Common Debt Management Questions and Answers

Debt management is something than causes many of us to struggle. It is so easy to get in over our heads with easy consumer credit. Many people are drowning in their credit card debt.

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These debt management questions have been answered by renowned debt management and personal finance expert, Dave Briggs.

Dave leads the Good Sense program at Willow Creek Community Church. His seminars focus on debt management and all areas of attaining financial freedom.

Complete list of Financial FAQ

Debt Management Question #1:

"My brother is suggesting we try and pay off the mortgage on our house by cashing in some stocks and withdrawing money from my retirement fund. Is this good debt management?"

Cashing in your stocks to pay off your home would be a personal decision that you and your spouse would need to make based on your individual situation.

As long as you can afford the monthly payment, there is no compelling reason to pay off your house or not pay it off.

I would not support withdrawing money from your retirement fund to pay off your house as the interest and penalties you would pay would make it a financially expensive transaction.

I would never put paying off the mortgage before building a solid emergency savings account, paying off all your other types of debt and funding enough in a 401K to take full advantage of any employer matching funds.

Debt Management Question #2:

"We just moved to the area from the west coast as a result of a job change. We sold our house there and are in the process of purchasing a home here.

Given the inflated housing market, we were able to get enough equity out of the sale of our house that we could actually buy a new house for cash.

Is that smart or is it better to take out a loan and takeadvantage of the tax deductions the interest on a loan would provide?

If we do that we could put some money in some form of investment and have it grow. What do you suggest?"

In your situation, I would set aside roughly 6 months of living expenses in an emergency fund and use the rest of the money to buy your house.

If you can buy the house with no mortgage, then I would put the money you would normally pay monthly if you had a mortgage into savings.

You will be better off doing that than getting a mortgage.

If you put money into a 401(k) and/or an IRA you would be gaining the tax benefits and your money would grow quickly while not having a house payment.

I like the idea but my husband is not so sure. Please let me know your opinion on debt management like this."

It is my experience that credit card companies are always trying to "stick it to people" whenever they can.

They offer these "zero percent interest" cards as a way to entice you to transfer money to their card so that you will buy things and they can charge you high interest after the "free" period is over.

Some people have worked this angle to save a few bucks by paying off the new balance during the zero percent period.

However ... some have gotten really burned!

If you read the fine print, it will tell you that the zero percent rate is in effect only as long as your payment does not arrive in their office any later than the due date each and every month.

If you miss the date with your payment ... even just one day, they will go back to the original date and hit you with all the interest you would have been paying at their "normal" rates.

This can be a huge interest bill which will only make your debt situation worse.

Unfortunately, that has happened in far too many cases.

As a result, if there is any risk of a late payment, you are better off calling the credit card company and telling them you want them to lower your interest rate and pay the debt off as quickly as possible.

Debt Management Question #4:

"I have outstanding credit card debt and my son is getting ready to go to college, should I withdraw money from my 401K to pay down my debt and help pay for his education expenses? What do you think of that debt management strategy?"

Generally, it is best not to “rob” from you 401K since that money will be needed for future retirement.

I would encourage you to live on a budget that would free up enough money to pay down your debt without pulling money out of your 401K and incurring the 10% penalty.

With regard to paying for your son’s college expenses, in this case, it may be better to use a portion of your 401K than to take on new debt since 401K withdrawals used specifically for higher education can be made without incurring the penalty. (You will still have to pay the taxes.)

Then try to make up for the amount withdrawn by contributing additional amounts to your 401K to “pay back” the withdrawal as soon as possible.

I would also caution against encouraging your son to personally take on significant debt for college, since more and more college graduates are finding their career choices increasing limited due to the pressures to pay off college loans.

More and more families are finding lower cost ways to pay for college and avoid debt.

Examples include, attending a community college for two years then transferring to a four year school, and spreading four years of college over five or six years to allow periods of work in between to earn money for tuition.

Debt Management Question #5:

"I retired after 31 years at the age of 53. I received a lump sum pension plus a monthly annuity. The lump sum plus my 401K were rolled over into an IRA.

My question involves paying off my two daughter’s college loans.

Should I take money out of my IRA and pay off these loans or stretch the payoffs out to minimize the taxes I will have to pay on the withdraws.

My financial planner would prefer if I did not use my IRA to pay off these loans, what is your opinion of this type of debt management?"

I agree with your planner because the 10% penalty is very significant.

The better way would be for the IRA to keep earning interest for the future and to develop a good debt reduction plan to pay off the loans as soon as possible with current income.

The best way to do that is to make sure you have a good working budget that frees up as much as you can to pay down the debt as soon as possible. Financial Freedom Trail can help you to create or improve your budget.

Debt Management Question #6:

"I have $13,000 saved in a CD that will be available in June of this year and I have $11,000 debt on my credit card that I just can't seem to ever payoff.

Should I use the money in my CD to pay off my debt? Every month about $120 more is added to my balance due to interest.

I do send them more than the minimum payment but I am overwhelmed. I am trying to use good debt management skills. For the past 2 months I have been on a budget and am not using my credit card for purchases any more."

Good for you that you are now on a budget and have not been using your credit card. Keep up the good work!

As long as you are not draining all of your emergency funds, I like the idea of using your CD to pay off your credit card to avoid the excessive interest.

However, that is only a good idea if you make a commitment not to get back into debt on your credit card in the future. If you used your CD to pay off the credit card and then go back into credit card debt ... then you would be worse off then you were before!

Debt Management Question #7:

"I really want to save, but a friend of mine said it would be better to put all my extra money toward paying off my debt before I begin saving. Is that a good idea?"

The road to financial freedom involves a commitment to do both saving and debt reduction at the same time.

Saving is the only way to avoid future debt since any unexpected expense that hits a person without savings will quickly become more debt.

Establishing an emergency saving fund is absolutely critical for everyone. Even when you have debt, this must be a high priority. Set a goal to put aside 3 to 5 months of bare bones living expenses. This will provide a cushion to absorb financial surprises such as a future job loss.

Continue to be aggressive about debt management by paying down the debt at the same time.

The foundation for accomplishing this is establishing good financial control by living on a working budget.

By building into your budget money for both paying off debt and accumulating savings, you will be making significant progress toward financial freedom.

Debt Management Question #8:

"I am going to be purchasing a new car this year. I may pay cash for the car, but if I end of financing it, would I get any advantages by using my home equity line and paying it down compared to financing it with the dealership?"

My hat’s off to you for asking these questions before you make a commitment to the car.

I would like to encourage you to consider a quality used car. You will have the ability to pay cash for it rather than getting a loan for a new one.

A brand new car is one of the single biggest drains on a budget because the value depreciates so quickly ... it can represent a lot of money "down the drain" compared to a reliable, high quality, used car.

Personally, I would never put my house at risk with a home equity loan to buy a new car. A home equity loan may be cheaper, but you need to understand the potential risk of having a larger loan against your house.

If for some reason you could not make the payments ... you could be in danger of losing your home.

A new set of wheels is not a good enough reason to put your house at greater risk.

Debt Management Question #9:

"I am 23 years old and I recently made a decision to go back to Graduate school to become a teacher. Other than my car payment, I do not have any other debt.

I like not owing much but I feel completely clueless how to pay off the $19,000 of debt I will be accumulating in the next 21 months. I have taken the Good Sense Seminar in the past.Do you have any suggestions? … I have less than two weeks before I sign my life away."

I wish there was an easy answer to your situation ... but any time you spend money you don't have it will be painful.

You probably won't like my answer ... but this is what I would tell my own son or daughter if they came to me with this question.

I would like to suggest considering other option besides going into $19,000 of debt in the next 21 months. On a teacher's salary that is going to be extremely difficult for you to pay back.

Consider working part time and going to school part time. Commit to live as cheaply as possible ... scrimp and save and go to graduate school as time permits while you are still working. By doing that and living wisely on a budget, you could avoid that significant debt.

Sure, it will take you longer ... but what difference does it really make it if takes you four years versus two.

I would much rather be a 27 year old teacher will little or no debt than a 25 year old teacher with $19,000 of debt.

Debt Management Question #10:

"I own a rental home which, if sold, would totally pay off all of my debt including the home we live in. I had anticipated keeping this for 10 more years and allowing it to appreciate in value, but my wife is interested in becoming debt-free now as opposed to realizing a larger profit in the future. What would you suggest?"

Because you don't know what the future may bring ... there is no way to know how much your rental property may be worth in the future … and therefore no easy answer financially to your question.

I do believe, though, it is very important that both you and your wife feel comfortable about your financial situation.

I believe this is more important than the profit opportunity. The chance to pay off your debt and start with a clean sheet of paper as well as give your wife a greater sense of “peace” … is a very powerful combination.

I would make it a matter of joint prayer as you seek God's direction. He does care about our finances and an opportunity to be debt free would be hard to beat!

Debt Management Question #11:

"I realize I should be saving money regularly, but since I have a lot of debt at high interest rates, shouldn’t I wait until I am out of debt before I begin to save?"

Saving or paying off debt is not an “either/or” question. To become financially free involves doing both at the same time. Saving is the only way to avoid future debt since any unexpected expense that hits a person without savings simply becomes more debt.

Establishing an emergency savings fund is absolutely critical to financial health.

Even when you have debt, this must be a high priority. Set a goal to put aside 3 to 5 months of “bare bone” living expenses in a savings account.

This will provide a cushion to absorb financial surprises such as the loss of a job. Continue to be aggressive about paying down the debt at the same time.

The truth of the matter is you will probably not be able to do this unless you are living on a good working budget.

By building into the budget categories of both paying off debt and accumulating savings, you will be making tangible progress toward living financially free.

Debt Management Question #12:

"We currently have the money to pay off our mortgage of $150,000 at an interest rate of 5.5%, but my wife and I don’t agree on whether we should or not.

She thinks we should pay it off and I think we can earn more by investing the money. What do you think?"

I believe the smart thing to do is to pay off your home if you can do it and still have an emergency fund.

Once you own your home, no matter what happens, you have a place to live. That way you can start investing the money you save by not having a mortgage payment and build for the future.

The problem with investing the money rather than paying the mortgage is you “earn” a guaranteed 5.5% with the mortgage versus the uncertainty of what you could earn by investing it.

Having a fully paid-off house would put you in a strong financial position and give you great peace of mind!

I hate to say it, but I side with your wife.

Debt Management Question #13:

'My wife and I are saving a significant amount for retirement through our 401(k)s at work. The problem is we just can’t make a dent in the $11,000 we owe on credit cards that we ran up a few years ago.

Are we wrong to put so much emphasis on retirement savings?"

Saving through your 401(k)’s is an excellent way to prepare for retirement and I strongly encourage it.

However, there is a better way in your situation. I suggest you temporarily reduce your 401(k) contributions to the smallest amount you can contribute and still get the full employer matching contribution (assuming there is a match) and take the rest you were contributing and put 100% of that against paying off the credit card debt.

As soon as you have the credit card debt eliminated, you can restore the higher 401(k) contributions and even add what you were paying in interest to the credit card company on top of that.

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