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5 ways to get smart and avoid drowning in dumb debt

  • Nearly half of respondents in a recent Northwestern Mutual survey were carrying at least $25,000 in debt.
  • Despite heavy debt loads, those surveyed still spent about 40 percent of income on non-essential expenses.
  • How to get out of debt? Drop the shame, prioritize, start to budget, consolidate debts and use cash for everyday expenses, say advisors.

Is debt dragging you down? You are not alone.

Despite the so-called "deleveraging" of the American consumer after the financial crisis, debt remains a major burden for large numbers of Americans, based on a recent survey by Northwestern Mutual.

A heavy debt load can lead to a sense of helplessness for borrowers. Many are ashamed of their situation and would rather ignore the problem than face it.
Wavebreak | iStock | Getty Images
A heavy debt load can lead to a sense of helplessness for borrowers. Many are ashamed of their situation and would rather ignore the problem than face it.

Interviews with more than 2,700 adults over the age of 18 revealed that nearly three-quarters of them said they were struggling with debt, and it was a "high" or "moderate" source of anxiety for 40 percent of them. Almost half of those interviewed were carrying at least $25,000 in debt, and the average debt load was $37,000, excluding mortgages. More than 1 in 10 owed more than $100,000, and 45 percent of those carrying debt were spending half their monthly income on debt repayments.

And yet still we spend.

The individuals surveyed by Northwestern spent on average 40 percent of their income on non-essential items, such as travel, entertainment, eating out and hobbies, despite saying they felt anxious about their financial futures.

"We have fueled a consumerism with easy credit, advertising and social media, and people don't understand the financial trade-offs involved in their spending," said Rebekah Barsch, director of financial planning at Northwestern Mutual. "There's all kinds of ways to get into debt and relatively fewer ways to get out of it."

There are ways out, however. Here are five ideas and/or strategies that financial advisors use to help clients with large amounts of debt improve their financial outlook.

1. Don't beat yourself up.

A heavy debt load can lead to a sense of helplessness for borrowers. Many are ashamed of their situation and would rather ignore the problem than face it.

"Debt can be debilitating," said financial advisor Lazetta Braxton, founder and CEO of Financial Fountains. "There's a lot of guilt and shame involved, and when someone is in that drift zone, it can be debilitating."

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Braxton, a certified financial planner, says that most people are relieved just to talk about the situation openly. "I don't overemphasize the issue. I just treat it as part of the financial planning process," she said. "Once people get a full picture of their situation and develop a plan to deal with it, they feel good about making a clean start."

Don't feel helpless and ashamed. It will only make matters worse. Talk to your financial advisor if you have one, or book an hour with a debt counselor to talk things through.

2. Take inventory and prioritize.

What kinds of debt do you have? Take an inventory of all the balances you owe, the interest rates they carry and the minimum payments required to avoid higher interest charges.

Once you have a clear picture of your situation, you can prioritize which debts to attack first. The rule of thumb is to pay your minimums on all obligations, then focus on paying down the high-rate debt (usually credit cards) as opposed to low-rate debt, like a student loan or mortgage. Unfortunately, emotion often comes into play.

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"Many people will pay down the mortgage debt before their high-rate credit card debt," said Barsch at Northwestern Mutual. Mortgages typically carry a rate less than a third of the 15 percent average APR on U.S. household credit card debt, and the interest is tax-deductible. However much you might like to own your home outright, put your resources toward the expensive credit card balances first.

In some cases, where individuals have multiple credit card balances and/or revolving debts, CFP Sheryl Garrett, head of the Garrett Planning Network, suggests people pay off the smaller balances — even if they carry a lower rate — to get the ball rolling. "Sometimes people need to see a win," said Garrett. "It depends on the personality of the person and their discipline or lack thereof."

3. Craft a budget.

You can't manage what you don't measure. The aphorism is apt for people carrying lots of debt. A budget is crucial for people struggling to reduce their debt.

The first step to controlling your debt balances is freezing them. When you know which expenses are essential and which are discretionary, you have a much better chance of controlling them.

Itemize all your necessary expenses, such as rent, utilities, insurance payments and minimum debt payments. Break down the annual expenses, like insurance and expected vehicle costs, and budget for them on a monthly basis.

"A lot of people feel good about getting a good deal on something, but if they can't afford it and put it on a credit card, they end up paying more than full price and going deeper into debt." -Rebekah Barsch, director of financial planning at Northwestern Mutual

"More people probably do triathlons than keep a budget," said Garrett. "It's painful, like counting calories, but you need to determine what you want to accomplish and what you have to work with."

She suggests people pay off the necessary expenses, including their minimum debt repayments, automatically each month. Minimum payments on debt won't stop your balances from increasing, but once you have covered the essential expenses, you can devote more resources to paying down the balances.

4. Consider consolidating debt.

In some cases, consolidating debt balances can be a psychologically valuable tool for people. It is no cure-all for a heavy debt burden, but it can simplify the situation and empower people to begin digging themselves out. Braxton at Financial Fountains often steers clients with large amounts of debt to a credit union that can often provide a lower rate on a single larger balance. It can motivate you to pay off the balance more aggressively.

5. Go back to cash.

You'll never pull yourself out from under a heavy debt load if you don't change the spending habits that got you there in the first place.

Shopping is a powerful urge for most Americans, particularly for those in financial distress. Buying things on sale may seem like a responsible thing to do, but it is a road to ruin.

"A lot of people feel good about getting a good deal on something, but if they can't afford it and put it on a credit card, they end up paying more than full price and going deeper into debt," said Barsch at Northwestern Mutual.

Garrett of the Garrett Planning Network has two simple tips to help people control the urge to spend.

The first is to simply wait a day before buying something you want. "Shopping can be an addiction involving endorphins in your brain that dissipate in a short period of time," said Garrett. "If you wait 24 hours, the percentage of people who follow through on the purchase drops dramatically."

The second is to use cash for discretionary purchases. Debit and credit cards and smartphone apps make paying for things too easy, and they mask the consequences of excessive spending. When someone pays a bill with cash, they have a much more tangible sense of the outlay they're making and often will decide not to make the purchase.

"Cards are dangerous," Garrett said. "Stop fooling yourself. Put away the cards and start using cash for discretionary purchases."

— By Andrew Osterland, special to CNBC.com

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