Outsmart the Debt Monster — Don’t let debt ruin your plans for a secure financial future.

By Mark Druskoff and Donna Mulder

You’ve heard the ads—no money down, no payments and no interest until 2008. It sounds too good to be true—and it might be.

We often take on debt with the best of intentions, but the slope can be a slippery one. If we’re not mindful, we can find ourselves in the clutches of the ever-pervasive Debt Monster—an all-too-familiar creature in many American households.

By some estimates, Americans are financially better off today than at any other time in history. But Americans also are more in debt today. A May 2006 study by the Center for American Progress found total debt for American families earning about $45,000 a year rose 33.1 percent from 2001 to 2004 alone.

Debt often starts when individuals use credit to purchase items they couldn’t otherwise afford. “They don’t have $2,000 for a stereo now, but they can afford the $20-a-month payment,” says Bill Bohmer, a Thrivent Financial representative in Temecula, California. “They start down that path and then it snowballs.”

Roger Kapsner, a manager in consumer and home equity lending at Thrivent Financial Bank, agrees. “I don’t think people have an idea of what things really cost when they buy on credit.”

Overspending is not just a problem for low or middle-income households, says Barbara Dunn, a Thrivent Financial representative in Exton, Pennsylvania. Over the years, she’s seen many high-wage earners spending far more than they bring home each month. “It comes down to living within your means,” says Dunn. “But most of us don’t know what our means are.”

In fact, she’s found that most people have a hard time accounting for more than 70 percent of their take-home income. The main culprits behind the “disappearing” funds: seemingly small, innocuous things such as buying lunch at work every day, eating out several times a week and the daily trip to the coffee shop. Simply cutting out that $2 cup of coffee each workday could save $520 a year.

But because many people use plastic to pay for such items today, they lose track of what they are spending. Using cash is a simple way to get clarity, says Dunn. “It’s harder to part with money.”

It’s important to come to grips with the Debt Monster. How was the debt amassed in the first place? How can you get out of debt? And, most important, how can you avoid similar pitfalls in the future?

Not all debt is the result of spending too much. “People in their 40s and 50s are really in a squeeze—trying to save for retirement and perhaps caring for aging parents while paying for their kids’ college or even helping them get started with life on their own,” says Dunn.

But even that Debt Monster needs to be dealt with. “Every family is different, but I encourage clients to consider sharing the cost with their kids. A college education or a big wedding do not have to be the parent’s sole responsibility. After all, there are loans and other options to help with these costs, but there are few options to make up for lost retirement savings,” says Dunn.

“You want your debt to retire when you do,” Kapsner says. “It’s difficult enough living on a fixed income without the added burdens of carrying a large debt load.”

Still, not all debt is bad. Christine Cousineau, director of experience management for Thrivent Financial Bank, points to home mortgages as an example. “They can serve an important role, if used appropriately, by providing a valuable tax deduction as well as consolidating various forms of bad debt,” she says, adding that you always should consult your tax adviser before making decisions.

To tame the Debt Monster, it’s important to look at all parts of your financial picture—your assets and your liabilities—and determine whether debt consolidation, restructuring or acceleration are options you should pursue, says Cousineau. Debt management plus beginning to save is the key to defeating the Debt Monster, she says.

Bohmer agrees. “Saving and investing are habits. You have to get in the habit of putting money away, even if it might take a little longer to pay off your debt. By also investing for the future, you begin building a foundation of good cash management.”

Mark Druskoff is a freelance writer from Houston, Texas.
Donna Mulder is editor of Thrivent magazine.

Does the Debt Monster Have You in Its Clutches?

Here are some questions to help you tell whether you’re still in safe territory or just steps away from facing an angry beast.

How much are you spending on monthly debt payments?

The total, excluding your mortgage payment, should not exceed 20 percent of your take-home pay. But be sure to include second mortgages and home equity loans in this total, because they are often used to pay off unsecured debt like credit cards. (Your mortgage payment usually shouldn’t exceed 28 percent of your take-home pay.)

Do you know how much you owe?

Ignorance is not bliss when it comes to your finances. Total up the damages. If the Debt Monster is in control, now’s the time to make a plan to get rid of it.

Can you pay off the bill in full each month?

The purpose of credit is to shift when you pay for something, not to start a running tab. If you’re continually running a balance, it’s time to change your spending habits.

Do you max out your credit cards or juggle cards to make the monthly payment?

This is a strong sign that you’re in trouble financially. If you’re living paycheck to paycheck, or using cash advances to cover basic living expenses or your monthly debt, take action now.

Do ads that promise to reduce your debt payments catch your attention?

Resist the temptation and seek the advice of a certified credit counselor from a reputable firm to ensure that you are making the right choices for your financial future.

Sources: www.bankrate.com; www.aarp.org; Iowa State University Financial Counseling Clinic; money.cnn.com; Credit Union National Association

Tame the Debt Monster
Your Thrivent Financial representative can help you work through and analyze options to deal with and restructure your debt.