Friday, January 11, 2008

Prioritizing Your Money

Budgeting money is all about prioritizing. Some of it is obvious - pay the mortgage before you pay for cable, buy food before you buy new clothes. I've been in the situation where you have to play bill roulette to determine which bill gets paid this week. Not fun. Fortunately, those times have passed (never to be seen again!) and we have a lot more choices to make with our money.

Once all the bills are covered and all essentials are met, we must make a decision. I come across these decision every day. I am not one of those people who naturally doesn't spend money. I have to stop myself from buying things daily. Whether I'm at the grocery store, at work, or driving by a restaurant, I always want to spend our money. I allow myself a little bit of "fun money" every month to spend on these trivial things, but ultimately the rest of our money goes toward our financial goals.

Even within our goals, we need to prioritize. The credit card debt has always been our highest priority, however, we have a no interest credit card that currently holds just under half our debt. The 0% interest ends in September, so I want to make sure we have it paid off before any interest kicks in. Hopefully we will have the remainder of the credit card debt paid off in March. So what to do with the six months in between?

The mathematically logical thing to do would be to start on our other goals while making minimum payments on the 0% card and then paying off the credit card just before the deadline. The psychological thing to do is to pay off the credit card completely as soon as we can. My plan is somewhere in the middle.

I want to make sure that everything is paid off with time to spare before the interest would kick in. I'm not very good at being on time, and this is very important not to miss. My goal is to pay off the 0% credit card by the end of August. In the time between March and August, I am going to split our non-essential money among three categories:

1. The 0% Credit Card
2. Emergency Fund
3. Retirement.

Opening my 401(k) won't take a huge chunk of my income, but the earlier I do it, the sooner I start making money on my investments. The rest of the money will be split evenly between the credit card and the emergency fund. If all goes well, the credit card will be paid off in August (or before!) by using half of our allocated non-essential monies alone. However, if we need it, come August 31 we can use the money in the emergency fund to pay off the balance before it accrues any interest, without completely depleting our savings.

This way we can work towards more than one goal at a time. I thought about splitting the money between the 0% credit card and the dreaded 2nd mortgage, but that would leave us high and dry if an emergency comes around. Hopefully, all goes smoothly, but we know how likely that is! :)


Lazy Man and Money said...

If the credit card is at 0% interest for some time, why not put more into your emergency fund - hopefully earning 4% or more interest? This way you have access to it in the case of an emergency. Come August, you can take the money and just make a big payment then.

JvW said...

This is definitely the best solution, mathematically. I don't know if I can trust myself enough to actually save that money and not spend it.

The other factor is that I love seeing my debt number go down. If it stagnates while we put all the money in the e-fund, how will that affect me mentally? I've never had any savings, so I don't know if I'll get a similar kick out of it.