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asked in Investment by
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I am new to this, but here are some of the obvious options:

  1. Paying off credit card debt

  2. Paying off mortgage / student loans

  3. 401k up to employer match

  4. 401k past employer match

  5. IRA

  6. Emergency fund

  7. Other important investments that I have missed

Clearly this will vary person to person, but if you were asked to put an ordered recommendation on a highway billboard, what would it be?

(For example:

  1. Pay off credit debt
  2. Emergency fund for 6 months
  3. 401k up to match
  4. ... )

2 Answers

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answered by (19.8k points)

The top priorities for me, then, would be to make sure, first, that we don't have to go further into debt, and second, that we eliminate the debt that we already have as soon as possible.

Here is how I would rate your list:

  1. Putting together a small emergency fund

A small emergency fund, perhaps $1000 USD, is going to ensure that, while you are funding other things, you don't end up so cash poor that, if something unexpected and urgent comes up, you are forced to add to your credit card debt. Make this small fund your top priority, and it shouldn't take much more than a month or two to do it.

  1. 401(k) up to the employer match

Getting out of debt is important, but if your employer hands out free money, you have to take it. It is just too good of a deal.

  1. Paying off credit card debt / car loans / student loans / other consumer debt

Get rid of this debt as fast as possible. When you are done, you'll have more income available to you than you've ever had before.

  1. Building up your emergency fund

Now that you have just gotten done eliminating your debt as fast as possible, don't stop there. Take the income you had been throwing at your debt, and build up your emergency fund to a few months' worth of your expenses. Finishing this fund up will enable you to withstand a small crisis without borrowing anything.

  1. Retirement savings: 401(k), IRA, etc.

You are now in a very strong position financially, and can confidently invest. Deciding which type of retirement account is best for you depends on the details of your situation.

  1. Paying off your mortgage early.

Once you are contributing a healthy amount to your retirement funds, you may want to consider paying off your mortgage early.

As I said before, I recommend getting down to the last step as quickly as possible. Depending on how much debt you actually have, if you sacrifice for a year or two you could be debt free and in a position to keep all of your investment gains. If you take your time paying off debt, like many people do, you could find yourself 10 years from now still making payments on your loans, still making car payments, and still needlessly sending interest to the banks, eating away at the gains you are making in your investments.

If you aren't committed to eliminating your debt quickly,  and plan on having payments for a long time, then skip this advice and put retirement savings at the top.

0 votes
answered by

Here is an "oversimplified" order of investments:

  1. Minimal kit to be able to sleep safely and soundly, clothe yourself and feed yourself, and get to and from work.
  2. Establish the habit of only buying what you need, have room to store, and are willing to take good care of.
  3. Establish the habit of only considering something to be a "savings" if you would have been willing to "pay full price".
  4. Enough money in a checking account to be able to tide yourself over from paycheck to paycheck, without ever risking overdraft fees.
  5. At this point, it often makes sense to obtain a no-annual fee, no-monthly fee credit card or other line of credit -- but limit your line of credit to about 25 times the amount you can pay off in a month without charging any more to the card.
  6. Establish the habit of buying durable things. Consider buying the $5 item that will last for years, instead of the $1 item that needs to be replaced monthly. Of course, only do this if you can store and maintain the $5 item, and could have afforded (and would have chosen to buy) the $1 items.
  7. Set up direct debit so that the minimum payment for all of your bills automatically comes out of your checking account. Make sure that your monthly income exceeds your monthly outgo, so that you never have overdraft fees.
  8. Borrow The Millionaire Next Door from your library; read it and return it.
  9. Enough savings to cover first month's rent and security deposit, plus deposits on utilities. In other words, be able to use your own money to get into a home.
  10. A $1,000 emergency fund.
  11. The basic tools of your trade; a reliable method of commuting to work (including basic liability insurance if driving a car); and books and/or cheap tuition to learn the skills for your next job.
  12. Renter's Insurance. If you have dependents, a modest term life insurance policy. If you have a car, collision and theft insurance. If your employer offers it, disability insurance. An umbrella liability insurance policy.
  13. Pay off any credit cards (and other debt) that charge more than 10% interest per year, if necessary by rolling over to a card or loan with a lower permanent rate. I avoid all credit card teaser rates -- I judge a credit deal by its regular rate, not its starter rate.
  14. Enough equipment to keep yourself in good physical shape. For some people, this is a pair of walking shoes; for others, a bicycle or pair of roller blades. For some it is Charles Atlas' program of isotonic exercises; for others, dumbbells or a cable-based weight lifting machine.
  15. Get a safe deposit box, or other safe way to store valuable papers.
  16. An emergency fund with three months' after tax living expenses -- unless you are in the Medicaid trap that prohibits having more than $2,000 of liquid assets. If you are in that trap, try to find a way to get out of it.
  17. Establish yourself as a person (or family): Make a respectable home, with an honest job, a worthy spouse, and a neighborhood in which you feel comfortable. If you are religious, join a church, and attend regularly. Make a will.
  18. Update insurance and wills.
  19. 401(k) up to employer match.
  20. Pay off short-term debt and student loans.
  21. Take out an unsecured personal line of credit from a bank, even if it means paying a modest annual fee. Avoid borrowing against the line of credit. An unsecured line of credit is very helpful when obtaining (or re-financing) a mortgage.
  22. If you expect that you would be happy to (and able to afford to) live in the same place for at least ten years, and if the after-tax cost of buying a home (including likely repair costs, principal and interest on a 30-year fixed rate mortgage, taxes, insurance, and utilities) is less than 125% of the comparable cost of renting (including rent, renter's insurance, and utilities), buy a home.
  23. Re-finance your mortgage if it is sufficiently profitable to do so. (How profitable? That is worthy of its own question.)
  24. After-tax tax-deferred retirement savings (e.g. Roth IRA and/or Roth 401(k)).
  25. When you have enough money saved in your retirement savings, consider investment options that provide long term growth with reduced exposure to bear markets. (Some of these options require large minimum balances.)
  26. Pay off mortgage. (Possibly before, possibly after retirement.)
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