Debt happens. A lot of time it happens while we’re not paying attention, and by the time we notice what’s going on, it’s overwhelming.

One reason debt happens to otherwise sane, right-thinking individuals is that many of us just don’t know enough about money. High school might teach you chemistry, math, and how to write a composition, but it rarely introduces concepts like debt, credit, interest rates, and balancing a checkbook.

So let’s take a moment to learn about debt. The way an ordinary person thinks about debt is not necessarily the way a financial person thinks about debt.

Nearly everybody in the U.S. technically has debts.

While financial purists might disagree with this point, the best way to think about your debts right now involves dividing the world into two groups. The first group are bills that you have to pay each month that will recur next month. In this category are things like the electric bill, grocery bill, what you pay for gasoline, and car insurance. You'll be buying clothes and paying for telephone service for the rest of your life. These are ongoing bills, and everybody has them.

If you rent (not own) your home, rent is one of these ongoing bills.

All forms of insurance (car insurance, homeowner’s insurance), utilities (even if you do own your home), supplies (food, clothing, gasoline) count here.

Taxes count here, too: figure property tax (if you own your home). Income tax would also count here but if it’s deducted from your paycheck, you may be better off thinking of your salary as your net salary (after taxes) and not figuring the taxes in. (Financial purists would say you should calculate your gross salary and consider your taxes as part of your ongoing bills, but why make things complicated at this point? For this simplified exercise, just work with you after-taxes salary.

Child care fits in here, too. So does entertainment, babysitting, and special services (getting your hair cut) plus vacations.

If you spend a little time, you can probably calculate what you owe each month to these ongoing bills. There are two ways to do this. You can try to figure out what you pay each month (which is how you're typically charged for water, electricity, and rent) or you can figure out what you pay each year and then divide by 12. The yearly method works out well if you pay some of these bills quarterly (like insurance), semi-annually (like property taxes) or annually.

These are your ongoing bills. You can sometimes alter them (by canceling a cell phone or downgrading to basic cable TV) but you can't really get rid of them, at least not all of them.

It’s important to know the amount you need to meet these ongoing (never-ending might be a better word) bills because you need to know what it costs you to live.

Look at your monthly total for these ongoing bills (and maybe also your annual total). Now look at what you earn, each month and each year. (If you are paid every two weeks, your monthly salary is your net paycheck times 26 weeks divided by 12 months.) For instance, if your net check every two weeks is $1,222 your annual net pay is $31,772 which, when divided by 12, gives you a net monthly income of $2,648. (Your monthly income is slightly more than the product of your biweekly check times two.)

If your ongoing monthly or yearly expenses exceed your monthly or yearly income, you are in serious trouble. You need to get off the computer (hey, maybe you ought to sell the computer) and find a credit counselor. If you live consistently in a state where you have to spend more than you make, you are digging yourself deeper and deeper into debt with no hope of ever getting out.

Assuming you have more income than outgo to ongoing bills, let's proceed.

You should know figure out—and this is hard to quantify—that you also need a certain amount of money every year for things like car repair, medical or dental bills, and other things that just seem to come up. While it’s hard to name a figure for this (and actual numbers may vary widely from year to year), you can see that it’s reasonable that you expect some of your money is going to get tied up in stuff like this. This is what I call "unexpected expenses," which is a misnomer, since I expect to have them.

Now that you have those amounts (your ongoing expenses plus your unexpected expenses), realize that debt consolidation does not apply to either of them. You can consolidate a lot of things, but not these amounts.

That means you are going to have to figure out how to come up with this much money each and every month to stay afloat, completely apart from your debt consolidation.

(If these numbers scare you, there are some things you can do. You have more control over what you spend than you might think. Downgrade or cut out extraneous services. Figure out ways to spend less on groceries and the light bill. Cancel things you don't need. You have a little less control over your income, but maybe you can figure out ways to earn more, like taking on a part time job or going for a likely promotion at work. Your goal is to have as much money left over from your income after you pay these bills. Work both ends, especially outgo, to get the best possible figure.)

Now you need to look at all of the sorts of financial obligations you might have which you can (in fact, which you’re expected to) pay off. If you own your own home, your mortgage counts here. You can’t pay off your property taxes, homeowner’s insurance, or lawn guy, but you can eventually pay off your mortgage. Actually, mortgage is not a bad debt to have (in many cases, mortgages are one of the few forms of “smart debt”). Take a moment to write down your debts—put a monthly figure (your monthly mortgage) and then a “pay off” figure (the total amount of cash it would take to pay off your mortgage today). This figure may be written on your mortgage statements but, if not, it’s worth the trouble to talk to a real estate person or certified credit counselor to figure out.

Another common form of debt in America is the car note, and since most households have more than one vehicle, a lot of us have more than one car note. Write down what you pay a month and how much it would take to pay off the note. The balance of your note should appear on your car statement each month. If not, call the toll-free number of the lender and ask to know the balance of the note. It’s your debt, you have a right to know.

Many Americans also have student loans. Again, write down what you pay each month and what you owe in total.

The come any “finance plans” you may have agreed to. Common ones are loans to buy furniture, computers or electronics, or even new tires or household appliances. You may have taken out a loan to pay off an orthodontist’s bill or to landscape your backyard. These may be in the form of special credit cards, in-store loans, financing deals, or loans you arranged yourself with your bank. Take each one and figure out what you pay each month and what it would take to pay off the loan.

By the way, some of these loans probably allow you to pay off any amount you want each month, providing you pay a certain minimum. For this exercise, just calculate the minimum payment as the monthly amount due. Technically, that’s all that’s really due.

Last but not least come the credit cards. Credit card debt can be the hardest to track, so use your last statement or—better yet—call the toll-free number on each card, ask for your exact latest balance and the next minimum due.

Now add up all of the debts that you can pay off (mortgage, loans, credit cards). You should have a monthly minimum payment and then a grand total of what it would take to pay them all off.

This total is what you can manage with a debt consolidation program. Now the details of your particular plan may vary, but all of this stuff is potential debt for consolidation.

The goal of debt consolidation is to pay off this kind of debt get one big loan to cover it, and then pay off the one big loan. Technically, debt consolidation is just another debt, but for the right people in certain situations, it’s “smart debt.”

Consolidating the debts means that you now have only one payment and you can often set this up to be much lower than the sum of all your little payments. (With this exercise, you and your credit counselor can compare what you’re paying now each month versus what you’d pay with debt consolidation, and typically, you pay quite a bit less with debt consolidation.)

Before you decide to consolidate your debt, you have to remember that you still need enough money each month to pay all of those ongoing bills (food, car insurance, child care). You can’t consolidate them, so they have to be paid out of your regular monthly income.

If you’re in a lot of debt, you need to take emergency action. First you need to sort through your debt to understand what it is and what might be subject to consolidation. Then you need to stop making more debt. Cut up your credit cards or do whatever extreme act you need to do to stop making the problem worse. If you’re in serious financial trouble and still using your credit cards, you’re like the guy who smokes on his way to lung cancer surgery.

You need to consider debt consolidation and to have a realistic idea of what it can do for you. If you owe a huge amount of debts that you are expected to pay off and your minimum payments are crushing you, debt consolidation is the very next thing you need to check out.

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