When deciding which debt should be paid off first, with the Y2k situation. Is it better to pay of a credit card or a home-equity line of credit? Any other thoughts in this area?

-- David Walters (dwalters@en.com), August 30, 1998

Answers

David, I'm no financial wizard but it seems to me that you want to get any mortgages and home loans paid off so you don't loose your home should you loose your job and not be able to pay for it.

Also, I think common sense says to pay off the highest interest money first, followed closely by any money that the creditor is likely to come looking for you to repay the debt by selling your home.

Might be a good idea to put back some money for local taxes, too. You never know...

sylvia

-- sylvia (msbrit@usit.net), August 31, 1998.

I belive that you can file a "Homestead Exemption" at your local courthouse which will allow you to remain in your house should you file bankruptcy. I think that would remain hinged upon the fact that the property you exempt is reasonable (not sure if palatial mansions would work) and you can move in the right direction paying off that house. You can call your local court house to get more information or wait around for more accurate answers.

My instincts say that it is more important to have accurate records in hand as of 1/1/00 than to have everything paid off at that time, however, that would be a nice bonus. I'm afraid that we are seeing the beginning of a major recession of which y2k will only increase the severity and duration. Hang on, the last I looked the DJIA was down 152 points.

-- St. Paul (slick@hucheemama.com), August 31, 1998.

I would find the cheapest interest rate charge card and apply for it. Transfer the balances of your high interest rate cards to the cheap rate, then start making double payments. These low interest rate cards are called teaser's and the cheap rate is usually for just 6 months. Apply for 3 or 4 of them and just keep transferring the balances until you get them paid off. Be sure to apply for the ones that do not have a membership fee.

On your home equity loan or line of credit, I would refinance at the lowest rate I can find. If you plan to stay in your home 5 years or longer it may be worth paying a couple of points. Stay away from adjustable rate mortgages, or baloon payments. I would act now before interest rates go up. Shop around for rates. One more thing, do not refinance and take more money to pay off any credit card debts because you will be financing those charge cards over a longer period of time! The secret to financial security is to be debt free, and it takes discipline to do it. When you receive your paycheck, pay yourself first, that is money in a 401K, or some type of savings. Without savings your one foot out the door. Good Luck.

-- Bardou (bardou@baloney.com), August 31, 1998.

Bardou, I have heard several "experts" say to borrow as much as you possibly can out of your 401K plan towards the end of 1999. If things go belly-up (like maybe your company!), the money was yours anyway and it might as well be you who gets it. If things turn out to be not so bad, just put the money back in. Does anyone have an opinion about this?

-- Gayla Dunbar (privacy@please.com), August 31, 1998.

I think about the tax implications of cashing out the 401K, they are severe. There are less volatile places you can put your 401K. It may not yield as much, but at least you won't lose all of it. I'm not a financial guru, I just use common sense. Bonds right now are good, if this is in fact a bear market. Money markets would be another choice of mine. There are millions of people depending on their 401K for retirement. Now there are millions forced to continue working and paying taxes because they lost their shirts today. I cashed my non401K mutual funds a month ago. Six months ago we had other money to invest and opted to stay away from the stock market. We put the money in a CD instead. It's the luck of the draw and a gut feeling. I'm sitting tight right now. But I am thinking that we will stop contributions to the 401K until things level out.

-- Bardou (bardou@baloney.com), September 01, 1998.

Bardou, good point, but I didn't mean cashing out the 401K. Most companies will allow you to borrow up to half at a low interest rate that when repaid the interest goes to YOU. No taxes applicable, it is a "loan" to you, from your own money.

-- Gayla Dunbar (privacy@please.com), September 01, 1998.

yep, hang onto that 401K. don't pay the government that 10% (plus the taxes u'll have to pay some day anyway.) watch the market drop 30%. hmmm? should I have sold? yup. hang in there for a major drop, but don't pay that 10%. makes sense, not.

-- blacky (dont@email.com), September 01, 1998.

Cashing out a 401(k) is not a logical option as a response to the recent stock market woes. Most 401s offer investment elections ranging from the money market (almost a savings account) to small cap growth funds (almost pulling on a slot machine). If you can't sleep at night because of the market volatility, direct your money into more risk- aversive funds, but don't halt your contributions into the plan or cash out. A friend of mine recommended rolling a 401 over into an IRA and pulling out that money in October/November 1999. From what I understand, you have three months to redirect those funds into another IRA/tax shelter without paying the penalty. I think this would only be reasonable with smaller amounts anyway, however. Apologize for the rambling.

-- bhayes (bkhayes@intellex.com), September 01, 1998.

It would be nice if our 401-K plan allowed us to do some of the things listed above. I would only borrow if I knew I would make more than the interest you were going to pay in repaying back yourself. We can't borrow so we just have to ride it out. We're ten years from retirement so we have a few years left. But one thing is for sure, I wouldn't give the government a single nickel more than I have to.

-- Bardou (bardou@baloney.com), September 04, 1998.

Capers Jones has estimated erroneous credit reporting to be the most likely personal impact of Y2K problems. He has placed his estimate (which he admits is unscientific) at 70% probablity of this problem occuring for an individual.

With that in mind, some consideration might be given to paying off the greatest number of debts before 1/1/00. The fewer payments you have to make, the less likely it is that the accounting of those payments is going to get messed up and the less likely it is that your credit report will need correcting. Paying off 10 smaller debts might make life easier than paying off three larger ones.

BTW, this is just something to think about and shouldn't be considered as advice on how to handle your debts. If you want that, seek the help of a professional financial counselor.

-- Paul Neuhardt (neuhardt@ultranet.com), September 04, 1998.