| How to Borrow Money, Part 3 |
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Figure out how much you can save each month to pay down credit card and other loans. Don't be overly ambitious in setting a target. It's better to come up with an amount that you know you can comfortably afford rather than set a target that will be discouragingly difficult to achieve. Depending on how much you owe on the cards, plan to put 50 percent to 75 percent of your monthly savings against the loans. The more debt you have, the more you should be putting toward reducing the loans. One thing you want to avoid is simply making the minimum required payments each month. If you pay just the minimum, you'll probably be in a nursing home before you pay off the cards. By the way, I hope I don't need to remind you that you should make only minimum use of these cards, lest you continue adding to the outstanding balances. Your "extra money" should be first put into a savings account at your bank or credit union in order to build up a small cushion for any financial emergency that might arise. At a minimum, this cushion should be enough to pay a couple of months' worth of card payments in the event you run short at some point in the future. Once you have enough money in your savings account, you should then put your extra money into a retirement savings plan. If one is available at work, by all means participate in that so that you can enjoy some tax savings and possibly a match from your employer. Absent a workplace plan, you can always start making monthly contributions to an IRA account. If you are blessed with more abundant resources in the future, for example a raise or bonus at work or a cash gift from relatives, don't use this happy event as an excuse to increase your spending commensurate with the increase in income. Instead, put one third toward your credit cards, one third into retirement savings, and enjoy the remaining third. If you have student loans, your payment coupon book may be thicker than an unabridged dictionary. No matter how large or small your loan balances might be, you should plan on how long you want to spend paying them off. You can consolidate the loans with a thirty-year repayment period, but who wants to take that long? There's no law against paying off student loans early. While at least some of the interest you pay on student loans may be tax deductible, the longer you take to pay off the loans, the higher the interest you pay. What to do with extra money? If you're sailing along making timely payments on your student loans, the time may come when you have some extra money available either to make extra payments against the student loans or to contribute to a retirement savings plan at work, like a 401(k) or 403(b) plan. Which to do? If you have high-interest student loans, you may be better off adding the extra money to your regular payments. On the other hand, if your loan interest is not so highless than 8 percentyou might want to put some or all of the extra money toward your retirement savings plan at work. At a minimum, you'll get a tax break for the money you kick in and if the employer offers a match, you'll get some free money to boot. |
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