What to do when you're treading water with over $100,000 per year?

Our experts tell Anna — and anyone else with trouble handling income and debts — how to manage her money.

Thanks to Debtors Anonymous, Anna now knows she can't keep spending more than she and her husband earn. But that realization won't bring financial security by itself. Anna and her husband also need to focus on the details; otherwise, they will be dogged by debt, could struggle to pay for their kids' college educations, and may well lack the money to retire comfortably. With all that hanging over their heads, where do Anna and her husband start?

I posed that question to two of my favorite personal-finance experts: Gerri Detweiler of myVesta.org, formerly Debt Counselors of America, in Rockville, Maryland, and Glenn Pape of Ernst & Young in Chicago.

1. Keep a budget — together. Anna has never kept tabs on her money. That's why she's been paying $40 per month for credit insurance without knowing what little protection that gives her. It's time to find out exactly how she and her husband are spending their money. The first step is to talk about where their cash is disappearing to — something they haven't done so far.

GERRI RECOMMENDS: Anna's husband should attend several DA meetings with her. That should help them start communicating about their money. Anna and her husband should keep a log of their spending, too. "She did it one month, but this needs to be an ongoing, joint venture."

GLENN RECOMMENDS: After studying monthly spending, the couple should figure out which expenses are set and can't be avoided (fixed expenses), which ones change from month to month (variable expenses), and which ones they choose (discretionary expenses). "Categorizing your expenses in this manner will help you determine where you can immediately cut back and where you simply cannot redirect your spending right away," Glenn says.

KOBLINER SUGGESTS: Figuring out the finances might be easier for Anna if she used a personal-finance program; she should consider Quicken ($59.95; www.quicken.com) or Microsoft Money ($27.99 at www.amazon.com). These software packages track expenses, income, investments, and taxes, among other things. And Anna and her husband should definitely check out our budget calculator.

2. Seek additional help with debt. Although Debtors' Anonymous has helped Anna change her spending habits, she seems to need a push to deal with her existing debt problems. 

GERRI RECOMMENDS: Anna needs a plan to pay off the debt. The Zilch home software package ($25; www.zilchworks.com) will tell her how much she needs to pay each month and show her when that plan will retire all the debt. 

KOBLINER RECOMMENDS: Tackling debt is easier for some people if they have outside help. One way is to join a credit-counseling service, such as the Consumer Credit Counseling Service of Maryland and Delaware, which doesn't charge its clients anything. CCCS sets schedules for people to pay off their debts, taking money from their bank accounts automatically each month to reach that goal. Gerri's company, MyVesta.org gives similar assistance, but charges up-front fees for it.

(Note: See how the Credit Counseling Service helped Liz.)

3. Eliminate high-rate credit-card debt. Whether Anna uses software or a credit-counseling service, it will tell her to tackle those four separate lines of credit — with debt totaling $21,114 — that she and her husband are carrying. They owe $8,015 on their MBNA Visa Card, which has an interest rate of 24.5%, and $4,772 on their Discover card, which charges a 24.9% interest rate. Their Optima American Express balance is $3,506; that interest rate is 23.9%. They are also carrying a $4,821 balance in a Citibank Checking Plus account, which charges them 19.5% interest. That's an awful lot of high-rate debt.  

GERRI RECOMMENDS: Anna should negotiate with her current credit-card companies to get lower rates. Her chances are good because she has several cards and at least one is likely to covet more business from her. She could also try to find a card with a lower rate using Web sites like Bankrate, CardWeb, and CreditCardMenu. She might find it difficult to get a new card due to the negative items on her credit report. She has been paying her bills on time for more than a year, though, so she may well qualify for a new card. If she does, she should transfer as much as she can from the high-rate cards to the new, lower-rate card. 

GLENN SUGGESTS: Credit-card debt should be the first thing Anna tackles. "Did you know that a credit-card balance with an interest rate of 25% will double in less than three years if no principal payments are made?" In other words, making the minimum payment each month won't cut it.  

KOBLINER SUGGESTS: Anna and her husband could erase half of the high-rate debt fairly easily. They currently have $11,654 in two money-market accounts, where it earns less than 5% interest. Using that cash, they could retire the $4,772 of the Discover card debt and $6,882 of what they owe MBNA. That would leave them with $9,460 in high-rate debt, which they should try to transfer to a card with a lower rate than 19.5%. (But not to a card with a teaser rate: last time they tried this, they made one late payment, and the interest rate rose considerably.)

Psychologically, of course, using all your savings to pay off your debts is difficult — it often feels better to have more cash on hand. And Debtor's Anonymous doesn't condone the use of credit cards, so it would be hard for Anna and her husband to deal with an emergency under DA's philosophy if they eliminate their savings. But maintaining a large emergency fund gives Anna and her husband a false sense of security when they're actually losing money. Right now, they are incurring more than $4,000 in credit-card fees while making about $460 in money-market fund dividends each year, for a net loss of $3,540. But this would be slashed to $1800 if they used all the money-market assets to pay off credit-card debt now.

4. Focus on retirement. Anna is just 27 years away from retirement age, so she'd better start thinking about it. She and her husband have $37,000 in an IRA rollover account with a major brokerage firm, and her husband contributes some money to his company's 401(k) plan, but that's it. 

GLENN RECOMMENDS: Anna's husband should contribute 10% of his salary, or $10,000, to his employer's 401(k) plan. He'd make those deposits with pre-tax earnings, and the money would grow tax-free until he took it out when he retires. The couple is also eligible to save $2,000 per year in a Roth IRA. That would provide tax-free growth, too, and it wouldn't be subject to taxes when they withdraw the money upon retiring. 
(Read more about Roth IRAs.)

KOBLINER RECOMMENDS: Anna and her husband may want to reconsider their IRA. That's because keeping it at the brokerage house is costing them a lot in fees. In the first year the account was open, for example, they were charged about $500. Most of that total came from sales charges on mutual funds. But there are several IRA providers that would do the job much more cheaply. An IRA with Vanguard would provide access to scores of funds without sales charges ("no-load funds"), which could give Anna and her husband more money when they retire. They could also look into no-fee IRAs and no-load funds offered by Charles Schwab, with whom they have another account.

5. Save to send the kids to college. Anna has generous in-laws who have promised to pay part of her two children's education expenses. But it isn't clear if the grandparents will cover all of the costs, so Anna should save for the kids' college years, too. 

GLENN SAYS: They have some time before college starts, but the couple still needs to save $500 per month to reach that goal. If it turns out the grandparents cover it all, they can earmark the total for retirement or another goal. Anna should keep in mind, though, "that even the best intentions of grandparents can become swamped by life's surprises: a disability, a long-term care need, a lawsuit, and a business downturn."

KOBLINER SUGGESTS: The money Anna and her husband save in his 401(k) plan and in their Roth IRA can help fund college for the kids. That extra $500 could go into those accounts, or an even better deal might be New York State's 529 plan (www.nysaves.com, 1-877-697-2837), a state-sponsored college savings program. They can deduct as much as $20,000 in yearly contributions for each child from their state income taxes, the money grows tax-free, and withdrawals for higher education will be exempt from state and federal taxes. That's a great deal.