Your Retirement Center

Managing Debt

You don't want debt to be a stumbling block that trips you up.
When you're using money that could otherwise go into your investment account to pay interest that's accumulating on old debts, it's time to take a hard look at your spending plan. And if you're wondering what a spending plan might be, it's probably time to put one together. When you construct a spending plan, sometimes called a budget, you divide up your income so that it covers your regular expenses — both essential and nonessential — always including some for your emergency fund and ideally some for your investment account. Some people use what they spent last year as a starting point — though last year's spending may be what got you into debt. Or you may prefer to check the Bureau of Labor Statistics website ( for the average nationwide expenditures for housing, food, and other costs. You'll have to modify that information to reflect local costs and your own situation. But it's a place to start.
DON'T GET DETOURED If you simply can't pay your credit card bills in full each month, even with a spending plan in place, you may have to take radical action. Consumer debt can create major problems, even if you are meeting your other obligations on time. Try substituting a debit card when you shop. Though there's no guarantee that you won't overdraw the bank account it's linked to, especially if you have a line of credit that gives you overdraft protection, you'll know you've spent too much the next time you check your balance. Give up all but one of your credit cards and use the one that's left only for emergencies. While using a credit card is a good way to build a strong credit history, it's also one of the easiest ways to end up with a poor one. Once your finances are under control, you may be confident enough to return to plastic. But you may also find you can live without it most of the time. Avoid buying on impulse. You may lose out on a good deal or two, but you'll strike a major blow against finance charges.


If you're determined to stick to your plan, it helps to keep careful track of where your money goes. Get into the habit of writing down the cash you spend and where you spend it. Then, once a month, using those notes, your bank statement, and your credit card bills, analyze where your money went. You may find you've underestimated some essential costs and overestimated others. But since a spending plan is an evolving document, not a set of rules, you can always adjust it if necessary. For example, heating your home and buying gas for your car may jump in price at certain times, or you may have unusual medical expenses in some years. You may also be spending much more than you thought on something you consider expendable. Following a plan doesn't guarantee you'll stay out of debt. But it does mean you're less likely to be taken by financial surprise if you follow the guidelines you've set for yourself.


If you owe more than you can comfortably repay with your current income, an informal spending plan may not be enough to solve the problem. Rather than risk losing your home or your car, having your electricity and telephone turned off, or your insurance canceled, be proactive. Ask your creditors to change the terms of your loans. They may agree to add the amount you're behind to the end of the loan, reduce your monthly payment, or both. It will extend the payback period and cost you more in finance charges over the long term, but it may keep you from drowning in debt.
You may also decide to seek professional help from an accredited credit counselor, who will help you change the way you spend and create a repayment plan. Check with the National Foundation for Credit Counseling for a not-for-profit center near you. You can call 800-388-2227 or find them on the Web at

As part of choosing a credit counselor, ask how he or she will work with you, and how your collaboration may affect your credit report. Ask, too, whether there is a charge for the assistance. Payment arrangements vary from center to center.


If part of your debt problem is the result of not paying on time, you may want to consider automatic bill payment arrangements that help you avoid hefty late fees. For example, many utility, telephone, and cable companies make it easy to sign up, and they debit your linked bank account each month. Some credit card issuers also offer automatic payment plans, which give you the choice of paying as little as the minimum balance or as much as the full bill. Of course, there has to be money in your account, or enough overdraft protection, for the debit to go through. But you can time automatic payments to coincide with the direct deposit of your paycheck — also usually a good idea.

A WORD TO THE WISE Beware of anyone who promises to fix your credit rating. It will cost you money, and you'll have nothing to show for it.
DON'T PANIC While it's possible to slide slowly into debt, you're actually more likely to face serious problems as the result of illness, an accident, or unemployment. That's why having an emergency fund is so important, along with adequate healthcare, disability, and life insurance.
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Your Retirement Center