Paying Off Credit Cards, Saving for a Home Top Priorities

I do not think there is anybody out there who hasn't seen the 800-pound gorilla in the room commercial. It may have a different effect on borrowers compared to investors, but now it somehow makes more sense to both.

Discussions about the government bailout plan are under way as is one of the biggest recessions in the nation's history. The 800-pound gorilla is usually associated with those approaching retirement, but reminds us all of the need to carefully manage the family budget and make sure the mortgage is paid. Schwab Corporate & Retirement Services most recent eight "savings fundamentals" recommendations are designed to help individuals prioritize and manage their short- and long-term personal and financial goals.

A related survey shows participants are on the right track but need help in creating and following a savings plan.

"One of the few benefits to the current market environment is that people are focusing more on saving money," said Charles Schwab vice president, investor development, Catherine Miller, in a company release. "Most of us have finite resources and are not able to save for all of our financial goals at once. Prioritizing makes them feel less daunting and more attainable."

A survey of over 1,000 individuals conducted on behalf of Charles Schwab found that respondents rank paying off credit card debt above all other savings priorities. Nearly 60% of those surveyed have credit card debt, carrying an average balance of more than $7,200. The second priority is to contribute to a household emergency fund. Those who do not own a home rank saving for a home purchase their second highest priority.

"Saving for a child's education or for a home are excellent goals," says Ms. Miller. "But we do counsel people that having an emergency fund and contributing to tax-advantaged retirement accounts should be at the top of the list if possible."

Seventy-nine percent of respondents are spending less money due to the current economy and 44% are saving less.

Savings fundamentals include contributing to their company's retirement plan and a maximum allowed to tax-advantaged retirement accounts, pay off nondeductible, high-interest-rate debt like credit cards, create an emergency fund to cover at least three months of essential living expenses and save for a child's education.

Saving for the downpayment on a home is also at the top of the list, as is paying down tax-deductible, high-interest-rate debt like mortgages. It starts by estimating how much house one can afford - typically, the mortgage payment, including principal, interest, taxes and insurance should not be more than 28% of gross income. Schwab advises future homebuyers to make sure they keep risk tolerance and timing needs in mind when deciding how to save for your downpayment. Also, avoid using tax-deferred retirement accounts to fund this purchase since reducing high-interest-rate debt from a tax-deductible mortgage, home equity, or student loan can significantly enhance one's ability to save in other areas over time. After taking care of other savings priorities, Schwab recommends refinancing this kind of debt if rates have dropped. "You may lower monthly payments in the near term and help save money over time, but make sure to factor in any transaction or closing costs before making a decision."

Finally, the counselor urges borrowers to keep investing. "If you've accomplished your other savings priorities, investing for the long term may be a good way to stay ahead of inflation and earn more than traditional savings accounts pay."

A realistic investing plan can help put it into action to begin earning right away, but never forget to create a diversified portfolio with an asset allocation "that matches your risk tolerance and keep long-term goals in mind to stay on track."