Friday, June 1, 2007

What are your priorities?

When allocating your income to paying various funds, what are your priorities? Obviously savings and retirement should be up there, but with the ridiculous amount of consumer debt on the table (the average American family has $9k in credit card debt now?), paying off credit cards needs to be taken seriously.

Are there any low priority debts? Student loans, mortgages, car loans? Many people describe these as "normal" debt. Am I unusual in believing that all debt can and should be avoided? And if unavoidable, at least attacked aggressively until it is gone as quickly as possible?

Here are my priorities:

1) Pay down high interest debt (credit cards with obscene 15-30% rates need to be eliminated before all else).
2) Begin saving emergency funds.
3) Saving for retirement.
4) Paying short term low interest debt (student loans, car loans, etc).
5) Paying long term low interest debt (mortgage).
6) Saving for spending and high dollar purchases.
7) Additional investments.

I also believe in doing all of these on the front end of your income. Rather than paying bills, setting aside some spending money, and then throwing whatever is left at a debt, I calculate my budget and spending habits, figure out how much I need for bills and casual spending and then figure out a percentage plan for my saving/repayment goals. 10% goes here, 5% goes there, 5% over here, etc as soon as the income checks are deposited. Then I pay bills, and then whatever is left over can be used for spending. Any miscalculation then ends up cutting into my personal spending, instead of my savings or debt repayments.


Rodrigo said...
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microman said...

I think it's awesome that debt-free is the way you think people should live. I used to be pretty religious about putting everything into Quicken and budgeting but then I learned that some people just focus on making lots of money while spending as little as possible(clipping coupons). Also use credit cards only for rewards.

I agree with your priorities but of course they'll be different for most people. If people have an 8% or more interest rate on their car or student loans, I'd put those at #2 and bump the others down.

Also, I'd probably never try to pay down mortgages and student loans before they're due. It's likely that you can make a bit of a spread investing in index funds.