Q. Should I pay off my debt or invest?
A. Although there can be exceptions, typically you are better off focusing on paying off the debt. Compare your interest rate paid to your interest rate earned. If you have a credit card that you are paying 10% on and you are making 1% interest in a savings account, you are losing 9% each month! However, if your investments are doing really well then you may want to do a 75/25 (debt/savings ratio).Q. Should I consolidate my debt?
A. Sometimes this makes your debt more manageable if you only have one bill to pay each month. However, don’t play the “shell game” and chase the “0%” interest-only offers to find out that in 3-6 months the interest goes up to 24%! Be CAREFUL. If you do decide to do use the introductory-rate credit cards, pay your bills early—often if you are late on ANY of your bills, the interest rate will automatically go up.Q. What is a safe amount of debt?
A. There is “good debt” and “bad debt”. There are debt ratios that lenders look at like debt to assets, or debt to income. Lenders typically prefer a maximum debt-to-income ratio of 1:3. The lower your ratio, the better deal you might get on your financing. Your “safe” amount of debt ultimately depends on your comfort level. Be warned, what is “safe” for one person may mean disaster for another! Generally, having debt on assets that will appreciate is considered good debt (like a home mortgage), and “safer”. A good rule is to pay cash for any depreciating asset, or bad debt--like a car. Save up your money and then buy something you can afford with cash, rather than incurring a big monthly payment for several years to come.Q. Should I borrow money on the equity of my house to pay off my credit cards?
A. Maybe… once. It is important to look at your whole financial picture. I have clients who were finally able to “start over” using this method. I have also seen people who didn’t change their lifestyle or their spending habits, and a year or two later they were in more debt then before. Also, never, ever, get “upside down” (owe more than the appraised value of your home) on your mortgage. You are better off selling the house and downsizing, or renting. I have seen foreclosures in some of these cases, especially when they have had a variable interest rate loan on the mortgage.Q. How do I get out of debt and then stay out of debt?
A. Whether you do it yourself or see a professional, you need to develop a financial plan that will help you develop a strategy or “roadmap” on which to take action. Ultimately, a permanent change must occur in your lifestyle to live within your means. Looking at what you NEED rather than what you WANT. It takes discipline, and often help from professionals to restructure your cash flow and live within a budget so you don’t have to waste your life worrying about debt in the future.Q. My partner and I are about to get married. Am I responsible for her debt?
A. Due to the legal nature of this question, I would strongly recommend that you talk with an attorney. This attorney should be familiar with how the individual state laws would affect a couple in their particular circumstances. Generally, in most states a same sex couple would not be responsible for the other's debt (at least at this point). Except in the states where it is a community property state. They could in fact be taking on their partner's debt.If you do decide to see a professional, find someone you trust and who really listens to you. You will be entering into a “long term relationship” with this person, so make sure they care and put your best interests first.
The opinions expressed are those of Anne Seelye and are meant to be general in nature and should not be construed as investment or financial advice related to your personal situation. Please consult your financial advisor prior to making financial decisions. Anne Seelye, CRPC is a Financial Advisor with Waddell & Reed and can be reached at anneseelye@wradvisors.com or 503-238-6036 ext: 119.
