Many people have learned over the past few months that interest rates aren't stable. Economics have a role in this matter, although the actual physical applications often are mitigated by emotion. Therefore, interest rates are subject to mandates set by the Federal Reserve Board, market conditions, fear and more. So, if you're young and you learned how to live a certain way, the current market conditions may have thrown you for a loop. Even if you're not all that young you may wonder if the world really is coming to an end.

I don't have a crystal ball, but - in my opinion - I think the world will be around for a while. As the world continues to spin, people in this country are learning how to cope with lower interest rates on investments and savings accounts and rising interest rates on debt. For instance, just a couple of years ago, it was better to draw out that federal school loan because the interest rate attached to that loan was much less than any interest an individual could earn in a compound savings account in many cases. Now, federal school loans carry a higher interest rate than many savings plans.

This turns the world upside down for many folks, and the decisions over which loans to pay off first may have become more confusing than ever. But, one thing hasn't changed, and that's the way an individual should pay off debt to that individual's advantage. First and foremost, the most effective way to reduce debt is to pay off those credit cards - even before you pay extra money on that school loan, that mortgage, or that car. Here's why...

1. The interest on school and home loans is, in most cases, tax deductible. So, for a student who owes money on school loans, the interest rates that you pay on those loans are subtracted from your wages for the year. Home owners also can take advantage of this tax deduction. You cannot deduct credit card debt interest rates, unless those cards were used for business ventures.
   
   
2. Extra money put into a home or school loan can be used to pay off that credit card debt first instead. When you're not paying interest on those credit cards, you'll have a lot more money to pay off those other items later.
   
   
3. Don't kid yourself into thinking you can pay off credit cards with minimum payments. If your interest rate figure is as high as your minimum payment (yes, Virginia, this can happen), then you're just spinning your wheels.
   
   
4. Using hard-earned money to pay off non-liquid assets is frightening, especially if an emergency arises. Credit cards, for all intents and purposes, are much more liquid than a car or a home. If you pay off those credit cards, you can rest assured that you have emergency funds - the type of funds that you can use immediately in an emergency situation. Granted, a home has equity (so does an automobile, but it doesn't appreciate like a home normally does), but you would need to jump through hoops these days to get a loan on a home's equity.
   
   
5. Some people believe that being out of debt totally is the way to go, but sometimes being in debt works to an individual's advantage - I'll go back to that school loan. If it weren't for that school loan this year, I would have been in another tax bracket altogether, paying Uncle Sam almost the same amount as my interest rate on my existing school loan. Of course, other factors came into play to reduce my taxable income, but that interest rate was a huge factor.

You might see that last bit as "robbing Peter to pay Paul" mentality, but I'd rather benefit from my debts than end up paying taxes or paying a credit card company. So, the best debt to eliminate is that credit card debt first. Other debts can come later.

Of course, everyone's situation is different. To that end, it might behoove you to get thee to a tax specialist who can tell you whether it's more advantageous to keep an outstanding balance on a loan or not. The amount you pay this specialist, in many cases, is tax deductible. That specialist may tell you that the interest rates on your home or school loans are far less than the interest rates on your credit cards. And, no matter how upside down your world might seem right now, the ability to pay off a loan that carries higher interest rates is a smart move.

As a final note - research has shown that women often are more reluctant than men to seek financial advice from consultants and advisors. Reasons behind this fact include not having the money to spend, not knowing whom to trust, not wanting to spend the money on themselves, and not knowing the questions to ask an advisor. While these concerns are legitimate, it's important to understand that financial advisors come in all shapes and forms - and, some of them can be trusted.

If you're ready to shed those excuses and seek help for your finances, the first step is to begin reading books, newspapers, and articles related to investment planning so that you become informed. I'll provide you with more steps in this direction in the next article...

Until Then,
Linda Goin