Money Talk: How to Focus on Your Financial Responsibilities

By Brian Shire 

It’s important today to prioritize your financial goals. Many families and individuals alike wonder whether they should pay off their credit cards, save for a house or put money into retirement plans. The reality is that most investors will struggle with these questions during the course of their lifetimes. 

The good news is there is a solution to all of the above. With today’s credit-card rates, it might be a wise choice to see if consolidating current debt from existing credit cards onto one lender with a lower interest rate is an option. If this is possible, it would be a strong solution. If not, focus on paying down the higher interest payment instead of the higher balance until you’ve erased that balance and then start on the next credit card balance. (Important to note: You still want to continue to pay the minimum amount on all cards so as to avoid any late charges or credit issues.)

In regards to a home purchase, beginning home buyers typically want to have at least 20 percent down so they can avoid P.M.I. (or Property Mortgage Insurance). Leveraging the mortgage debt is one option (paying little to nothing down, and financing the rest), but this is only a safe solution if the buyers have existing capital working for them to offset the higher payments. If they’re like most homebuyers, they want to keep the payments lower, which will require a down payment. This should be saved up over time in safe vehicles with little to no volatility to ensure the savings foundation is intact. 

It may take several years to save up the required amount, and if that is too long to wait then a lower priced home purchase should be considered. At the end of the day, if a family doesn’t have the capital to put down for a more expensive home purchase, then they are setting themselves up for trouble if one of them loses their job or they have an unexpected financial emergency. The cost of a higher payment can wreak havoc on the family’s budget when unforeseen expenses appear.

When considering funding your retirement plan a few things should be evaluated. If your company offers a 401(k) solution (or similar qualified pre-tax option) and matches their employees, then a true understanding of your match should be identified and implemented in your retirement strategy. 

At this point, I caution investors “not to contribute more” than the match, as most plans don’t offer any true guidance, are not guaranteed against loss, and all the money will be taxed when taken out in the future. Other areas such as liquidity and limited plan options, as well as RMDs (required minimum distributions) should be considered when funding a company plan. Investors should also consider funding a “post-tax” solution like a Roth IRA or getting educated on other vehicles that will grow tax free for future retirement income needs.

A conservative savings strategy should be implemented to pay down debt, save for a home purchase and put aside money for your retirement needs. Because you may be trying to achieve all three, then certain areas should be considered. How long you have until you want to retire could help you decide if retirement is the smaller percentage of your savings design. Are you a one income family or two? Additional factors should be observed when trying to create a savings plan, but if your retirement years are more than 30 years or beyond, then paying down debt and saving for a home may trump putting away money into your retirement.

If you’re more advanced in years, then padding your retirement may be more important as it is closer and should be considered because you have less years to plan.

Independent Finance Group

(619) 534-4240