Review Your Priorities

Any financial plan is a juggling act of conflicting priorities and limited resources. You make only so much money (even if you add a second or third job), and your wants can be almost endless.

In earlier chapters, you read that debt repayment needs to be part of your larger financial strategy. Specifically, you need to make sure that you're taking appropriate advantage of retirement savings opportunities and that you can access sufficient funds in an emergency. You'll also want to think about your other important goals—the things you want to do, accomplish, or create for your family. As you work with your budget, you'll want to make sure that these important areas are adequately addressed and funded. If you need a refresher on these concepts, reread Chapter 2, “Your Debt Management Plan.”

Also in Chapter 2, you used a worksheet to list all your debts and the relevant details, such as balances owed, interest rates, and so on. Now it's time to go back over those debts, fill in any new interest rates or payments, and assign each a repayment priority: high, medium, or low. Use Table 11.3 to do this.

These priorities are entirely up to you, based on your knowledge of your goals and current financial situation.

Paying off credit card debt should usually be a high priority. It's usually your most expensive debt, and even if you've currently got a low rate, you're limiting your financial flexibility by carrying a balance.

Auto and student loans are usually medium- to low-priority debts. Paying them off typically doesn't increase your financial flexibility much, and interest rates on these debts are usually quite reasonable. If these are your highest-rate loans, though, and you have extra money to pay them off, you might well decide to give them higher priority.

A home equity line of credit could be high-, medium-, or low-priority, depending on your circumstances. Generally, this relatively low-rate, potentially deductible debt will be far down on the payback list, but you may want to move it higher if a HELOC is your only source of emergency cash.

Paying off your mortgage, meanwhile, is usually a low priority. Generally, you should have retired all your other debts before you consider prepaying a mortgage.

Once you've assigned priorities to your debts, you can start creating your debt repayment plan. You can use the worksheet shown in Table 11.4 to play with the numbers until you have a plan that works. After that's done, you can return to Table 11.3 and fill in the new payments you want to make toward your highest-priority debt or debts. You can use the Quicken Debt Reduction Planner I mentioned in Chapter 2 to see how long it will take you to retire each debt using your plan.

Creating a financial plan that allows you to meet your current expenses, save for retirement, enhance your financial flexibility, and pay down your highest-priority debt isn't easy, but now you have all the information you need to get going.