Paying Off Debt

Debt is the albatross for young people these days. Often, we're leaving college or grad school with more than 100k in debt. http://www.forbes.com/2009/03/10/college-graduate-school-loans-personal-finance-retirement-grad-school-debt.htmlWhile this is daunting, this debt is an investment in future earnings and options. However, there are a number of excellent options in debt repayment which could help you to greater financial flexibility faster.

First, get rid of all of your private and personal debt. That means credit card debt, car debt, and any private loans. Credit card debt and car debt can be avoided with effective budgeting, restraint in shopping, and avoiding overspending. Private loans are a different story. Often, these loans will carry a higher interest rate, and thus, be more costly than government subsidized loans. There are two ways to manage this money. One, try to avoid it by working while you're in school, and thus avoiding the need for private loans. A second option is the immediate termination of the private loan through no-interest methods. One way which can work is by asking for a salary advance from your job. Your employer will dock your pay to cover it, but you're not paying out over 13%. http://www.thefreemortgagecalculator.com/interest_rates/Personal_Loan.html
If a salary advance is not available, perhaps a no interest loan from family or a close friend may be an alternative. But getting rid of that high interest rate is crucial.

In terms of federally subsidzed loans, look into consolidating your amounts and getting the lowest interest rate possible. http://studentaid.ed.gov/PORTALSWebApp/students/english/consolidation.jsp?tab=repaying The goal is to ensure you get the lowest interest rate possible. Also, at the same time, don't just pay the minimum. Find out how much you can afford to pay off monthly, and do your best to devote a lot of cash to that. The money you are paying in interest is for the privilege of having enhanced earning power, and you should do everything in your power to make that cost as small as possible.

If you have a very low interest rate (some Stafford loans are around 2.4%), don't concern yourself with paying that off on a rushed schedule. You may be able to get a better return for your money in other investments, and so, it would be a prohibitive opportunity cost to pay off the debt rather than get that return.

Also, remember that there are potential loan forgiveness programs and loan repayment options offered from employers. Ask your HR about whether or not your  job can help you out. Further, mortgage interest and interest on education loans may be tax deductible, depending on your income. Research this to see if you qualify, and if so, take advantage of these deductions.

Do your best to remove the bad debt (debt with high interest, no tax benefits) as soon as you can, as long as you are not sacrificing more lucrative opportunities. You can find yourself debt free much sooner, allowing you greater financial freedom.

Credit Card Management

There are a myriad of credit card offers in the marketplace, and it is important to choose which credit card is right for you. It goes without saying that you should never carry any kind of balance, and you should treat your credit cards like charge cards or debit cards, where the full balance is paid off every month. If you budget effectively and exercise some discipline, this should not be too hard. Also, I find very little reason to pay an annual fee. It's a cost benefit analysis, and I have found that the costs generally lose out. Which means that credit card choice often comes down to the rewards and incentives.

Many of my friends in the past few years have focused on getting credits cards with very particular rewards programs. The Starwood American Express is particularly popular, as is the Amtrak Guest Rewards Visa. Other friends have focused on particular airlines, and their linked credit cards. I generally think these are the wrong way to go.

Websites such as kayak.com have democratized the travel industry, and locking in loyalty at one hotel brand (Starwood), or one airline, provides a psychological block to other alternatives. It may make sense if you live in a place where there is only one real airline serving your metropolitan area, but in a place like Washington DC, where there is excellent service from Southwest, USAir, American, and United, it makes very little sense to be wed to just one of those. There are similar situations in most metropolitan areas, which are served well by larger carriers and smaller carriers. Additionally, focusing on airlines leaves you at the whim of black out dates, which at times seem arbitrary, and increasing levels of miles necessary for rewards. It can now require 60,000 for a round trip ticket on Delta, meaning you need 120,000 miles if you are not traveling alone. http://dmn.delta.com/skymiles/direct/charts/us49/. When was the last time you had 120,000 miles?

Instead, I focus primarily on getting cash back rewards, because I can then use the cash for whatever I want. To look at miles vs. cash, check out: http://www.creditcards.com/credit-card-news/cathleen-mccarthy-6-questions-cash-back-miles-1433.php. I like having the options. I personally carry the Chase Freedom Card, because I can get up to $300 in bonus cash back in any given year. https://creditcards.chase.com/credit-cards/chase-freedom.aspx The opt-in for the bonus categories is simple and easy, and most of the categories are in things I buy anyway, like gas and groceries. I also carry Blue Cash Everyday from American Express, because I get three percent back on groceries. http://www304.americanexpress.com/getthecard/side-by-side/bluecashever-bluecashpref/12006. If I drove a car regularly, I would probably carry the Bank of America Cash Back card because it offers 3% back on gas. https://www.bankofamerica.com/credit-cards/marketinglist.action?context_id=marketing_list&category_id=2012

The point here is that you want the ultimate flexibility in your rewards, and you want rewards which give you the most for what you spend the most. We only use the Amex for groceries because of its specialized benefit. We focus on using the Chase card on its bonus categories to maximize our cash back. At the end of the year, I have a few hundred extra dollars in my pocket to use at my discretion.

Disagree? Got a credit card you love that I should be using? Let me know. Thanks.