Parents, April 2008
Decisions, Decisions: Making Good Financial Choices
Is it okay to borrow money from your folks? Does a high-deductible medical plan make sense? Should you save for retirement or your kids' college? We have the answers.
by Teri Cettina
Should you pay off debt OR
Start an "emergency" savings account?
It's smart to stash a little cash for unexpected expenses, such as a car repair or an ER visit. But if you're carrying debt, don't focus on socking away three to six months' worth of living expenses, as most financial planners recommend. For the time being, aim to build a modest emergency fund of $1,000.
Once you've reached that level, focus on paying off your credit-card debt and loans one at a time. Start with the smallest dollar amount, not the highest interest rate, since it's more empowering to eliminate a debt entirely than to see it decrease slowly, suggests Dave Ramsey, author of The Total Money Makeover. Once you've paid off everything, go back to building a bigger financial cushion for those unexpected expenses.
Bottom line: You need some money for a rainy day, but it's better to get out of debt as quickly as you can.
Should you borrow from family OR
Get the money from a legit lender?
Your in-laws say they'd be happy to front you the money to buy new furniture for the kids' room — and they won't even charge you interest. What's wrong with that? "If you need a low- or no-interest loan badly enough to borrow from relatives, you probably can't afford what you're buying," says Michael Haubrich, a financial advisor in Racine, Wisconsin. Plus, there's often more than money at stake with the Family Bank: What if you miss payments? What if the "lenders" start questioning your other money and parenting decisions?
Unless the money is offered as a gift — with no strings attached— you should borrow from a bank or a credit union. Also, think about checking the financing options with the retailer where you plan to make a purchase; you might even get a better deal.
Bottom line: Relatives and money generally don't mix.
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