Financial Dilemmas: To Save or Shed Debt?
Pay down your debt and hold off on investing – or do both? And do you first pay off the debt with the highest interest rate, or the one with the biggest balance? These are common financial dilemmas many Americans face in these tough economic times.
Yet advice distributed from money experts is not a one-size-fits-all answer. The more concerns, the more directions. And the harder it is to get going. We’ve outlined a starter map to give you the confidence to craft a solution for yourself.
Take your financial temperature. This Forbes article describes a 41-year old consumer struggling to decide if he should pay off $5,500 in credit cards or put the focus on his retirement goals. Sound familiar? Forbes says the answer is about personalizing the solution, which is different for all. Is debt what bothers you the very most? Or not having enough cash in cash of an emergency? This Kiplinger story tells a similar story from a 25-year old and his student loan financial dilemma. Advice or priorities all differ due to age, situation and personal feelings.
Secure a small cash or Emergency Fund. Some experts advise at least $500, others recommend having $1,000 available in cash or in an account you have instant access to. Ideally, it grows to 4-to-8 months of income that covers the basics or must-have expenses in case of an emergency. But start with some kind of a cash cushion before focusing on nailing debt or further investing.
Rewards found when reducing accounts owed. When paying off debts, it is more financially advantageous to tackle the debts with the highest interest rate. However, it feels psychologically better to lessen your account load by reducing the number of debts owed. This alternative “snowball” effect could be the motivation that keeps you on track. It’s all about creating a personalized order of importance when it comes to financial dilemmas.
January 24th, 2010 at 8:11 pm
I think people tackling debt need to pick a direction and stick with it. Too many people approach their debt like they do dieting: first they try one way and then when they fail stick to it they try another and another and another. In between approaches though they charge away because “soon they’ll correct it all.” Sometimes they hear what their friend is doing and abandon their own plan to try that one. Pick a plan that meets your personal goals and needs and stick to it!!! If you fall off the wagon and are disappointed in yourself then try again, don’t give up. I found Suze Orman’s 5 Steps to Financial Freedom very helpful when I was investigating my money matters.
January 25th, 2010 at 5:21 pm
I totally agree with Tiffany. The key is sticking to it. And like the article says, realizing the answer is not a one-size-fits all. So create a plan and don’t doubt yourself! Also, tracking your progress is key and inspires motivation.