5 Guidelines for Assessing Your Financial Situation

April 29, 2008 By Debbie Dragon

It isn’t possible to give everyone definitive answers to financial questions in a generic one-size-fits-all article. What we can do, though, is provide a set of guidelines that will apply to most situations, to help you assess your own financial situation and make educated decisions.

1. Repaying Debt: There are a number of methods for paying down credit card debt. Many promote paying cards with the highest interest rate first, in order to save the most money, while many others, including Dave Ramsey argue that paying smaller balances first and paying them off will generate momentum and free up money that can be applied to the next account in the line. When you consider your credit score though, it’s a better idea to start paying a credit card that’s close to it’s limit first. Having maxed out credit cards will hurt your credit score and even trigger higher rates and penalty fees.

2. Emergency Fund: In the ideal world, everyone would have at least three months of living expenses saved in case of emergency. Since most people aren’t able to get this together, a good guideline is to have access to cash or credit equivalent to three months of your living expenses. If that means having a credit card with a limit equal to that amount in your wallet, so be it (just be sure to save it for a real emergency or else you won’t have it when you need it!)

3. Life Insurance: The big questions regarding life insurance is whether or not you need it and if so, how much do you need? If other people depend on your financially, you need life insurance. The amount you need is probably somewhere between five and ten times the amount you earn. Term insurance policies are often better and more affordable than whole life or insurance options with investment components.

4. Prepaying Mortgages: It’s true you can save thousands of dollars in interest if you send additional payments to your mortgage lender. However, prepaying a low interest rate, tax deductible mortgage is not really the best use of your money if you’ve got high interest credit cards and other bills eating up your cash each month. Focus on getting rid of other debts first, and generating high yield investments before you concentrate on paying down the mortgage.

5. Retirement Savings is Your Priority: If you have kids, you could be tempted to put all your money into a savings account for your children to go to college. The thing is, students can get student loans and scholarships. No one is going to lend money to you in order to have more money during retirement. Also, students who have money in savings receive less grant money and student loans, so chances are your priority should be your retirement savings.

Posted in budgeting, credit cards, financial plans, lifestyle, miscellaneous, personal behavior, personal finance basics