How Does One Determine Where To Put Their Money First?

This has been an old question from the past. Should you be putting money in savings or investments, or paying off a loan? This is one of the most frequently asked questions that are asked at financial offices throughout the country.

The best way to narrow this down is to examine your debt and separate your good debt from the bad debt. You ask, is there such a thing? It is almost always a good idea to get rid of credit cards and other high interest loans before you set aside cash.

However, it is paramount not to accelerate payments on your mortgage or student loans at the expense of increasing your savings or retirement. This is what we call good debt. We will examine more on this later.

First Step Is To Pay Off Your High Interest Debt

If you have high interest credit card debt, pay that off first. It does not make sense to keep paying that high interest rate and try to save pennies at the same time. You would have to make more than 20% after-tax return on stocks, bonds or mutual funds to make them a better investment than paying off credit card debt.

There is one exception to this. If your employer offers a 401k plan and matches your contribution, fund it up to that level, even if you have credit card debt. This is because you are getting a 100% return on your investment.

Second Step Is to Identify The Good Debt

It is usually not a good idea to pay off your home mortgage unless you have a lot of extra cash. Uncle Sam refunds part of your interest payment if you itemize your deductions on your tax return. Use your money instead to invest in liquid assists.

Do not be in a rush to pay of your student loans either. Qualifying interest on student loans can be written off no mater how long it takes to pay off your loans.

You can ease the burden of repaying your loans. Thanks to recent legislation, you can now shop round for the best terms. For example, lenders may offer a rate reduction if you choose to have your loan payment automatically deducted from your bank account.

And some lenders will knock more off your rate after 24 or 36 months of on-time payments. Also, you can often save quite a bunch of money by looking into consolidation of your loans, which is also a good idea.

Third Step Is To Try Saving And Investing

Once you have eliminated your high interest consumer debt, start saving as much as you can. The best place to begin is a 401k plan if you have one. The next best option is an IRA. In addition to putting money into a retirement account, you need cash that is readily available to you in case of an emergency so you do not have to go back and rely on those darn credit cards.

Try to set aside enough money to tide you over for three months if your job suddenly stops. If you have less-than-steady income, such as from a commissioned sales position, a job that has exposure to economic fluctuations, you definitely need a six month cushion set aside for income.

It is best to put it away in a high-yield saving account or money market fund on a monthly basis until you reach the amount you need.

How And Where To Begin?

First you need to take a look at all of your debt. This not only includes your student loans, but your credit cards, mortgage or rent, monthly utility bills, insurance, department store charges, savings accounts, checking accounts, etc.

Then you need to place the entire bill portfolio down starting with the ones having the largest interest rate. Next you must decide which of all of your bills and or loans can be used as tax deductible. These are the bills you should separate from the others and in due time we will discuss why it might be the best to pay these off last.

Now you have a complete picture in front of you of your monthly obligations that can be added to reveal your total payment strategy that you have to work with.

Which Bill Do I Try To Pay Off First And How Much Should I Try to Put Into Savings?

Well, remember almost all debt is bad debt. However, you can make some of that debt work for you to your advantage. And these are the bills or loans that the government lets you use to write off as tax deductions and that helps you to protect wealth.

And those that stand out right away are your mortgage (home) and your student loans. The faster you pay of these two loans the faster you lose your tax deductions, and that is why you should pay the minimum payments on them. Now, with the savings from your tax deduction, you have more money to put into investments.

The bills that hurt you the most are, your credit cards due the extreme high interest rate and department store charges. Neither of these help in any way when it comes to income tax time and they eat away hard and fast at your wallet if they are not paid off in full each month.

So to narrow it down, make the minimum payments on your mortgage and school loans, pay utility bills to keep up good credit (not to say TV, heat. water, etc.) and largest payments on the bills with the high interest rates that gobble away at your money fast. Wealth Creation comes quickly once you start.

Another factor to consider is if you save a nice emergency fund, you won’t have to worry about getting guaranteed personal loans in the future.

How Am I To Be Building Wealth?

Now that you are finished with college and have a decent job and making money you will have more money to work with. The best way to make money for yourself and also to pay off your loans is the following.

Say your loan is for $20,000 and your monthly payment is $202.00. You have a choice as how to pay it off. You decide that you can afford $100 extra to use towards the loan. How should you use that $100?

Pay the minimum amount on your school loan. Then take the extra $100 and invest it. Now if you do this simple plan for the full life of your loan you will have been able to use it as a tax deduction and by the end of the 10-year period your investment has now grown to $21,700.

Now let’s reverse this plan and put the extra $100 as an extra payment towards your loan. You decide to pay your school loan off as quickly as possible. You are able to do this just over six years. Now you take the $202 (the regular payment) plus the $100 and start to invest that full amount. In 10 years after graduation your investment would be $16,728.

This is where you need to study to learn to use your own money to work for you to help you in the long run, providing you with debt relief.