The Hard Truth: There’s No Easy Way Out of Financial Problems

If the questions you sent to Money Talk are any indication, debt weighed heavily on your minds this year.

Queries about debt--how to reduce it, manage it and mitigate the damage it does to your financial health--dominated letters from readers in 2001.

And no wonder. The average household with credit card debt now carries a balance of more than $8,000. Debt of all kinds, including mortgages, credit cards and car loans, rose 42% from 1995 to 1998, according to Federal Reserve figures, with the median family indebtedness topping $33,000. High debt loads have helped lead to a record number of bankruptcies this year, with more on the way as layoffs mount.

But whether it was getting out of debt or tapping retirement funds or devising a do-it-yourself estate plan, many of the people who wrote in this year were looking for the same thing: an easy way out.

The problem is that there is still--unbelievably as it may seem, and despite advertisers’ best efforts to convince you otherwise--no free lunch.

Take debt. By now, Money Talk readers should know that debt can be a cancer on your fiscal well-being. Whatever you buy on credit can ultimately cost you two, three or four times as much as the initial purchase price, once you figure in the cost of interest. You wouldn’t pay a merchant $200, $300 or $400 in cash for something with a $100 price tag. But millions of people gladly pay credit card companies that much for the privilege of buying something that most likely won’t last for as long as the payments do.

Some people who wrote Money Talk thought they had the problem licked by consolidating their debts through a mortgage refinance or home equity loan. Trouble is, they still have to pay that money back. And if they can’t make the payments, they lose their house.

Others looking for the easy road turned to companies that promised to painlessly reduce or eliminate debt, only to have their credit ratings trashed in the process.

And many wanted to believe rosy promises by Internet hucksters that bankruptcies, delinquent payments and other negative credit items could be magically “erased” from their credit report. Not so.

Over and over again, our advice was the same: The way to climb out of debt is first to stop digging yourself deeper into a hole. Cut up your cards if that’s what it takes to stop spending. Make a list of your debts, and start paying off the highest-rate loans first. Most personal finance books have a chapter on how to reduce debt, and Quicken offers a handy debt pay-off calculator at www.quicken.com.

People also had lots of complaints about credit card companies that charged high fees and jacked up interest rates.

Consumers can start fighting back by shopping around for a better deal. (Those who can’t find a better deal, because of bad credit, should figure out that it’s time to stop borrowing.)

But really, the only way to win the credit card interest game is not to play it. Paying off your credit card in full each month drastically reduces the ways a credit card company can profit from you.

Of course, debt wasn’t the only concern readers expressed this year. Several of you wanted instructions on how to raid your retirement funds.

Sometimes the cause was ostensibly worthy, such as the desire to pay for a child’s tuition to a private college. Other times, the proposed withdrawal was just plain ridiculous--such as using 401(k) savings to pay off a low-rate mortgage.

For the record, once again: Don’t tap your retirement kitty prematurely except in the most dire emergency. Taxes and penalties mean you’ll lose half or more of what you withdraw.

Even worse, you’ll lose the benefit of all that tax-deferred (or, in the case of Roth IRA, tax-free) compounding. That’s something you can never, ever get back. A $10,000 withdrawal now means you’ll have nearly $175,000 less in retirement money in 30 years, assuming a 10% annual return. (And because someone always writes asking where to find a safe 10% return, the answer is: You can’t. The 10% return figure assumes long-term investments in stocks and stock mutual funds, which, as we all know by now, can decline in value in any given year.)

Chances are you can find some other, better way to accomplish your goal that doesn’t require gutting your future.

If you want to pay a mortgage off early, you can make extra payments toward the principal. If you want to cover your child’s tuition, you can take out a tax-deductible home equity loan, apply for student loans or encourage him or her to look for more affordable schools.

Remember, no one is going to lend you money to pay for your old age. It’s up to you to save, and to keep those savings intact.

Finally, many of you are confirmed do-it-yourselfers when it comes to finances--whether or not you should be.

Tax law, for example, is so complex and ever-changing that it makes sense to have a tax pro prepare your return if you own a business, have a lot of taxable investments or otherwise lead a complicated financial life.

A lot of people resisted the idea that they shouldn’t be preparing their own returns. But more than half of Americans now hire help, and more probably should.

Likewise, anyone who’s worth more than $1 million needs the services of a qualified estate planning attorney.

Do-it-yourself software is great for simple wills for people who don’t have much (or much to lose), but it’s not sufficient for people wealthy enough to face estate taxes. Your local bar association can refer you to certified estate planning specialists.

After all, free advice is worth every penny you pay for it. Money Talk is happy to inform and entertain, but for the real scoop, stick with the pros.

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Liz Pulliam Weston is a personal finance writer for The Times. Questions can be sent to her at moneytalk@latimes.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012. For past Money Talk questions and answers, visit The Times’ Web site at www.latimes.com/moneytalk.