Monday, December 6, 2010

To Pay Off Debt or Save?

I wanted to link (from Frugal Dad) to an article that hits right on the head something that I consider very important in personal financial management.

I'm not necessarily going to hash over the need to not be broke, we all get that, but the fact is that it can be kind of confusing on how the best way to get there is. And it is different for some folks than others. (The article does a decent job of looking at the alternatives) Taking myself as an example I am what I call very liability unfriendly. What that means is I don't like debt, I don't like payments, I don't like obligations. In reflecting back over my life it has always bugged me to owe someone a dollar, even though they know I'm good for it. I will get them repaid as soon as possible. That is a me thing, it may be different for you. And ... I will say I don't always follow my own plan every time, which I will throw under the "extenuating circumstances" doctrine; we just have to make sure and not get carried away with that.

So basically I still believe in my "baby step" tenants (also on the right of the blog) -

  • #1 - $1000 Emergency Fund
  • #2 - Pay off all debts under $10k (unless sub 3% APR)
  • #3 - Up to $5000 Emergency Fund
  • #4 - Invest the max for a ROTH (recurring monthly goal)
  • #5 - Create 3 months expenses of savings (not Emergency)
  • #6 - Pay off all debts over $10k (unless sub 3% APR)
  • #7 - Up to $7,500/person into Retirement
  • #8 - Pay off home early
  • #9 - Pay off any loans with sub 3% APR
  • #10 - Stuff as much as possible into retirement so get there early

Which kinda brings me to when exceptions might be ok, well in my world. I kind of play around with steps 3 and 4, I'm done with 1 & 2 but I kind of interchange 3 & 4 depending on the situation I'm in. As an example I just got a new (to me) car. And to do so I traded in my old car and took 10k of cash and put down on the new vehicle to buy it. Like outright. SEE HOW MUCH I HATE PAYMENTS. But in doing so I probably took my self under the #3 level but I'm still trying to save for the #4 level. My current idea in moving towards these baby steps is to be all the way through "baby step" 4 by April 15 (the last day to fully pay Roth for 2010). I'm also really hoping to see some significant gains in the ole cash flow since I sold my house in Jxn (that I haven't lived in like 3 months) and won't be having to pay insurance, mortgage, taxes, electricity, water, etc. on a second property. Anyway, that is my money update, well part of it, I have another small piece I want to blog when I get the chance.

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