I’m always happy to give financial advice, but sometimes you just have to ask an independent financial advisor. I’ve asked CERTIFIED FINANCIAL PLANNER™ Jeff Rose to give his feedback on some reader submitted questions. Jeff is an Illinois Certified Financial Planner and co-founder of Alliance Investment Planning Group. He is also the author of Good Financial Cents, a financial planning and investment blog. You can learn more about Jeff at his website Jeff Rose Financial. (p.s. yes that IS him in the picture below) Let’s get right to it. Take it away Jeff!
Question: My wife and I have recently become debt free except our house, and have been blessed to be able to save up 6 months worth of expenses in a high-yield savings account. We are now trying to decide what our next step will be. I want to start saving 15% towards retirement, and then making extra payments towards our home mortgage. My wife, on the other hand, is unsure of our current economy and wants to be safe by continuing to put money away in a regular savings account (in addition to our current 6 months emergency fund).
What steps would you suggest someone who is recently debt free take to plan for their future? Would you suggest saving more like my wife would like? Investing for retirement?
Help! – John
Answer: John, first, congratulations on becoming free of debt (except home) and getting your emergency fund up to par. I completely understand your wife’s dilemma. The market has left many on edge and nervous about putting their hard earned money at risk. A couple items I’m missing is if you both work and if so do you have access to a 401k plan with a match ? If so, you can contribute to a 401k into a money market or stable value fund that puts your money at very little to no risk and still benefit from the employer match.
If you don’t have that, you could consider a Roth IRA, so as long as you meet the Roth IRA phaseout limits . If your wife is still fearful of the market, you can implement a dollar cost averaging strategy that gradually transitions your money from more conservative bond investments into the market. That way it will give you both a chance to get your feet wet and feel the market’s temperature. That way you both accomplish your goals.
Question: I have incurred over $10,000 in debt on a very high interest credit card. We want to do something about it and are not sure which way to turn. Would it be wise to get a lower interest loan to pay off the credit card and get a lower payment? Or what about getting another credit card to do a balance transfer? What strategy do you suggest we use to get out of debt? What’s your advice to us in this situation? – K & B
Answer: K & B, congratulations for recognizing your debt situation and making a resolution to do something about it. I’m never a fan of getting debt to pay off debt, so I’ll rule the first option out. How high is “very high”? One option is to call your credit card company and negotiate the rate. If that doesn’t work, then you definitely look into a balance transfer. Be careful to read the fine print and make sure you don’t put yourself into a worse situation.
Question: Often times I struggle between passionately paying off my debt and investing in what has the potential to be a very “low” market. Right now I’m extremely intense in debt reduction mode even though we only have student loans left. I also try to convince myself never to “time” the market. From your professional experience, do you have any insight for my situation? – Baker @ ManVsDebt.com
Answer: Baker, I have wrestled with that same struggle, as well. One thing that you can never put a value on is the feeling of being debt free. For me, it was making that last student loan payment that cleared the last of my debt (before our home purchase). That is one of those days that I will never forget and is hard to express in words how liberating that was. I do recognize that this is a tremendous buying opportunity, but the one thing I’ve learned is that when people that have investments get into a bind, the first place they tap is their investment accounts ( or credit cards). And that’s where market timing can be of serious consequence. I think your plan to pay off all your commercial debt (car loans, credit cards or any high interest student loans) is a solid plan. Once you those under control, you can start balancing your debt payoff with dollar cost averaging into the market . As time goes by, you will have plenty of opportunities to get into the market.
Question: With a good amount of debt, is there a certain percentage to focus on debt repayment & emergency fund contribution? Right we’re doing 75/25 respectively.
I currently have:
- $7,000 credit card debt (high variable int rates – paying these first)
- $5,500 auto loan debt @ 10% int
- $40,000 2nd mortgage @ 8.8% int
- $67,000 student loan debt (35,000 @4% int and $32,000 @6.25%)
- $120,000 1st mortgage @ 5.825% int
I’m currently paying $1,000 toward the CC (800) and auto loan (200) until they are paid off. In the meantime I am putting $600/month into savings while paying a little extra principle on the 2nd mortgage to knock it down faster. Once the CCs & auto loan are paid off I want to focus on paying my 2nd mortgage off in 3 years ($1,250/month). Is this the best plan or should I being allocating differently.
I currently have around $2,000 in savings. – Matt @ debtfreeadventure.com
Answer: Matt, good job of making a list of all your debt. In order to truly implement a plan, you first have to take a detailed inventory, which you’ve done. A few key pieces of information I’m missing are: What is your monthly household expense? How many incomes fuel your household? How safe are those current jobs? That’s a little more information I would need to answer your question to the fullest extent. Based on what you have, the strategy is not bad. Since you don’t have a significant amount in savings (6-8 months of expenses), I would encourage to focus on that more than the extra amount towards the 2nd mortgage. At least get to 6 months on the emergency fund in a high yield savings account and then go hardcore in paying off the rest of the debt.
Jeff Rose, CFP®
LPL Financial Advisor
The Weakonomist says
Great advice Jeff. This man knows what he is talking about!
The Weakonomists last blog post..Local Towns Making Their Own Currency (So The Weakonomist Does One Too)
Matt Jabs says
I will continue to pay down my high interest consumer debt (credit cards and auto loan) until it is gone (I have around $12,000 left). Then I will focus on building up the Emergency Fund to around $20,000 before hitting the 2nd mortgage with my financial guns cocked & ready to shred!
Thanks Pete, & thanks Jeff!
Matt Jabss last blog post..All you’ll ever need to know about The Swine Flu
Jeff Rose says
@ The Weakonmist
Thanks for the kind words!
@ Matt Jabs
Glad I could be of help. The implementation of your strategy is spot on. Just needed a few tweaks. Like I said, I can’t tell you how good it feels once you reach the debt free zone. Quite a nice feeling.
Debt Free says
We want to save more money, but we’re not sure where to begin. Our first step is to make a budget, so we can then make a plan on how much we can save after our necessary bills are paid. It may seem like there’s nothing left, but even if we’re just putting away a few dollars a week, we’re heading in the right direction.