Tales of Life and Debt

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

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Maybe It Was a Combination of Things

In January 2004, I announced on the Today show that later in the year, I would be doing a series on getting out of debt. We would follow - and help - two families in their quest to become debt-free. Then I asked for volunteers. I got thousands of e-mails within 24 hours (if I didn't know I was on the right track already, I knew it then).

What these e-mails showed, time after time after time, was that you are often able to handle a single one of these problems, but, as Murphy's Law would have it, the problems often hit you simultaneously - or one right after the other. You could handle the fact that you had a spending problem as long as you had a high five-figure salary. But then you lost your job. You could handle the fact that you could just barely afford your mortgage payments, until you had a health scare that saddled you with a pile of bills. You thought you could handle the second lease on the second car, until you didn't get that raise you were counting on.

Elizabeth in Washington wrote: "My financial despair is due in part to a devastating personal loss, which resulted in loss of employment. The loss of my job and the resultant stress of the financial devastation it created further impacted my personal loss. I have been suffering from depression and doing some self-medicating with occasional 'retail therapy.' This behavior worsens my situation and leaves me feeling further overwhelmed by my financial situation. I don't know how to 'get a grip'!"

And from Gloria in Pennsylvania: "Two years ago, my husband was forced to retire after 33 years of employment at a local company. When the 'retirement' occurred, we were in the midst of building an addition [to our home], starting a new business and paying for my daughter's wedding. We accumulated $17,000 in credit card debt. Our income, since the retirement, is reduced by almost two-thirds. Both my husband and I work long hours in a seemingly fruitless attempt to pay down our debt; however, the credit card balances remain almost stationary because of the high interest rates, finance fees and late fees. We are drowning."

The sort of worry and anxiety that Elizabeth and Gloria expressed ran through just about every one of the e-mails I received. It also showed up in the results of a RoperASW study conducted at the end of 2003:

• More than 70 percent of people are worried about the rising cost of health care.

• More than 60 percent are worried about having enough money to live "right."

• More than 60 percent are worried about having enough money to pay the bills.

• More than 50 percent are worried about interest rates rising.

Worrying, unfortunately, doesn't do any good, nor does an underlying belief that credit cards are bad or evil. Research by Sue Eccles, a professor at Lancaster University Management School in Great Britain, has shown that most of us believe we use credit too often. Another study by Thomas Durkin, an economist with the Federal Reserve of New York, showed that the more people use their credit cards, the more they feel credit is "bad."

Credit, it turns out, is like a double bacon-cheeseburger (with the bun): we know perfectly well that it's bad for us, and yet we eat it anyway.

So, How Bad Is It?

It's time to answer the question, How much debt do you have? Many people really don't know, and even if they do, sometimes their spouses don't. (I got e-mails from people who wanted to be "outed" on the Today show because they couldn't tell their spouses that they were hiding a massive credit card bill.)

To get on the road to repayment, you need to know how much debt you're carrying and at what interest rates. And if you're part of a couple, you both need to know.

You can use the work sheet on pages 9-10 to get you going or you can do the work on a computer or on another piece of paper, but it's time to take stock.

There are two basic types of debts. Secured debt is debt that has an asset - also called collateral - backing it up. Your mortgage is a secured debt that uses your house as collateral. If you miss enough mortgage payments, the bank will foreclose and take your house. Your car loan is, similarly, a secured debt. If you stop writing checks to GM Capital (or whomever), you can count on a visit from the repo man. Likewise, if you've purchased furniture or appliances on a payment plan, this is a secured loan. Unsecured debts, on the other hand, are those not backed with collateral. Because there are no assets behind these loans, the bank or lender takes a bigger risk in lending you the money. Nothing can be easily taken from you to force you to pay. That's why the interest rates on unsecured loans are higher. Credit card debts are, as you probably figured, unsecured loans.

When you've completed the work sheet your tendency is going to be to worry. Don't. I know your total looks big. I'm going to teach you how to break it down into manageable pieces so that you can tackle it on $10 a day.

Tales of Life and Debt:
"We Didn't Know How Bad It Was"

Until very recently, Tina and Brian, parents of two living in Everett, Washington, could tell you that they were in debt (the bills each month were nonstop and overwhelming) and they could tell you why they were in debt (Brian lost his job as a help-desk analyst nine months earlier, cutting their family income in half). What they couldn't tell you - because they didn't know themselves - was how bad the problem was.

"If I say I didn't want to know, does that make sense?" Tina asked. "I'm kind of 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 rate allows you to spend as if the problem doesn't exist, as Tina and Brian did the previous holiday season. It leaves you wondering if you're making the right decisions about who to pay first. In other words, it gives you room to hang yourself.

There are many, many people in Brian and Tina's situation. According to research conducted in late 2002 by RoperASW, although 88 percent of Americans have enough money to make their rent or mortgage payments every month and nearly as many have enough money to buy the things they need, only 44 percent can afford to pay off their credit cards each month, and only 32 percent say they'd have enough saved to weather a financial hardship. If you're one of the people who are leaning a little too hard on the plastic in their wallets, step one in getting out of debt is understanding why you're in debt and how bad the problem is.

It comes down to 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 destructive behavior and end up in the same debt hole all over again. You need to understand why it happened in the first place. The second thing you need to understand is how bad 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 said. "I cried."

Tina figured that, with Brian's unemployment checks, they had a net income each month of $4,634. Their average spending for the previous couple of months - which included making the minimum payments on five credit cards, as well as paying the mortgage, a consolidation loan, and home equity line of credit - had been $5,875. "It's even worse than I thought it was," Tina said.

But going through the numbers also showed her the possibilities. Her credit cards were at fairly high interest rates; she vowed to try to reduce those. She also had been spending more than she probably had to for auto and homeowners' insurance, as well as for long-distance phone service. She decided she could easily swap from premium cable to cheaper basic, and she'd never thought of contacting the pricey preschool her daughter attended to ask for financial aid.

The family's goal for the next few months was to trim their expenses to the point where they could at least tread water. Brian enrolled in a training program for medical transcriptionists. He'll graduate and - they believe - will be back in the workforce within six months. By paring their spending back, they can put themselves in position to make rapid progress on their debt when Brian begins working again. And while daunting, that's a prospect that feels good. "I should have done this years ago," Tina said.

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!