Answer: It’s smart to put at least a few hundred dollars in the bank before you begin to pay down your debts. That way, if you face a small financial setback, you can tap your emergency fund and not have to add to your debt. But it doesn’t make sense to wait until you have several months’ worth of expenses saved before you pay debt, because that can take years to accomplish and you’d pay a fortune in interest in the meantime.

Answer: Let’s first get clear on some terminology. CDs and money markets are types of investments, while IRAs and Roth IRAs are types of accounts — specifically, they’re retirement accounts. Think of IRAs and Roth IRAs as buckets into which you put investments, such as CDs, money markets, stocks, bonds or mutual funds.

The next thing you need to get clear about is your plan for your savings. If the money is meant to be an emergency fund, to tide you over in case of job loss or a large expense, then you probably shouldn’t put it in a retirement account, which could have penalties or restrictions on withdrawals.

You also shouldn’t put your emergency fund into investments that could lose value in the short term, such as stocks, bonds or most mutual funds. The best place for emergency money is usually a federally insured bank account. If your bank isn’t paying much interest, you can check with others, including online banks and credit unions, to see if you can get a slightly better return.

If you don’t need the whole sum as an emergency stash, however, then you might want to think about taking more risk to get more return, and perhaps using an IRA or Roth IRA as your savings vehicle. To learn more, check out Kathy Kristof’s “Investing 101″ or Eric Tyson’s “Investing for Dummies.”

Answer: Use your grandfather’s generous gift to both help you retire most of your debt and get a start on an emergency fund.

After you sell the car, take $500 to $1,000 of the proceeds for your emergency fund. That will cover most minor emergencies and should keep you from adding to your credit card debt. Put the money in a safe account that’s accessible but not too accessible. If it’s too easy to tap, you might be tempted to raid it for non-emergencies. A savings account at an online bank or a credit union are two good choices.

Take what’s left and pay down your credit card bills. Stop using your cards and figure out how much you need to put toward your debt to get the rest of it paid off in a few months. Then trim your expenses to come up with the money and set up an automatic transfer from your checking account to your cards.

Despite what you may have heard, credit card debt isn’t normal — a majority of U.S. households don’t carry credit card balances, according to Federal Reserve statistics — and it’s a real cancer on your finances. While you’re young, you should get out of the habit of carrying balances and into the habit of paying your cards in full every month. You’ll be richer for it, and less likely to find yourself in the sad position of being old and in debt. Read on:

Answer: You should put retirement saving first now, even before you pay off your debt. If you don’t get a relatively early start putting away money for retirement you’re unlikely to be able to catch up later. Those who start saving after age 35 have a very tough time putting away enough money to comfortably retire, says Roger Ibbotson, founder of Ibbotson Associates financial research firm and a Yale School of Management professor. The ideal time to start saving for retirement is with your first job.

Prioritizing retirement means you’ll have less money for other goals, so paying down your debt and building up an emergency fund will take longer, but so be it. The amount of extra interest you pay on your debt will be overshadowed by the tax breaks and investment gains you’ll make in the long run in your retirement accounts.

After paying off your credit card debt, your next goals will depend on your individual situation. If all your education debt is federal student loans rather than private loans, then you needn’t be in a rush to pay it off. That’s because federal student loans have relatively low, fixed rates and many flexible repayment options. You also may qualify for student loan forgiveness in 10 years if you work in public service or 25 years if you don’t. An income-based repayment plan would allow you to minimize your payments so you could put money toward other goals. You can research your repayment options at FinAid.org, a financial aid and student loan education site.

If, on the other hand, you have some private student loans, you’ll probably want to make paying that off a priority since the rates are variable and you don’t have as many repayment options. (You probably wouldn’t be able to make income-based payments, for example.)

When to prioritize a home purchase depends, again, on your individual situation. If you’re sure you’re where you want to be for the next 10 years or so and are eager to own a home, you could start a down payment fund as soon as you finish paying off the credit card debt.

A budget is a great (I’d say essential) tool when you’re trying to get a handle on your money and dig your way out of debt. But once you’re on solid financial footing, accounting for every penny can be a real drag and often isn’t necessary. One of the benefits of finances that work is that you can keep a looser hand on the reins.

I use online personal finance software to track our transactions and make sure we’re spending within the broad guidelines we’ve set down. If we start to run out of money before we run out of month, I’ll review more closely where the money is going and make adjustments.

Here’s how Jeff puts it:

Contrary to what most non-cheapskates seem to think, only about 10 percent of the cheapskates polled said that they have a formal, written household budget. For most of us, a budget seems too much like a diet: a plan that’s always looming over you, bringing you down, when what you really need is a lasting lifestyle change that makes the desire behavior effortless.

While we’re not big fans of budgets, the cheapskates next door do place a high priority on keeping score, doing at least an occasional reality check to see how they’re actually spending their money….I’m mostly looking for red flags—expenses that seem high, either higher than I remember them being in the past or higher than I’d like them to be. These are the things I’ll dig into further or try to control more carefully going forward; they’re also sometimes things that I’ll “chat” with my poooor wife about, if she’s the spender in question.

Here’s what it takes to live a budget-free life:

Reasonable overhead. If your must-have expenses exceed 50% of your after-tax income, you’re going to have a tough time making your money stretch as far as it needs to go. Reducing your overhead—shelter costs, utilities, food, transportation, insurance, child care, minimum loan payments—to the 50% mark goes a long way to create a more balanced financial life. The lower your overhead, the more flexibility you have.

Automatic savings. My top priority is making sure we’re saving enough for retirement. We’re also saving for our daughter’s education. I’ve also got a bunch of savings buckets for various goals and irregular expenses, including property taxes, insurance payments, vacations, home maintenance/repairs and car expenses (and eventual replacement). All of these goals are funded with automatic transfers from our checking account to the appropriate savings account. That way I know I’m on track for all our various goals without having to think too much about it. Then if we want something special or out of the ordinary, we save for it. We have a fat emergency fund as well, which is earmarked for big setbacks such as job loss but which is available if a car or home repair exceeds what’s been set aside in those particular buckets.

Automatic payments. Blogger Adam Baker at ManVsDebt makes a valid point that automatic payments can lead to thoughtless spending. On the whole, though, I find paying bills automatically works well for us as long as I subject our spending to a periodic reviews. Recently, for example, I was able to knock $10 a month off our cell phone bill using MyValidas.com and a similar amount by negotiating a discount on our newspaper subscription. (Hey, I’m a lifetime journalist—can’t rid me of my dead-tree addiction.)

A good tracking system. The online personal finance software lets me know what’s left over after all the transfers and bill payments are made (love that cash-flow forecast feature). So I know that what’s left over is available for day-to-day spending. To earn rewards, we put much of our spending on credit cards (which are paid off in full each month, of course) and I’ve set up alerts to let me know when we’re closing in on a spending limit I’ve set for each card. If you’re not comfortable using an Internet site like Mint, Yodlee or Quicken Online (soon to be merged with Mint), then Quicken’s software is a good alternative (the data lives on your computer, rather than in the cloud).

And that’s it. As I’ve said, doing without a formal budget isn’t a good idea until you’ve conquered your credit card  and other consumer debt and are living comfortably within your means. Once you achieve that, though, the reward for all your hard work can be kissing your budget goodbye.

Answer: You don’t say how old you are, how much you’ve saved for retirement already or what your other debts are. All those factors help determine where your savings should go.

You’re smart to be contributing to a 401(k) and getting the full company match. You can use an online retirement calculator, like the one at ChooseToSave.org, to see if you’re saving enough. If you’re not, you can boost your contributions.

If you’re on track for retirement, the next step is to pay off any toxic debt such as credit cards. (Toxic debt is any debt that carries high or variable rates and that erodes, rather than enhances, your wealth.) Once that’s paid off, you can focus on building up your emergency fund. In general, it’s smart to have at least three months’ worth of expenses in a savings account to be tapped in case of real emergency, such as a job loss.

Answer: Build up your emergency fund.

Because you charged your emergencies, you used up more of your available credit. The more of your credit you use, the more negatively your scores tend to react. It doesn’t matter that you paid your balances off each month. What counts is the balances that your credit card issuers report to the credit bureaus, which are typically the balances on your latest statements.

Now, the good news is that your scores probably will recover as soon as you start charging less. But you should take this as a sign that credit cards are a poor substitute for savings. An emergency fund could help you survive life’s inevitable setbacks without having to run to your cards.

I have another loan (for my son’s private school tuition) with an original balance of $4,950. I’m supposed to make 12 payments interest-free, which will leave a balance of $3,020, which then reverts to 12.5% interest for the next 14 payments until it is paid off.

What should I do?

Answer: Getting a fixed-rate loan from a credit union to pay off credit card debt is often a good idea — if you don’t already have cash sitting around to pay off the debt, which you do.

Unless you’re in real danger of losing your job, using your savings to pay off the cards is a virtual no-brainer. Clinging to cash that’s earning less than 2% doesn’t make sense when your debt is probably costing you a double-digit interest rate.

When the card debt is paid off, you can focus on rebuilding your emergency fund — until the interest-free period on the school loan is up. At that point you should pay off the rest of the debt.

It should go without saying, but you also need to fix whatever issue caused you to rack up the debt in the first place.

If you can’t afford to pay in full when the bill comes, you shouldn’t buy it. That’s as true for private school tuition as it is for credit card purchases.

A survey released yesterday by HSBC Bank USA found:

• 38% of respondents didn’t have even one month’s worth of expenses saved
• 61% could live on their savings for 3 months or less
• 51% of respondents with household incomes of less than $50,000 had less than one months’ expenses saved
• 29% of those who earned $100,000 or more had less than 3 months saved.

HSBC’s findings mesh with those of previous researchers who found only about one third of U.S. households had enough liquid savings to sustain them for three months or more.

Three months’ worth is a good goal in normal times, but in recessions, when the risk of job loss spikes, you may want more. The median duration of unemployment is now 14.7 weeks (nearly four months), up from a duration of 8.9 weeks (a little over two months) in July 2008. One third have been without a job for 27 weeks or more.

If you have toxic debt such as credit card debt or aren’t saving enough for retirement, taking care of those issues usually should take priority over building up your emergency fund. As soon as you’re able, though, stashing aside extra cash is a smart idea.

For more, read:

• Why you need $500 in the bank
• An emergency fund out of thin air
• When should you use your emergency fund?

Answer: The answer to this question is more complicated than you might think.

All things being equal, it makes sense to use cash in a low-interest money market account to pay off much higher-rate debt. But all things are rarely equal.

You may be taking a big risk if the money is all the cash you have in the world and paying the debt would wipe out this emergency fund. Card issuers are reducing credit card limits, so you might not be able to access your credit again in an emergency, such as a job loss.

If that’s the case, you may want to use only a portion of your cash to pay down the debt and pay the rest off out of your current income.