Kick the spending habit!
Christy Heady • Bankrate.com

There aren't any self-hypnosis tapes to help cure overspending (maybe there should be?). However, your personal motivation and goal-setting can surely help. Picture this: You have no debt and an investment account worth $75,000. How does it feel? Many experts urge consumers to use their imaginations instead of their wallets to help with their finances.

FACTOID:  Here's a motivating statistic that might light a fire under your seat. If you're making 12 percent interest on your investments but are paying off a credit card balance of 19.8 percent on your $1,500 purchase, the money you make on your investments turns into a negative 7.8 percent. But wait -- there's more! If your money is in a taxable account, you have to pay taxes on any income or capital gains; you can't even write off the credit card interest on your taxes.

Once you've got the proper motivation, try the strategies discussed in the following sections to reduce your debt.

Use your savings

Before you use your savings to pay off the budgetary fat, determine your debt-to-income ratio. Oooh, all those numbers ... Sounds intimidating, huh? It's simple! All you have to do is answer one question: How much of a chunk of your paycheck goes to pay your debts? The smaller the percent of your monthly pay that is allocated to credit cards (as well as other loans and debt), the better.

You know you're in bad shape -- completely overextended -- if you're flirting with a debt-to-income ratio of 75 percent debt to 25 percent equity. Even 50-50 is bad. The rule of thumb is that current assets should be approximately two times greater than current liabilities.

TIP:  If you are still swimming in debt and can't make ends meet by just reducing your expenses, consider boosting your income -- either through a part-time job or odd jobs you can do on weekends. Every little bit helps.

So lump together all of your assets (what you own) and your liabilities (what you owe). If you have socked away a ton of cash in your bank account and you have revolving debt on your credit cards, it's time to pay those off. Why not use your savings? It'll be in your best interest, since you won't be paying any more than you have to!

TIP: If you're knee-deep in debt, you could liquidate some -- but not all -- of your assets to help pay the bills. Which ones you liquidate will be up to you. If one of them is an investment that will give you a huge capital gain to pay a lot of taxes on, however, consider other alternatives, for example: selling old items at a garage sale (really!).

Posted: May 21, 1998