Debt Management: Get out from under

Key Points

Like living and dying, bills are a fact of life. We've all got them. What separates those who build wealth from those who never do is the ability to keep their debt and spending in check. According to a report from last year, 36 percent of Americans say they often or sometimes spend more than they can afford. You might be one of them.

Of course an occasional splurge isn't likely to send you to the poorhouse. But a pattern of splurging, and spending on increasingly more expensive items like luxury cars, can spell financial ruin to those who aren't careful. If you have debt, this article will help you get your arms around it before a creditor or a collection agency comes calling.

First, size up your debt situation

How much debt is reasonable? A good rule of thumb is that your total annual payments-including your home mortgage-should equal no more than 30 to 40 percent of your family's annual income. Your start-up costs for your practice may be high initially, but as time goes by, they should taper off. If your debt gets to 60 to 65 percent of your income, you're on thin ice.

It may sound like a chore, but if your debt is creeping up, it's time to start tracking your spending to see where the money's going and to discover opportunities to cut back. Maybe you didn't realize to what extent those weekend getaways are putting a dent in your pocketbook. Or how much that huge vehicle is costing you in gas, maintenance, and insurance. By keeping tabs on your expenses, and categorizing them according to what's essential and what isn't, you'll be better able to sort out which specific costs are putting a crimp in your weekly, monthly, or annual budget.

To make the job of tracking your expenses easier, consider using personal-finance software such as Quicken from Intuit (quicken.intuit.com) or Money from Microsoft ( http://www.microsoft.com/money). Each has different features depending on how deep down the financial well you want to go. Quicken offers an online quiz to help you choose the best version of its product for your situation.

Juggle or consolidate your loans

If you have a bunch of loans, compare their interest rates, deductibility, and how long they'll run. Begin paying off the loan with the highest after-tax rate and the shortest time to completion. For example, if you have two loans at 8 percent-one for 12 months and one for 12 years-pay off the 12-month debt first. Then use the money you no longer need for that loan to help repay the next one.

For credit cards, it's a smart idea to transfer balances from your high-interest-rate cards to those with lower, fixed rates. A good source for comparing rates and fees is Bankrate.com ( http://www.bankrate.com). In addition to credit cards, the website lets you compare rates for auto loans, mortgages, home equity loans, certificates of deposit, and school loans. (We'll cover credit cards more in-depth in an upcoming article.)