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The Battle Plan For Combatting Family Debt

How to get out of the red in five steps.

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, Kanye concerts (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. 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.)

Step 4

Raid your non-retirement savings, leaving just a small–$500?–cushion. Apply the money to your debts. (If you subsequently have a big emergency, you can always borrow.)

Step 5

Time to make a debt payment plan. Brace yourself for some controversy. Simple math says pay down your highest-rate debt first and make the minimum payments on everything else. The math is undeniable. It is RIGHT. Except many people have extra-mathematical things called emotions.

Researchers at Boston University’s Questrom School of Business tracked consumers who were using HelloWallet to try to pay off credit card debt over a three-year period and reported their results in the Harvard Business Review. The most successful debt reducers focused on paying off their smallest balance first. If they paid the $1,000 balance down by $500, their brains seemed to say, “Wow, I just cut what I owed by 50 percent. One more month like this and the debt will be gone! I love debt reduction.” Had they instead spread the money over multiple accounts or put it toward the largest balance, they would have felt worse.

Many people paying down debt are like dieters. They are encouraged by good news and discouraged by an apparent lack of change.

So are you the pure math type or not? I don’t know — and you may not know either. So first, do the math. See how much it will cost you in extra interest charges if you eliminate your smallest balance first. And so on. Just because you start one way doesn’t mean you can’t switch.

Experts disagree. Ric Edelman says math should rule. Dave Ramsey believes people need the motivational kick that comes from extinguishing one debt quickly.

My view: eliminate the smallest debt first, then tackle the most expensive one. See what works. Then repeat.

Almost everyone agrees that when you eliminate a debt, you should reward yourself. Get a sitter and go out for dinner and a movie—or whatever passes for legalized fun in your world.

If you haven’t already, at some point analyze where your money went over the past year. Everyone who does is surprised by something. To make sure debt doesn’t get out of hand again, use a budgeting program like Mint. Or you might turn to your partner and say, “I don’t think little Luke really likes Mandarin.”

Andrew Feinberg is a writer and money manager. He is the author or co-author of five books on investing and personal finance, including Downsize Your Debt. His work has appeared in the New York Times MagazineGQ, Barron’sThe New York TimesPlayboy and The Wall Street Journal, among other publications.