Financial coaches get a lot of questions and scenarios as people search to figure out unique situations and circumstances of their finances. Finance fundamentals are often straightforward, but our habits and tendencies often get us into trouble. Here are some real-life questions — and guardrails — offered by clients and traditional thinking.
Should I use a no-interest-rate credit card to consolidate my credit card debt?
Sure, if you want to kick the can down the road. Generally, this band-aid may give you some false breathing room for a short period, but soon, you realize your problem didn’t go away. Moreover, if you don’t cancel the original credit card and fix the bad spending habits that initially got you into the fix, you’ll be in a more significant money problem down the road.
I can borrow from my 401k and pay off my debt, right?
You never want to borrow from your future to pay for your present. Borrowing from your 401k can result in penalties, and you’ll lose the power of compound interest that’s working for you. Here’s one suggestion: You may temporarily pause or cut back your contribution to pay off the debt. One client cut his contribution from 13% to 4% (he would still get the company match), resulting in an additional $500 he could use toward his debt for several months. Great solution.
If I invest my emergency fund, I’ll make more money.
It’s simple — your emergency fund is insurance, not an investment. Put it in savings or a money market where it’s safe and accessible, and don’t play with it. If you start to tinker, it will take time and effort, and you could lose it. It’s not worth it. Finally, you want something you can depend on, and a volatile market isn’t a place for an insurance fund.
When should I start saving for retirement?
Today is the best day. It doesn’t matter how old you are; it’s never too early, and it’s never too late. What’s holding you back from opening an IRA or 401k at work? If you’re working for an employer who matches your contribution, you’re leaving money on the table if you aren’t contributing.
What should I do first to start getting out of debt?
It’s not rocket science. There are tried and true methods, and we’d rarely recommend deviating from the plan. It would be best if you had an emergency fund, plain and simple. Many people want to bypass this, but it is essential. If you’re single, it may be $500, but typically we recommend $1,000 in your starter EF. In these times, however, $1,500 or even $2,000 may be a better goal. Do whatever it takes to get this in place. It will give you peace of mind and allow you to focus on real issues quickly. Set it up today. It works for the ants.
Can I save for a down payment on a house while paying off my debt?
Honestly, we don’t multi-task well. Studies show that our minds can focus on one thing at a time. It’s most productive to double down on your debt before focusing on saving or putting money aside for a project or house down payment. Remember: It’s a process, and nothing will happen overnight.
Excellent information! Thanks Chip for making time to prepare and send out these vital truths!