Lots of Income, Little Common Sense

There would be much less cynicism around here if there were fewer people in the world like this couple who took time out of their busy day to write this note to LA Times personal finance columnist Liz Pulliam Weston.

Dear Liz: We recently realized we needed to stop our spending ways and would like to know the best way out of debt.

Our income, which has fluctuated between $190,000 to $250,000 a year, is being eaten up by payments on $68,000 in credit card debt, so we're not saving anything for retirement or our two kids' tuition.

We're thinking about refinancing our second mortgage or tapping our 401(k)s to pay off the debt. Additionally, we hold some company stock outside our retirement plans on which we could clear, after taxes, approximately $60,000.

What would be the best way to pay down all of this debt? We know we must tap into at least two sources.

Answer: Actually, you should tap into one source — selling the company stock — and avoid the two other sources as if your financial life depended on it. Because it probably does.

The problem with tapping home equity is that you're squandering a source of long-term wealth to pay off a bunch of short-term spending.

Most people who pay off credit cards with home equity loans wind up racking up more credit card debt because they don't fix the overspending that caused the debt in the first place.

Taking out 401(k) loans is also fraught with peril. If you lose your job, you typically have to pay the loan back quickly or risk having to pay taxes and penalties on the balance you owe.

You're extremely lucky to have an asset — the stock — that you can sell to pay off the vast majority of this debt. Then you can concentrate on paying the rest out of your substantial income.

That's a far better solution than putting any of your other, more important assets at risk through unwise, and unnecessary, loans.

Given your income and a concerted effort, you could eliminate this debt in a few months.

The discipline you'll use to do so will help you get the rest of your financial life in shape, and the money you'll free up by reducing your spending can be used to get your retirement savings started. Once you're on track there, you can start saving for your kids' future education.

People with far lower incomes have dug themselves out of bigger holes. There's no excuse for you not to take care of this debt — and fast.

It's tough to get by these days when your household income is only a quarter-million dollars.

Do you think their employers would have second thoughts about these two during their yearly performance reviews if they were to learn of this letter, "Geez, we're paying you over a hundred grand a year and you've got $68,000 in credit card debt in addition to a second mortgage...and you're writing to a newspaper because you've just now figured out that you have a problem?"

This is such a 21st century phenomenon.

Someone transported to the present from just a few decades ago would be astounded by this note - not so much by the dollar amounts (which really are a little mind-boggling) but by the casual nature of it all, "Hey honey, let's write a letter to Liz and see what she thinks we should do".

We really do live in an era where people have no fear of debt.

Since Ronald Reagan was in the White House an entire generation has become accustomed to and, in fact, embraced debt as a way of life at all levels - indivuals, business, and governement.

What could possibly go wrong when much of the Western World thinks this way?

It's hard not to be cynical.