It's hard to find an American who doesn't live without a little bit of debt, but too much could crush your savings dreams.

That house you're sitting in right now is your home. Do you also think that it's a piggy bank that lets you tap into your home equity to finance your next plasma TV, ski vacation, or collection of single-malt scotches?

If you do, snap back to reality! Too many Americans had actually believed that. Now, the subprime mortgage crisis has created the most disastrous economic problem since the Depression. National savings rates are down to abysmal and alarming levels, and the gravy train of ever-rising home prices has come to a screeching halt.

Cash-out refinancing was never meant to make you rich, because you don't own the money you're getting. You're borrowing it. The bank is kind enough to hand you some cash with the reasonable expectation that you'll pay it all back someday-with a few years of compounded interest.

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Would you take out a second loan on your car to fuel your everyday spending? Of course not. The 401(k) is sacred ground, too, because there are severe penalties for grabbing that cash too early. And your home is most likely the most valuable asset you own-and you're chained to it by a hefty mortgage debt load. You should treat your home like the major investment that it is.

Refinancing can still be your friend, of course. If your current mortgage is one of those "innovative" loan structures that were so popular in recent years, you should probably refinance right away. Mortgage rates are still historically low and dipping, and there's no reason to wait for an adjustable-rate loan to start adjusting. You're not very likely to see any positive changes to those rates. A simple, safe 30-year mortgage loan with a fixed interest rate could save you many thousands of dollars over the next few decades.

Cash or credit cards?

The same goes for plastic. Used correctly, credit cards can be great money management tools. There's no need to carry around wads of cash. Every month, you get a detailed statement that shows exactly where your money goes. And some cards give you valuable benefits, like annual cash-back rebates or frequent flyer miles.

But if you can't afford to pay off your card balance at the end of each month, you shouldn't use the cards. The trick is to find a card with a generous cash-back policy, and never pay a dime in interest charges. The rewards would not be worth it if you couldn't zero out the balance every time the bill comes around. You'd be better off paying cash until the problem was corrected.

Debt instruments, like credit cards, mortgage loans, home equity loans, or HELOCs, are great tools when you use them the right way, but they're terrible threats to your financial health under a wrongheaded money management strategy. Don't get caught on the wrong side of that line.

Published on October 9, 2008