Once you've got your debt and saving goals written down and prioritized, it's time to merge the two. Prioritizing between the two lists can be difficult. You have to balance two competing interests -- reducing debt as quickly as you can versus investing your cash in an appreciating asset. Here are some tips for doing this.
Start with a budget. First, make sure you know where your cash is already committed. This will help you figure out how much money you have to work with. It will also help you see places you might be able to cut corners.
Divide and conquer. Don't assume you have to meet only one goal at a time. If you have $400 extra each month, you might want to put half toward your 401(k) plan and half toward reducing credit card debt, for example. (And remember, the half that goes to your 401(k) will come out to more than $200 in value, since your contribution is pre-tax.)
Make it automatic. If your employer offers direct deposit, take the opportunity to funnel cash directly to your savings account or retirement plan. Set up automatic bill payments when you can -- you may even get a reduced interest rate for doing so, and developing a history of on-time payments will boost your credit score, which can mean better borrowing options at lower interest rates down the line. (Employers and landlords often check your credit score, too.)
To keep your head above water, you may be considering borrowing more money. And even if you're able to meet your financial obligations, by using credit wisely you may be able to transfer current debts to accounts with lower interest rates.
If you are considering a new credit card, car loan, or other type of debt, follow these tips to make smart choices:
Shop around. Always shop around for the best deal. For example, when buying a car, be sure to check car loan options with your bank or other lending institution (which typically offer better interest rates than car dealerships). Even if you get a lower rate from a dealership, you'll have less negotiating power on the price of the car as a result of consolidating these services. For information on shopping for credit cards, read Nolo's article Shopping for Credit Cards.
Read the fine print. A deal that sounds too good to be true usually is. A loan with no interest or payment for one year usually comes with some catch -- you have to pay the entire thing off in that year or you'll owe all the interest that's accrued in that time, or there's a huge interest rate adjustment at the end of the year. Even if you use these forms of credit, you want to be sure you know when the changes occur and be prepared to handle them. Also, ignore the pressure of salespeople who want you to read without signing. Take the time to read everything carefully first; if you don't understand something, don't depend on a salesperson to help you figure it out.
Be realistic. Don't assume you're going to make a lot more money in the relatively near future. Make decisions based on what you can afford now. If you have more money later, you can reevaluate your plans.
Exercise discipline. Living on credit because your tastes exceed your income is a strategy that has doomed many people before you. Don't open new forms of consumer credit without closing old ones. You'll find yourself deeper in the hole, and it will be harder (and more expensive) to get out.
Borrow from family or friends. Parents, grandparents, and family friends know that it's hard to make your way in the world when you're saddled with debt. If you need cash for a good reason -- you want to put a down payment on a house, or you need to pay off your credit card debt and want to contribute to your employer's 401(k) plan for the full matching amount -- talk to family members who may be willing to lend you the cash. Don't expect any help if you just took a vacation to Hawaii or replaced your entire wardrobe, though. Instead, have a good reason for the request, show your responsible borrowing history, and offer to pay a fair interest rate.
Give yourself a break. It's unrealistic to forgo every pleasurable purchase in the hope of future financial wealth or freedom. Set a budget and stick to it, but include some room for the occasional night out or small shopping spree. Just make these splurges the exception, not the norm.
To learn more about making a budget, prioritizing debt, and getting back on your financial feet, get Solve Your Money Troubles: Debt, Credit & Bankruptcy, by Robin Leonard and Margaret Reiter (Nolo).
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