Debt and Saving strategies.
Original post:
>At what point do you switch from debt reduction to power saving? I have
>whittled 12 credit cards down to 4 and two will be paid off in the next
>2 weeks. I would like to save 5K to 6K into a cash account for
>energencies (now I have $50). And after I get the emergency cash settled
>I would like to max out my IRA and start one for my wife. By the end of
>the year I hope to be in a new house.
>The main question I have is, as I stated in the beginning, When do I
>make the debt reduction to power saving/wealth building switch?
Micheal replies:
As someone said recently on another newsgroup sparking a big semantical
debate, "Getting out of debt *is* saving."
Saving/wealth building is a process of building up your net worth. Being
in debt just means that you're starting from a negative instead of zero.
Functionally, paying off debt is equivalent to building up assets.
Do set up the emergency fund first, unless the interest on your debt is
usurious (~20% like some credit cards), save the rest of your investing
for after you've dumped all your consumer debt.
Consider hanging on to low-interest deductible loans like mortgages while
you do other long-term investing (but consider paying them off as well).
The interest rate of the debt is key. Paying it off is equivalent to
earning that on a tax free bond with no credit risk. So if your debt is,
say 12% -- compare your other options to buying a tax free AAA bond
earning 12%.
If you think this sounds like an *awfully* good investment, you're
getting the idea.
Michael
(
geocities.com/vyque)