From 401(k)s to credit cards, here’s how to know where your money goes first.
Transcript:
JEAN CHATZKY: If you’re looking at it by the money, if you’re looking at it mathematically, you are looking for the greatest return on your money. That’s how you decide where to put the next dollar. So top of the list, you put the money in the 401(k) to get the match, because if you’re getting $0.50 on the dollar, that is the best return that you’re ever going to get. Next level, the interest rate that you pay on a debt is equal to the return on your money. So if you’ve got high interest rate credit card debt charging you 25%, 29% that comes second because that’s a guaranteed 25% on your money. From there, you move to other taxable, or from there you move to other tax advantaged accounts that you have access to. So we’re talking about your 401k, your IRAs, your HSAs, maybe your 529. And from there you sort of look at the other returns on your money. You got a very, very low rate on your mortgage. Then you shouldn’t be necessarily thinking about pre-paying that mortgage, but it’s OK at that point to think about putting some money in a discretionary investment portfolio where you’re not getting any tax advantages. The other way to look at the question is emotionally, if you have a very, very big goal that you are striving to reach for, let’s say you are trying to build an emergency cushion, but you’ve got some credit card debt that you also have to wipe out. Yes, you’re going to get the bigger bang for your buck by wiping out the credit card debt. But the emergency cushion is your insurance policy against future credit card debt. So in that case, you want to divide and conquer. Split the difference.
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