Once you have a well-established habit of saving money each month, and have your Emergency Fund set aside, we can move to the next step - prioritizing debt and your life goals.

Action Step One:

Open up a dedicated savings or money market Emergency Fund account. Set aside a fixed amount of money each month - whether it is $50, $500, or $5,000 - until your fund is at three to six months of your living expenses.

Step Two: Pay Off "Bad" Debt

You've set up your Emergency Fund, and created a wonderful habit of saving $50, $500, or $5000 each month. We don't want to let that habit disappear ... so where do we put your money next?

Step 2 is to pay off any "bad" debt. What that means really depends upon the person, and your tolerance for debt. Some people are not particularly bothered by debt, so their only "bad" debt are those with high interest rates, or minimal tax advantages (non-mortgage and non-student loan debts).

There are two situations where I may ignore the interest rate, and recommend the client pay off the debt ASAP.

(1) Loans from family or friends. These loans, while low interest, may be eating away at the relationship, without you even knowing it. They may reduce the relationship to a formal, strained, money-based transaction, instead of a loving, friendly, supportive bond. You may know the debt is a problem, or ask other relatives to see if the debt is a problem in culture of the family - if so, pay it off quick.

(2) Debt that is keeping your up at night, or making you feel unsuccessful. Debt may be the new "American way" - but it is not right for everyone, or even most people. Monthly payments, or even the idea that you could be repossessed or foreclosed upon, may be eating you up at night. You may feel venerable, or like you have never achieved any of your goals until that debt is paid off.

If this is you, then your debts may become a high priority, even over other goals, like college funding or purchasing a new home. Whether your debt should be paid off as a high priority, depends not just upon the interest rate, but upon the mental and emotional interest rate you are burdened with each month you are making loan payments.

Action Step Two:

Take a personal inventory of your debts, and how much they are costing you in mental and emotional energy. Do they bother you? How much? If so, regardless of how low the interest rate is, paying them off should be a high priority. Start today - pay an extra $10, $100, or $1000 on the principal each month. Even better, set up automatic bill payments in your online bank account bill-pay system to make automatic regular extra payments each month or quarter.