Many people in troubled financial positions find themselves having to prioritize loan payments. And with all the advice out there, it can be hard to figure out the right thing to do. TV host, author and financial expert Suze Orman offers advice on which loan payments to take care of first.
Q: Pay off credit card or save for an eight-month emergency fund?
A: Save for an eight-month emergency fundListen, everybody: If you do not have at least an eight-month emergency fund, and you think there's a probability you could loose your job — and it's not just losing your job; you could be in a car accident, get sick — continue to pay the minimum on your credit card every month. Everything beyond that needs to go to establish an emergency fund. And if you have an emergency fund saved, then fund your retirement account before paying down credit card debt.
Q: Pay off credit card debt or save for children's college?
A: Pay off credit card debt
Absolutely pay off your credit card debt, because a child can always get a loan to go to school, possibly a scholarship, a grant. If you have credit card debt and credit card companies continue to close down the cards, what are you going to do? What are you going to do if they raise your interest rates to 32 percent? That's five times higher than what your kid is going to pay in interest on a student loan. Get rid of your credit card debt.
Q: Pay off credit card debt or pay off student loan debt?
Remember that in most cases, student loan debt is not dischargeable in bankruptcy. So you continue to pay it off anyway. Those who have very low interest rates (2-2.5 percent) on student loans and know everything is secure, great. But credit card debt is unsecured debt, which means if you get in trouble and cannot pay off your credit card, you can discharge it in bankruptcy. What are they going do to you? If you're in a financial position to just methodically pay off both credit card and student loans, pay them all.
Q: Invest in retirement or save for children's college?
A: Invest in retirement
Absolutely invest in retirement. You can always get a loan to get kids through school. I do not know of any loans to get you through retirement. The markets are seriously low from where they were (even though they've gone up 30 percent recently). Now is the time to be dollar cost averaging; the more money you put in, the more shares you buy. Save for your retirement, people.
Q: Invest in 401(k) that employer matches or pay off credit card debt?
A: Invest in 401(k) that matches
If your company matches your 401(k) contribution, then no matter what, contribute to your 401(k) first. You put in a dollar, they put in 50 cents. It's an automatic 50 percent return on your money. You can't pass that up. I'd rather have the 50 percent than pay 32 percent interest on a credit card. If you have a 50 percent match and you get in trouble financially, you can either withdraw money as a loan, or withdraw the 50 percent match. If you take it out, you have to pay taxes on it, but you still come out ahead.
Q: Invest in 401(k) that does not match or pay off credit card debt?
A: Pay off credit card debt
Absolutely pay off credit card debt. If you're not getting a match in your 401(k) and you've got credit card debt, you've got to get yourself out of credit card debt. When you get out of credit card debt, your credit score goes up and interest starts to go down.