While Dave Ramsey advises everyone to have zero debts, the reality is almost everyone has "some debt." Mortgages, student loans, car loans, etc. Even people who are living within their means have some or all of these payments.
If you have your emergency fund fully funded, what should you do with extra cash flow in today's environment?
- Savings – Current high interest savings accounts pay less than 2%. For people living in states with income taxes, the after tax yield is in the neighborhood of 1%.
- Investing – in today's investment climate, stocks and real estate investments are likely to face a short-term decline before they rebound. With very few exceptions, I do not think is the time to put long-term money "at risk" with the possible exception of new 401k contributions.
Simply put, debt is expensive in this deflationary market and extra funds should be allocated towards debt reduction – wherever we can.
- Mortgage - trying to refinance into a fixed loan. We are leaving this alone for now.
- Student Loans – paid off the smallest loan last month. Using the snowball approach, the old "payment" has now been added to the next smallest loan. We should be down to two loans by the end of the 2009.
- Car Loan – one car is paid off. The other loan is a zero percent loan with three years to go. Obviously, we are not rushing to pay off this loan. We are making a "payment" to ourselves (i.e. – savings) for an eventual replacement to our high mileage vehicle.
- Credit Car – we have a $10K balance on a Discover card at a 0% rate due in July. Although we have set aside $10K at ING to pay off this balance, I have decided to send much of our monthly savings to Discover. Why? The after-tax income earned on the money is not worth much. Since I do not like having any balance on my credit cards, the "cost" to send the money to Discover is almost zero.