 million times a day.
2.2 million times an hour.
36,242 times a minute.
604 times a second.

That's how often we use our credit cards in this country. That's how often we whip out our slim pieces of plastic, slide them through the little electronic slots or hand them over to the cashier. We type the numbers into our browsers or read them hurriedly to a clerk over the telephone to buy books, or groceries, or movie tickets, or even to foot the bill for the co-payment at the pediatrician's office. We do it so often, we don't even think about it anymore.

But we should. Because on average, each of those transactions costs us $82. That may not sound like much - dinner for four at the local Italian joint; a sweater and a pair of jeans at the Gap; a rehab for the broken vacuum cleaner - but when we start to add up all of those $82 charges, the number quickly becomes meaningful. And when we lump them with the money we owe on our mortgages, our car loans, our home equity loans, and our student loans, the numbers start to get very large very quickly. In fact, they get downright scary.

The fact is, consumer debt, as measured by the Federal Reserve, is at an all-time high. Members of the average household in America owe more than $8,000 on the 16 (16!) pieces of plastic they carry in their wallets. We have less equity in our homes than at any time in the past. We have less equity in our cars than at any time in the past. That's why it's not so surprising that the number of cars repossessed and homes foreclosed on has skyrocketed in recent years. Ditto the number of people filing for bankruptcy.

The fact is, Americans are addicted to debt.

Is Debt Getting in the Way of Your Future?

If you have too much debt - particularly credit card debt - I can guarantee that you don't have much of a financial future. Why? Think about what happens when you have credit card bills looming large. You feel like you have to pay those bills first - and so you do. If you don't, the creditors start to call.

Because those bills are so large (even the minimums look maximum), there's nothing left over to save or invest. So when an emergency hits - whether it's an unreimbursed medical bill or a new transmission - you pay for it with plastic. Then the minimums go even higher, and the cycle continues.

There are millions and millions of Americans in your shoes, and, unfortunately, for many, many people it's about to get worse. Years of the lowest interest rates in history have made it possible for you to borrow more for less: you could take out bigger mortgages, larger car loans, tack on home equity lines and keep your monthly payments fairly steady. But interest rates aren't headed down. They aren't even likely to remain fixed for very long. As our improving economy gains traction, they'll be heading up, which means that your adjustable-rate loans - your adjustable-rate mortgage, your home equity line of credit, your variable-rate credit cards - are going to be more expensive.

That's going to be extremely difficult to deal with . . . unless you start to wipe out the most expensive of those debts: your credit card bills.

Why You Have to Tackle the Credit Card Bills First

The amount you can accumulate by investing that $10 a day is so tempting that you'll want to skip the first two steps - the credit card repayment, the emergency savings cushion - and jump right in. (And if you can free up $20 a day, well, then, be my guest.) But there's a good reason for tackling those credit card bills first: at 14, 15, or 16 percent and higher, they're costing you more than you can earn by socking the money away. At 24, 25, or 29 percent, they're costing you double or triple what you can earn. Not only that: they're doing damage to your confidence. They're sabotaging your ability to be content, not only with your money, but with your life. They have to go.

I can make you this promise: As soon as you start plowing through those credit card bills, as soon as you see the numbers heading down rather than up, you're going to feel better. You're not only going to feel optimistic about your financial future, you're going to actually feel, for the first time in a very long time, as if you really have one.

Step 1: Assess the Problem

How Did You Get into This Mess?

Before you can solve any problem, you need to understand how you got into trouble in the first place. That's the only way you can clear up your mess - in this case, your debt mess - and dramatically reduce your chances of it happening again.

So, I want you to think back. At some point, you had a clean credit record. For some of you, that may have been way back when a solicitor approached you on your college campus and offered you a big bag of M&Ms or a T-shirt if you'd apply for a credit card. But for most people, it was sometime later than that. Think what was it that sparked the trouble:

Maybe it was when you lost a job. You may be one of the 2.4 million Americans who've lost a job since 1991. Unfortunately, it now takes longer than ever before to find a new one, and even when you do find a new one, it may come at a lower salary, with no health insurance.

Or when you didn't get the raise you were counting on. Perhaps you made a habit of spending ahead of your salary. You figured that although you earned $35,000 a year this year, you'd earn $40,000 the next year and $45,000 the year after that, so you could afford a more expensive mortgage payment or car payment or wardrobe. But the raises never came - not just for you, but for many people. Over the last few years, the average income for moderate-income families has grown almost imperceptibly.

Maybe it was when you bought your house. The house. Of course you always wanted one. It's always been the American dream. In the past half-decade or so, as the stock market has dawdled, the perception has also been that it's a sure-thing investment. Unfortunately, that's just not the case. Today, so many people are buying houses that they can't truly afford that the foreclosure rate is higher than it's ever been.

Or when you rented your apartment. Between 1993 and 2000, rents rose at twice the rate of inflation. They rose well ahead of the raise you were likely to receive on the job. As your rent ate up a bigger share of your budget each month, maybe you started leaning on your credit cards.

Or when you got divorced. After a divorce, the temptation to try to maintain your standard of living - often by continuing to live in the house you shared with a spouse - is great. Unfortunately, unless you're wealthy, it's also next to impossible.

Maybe it was when you had a health scare. Forty million Americans have no health insurance. Perhaps you're in that boat, but even if you're not, the rising cost of health care can easily throw you deep into debt. Health care premiums have skyrocketed in the last decade. Simultaneously, the percentage of people who had employers paying for that health care fell out of the sky.

Maybe you could afford most of these things, but nothing else. Americans have started using their credit cards to fill the gap between how much they earn and how much they need to live. They may be able to pay their rent, their utilities and their car payments, but groceries, doctors' visits and other necessities are going on the credit card.

Maybe you had no savings to bail you out of a jam. Perhaps the transmission died, or the roof sprung a leak, or you had some other problem that absolutely, positively had to be taken care of but you had no savings to pay for it. So you had to charge it and figure you'd pay it back later, but the cost of living got in the way.

Maybe you have a spending problem. There are people who are addicted to shopping, and then there are people who just spend more than they make. More and more people every year fall into the latter category. According to a Roper survey, fewer Americans in 2004 than in the two previous years said they planned to cut back when it comes to buying luxuries, high-tech items, eating out in restaurants or buying items for their homes. Unfortunately, if you're spending more than you make, you're digging deeper and deeper into debt.

Copyright © 2004 Jean Chatzky. All rights reserved. This excerpt, or any parts thereof, may not be reproduced without permission.

About the Author

Known to millions of readers and tv viewers, Jean Chatzky is the financial editor of NBC's Today show and also appears on CNBC. She is a regular columnist for Time, Money, and USA Weekend magazines. She is also the author of Pay It Down!