Spending reductions are needed to cut debt

May 02, 1993

Sooner or later, nearly everyone will experience a short-term money crunch.

For some people, however, the problem is chronic: There is never enough cash to cover immediate needs, and saving or investing is impossible.

The solution: Earn more income or slash household expenses. For most people, the latter choice is easier.

In a typical American household, about 75 percent of after-tax income goes to cover basics, such as food, housing,transportation, clothing and health care. The remaining 25 percent is spent on consumer debt, entertainment and savings.

Problems often arise when too much is spent in one area, says the American Society of Chartered Life Underwriters & Chartered Financial Consultants, a trade association for financial planners.

"If you have an excess allocation to any category, you should re-evaluate the importance of that category to your real personal needs and desires," the organization says. "For example, is it really necessary or desirable to pay $500 a month to lease that special automobile?"

Because most families need about 75 percent of after-tax income to cover basics, the easiest cuts can be made in the remaining 25 percent. All too often, however, most of that discretionary income is spent repaying debts.

Eliminating debt is never easy, but persistence pays off. For those buried under mounds of debt, the organization recommends that 20 percent of take-home pay be allocated to debt reduction.

"At some future date, probably two years or less for most debtors, you will be debt free and will have that 20 percent to apply to your real needs and desires."

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