Feb 24, 2017
Learn how to prioritize paying bills, debt and expenses.
Listener question today.
Dana asks:
Linda, there are several things we want to do this year and are wondering about the best use of our funds to do so.
1. Consolidate some miscellaneous credit debt or pay it off in
full ($8k range)
2. Home updates/renovations - small scale projects like painting,
lighting, window treatments ($5k total range)
3. Upcoming medical expenses for birth of child ($3000 based on max
out of pocket per policy)
4. Upcoming 1st installment property tax bill ($4500)
We have the following sources to draw from to do all of the above:
1. Cash - enough to pay all of the above and still have 12+ months worth of total monthly expenses in cash savings
2. Credit - several rewards/points cards, average interest rate 11-15%
3. Home equity - access to $32k from our existing Home Equity line of credit at 4.25% interest/only
4. Sell some securities from a brokerage account - $58k in non-retirement investment accounts that we sell some shares
5. Federal Tax refund - expecting $8k-$9k refund per CPA
Are there advantages/disadvantages to doing the above via one form of payment or another?
My personal comfort level is to keep plenty of cash accessible. I have allocated several different savings accounts specifically for taxes, home improvements, travel, etc and can pull from those. Income will vary so I am not really counting on using our income for these items, as it will just be used for our regular recurring monthly expenses.
Thanks, Dana
Before I answer that, let’s prioritize the payments and then look
at the best way to pay them.
I want to look at the non-elective expenses - ie. those things you can’t put off.
#1. Property taxes of $4,500. This is a MUST do, no wiggle room here! The consequences of NOT paying your taxes are too high, so this has to be priority #1.
#2. You also can’t put off the birth of a child. You will have medical expenses. Must allocate the $3,000 maximum costs.
#3. Normally, I would look at the credit card debt first but because you had 2 non-negotiable goals above this, it became priority
#3. Look to normally eliminate credit card debt as your #1 goal because it is so expensive. Dana tells us it’s 11 - 15% interest.
When you pay it, it’s like earning that rate of return.
Where else can you earn 11 - 15%?
Pay off the credit cards.
#4. Remodeling. This is the one with the most wiggle room that you can put off, do part of it, or do all of it.
Minimize costs as much as possible.