Yesterday I was browsing around various personal finance forums and I just could not get past how many people were giving terrible terrible advice. Not just bad advice, we are talking the kind of advice your friends give you after 14 or so beers. Whats worse is that a lot of these people eat up the advice like they’re plastered too. Here is a direct example of a question asked:

“I am 33, my husband is 36. As stated above, we save $29,200 per year for retirement. Add our company match and our retirement savings reach about $35K per year. We hope to retire in our mid 50’s. My husband will have a pension, I will not. We don’t have credit card debt, but have a mortgage (200K), one car loan (18K) and student loans (16K). Should we be paying down this debt instead of maxing out our retirement savings? Basically, is it foolish to save for retirement and have current debt???”

So what is the very first response to this?

“The first thing you need to do is pay off debt. I would stop contributing to the 401(k) and Roth IRA at this time.”

The poster then went on to say some other crap which I ignored because it was all I took not to register and post a reply. (Later I noticed the thread was over a year old.) In any case this is a great example of 1) the wonders of the interwebben to spread false information and 2) people being so debt-phobic that they fail to really analyze financial situations. In this case the student loans and car loan were both around 4%. Lets see, tax deferred compounding interest with company match or pay down debt at a 4% interest rate?

Here is my suggested flow as far as money allocation:

401(k) max company match —> High interest debt —> Max Roth IRA —> More 401(k) —> Low Interest Debt —> other investments

Lets break this down a bit becaues you might be wondering about my priorities. There is a specific reason for each step here.

401(k) max company match - If your company matches every dollar up to say, 3% then you are getting a raise of 100% on that money contributed. Lets take Joe Graduate who makes $60,000.00 a year. That 3% match is $1800.00 per year.

High interest debt - This one is fairly self evident. If you are paying 25% on your credit card that is a ton of money down the drain.

Max Roth IRA - Its important to contribute to the Roth IRA while you can. There are contribution limits (currently $4000 if you are under 50, $6000 if over 50) as well as income limits ($99,000.00 currently) to be able to contribute. For more information read my Roth IRA basics.

More standard 401(k) - Tax deferred? Compounding interest? What a deal!

Low Interest Debt - The truth is you could probably come out with more money doing various investment strategies rather than using the money to pay off low interest Debt, especially considering things like student loans and mortgages being tax deductible. However, things like low interest car loans/credit cards are good things to pay off because they are liabilities, and missed payments could mean interest rates rise. Plus there is the peace of mind factor.

Other investments - If you are a young professional and still have money left over I applaud you, you’re way way way ahead of the game. This means its time to save up an emergency fund and if you’d like, find a discount broker and ease your way into buying some other securities.

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