Which debt to payoff first.

Do you find yourself consumed in a mountain of debt considering a debt consolidation loan and struggling  to decide which bill to pay off first? Is it the department store card with a 24.99% interest rate?  Or maybe it’s your car loan that you financed for 72 months?  Or should you double up on your mortgage and become a home owner sooner?  When it comes to paying off debt, many have their opinions to where the pecking order should be begin.  Dave Ramsey, author of Total Money Makeover, recommends the Debt Snowball approach.  This method suggests you make a list of all your debts, smallest to largest while disregarding interest rates, and paying off the smallest to largest to help you achieve satisfaction as you mark off the paid balances.   Suze Orman has a different approach.  Catching another of Suze’s episodes, she shared her Loyalty List of Paying Off Debt.  Suze shares which debts you should pay off sooner rather than later.  When you don’t have a lot of extra cash to spread around, this might help with your decision.

First, a disclaimer.  I do not endorse Suze Orman. Sometimes her advice is downright scary.  But I thought this was a decent approach on helping individuals struggling with debt to sort through the mess.

6 Kinds of Debt According to Suze Orman

Suze first breaks down the six kinds of debt that that all people have:

1. IRS Debt
2. Student Loan Debt
3. Personal Loan Debt
4. Mortgage Debt
5. Car Loan Debt
6. Credit Card Debt

Any of these sound familiar? Probably more than you want to admit.

IRS Debt

The first on the list is debt owed to the IRS.   As Suze says, owing any money to the IRS is, “Bad, bad, bad.”  (I think she added a few more “Bads” in there).  I couldn’t agree with her more.  Anytime you owe money to the IRS is not a good thing.  Why?  Primarily, since the IRS can legally seize your money via your bank accounts at anytime.  Why would you want to own money to a entity that has legal authority that can do anything they desire?  Don’t mess with them, period.

Student Loan Debt

photo credit: Medmoiselle T

Next on the list……paying for that college education. One reason to keep paying your student loan debt is that it can not be discharged in a bankruptcy filing.  Sure, you can arrange a deferment or forbearance, but; whatever you do the interest will continue to accrue.  Thinking about not making your student loan payments?  It’s okay, they can just garnish your wages to get their money back.  Ouch!

Personal Debt

Why would Suze think that personal debt would rank higher than credit card debt?  Suze argues that when somebody has personally loaned you money they have done so  because they trusted you would pay them back.   Not paying off your friend/family member/loved one will negatively affect your relationship.  Think of the uncomfortableness of being around that person at a family function or party.  Can you say, “Awkward”. Besides, by not paying them back you could be putting them at financial risk.  You must be responsible to those who helped you and make it a point to pay them back.

Mortgage Debt

“You don’t want somebody to take your home away from you”, Suze says.  The past year the term “foreclosure” was too common place and a sad reality for many home owner’s.  The last thing you want to lose is your home.  Suze suggest to do your best and keep making those mortgage payments.

Car Loan Debt

After you continue to make your house payment make sure you still have a way to get to work to be able to keep making those payments.  Losing your car might put a damper on this.   Make those payments and don’t let your car get repossessed.

Credit Card Debt

Many of you think that credit card debt should be first on the debt loyalty list.  Suze argues, “Credit card debt is unsecured debt.”  That means that if you don’t pay it, they can’t take your home or your car.    They also can’t take your money, seize your accounts, or make you feel guilty at a party.  On that note, I agree with Suze.  Often times I’ve had clients that have wanted to cash out their 401k’s to pay off their credit cards.   Whatever you do, DO NOT do this!  Your 401k is protected from bankruptcy and might be the only source of money if you if going bankrupt becomes a reality.

What do you think of Suze Orman’s Debt Loyalty List?  Do you agree with her order, or would you change it?

Jeff Rose is a Certified Financial Planner and co-founder of Alliance Investment Planning Group.

As I said before, you have to watch the Suze Orman at least one time in your life.  On her show she has a segment called “Can I Afford It”  where callers phone in seeking Suze’s permission to buy whatever item that they so desire.  I previously wrote how to get approved on the segment earlier.

Man’s Best Friend

In one of the most recent episodes that I caught on my DVR the other day, a couple had phoned in wanting to clone their dog a Great Dane.  The couple has had the Great Dane for over nine years and  loved the dog so much that they couldn’t bear the thought of living without him.  Apparently, the couple did not have children and were not planning on having children.  So by doing some research, they had found that they could actually clone their dog.  To initiate the cloning process they would have to send the dog overseas to Korea.    The total cost of this whole process was roughly $100,000.  I repeat $100,000.  Obviously, these folks were dog lovers.

Can Should I Afford That?

As with every caller in the “Can I Afford It” segment, they have to reveal their financial status to Suze.  The caller’s name was Tom and he was 45 years old.  Combined, he and his wife brought in $15,000 a month of income.  Not too shabby, but still is that really enough money to clone a dog for $100,000?  They currently had $200,000 left on their 30 year fixed mortgage paying 5.25%.  The home was valued well above $1 Million (Nice to be them, huh?)  so they had a substantial amount of equity in the home.  Currently they had $150,000 in savings and $300,000 in retirement.  At that point in time, neither I, nor Suze, would ever have “Approved” Tom to begin the cloning process. I mean who would, right?  $100,000 to clone a dog is kind of steep, don’t you think?  Especially, considering that their current dog is 9 years old.  Does that mean that they will have to clone another dog 9 year for now?   But as it turns out, in addition to the savings and equity in the home, Tom was also getting a cash distribution from a company he had invested into.  So, between the distribution and a small portion of his savings, he was able to pay cash for the entire cloning process.

The Final Verdict

Now the premise of the “Can I Afford It” segment on the Suze Orman show is not really judging the item or items that the caller wants to purchase but just basically can the caller actually afford it. Since the caller was paying for the entire cloning process with cash, and not putting a great hurt on their savings, Suze gave them the stamp of approval.  I think she felt odd doing it, as would I doing the same, but based on the numbers; you can’t deny that they could afford it.

Approved!

The question is: how much do you love your dog and would you be willing to spend $100,000 to clone it?

by Hootmen

Securities offered through LPL Financial, Member FINRA/SIPC

If you haven’t at least watched  one Suze Orman show, you don’t know what you are missing.  Although I don’t always agree with everything she says, she does provide good basic investment advice.

One of the more popular segments of the Suze Orman show is called “Can I afford it”.  This segment is where callers phone in with items that they want to buy. Items can include anything from new cars, home renovations, Gucci handbags to big screen TVs.  After the callers enthusiastically share what they want to buy, Suze then responds with her classic line, “Show me the money”.  This is when the callers dispel their complete financial situation to include their current mortgage,balance and payment, credit card debt, amount in savings and amount saved for retirement.  After sharing their financial background to Suze and the rest of the viewers,  they wait for Suze’s “approved” or “denied” from the finance guru herself.  It is funny when you watch this segment for the various items that people call in for that they have to have.  Here are four ways that you can get approved by calling into the show.

1.    Have substantial emergency funds.

Suze is big on having an emergency fund as part of your financial planning.  She would recommend having at least eight months of savings and this is something that I whole-heartedly agree with.  So if you want to be approved by Suze make sure you’ve got at least eight months worth of expenses saved up and you might have a fighting chance.

2.    You better have no credit card debt.

I don’t care if you’ve got money in the bank and plenty in your retirement account, if you have any type of credit card debt, you better expect a big fat denied.  There were many times where I’ve seen people that have plenty of emergency funds saved but for some reason they carry credit card debt where they are paying high interest rates.  What’s the point of having it in savings when you can just pay it off? This is one of Suze’s pet peeves, so just don’t do it.  Pay off the credit card before you call in.

3.    You better be investing.

Whether you are 25 years old or 55 years old and if you are still employed, you better be putting money into your retirement account.  If you are not, it doesn’t make Suze very happy.  Make sure you are taking advantage of your 401(k) or Roth IRAs or just investing in a basic brokerage account, whatever it is, just invest.

4.    Don’t Call in

Face it, we’re Americans living the American Dream.  Typically, if you want to buy something, you’re going to do despite what I or Suze has to say about it. If you know you’re going to buy it regardless, don’t waste her time.  Go out and buy it and dig yourself in a deeper hole.  Then you’ll be forced to call in for the show to seek real advice.

Securities offered Through LPL Financial, Member FINRA/SIPC