Now More Than Ever, Dig Out of Debt
Wall Street got into trouble partly because of too much debt, so let's get our own houses in order.
Wall Street debt is one of the major culprits of the current market crash, says TheStreet.com columnist Doug Kass. And while Wall Street has spent beyond its means, Main Street hasn't exactly been diligent about keeping out of debt, either.
Data from the Bureau of Economic Analysis shows that the personal savings rate has declined since the 1980s. Personal savings were a mere 0.2% of income in the first quarter and briefly dipped below zero three years ago.
Fact is, many consumers are spending more than they earn. But while getting out of debt can be difficult work, do yourself a favor by paring down how much you owe. Here are a few tips for reining in spending and digging yourself out of debt.
Talk to a debt counselor
Debt counselors can help identify problems in your budget that you may not have noticed. They can help you figure out which debt you should target first. And even if you aren't struggling, many counseling agencies offer budget counseling to avoid problems in the first place.
Be aware that not all debt counselors are reputable. Some that claim to be non-profit, in fact, charge fees for services that consumers can perform on their own. To find a reputable debt-counseling agency in your area, search the National Foundation for Credit Counseling Web site under "First Steps."
When choosing a debt-counseling agency, make sure you find out ahead of time about their fees and services. Some agencies offer free counseling, while others charge a nominal fee -- often around $25 a month. You should never have to pay a fee in advance for a service, and the agency should have a variety of services available. For more tips on how to choose a counselor, check out these NFCC guidelines.
Consider a debt management plan
A debt-management plan offered through a reputable agency may help you get back on track faster than if you attempt to go it alone. In many cases, counseling agencies have standing agreements with some creditors to lower rates or waive certain financing charges on your debt when you enroll in a DMP. You make a single monthly payment to your counseling agency, which then disburses that money to your creditors. Most DMPs are set up to pay off debt in less than five years.
Consolidate your loans
Another option to pay off debt quickly is to consolidate your loans. By taking out a low-interest loan (either an unsecured personal loan or a home equity loan or line of credit), you can pay off your existing high-rate loans in exchange for a lower monthly payment.
One concern with debt consolidation, however, is that you are fighting fire with fire. By chasing bad debt with slightly better debt, you have no motivation to change your ways, and you risk ending up worse off than when you started. Furthermore, qualifying for an unsecured loan is difficult, and consumers likely will need to use their home as collateral for a secured loan.
Regardless of how you choose to get out of debt, you'll need to rethink your spending habits to avoid backsliding. The good news is that people can change: After a dismal first quarter of savings, consumers managed to save 2.7% in the second quarter. It's still a far cry from the 6% to 8% savings rates prior to the 1980s, but it's a start.
—For more ways to save, spend, invest and borrow, visit MainStreet.com.