Overdosing on student-loan debt is bad, but not getting a degree at all may be worse. People with only high-school diplomas have twice the unemployment rate and significantly lower lifetime incomes than college graduates.
The key to staying out of trouble with student loans is to limit your borrowing. A general rule of thumb is to borrow no more than you expect to make during your first year out of school, and to steer clear of private student loans. Since the maximum in federal student loans that most students can borrow for an undergraduate education is $31,000, you're unlikely to get in over your head for a four-year degree -- as long as you get that degree. Your earnings won't rise enough to justify the cost of borrowing if you drop out.
The federal borrowing limits are higher for graduate school, so tread cautiously there and consider whether the jobs for which you're preparing will pay enough to allow you to easily repay your debt.
3. Pay off your mortgage as fast as you can
The savings, on paper, look thrilling. Make one extra mortgage payment a year on a $200,000 loan and you can shave five years and nearly $33,000 in interest payments off your loan. Why shouldn't you take advantage of that?
Well, there are plenty of reasons. And it's not that you can get a better return on your money over time by investing it, though you probably can. It's simply that most people have more pressing financial priorities. In other words, you have better things to do with your money than pay off low-rate, tax-deductible debt.
You should start making extra payments on a mortgage only when you:
- Are on track with your retirement savings (see above).
- Have paid off all other debt, which typically carries higher interest rates and often isn't tax-deductible.
- Have sufficient health, life and disability insurance coverage.
- Have a fat emergency fund. The size depends on your circumstances, but figure at least three months' worth of essential expenses.
If you've covered all those bases and still want to prepay your mortgage, then have at it. Until then, though, cool your jets.
4. Buy a home as an investment
There are some good reasons for buying property; historically, this hasn't been one of them. In normal times, home-price appreciation barely outpaces inflation, as I explained in "Are you crazy to buy a home now?"
Most people who think their homes have appreciated considerably aren't adjusting for inflation or subtracting all the money they've spent on maintenance, insurance, taxes, repairs and remodeling.
There are exceptions, of course. In a few select markets, homes have appreciated in real terms, and people have gotten rich from their home equity. But there are also places where home prices have fallen after an economic shock and not recovered.
Paying down a mortgage over time should increase your wealth, but buying a home is definitely not a slam-dunk investment.
5. Make an emergency fund your financial priority
The financial crisis came upon us so suddenly, and the resulting recession was so deep, that some people decided that nothing was more important than saving up a huge emergency fund.
There's a problem with that thinking, though: Saving up even a small emergency fund takes a heck of a lot of time.
I use the following example in my new book, "The 10 Commandments of Money," to illustrate the problem. Say a family that spends $40,000 a year cuts back by 10%, or $4,000, and devotes every dime of that savings to building an emergency fund. It would take this family more than two years to save up a three-month stash ($3,000 of post-cuts spending a month, multiplied by three, is $9,000). And that's assuming that family members don't have any financial setbacks in the meantime, such as a job loss or a big bill that forces them to raid their fund.
Two years is a heck of a long time to put your other financial priorities, such as saving for retirement or paying down troublesome debt, on hold. It makes a lot more sense to downshift your emergency fund as a lesser priority and identify alternative sources of cash you can tap as you build your savings. These might be an unused line of credit, space on your credit cards, stuff you can sell, friends and family who can lend money or a family member who can go back to work.
It's true that a big cash cushion can help you sleep at night, but you shouldn't sacrifice other, more important financial goals to get one.
Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy" (find it on Bing). Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Join the conversation and send in your financial questions on Liz Weston's Facebook fan page.
