The Battle Plan For Combating Family Debt

When you have a child or two, expenses can really rev up. Diapers, rice cereal, pureed kale, child care, pre-school, Mandarin lessons, ski instruction, Disney World, psychotherapy, Kanyeconcerts (tour canceled, phew) and the list goes on. Along with more joy in your life comes its partner—more debt.

Deciding to reduce your debt is often smart — and for some people it’s essential. Here’s how:

Step 1

Make a list—spreadsheets accepted—of all your debts, ranked from highest interest rate to lowest. Most people don’t know how much they owe. Now you will. (The average household has $17,000 in credit card debt alone.)

Step 2

Make a reasonable, achievable goal. How much debt do you want to pay off? By when? Writing it down helps.

Step 3

If possible, refinance as much debt as you can. You can save hundreds of dollars a year—or more—simply by lowering your rate. Consider using a no-fee, 0 percent rate balance transfer credit card or whatever card will work best for you from this NerdWallet list. Make a calendar entry so you know when this new card’s rate will rise.

Other lower-rate sources you might consider:

*an unsecured signature loan from your bank or credit union

*a home equity loan (the interest you pay is deductible, but beware of having the total you owe on your home approach 100% of its value. That could put you in danger of losing the home.)

*a loan against your cash-value life insurance (rates are low, but plan to pay the money back while you still have a pulse so your heirs don’t use the word “weasel” at your funeral).

What about borrowing from your 401(k)? Permissible, but risky. First, the money you borrow will, temporarily at least, no longer be invested in stocks or mutual funds. So if the market rises, the sum you’ve borrowed won’t benefit. Second, it’s psychologically difficult for some people to repay a loan when the lender is the guy whose face they see every day in the mirror. And if you don’t pay it back there are taxes, and probably penalties as well.

Bankrate.com has a better idea. You can stop making contributions to your retirement plan for a discrete period of time and instead use the money to pay down debt. Be sure to put a note in your calendar about when to restart your contributions. (Don’t forgo an employee match to execute this maneuver.)

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