Tier 1: Credit Card Debt
Eliminating high interest credit card debt should be your first priority. Keep a little cash on hand to protect against a faulty card, but dump all your other savings into paying off this debt. If you later need access to that money, you can still (reluctantly) use your card, but you’ll at least save the interest fees in the interim.
If you’re not sure why credit card debt is the first tier, consider that the monthly minimum payment you make is almost all interest, which means you’re throwing that money away; it does very little to reduce your actual debt or lower the next month’s payment. However, if you pay more than the minimum, the extra reduces the principal to reduce the interest you pay later. When you pay it off, there’s no more interest and no more monthly payment. With credit card rates upwards of 19 to 29 percent, this wasted money far exceeds returns you could realistically expect by investing those payments to stocks, bonds or bills.
Note that this tier only encompasses high-interest credit card debt or other lines of credit in which money paid into them is still accessible. Although you should pay off, for example, an auto loan early, you need to first establish an emergency fund (Tier 2), because money paid into the auto loan is no longer accessible. Therefore, if an emergency crops up after dumping all your savings into the auto loan, you won’t have a backup. Yes, you do pay more in interest by waiting to pay off the auto loan, but think of it as financial insurance.
Also consider applying for a home equity line of credit, if you own a home with equity. These lines of credit usually have a much lower interest rate than credit cards, which are tax deductible, and offer accessibility of money paid back into them.