Forget Wall Street's Debt -- Pay Off Your Own

Sept. 22, 2008 — -- When I sat down to compose this week's column, it seemed inadequate to write about any topic other than the economy. What good are warnings about common scams and rip-offs when something uncommon is happening to our markets? But in my role as a consumer reporter, it's not really my expertise to tell you how to make money. My focus is more how not to lose money.

Then it dawned on me: in these wild financial times, not losingis the new gain! Here are three great examples. Not every one will help every family, but consider your financial situation carefully, get professional advice if necessary, and see if any of these strategies will work for you.

Pay Off Credit Card Debt

If you're one of those paradoxical people who has liquid investments but also credit card debt, you are facing a great opportunity.

Huh?

The way I figure it, when the financial markets are rosy, it's way too tempting for folks to try to make money in stocks or mutual funds even though they are simultaneously saddled with credit card debt. Now that the markets are sort of scary for average investors, perhaps I can press my point about the benefits of paying off credit card debt instead.

I get into this argument with people all the time. I know lots of smart people who have savings and credit card debt. I know, I know, you feel it's important to save for emergencies. Trust me, credit card debt is an emergency. Think of it this way -- if your savings account (or money market or whatever) yields 3 percent interest and your credit card charges 19 percent interest, you can instantly "make" a 16 percent "profit" by using your savings to pay off your credit card debt. That would be an impressive gain in any market! Then, instead of pulling out your credit card to make impulse buys, you could fall back on it in emergencies -- a much sounder use.

Consider Prepaying Your Mortgage

If you can pay off your mortgage in less than the 15, 20 or 30 years you are allowed, you will save thousands of dollars in interest. Once again, the crude analogy: if your mortgage interest rate is 6 percent, you make a 6 percent "gain" on whatever amount you can pay off early. (You actually make a bit less as the amount of mortgage interest you can write off on your taxes goes down.) Do make sure there is no penalty for early repayment. In some states, prepayment penalties are illegal, but in others they're quite common.

Just proceed with caution because this strategy is not for everyone and not for all your cash. After all, when you sink money into your home, it is no longer liquid. Normally you can get a home equity line of credit to tap your home's value, but in this financial climate that is not as easy to do. So consult an unbiased financial professional about your individual situation to see if this is a good idea for you.

If you decide to move forward, there are a couple different ways to set up your own early repayment system. One way is to simply send extra money each month when you pay your mortgage. Most mortgage companies provide a blank line for you to write-in the extra amount you are sending. Just be sure to note that your extra money is to go toward principal. Paying extra toward your principal reduces how much interest you owe in the long run. This method is flexible, so if you're pinched for cash one month, you can send less. If you're flush another month, send more.

If you need a more structured approach, consider this: most of us pay our mortgage bills once a month. But most of us get paid every two weeks. If you set aside half your mortgage money every pay period, you will end up with an extra month's payment by the end of the year. Send that money in to pay down your principal and over the years you'll get way ahead on your mortgage.

Because prepaying is such a great benefit, some companies try to cash in. These companies offer "mortgage savings plans" for a price. The company collects your extra money every two weeks and sets it aside for you. This method certainly provides a dose of discipline, but it comes at a price. Mortgage savings plans typically start at about $500 to set up and $2.50 for each withdrawal. If you experience hard times, you still have to pay, and if you don't pay you could face late fees. To make matters worse, the company holding your mortgage money makes interest on it. Wouldn't you rather earn that interest yourself?

Contribute Enough to Get Your Company 401k Match

Here's a statistic that makes me want to scream: 20 percent of people don't bother to contribute money to their 401k retirement plan, according to the 401k Council of America. Ack! If you're one of them, you're losing out. You're losing the chance to set aside money tax-free for the future. (I know, that's a little esoteric because you don't actually see the money.)

You're also losing out on the "free money" of a company 401k match. If your employer offered you a raise for doing the exact same job you do now, would you turn it down? No way. But that's what it's like when people fail to contribute enough to get the maximum company match. The most common match is 50 cents of every dollar you contribute up to 6 percent of your salary. Not all companies offer a match, so if yours is generous enough to do so, I say greedily grab every cent!

True, the stock market is sort of, how shall we say, convulsing right now, but if you are young and years from retirement, there is no bad time to start investing for your future. Many stocks are at new lows, so perhaps your timing will be good as they climb up once again. (One tip: many employers make their match with shares of their own company stock. If that is the case, you'll want to put the rest of your 401k money in other investments to diversify.) And now, to come full circle, one last nugget of info for you. If you're still market-shy, most 401ks give you the option to put your money into a "GIC" or Guaranteed Investment Contract, which is basically a safe 401k savings account.