Get out of debt one dime at a time

Getting out of debt is not just about improving your finances, it's about improving your quality of life.

Take credit cards.

Today's average card charges 17 percent interest, and an average cardholder carries a $5,000 balance, says Marc Eisenson, editor of Good Advice Press (www.goodadvicepress.com) and co-author of several personal-finance books. With interest, that $5,000 loan can easily cost $16,000 to pay off - after taxes.

Counting taxes (in the 28 percent tax bracket), you have to make $4 to cover every dollar you spend on the credit card, Mr. Eisenson says.

That dramatically increases the cost of living.

Getting the credit monkey off your back "dramatically cuts the cost of living. And if you dramatically cut your cost of living, you have all kinds of options that you don't have if you're always slightly behind," explains Nancy Castleman, one of Eisenson's co-authors.

Ms. Castleman and Eisenson recommend eliminating household debt, including home mortgages. But even reducing debt to a manageable level can make a big difference, they say.

To get started, many debt counselors recommend you list every expenditure for a month. Then you can see how much you spend on, say, pizza delivery, and decide where to cut back.

If all that record keeping is too much, "at a minimum, use that spare change that you throw up on the dresser every night" to pay down debt, Eisenson says.

Eighty-three cents a day adds up to more than $25 a month. Put that money toward paying down a $100,000, 30-year mortgage, and you could save some $20,000. An extra dime a day -$3 a month - can save $1,000 and more than nine years of payments on an average credit-card balance.

It's also a good investment.

Since debt prepayments aren't taxed the way earnings on investments are, paying down a 17 percent credit card yields a 23 percent return after taxes. "Where else can you get a 23 percent return, guaranteed, and risk free?" Eisenson says.

Even paying down a 7 percent or 8 percent mortgage is as reasonable a part of an investment portfolio as owning a 5 or 6 percent bond, he says.

And mortgages usually cost more than people imagine, because most people don't have just one.

"We think of it more as a serial mortgage," says Castleman. With moves and refinancings, "we go from one mortgage to another to another," not for 30 years, but perhaps for 50.

So early payments can keep you to your original schedule.

Budgeting to get your debt under control is a slow process, however. People make the decision to get their finances under control "again, and again, and again," says Castleman.

You have to have a reason to be committed to it. And you can't deprive yourself. "You can't say: I'm not going to go to the movies. I'm never going to eat out. I'm not going to buy anything I like. I won't get any clothes. I'm just going to pay off my debts," Eisenson says. "That'll last about an hour."

Once you learn to keep your debts under control, Eisenson and Castleman suggest you use the money to invest in your whole portfolio, including savings, investment, spending, education, skills, and spending more time with your family.

"Money isn't really the most important aspect of life," Eisenson says. "If we save money, we're also saving time."

For example, the cost of an average new car today approaches six months of a median family income. If you bought a less expensive car, "that six months could be added to your retirement," he says.

(c) Copyright 1999. The Christian Science Publishing Society