PaydayAct

Leo Tolstoy famously wrote in “Anna Karenina,” a novel that culminates in an equally famous suicide, that “All happy families are alike; each unhappy family is unhappy in its own way.”

When families are unhappy because of their finances, however, they’ve typically chosen one of a relatively small number of paths to get there.

That became abundantly clear when MSN Money invited readers to post their debt and credit questions to the Your Money message board as part of “Get Out of Debt Day.” Although the posts ranged all over the financial map, those in the most serious trouble often committed one or more of the following acts of financial suicide:

Carrying credit card debt
Carrying credit card balances is not the norm in America, as I wrote in “The truth about credit card debt.” More than half of U.S. households have no credit card debt, and only 7.2% carried balances of $10,000 or more, according to the latest Federal Reserve survey.

Yet four- and five-figure credit card debts were scarily common among the Get Out of Debt Day posters. Many of those who had significant credit card debt were already behind on payments or dealing with collectors. Even those who were paying on time had suffered the consequences of bloated debt.

Poster Bobbie Pittsburg said he and his wife have $50,000 in credit card debt after a two-year stint of unemployment while putting four kids through college. Their high debt loads and previous trouble making payments were playing havoc with their credit scores and their plans to downsize to another home.

In hindsight, Bobbie and his family didn’t cut back soon enough or hard enough. The kids should have been shouldering more of the costs of their education, and the parents should have been more cautious about using credit cards as a crutch.

Carrying any credit card debt is a big, red flag that you’re living beyond your means. Paying off that debt should be a priority. If you’re not sure how to come up with the money, check out MSN Money’s Learn to Budget Decision Center for ideas.

Letting fixed-living costs swell
If you’ve cut your spending to the bone and are still struggling, maybe you need to take a closer look at the bones — that is, your basic living expenses.

Poster Alee, for example, has a mortgage payment of just $550 a month. But combine that with her monthly utility bill of $300, and she’s already spent 60% of her $1,400 a month in take-home pay — and that’s before paying for groceries, gas and other necessities. Even if she didn’t have $12,000 in credit card debt to finance, Alee’s spending would be out of balance, according to Elizabeth Warren, a Harvard University bankruptcy expert and co-author of the personal finance book, “All Your Worth.”

Warren recommends people’s “must have” expenses total no more than 50% of their after-tax income. (Your after-tax income is basically your take-home pay, with any non-tax deductions like 401(k) contributions and health insurance premiums added back in.)

“Must haves” typically include:
Mortgage or rent
Utilities (including phone and television)
Transportation (gas, car payment, car insurance)
Other insurance (life, health, property, disability)
Groceries
Child care
Minimum loan payments
Child support or other court-mandated payments

Once you’ve trimmed the easier stuff, like utilities and groceries, you come to more agonizing decisions, such as finding cheaper child care, opting for less expensive housing or taking in a roommate. Alternatively, Warren said, you can look for ways to boost your income.

Either way, hard choices and extra effort may be required to get yourself on track. But a budget that seriously out of balance can’t be sustained and eventually will lead to financial ruin.

Using retirement savings to pay off debt
Newbies to the Your Money message board frequently post about their bright idea to raid their IRAs or 401(k)s to pay off debt. Your Money regulars quickly set them right, because such raids are:

Incredibly expensive. Penalties and taxes typically eat up 25% to 50% of such withdrawals, but even worse is the loss of future tax-deferred gains that money could have earned. You should figure each $1,000 you withdraw from a retirement account now will cost you at least $10,000 in lost retirement income. That assumes 8% average annual returns over 30 years, which is a reasonable long-term assumption for a balanced portfolio of stocks and bonds.

Often shortsighted. Grabbing money from your retirement doesn’t help you fix the problem that caused the debt in the first place, which is usually overspending. That means you’re just going to run up more debt after you’ve squandered your retirement cache. Furthermore, money in retirement accounts can be protected if you end up filing for bankruptcy.

Trust me, you don’t want to wind up like poster upsydaisy:

“My husband has retired and we both are still working, him part time and me full time. We are overloaded with credit card debt and need to get out. He is 63 and I am 60 so time is running out for us. We have used all of our retirement savings trying to get out of debt and so far nothing has helped. . . . I know we need to pay off the credit cards but it seems impossible. Help!!!”

Using payday lenders
Walking through the door of one of these shops is the equivalent of locking your windows and turning on the gas. You might be lucky and escape with minor damage, but you’re more likely to pay a heavy toll.

These lenders promise you a short-term loan, to be paid off when you get your next paycheck. But they charge you fees that are the equivalent of a 400% annual interest rate, or even more. Many people find when payday rolls around that they’re not able to repay the loan, so they wind up rolling it over and incurring more fees.

Whatever the crisis that makes you think you need a payday lender, there’s always a better option. Nonprofit agencies affiliated with the National Foundation for Credit Counseling, which co-sponsors Get Out of Debt Day, have budgeting classes and counselors that may help.

Failing to have an emergency fund
Among the unemployed, the average time between jobs is nearly 17 weeks, according to the Bureau of Labor Statistics. Yet only about three in 10 U.S. households have liquid savings sufficient to last them even 12 weeks. Many, as I wrote in “The $0 emergency fund,” either live paycheck to paycheck or have less than $1,000 in liquid savings.

Poster rscott was out of work for just two months, but look at the toll:

“I have fallen behind in all of my obligations. The one that hurts the most is my truck payment, which is three months behind. I have negotiated with the lender, but they were not much help. I also have bank overdrafts and also owe money to a payday loan company. There is no way that I can catch the payments up as I don’t make near the money I used to. I’m only 24, and I don’t want to ruin my credit.”

Having a sufficient emergency fund can help you withstand all kinds of financial setbacks, from car trouble to losing your job. Even if you’re concentrating on other goals, like saving for retirement and paying down debt, you should keep at least $1,000 in savings and try to supplement that money as soon as you can. Keeping space open on your credit cards or home equity line of credit can be a temporary supplement to a real emergency fund, but as soon as you can you should give yourself a real cash cushion.

Hanging on to an unaffordable house
It may be your children’s home or the place you thought you’d live forever. But if you can’t afford the payments, it’s an albatross, as I discussed in “Facing foreclosure? 9 options.”

Poster khala is trying to ignore that reality:

“I have filed Chapter 13 (bankruptcy) four times since 1996 (to stop foreclosure proceedings), the most recent being September 2004. I have had several job interruptions or just not enough (money) to pay. Once you are in foreclosure, they always want (all the back payments made up). . . . I am still behind.”

Khala went on to ask for suggestions on how to restore her credit, but the harsh truth is that unless she can catch up and continue making payments on time, her credit scores will be dismal and her finances a ruin. Getting out and starting over may be her only real choice.

Trying to borrow your way out of debt
So many debtors are looking for a magic bullet in the form of a consolidation loan and think their problem is that they just haven’t found the right one.

Poster 44jussie was fairly typical: A dozen or so maxed-out credit cards and mediocre credit scores, thanks to the high balances.

“We make the payments and just slightly get ahead,” 44jussie wrote, but estimated it would take four to six years to pay the cards completely off. “We would like to pay off sooner in an effort to lower the (balances), thus increasing the credit score and paying less interest so that one day we could buy a house. … Are there any consolidation loans (that don’t require home equity) for the purposes of paying off/down credit card debt into one monthly payment plan?”

If you don’t have home equity to tap, the debt consolidation loans available to you typically come with sky-high interest rates and hefty fees. Instead of getting you out of debt faster, they normally stretch out your loan term so that you wind up in debt much longer and pay a lot more in interest. Clearly, that’s not the way to go.

Even if you do have lots of home equity, using it to pay off credit card debt is usually one of “The 3 worst money moves you can make.” That’s because, once again, you haven’t fixed the problem that caused the overspending in the first place.

Often, the best option is to simply buckle down and pay off the cards, one by one. If you have good credit, you may be able to negotiate lower rates directly with your lenders. If not, and you’re having trouble making progress on your debt, you might consider a debt management plan through a legitimate credit counselor (just read “The consumers’ guide to credit counseling” first).

If you’re really drowning, and facing debts you can never repay, then bankruptcy might be the best of bad options. (You’ll find more details in MSN’s Bankruptcy Guide.) Filing bankruptcy is often unpleasant and expensive, but unlike real suicide, the damage isn’t permanent.

Better yet, let’s hope you can contain the damage to your finances before your situation gets that bad. Realizing how serious these seven missteps are can be the first step toward averting disaster, and getting yourself on the right financial path.

http://articles.moneycentral.msn.com