Leave Debt in the Dust: Map your own path out of the financial minefield |
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Your Best Investment
What's the best investment you can make? Even in a booming stock market, it's cutting down your debts. "Paying off what you owe on your credit card should be first on your list," says Eleanor Dean of American Express.
Consider someone we'll call Robert who has $10,000 in credit card debt at 16 percent annual interest. He makes a minimum payment of 2 percent, which comes to $200 a month. He pays $1,600 a year in interest. Now say he receives a $5,000 annual bonus, after taxes. Suppose he invests his bonus in the market at a 10 percent annual return--he'd get $500. If, on the other hand, he puts the money toward paying off his debt, then he'd cut the amount of principal he owes to $5,000, his interest debt service would be cut in half to $800, and his monthly payment would drop to $100 a month.
What does it mean? By applying the money to lower his debt, he'd save $800 a year. By investing in the market, he'd make $500--and that's before taxes. As a matter of fact, financial planners advise that after you attack your debt, your next move should be to start saving for a cash reserve. Only then should you begin playing the market. "People think, 'if we do that, we'll miss the party,'" says Zelda Benson, a financial planner with American Express in Yorba Linda, California. "But they forget there's still risk to the market and the potential for big losses. You're just fooling yourself into living a lifestyle you really can't afford."
Debt Counselors
Can't seem to find a way out of your debt alone? Consider seeking the help of a debt counselor. He or she will review your debts, help you work out a budget and a repayment plan. (Warning: You'll probably have to cut up all your credit cards in the process.) The counselor will also contact your creditors. In some cases, they may be able to negotiate lower fees on your behalf. To find a counselor in your area, contact the National Foundation for Credit Counseling in Silver Spring, Maryland, at 800-388-2227, or visit the Web site. Next: Your Debt Toolkit >
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