Prioritizing Your Payments

Q: My husband and I are at a crossroads. We expect that the company I work for will pull out of our area and I'll be laid off. We've been saving diligently, putting money away every month to keep us afloat while I'm between jobs. Then we realized we have enough in our savings account to pay off all our debts (cars, campers, one credit card) except for our mortgage. Doing so would free up about $2,000 a month. Should we pay off everything and begin saving again or keep the money in the bank for the probable end of my employment?

A: Pay off the credit card, but don't pay off the cars and campers. I firmly believe that everyone needs to make it a priority to get out of credit card debt (see Preparing for a Possible Layoff). But you also need to keep enough money in your savings account to cover the mortgage payments if you cannot quickly find another job. If you deplete your savings to pay off the cars and campers, how will you be able to make the house payments if you are laid off?

That said, what you really need to consider is selling one or more of the cars if you can pocket enough to cover the loan balances on the vehicles. And those campers fall far short of being a necessity, so you might think about selling them, too. I know that getting rid of certain possessions is hard to contemplate, but hard times require sacrifices.

Read More: How to build an emergency fund

Q: I've got $17,000 in credit card debt, $21,000 in student loans, a car payment, and an interest-only, variable-rate home loan that will adjust in two and a half years. I take in about $37,000 annually. How will I ever be able to save for today, for retirement, for my sons' futures? Where do I begin, and how do I prioritize?

A: Your overriding goal must be to stay current on all your monthly debt. Pay at least the minimum amount due on your credit cards each month, and keep up with the car payment. That should result in a strong credit score, which means you may be able to ask to have your cards' interest rates reduced.

Next, I want you to consider selling your home and moving into a rental. Next, ask your mortgage lender what your payment would be if the adjustment hit today. If the answer scares you, I want you to consider selling. If you can sell and make enough to cover your mortgage and moving costs, I suggest you do it now. The move will give you a better grip on tomorrow by reducing your costs today. Assuming that renting will free up some money, I want you to open two accounts that will help you establish peace of mind: an emergency cash fund and a Roth IRA. When you find full-time work in your chosen field—and you will, stay positive—you can revisit buying a home.

Read More: Four reasons to prioritize your financial security

Providing for Your Family

Q: My husband has a structured settlement from an accident he was involved in as a child. He sold ten years of that settlement in 2004, but in 2014 he'll start receiving monthly payments of $400. We have approximately $30,000 of debt, including medical bills, and we lease our only vehicle. These days we are having difficulty making payments on time. There is literally $1 in our savings account. We have a 7-month-old son and hope to buy a house within the next few years. We think that selling the rest of the settlement to pay off our bills will allow us to save for the home of our dreams. There's about $110,000 left; by selling it, we'd net $17,500. Would that be smart?

A: Structured settlements are a common way for people who have been injured to receive an insurance payout. The periodic payments provide ongoing income and reduce the risk of blowing a lump sum through poor financial choices. In many states, you can sell your rights to periodic payments to a company that will pay you a lump sum today. Doing so, I realize, is tempting, but it's typically not smart.

For starters, payments received in a structured settlement are generally tax-free; if you sell in return for a lump sum, you may owe state and federal tax, thus reducing the settlement's value. More important, the firms that buy your settlement are out to make money by underpaying you for its real value. The bottom line: Cashing out today can mean netting far less than you'd get if you kept the payments.

Let's do the math. Since you owe $30,000, a $17,500 payout isn't going to solve your problems. You would still have $12,500 in debt, and a car lease, and you'd be no closer to building a savings account, let alone coming up with the down payment for a home. I want you to dig out of debt without touching the settlement money. Your dream should be to get out of debt, not to buy a home that you have no way of affording right now.

If you need help tackling your bills and learning to live within your means, I suggest you contact the National Foundation for Credit Counseling, a nonprofit organization that will connect you with a debt counselor in your area. NFCC counselors will assess your situation, help you negotiate payment plans with your creditors when feasible, and, yes, tell you if cashing in your settlement is your best move.

I also want you to focus on what those tax-free settlement payments can do for you beginning in 2014. It sounds as though you have 20 more years of payments coming to you. If you were to invest the entire $400 every month in a Roth IRA for 20 years and earn a conservative 5 percent annual return, you would have about $165,000 in 2034. If you were to keep that sum growing for another 15 years—without investing another penny—you could have more than $340,000 by the time you retire. That's a dream that can be yours if you use the structured payouts wisely.

Read More: Suze's financial couples' therapy

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