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How to take control of your debt

There are some aspects of your finances that you can't control—like the stock market, and others you can—like debt

Making a few smart lifestyle decisions and maintaining some discipline can keep it under control.

While debt can be easily abused, it isn't necessarily bad. Borrowing to pay for a home, for example, can be good. You gain equity as you pay down your loan or mortgage. Also, your mortgage interest can be deductible on your income taxes.

On the other hand, relying on credit card debt to sustain your lifestyle is like playing the lottery to fund retirement. The math is overwhelmingly against you.

Do the math

Credit cards offer instant gratification for people who want something they can't afford. Often bearing interest rates of 15% or more, this kind of debt erodes your ability to save and costs you dearly over time if you continue to carry a balance.

For example, if you borrowed $1,000 at an annual interest rate of 15% to buy a new television and made monthly minimum payments, it would take more than 4½ years to pay off the debt. The $1,000 loan would end up costing you $1,375 with interest. You also would lose any chance to earn a positive return on the $1,375 by saving or investing it.

Live with a budget

You can avoid such bad debt by living below your means. A detailed budget can get you on track and help you stay there. Just as dieters who keep a record of what they eat tend to lose more weight than those who don't, people who monitor their spending habits often have an easier time sticking to a budget.

Make saving a priority. One way to do this is by setting up an automatic direct-deposit plan through your bank or investment company. Ensuring the money never hits your wallet will reduce your temptation to spend it. You should also establish a financial safety net—at least 6 to 12 months' worth of expenses in an account that's easily accessible in an emergency.

A budget can help you watch expenses and divert more money to saving or paying off bills. Pack your lunch instead of eating out. Forgo the $4 mocha latte supreme and order regular coffee. Keep your car after it's paid off rather than trading it in for the latest model—and a new set of payments. It all adds up.

Gain control of your finances

If you have credit card debt, you can dig yourself out. Find the card with the highest interest rate and pay as much as you can above the minimum payment each month while continuing to make minimum payments on other cards. Once the first card is paid off, divert those payments to the next most expensive card, and so on.

If possible, consolidate your cards under the most favorable interest rate available and pay as much as possible toward your monthly balance. Even a credit card is OK if you can pay off the balance every month. You get the convenience of using a card but avoid paying interest on products such as groceries, food, entertainment, and travel.

If you're in serious trouble, consider debt counseling. Reputable sources such as the National Foundation for Credit Counseling can help consolidate your debt into one monthly payment and negotiate with your creditors for lower interest rates or minimum payments.

In the end, it's all up to you. Stick to your budget and live within your means. Then you can manage your debt and not let it manage you.

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