September 29, 2016
It's human nature to think that making money entails investing in the stock market, bond market or real estate. But another important way to boost your net worth is to pay down your debts.
• Use Extra Cash to Boost Your Payment. If you are paying 14% or more interest on credit card debt, using a raise or bonus to chip away at the balance is the best use of that money. There is no investment that can deliver you a guaranteed 14% return pronto. But that’s exactly what you get when you wipe out a credit card with a high balance
• Leverage Your Improved FICO score. If you’ve spent the past few years recovering from a financial hit during the recession, chances are your FICO credit score is now higher. If you have a score of at least 720 or so, and are still paying a high interest rate on your credit card, call up the issuer and ask them to lower it. If they don’t make it clear you will be doing a balance transfer to a card with no interest for 21 months. (see the next point.)
• Zero in on a great balance transfer deal. As I recently shared with you, there is now a credit card that essentially gives you a 21 month grace period to pay off a balance without owing a penny of interest.
And with home values continuing to post solid gains, anyone who wasn’t able to refinance a few years ago due to a lack of equity, should give it another look. Mortgage rates are still near historic lows. You know I am adamant that you shouldn’t extend your loan term by refinancing into a new 30-year mortgage, but right now 10 year and 15-year mortgages have fixed rates as low as 2.7%. That might make it possible to refinance into a mortgage that speeds up your payment without costing you more in monthly payments than what you’ve got on an old mortgage with a rate of 5% or higher.
Answer Yes or No to the follow statements.
I pay all my credit card bills in full each month.
I have an eight-month emergency savings fund separate from my checking or other bank accounts.
The car I am driving was paid for with cash, or a loan that was no more than three years, and I sure didn’t lease!
I am contributing at least 10% of my gross salary to a retirement plan at work, or I am saving at least that much in an IRA and/or regular taxable account.
I have a long-term asset allocation plan for my retirement investments, and once a year I check to see if I need to do any rebalancing to stay on target with my allocation goals.
I have term life insurance to provide protection to those who are dependent on my income.
I have a will, a trust, an advance directive (living will), and have appointed someone to be my health care proxy.
So how did you do?
If you answered yes to every item, congratulations. If you are working on improving on a few items, I say congratulations as well.
As long as you are comitted to truly creating financial security, I applaud you. If that means you are paying down your credit card balances, or are building up your emergency fun with automated payments, that’s more than fine. You are on your way!
But if you found yourself saying No to any of those questions, and you’re not working on moving to Yes, then I want you to stand in your truth. No matter how good you feel, you have some work to do before you can honestly know what you are on solid financial ground.