@Randem

“Good times are when people make debts to pay in bad times” — Robert Quinlin

I’m growing rather fond of The Millionaire Mommy Next Door. Her views on personal finance are refreshingly useful, rather than the typical “diversify, budget, and save” advice you usually see in financial books, web sites, blogs, etc.

Today, she offers this list of debt reduction tips in answer to the question: If debt was an issue for you, what financial steps would you make — and in what order?

1. Separate my basic needs from my wants
2. Identify my priorities and visualize a debt-free life
3. Involve my family in the plan
4. Make a list of my debts
5. Remove temptation. Cut up my credit cards (but don’t close the accounts)
6. Minimize my spending
7. Maximize my income
8. Pay off “toxic debt” first (highest interest rates; balances that are closest to credit limits).
9. Once I’d paid off all debt balances with interest rates over 10%, I’d save at least 15% of every penny I earn to build an emergency fund equal to 6-9 months of my take home income.
10. Once my emergency fund was complete, I’d start investing at least 10% of my gross income in mutual funds held within retirement account(s)…
11. …and I’d get cracking on my remaining low-interest rate (<10%) debt balances.
12. If I had a mortgage, this would be the last debt on my list. Actually, if I had a home with a mortgage and I was seriously in debt, I’d sell my home to pay off my debt with the equity.

This list bears a remarkable resemblance to my own endeavors to live a debt-free life. Not only the items on the list, but the priorities assigned to each item. Around step 9 is where I really start to see the difference. She’s suggesting 6-9 months of take-home income as the amount to have in savings, whereas I’ve never kept more than 2-3 months worth.

Also interesting to me is that she places more importance on that (rather large, from my perspective) emergency fund than she does on paying off debts under 10%. It seems to me that the 10% figure is not so much about the number, but rather an indicator of the type of debt, since credit card interest tends to run higher than that, whereas mortgages and loans tend to run below it. If that’s the case, I completely agree with making the emergency fund first, but if you have a credit card at 9% interest, I think it’s still more important to pay it off than to start stashing cash.