The New Commonsense Guide to Your 401(k): Rebuilding Your Portfolio From The Bottom up

Chapter 66. Pay Off Debt

AMERICANS AT ALL STAGES of life carry too much debt. As you prepare for retirement, paying off debt should be a top financial priority for two reasons. First, there's nowhere else you can get a guaranteed investment return equal to what you get by investing in your debt. Paying it off yields a risk-free return of whatever your interest rate happens to be. Paying off $2,500 at 16 percent yields a 16 percent return on that money. Second, it will give you flexibility by freeing up your cash flow so that you may be able to do something creative during the next phase of your life.

Here's a plan to help you become debt-free:

1. Figure out how much you owe. Gather all your credit card statements and make a list that includes the interest rate, total balance and minimum monthly payment. List the highest-rate card first and so on. "A lot of people lose track of what they owe," says Gerri Detweiler, one of the country's top credit specialists, who serves as a credit advisor for Credit.com, a free Web site offering a wealth of tools to help consumers improve their financial lives.

2. Keep the two cards with the lowest rates. Cut the others up. Write to the card issuers and ask that those accounts be closed.

3. If you do not have a card with an interest rate below 14 percent, get one. CardTrak.com offers screens for credit cards depending on what you are looking for: the lowest rate, frequent flyer miles, discount merchandise.

4. Resolve that you will use your cards only for essentials ...