Money 911: Setting your financial priorities

TODAY’s financial team offers viewers advice on money matters ranging from preserving emergency funds to dealing with student loans — and they include several helpful links to help secure your financial future.

Q: We have no consumer debt or car loans, but we do have a big mortgage of $330,000 which is at a variable interest rate of 2.2 percent. We are wondering if, with an interest rate this low, if we should take some of the money we have been putting toward an emergency fund and use that to pay down more of the principal of our home. —Charmaine Wong, Markham, Ont.

Jean Chatzky: You need an emergency fund, no question, in an economy like this. And it needs to hold enough cash to cover six months of living expenses at the minimum. You don’t say how far along you are in building your emergency fund, but I’m going to assume you haven’t gotten there yet. If that’s the case, then I want you to continue putting money away until you do. Then, you can consider prepaying on that mortgage.

When your ARM payment falls, and you continue to send in the same amount each month, the extra goes directly toward the principal, and you can make some real progress knocking that down. That way, the next time your rate adjusts up, your monthly payment may be less than it would have been otherwise, because your loan balance has come down a bit.

But there may be a better use for that money. In your case, it’s the emergency fund right now. After that, it may be not against that 2.2 percent loan — which is costing you next to nothing after the tax deduction — but in investments in your retirement accounts, college funds and other places where the money could grow faster and beat that 1 percent and change return.

Lastly, keep your eye on mortgage rates. At some point, depending on how long you plan to stay in that house — and what the cap is on your ARM — it may make sense to lock into a 30- or 15-year fixed rate loan.

You’re probably saving hundreds of dollars a month with a mortgage this large. But the question you need to ask yourself is, “When will I erase those savings by holding onto this ARM for too long?” As rates go up, you lose your opportunity to lock in low. And so that’s the risk you’re running. If you don’t mind taking the risk for the prospect of capturing the savings, the onus is on YOU to keep very close tabs on the mortgage market so that you can lock into a new longer-term rate before those longer-term rates get too expensive.

Q: I lost my job last summer, and again two months ago. We used almost all of our savings during last summer’s job loss and now have no choice but to accumulate credit card debt until I get another job. We recently received our tax refunds and immediately put that money into savings instead of paying off our credit card debt. Should I have done this or should I have paid off my credit card debt? (At this point we are talking about less than $5K in debt, but it is accumulating at around $1,200 per month.) —Susie Morelli, Ann Arbor, Mich.

Sharon Epperson: This is a tough one, Susie. If you don't have an adequate emergency fund saved up — at least six to nine months of living expenses — you need to build that cushion. So it wasn't wrong to put your tax refund checks in that pot. But by racking up credit card debt, which is likely at pretty high rates, you're digging yourself into a hole and it will be difficult to climb out. Take half of the amount of your tax refund and put it toward paying down your debt. Do it all at once or take out enough each month to help you pay at least pay the minimum balance on those credit cards.

I don't know when you'll get your next job — soon, I hope — or how long you'll be able to keep a new job in this economic climate. In the meantime, you need to maintain good credit; that means making sure that you're putting enough money toward your credit card debt to keep those accounts in good standing. You don't want to overuse or abuse your credit cards, but you do want to be able to continue to have access to those accounts if you need it. At this point, you don't want to be in a situation where you have no income and no credit.

The bigger problem for you is going to be figuring out what you're going to have to give up. You have to cut expenses so that you're not relying on credit cards to cover $1,200 worth of bills each month. Housing is probably your largest expense. If you own, it may be tough to sell. If you rent, perhaps look for a smaller apartment. Make a list of your committed expenses and see what changes you can make in your lifestyle to reduce them. You may have to forgo nearly all discretionary expenses at this point — at least until you're working again. Finally, you may have to look not only at cutting back on spending but possibly selling some assets. It's time to make some drastic changes.

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