Make interest rates work for you in 2002
By Greg McBride • Bankrate.com

The end of the year is an opportune time to take stock of the financial path taken in 2001 and plot a course for 2002.

The economy officially entered recession and thanks to 11 rate cuts by the Federal Reserve, interest rates reached record lows this year.

How did you respond? How have your actions in 2001 affected what 2002 holds for you?

Do a debt checkup
Line up the current billing statements for all of your outstanding credit cards and loans next to those from this time last year. Add up the entire debt burden and compare that to what it was one year ago. Did you accelerate debt repayment with the wind at your back? How much debt did you actually pay down and how much still needs to be paid? Lower interest rates, diligent payments and refraining from further borrowing will keep you on target to becoming debt free. Perhaps 2002 is the year this happens.

For those who did an about-face into the wind and used lower interest rates to pile on more debt this year, assess why. Was it due to a medical emergency, sudden job loss, or other financial catastrophe? If so, you now have a new understanding and appreciation for a liquid emergency fund. The added debt burden is a reminder of what to do in 2002 -- pay down that high-rate debt and build up a safety net for the future. Don't worry about what rate you are, or aren't, earning on this savings. Think of it as an insurance policy against falling into a 15-percent interest rate debt trap the next time an unavoidable financial misfortune befalls you.

Or is this added debt a result of overindulgence due to low financing costs and unbeatable discounts and offers in 2001? Your efforts to single-handedly revive the economy are commendable, but you haven't done yourself any favors. Simply put, regardless of how low interest rates fall, if you are drawing down more debt than you are repaying each month, you are moving in the wrong direction.

Reap the benefits of lower rates
Maybe your vice is credit cards. Pay down the highest-rate balances first and do not use the cards for any additional purchases. Maybe you consolidated this high interest rate credit card debt at a much lower rate using the equity in your home. Good move, as long as you haven't started tapping those credit cards again. Becoming debt-free means the debt must ultimately be paid back. All the jockeying to take advantage of low interest rates will get you no closer to this goal without a disciplined effort to pay down the debt.

The low-rate environment is a boon to those with a debt burden, but not just for the obvious reason that debt costs less. More importantly, it assists borrowers in being able to throw that monkey off their backs that much sooner. There is no better time than the present to begin taking advantage of this by accelerating debt repayment and putting a moratorium on incurring further debt. The rising numbers of personal bankruptcies are testimony to the importance and difficulty of this task in the current economy. But servicing a debt burden is considerably more productive now when rates are low than when rates begin their inevitable climb.

Making headway is the first step to removing the debt burden; building an adequate emergency fund removes the reliance on debt in the event of an unexpected financial crisis. Removing the debt burden and the likelihood of plunging back into debt facilitates saving for other financial goals -- education for a child or grandchild, retirement, or travel. Now is the time to get moving, as with low rates, the wind is at your back. But just as warm summer weather has given way to the cold of winter, the winds of interest rates won't be blowing in one direction forever.

-- Posted: Dec. 28, 2001