Investing Fundamentals

Where to Put Your Money First

Updated on March 27, 2020 Updated on March 27, 2020
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  1. Show Notes

Which of your financial obligations should you meet first, loans, investing, credit cards?  Learn where to best allocate your money.

Nick is 29, married, owns a home and has $100,000 in student loan debt at 7% interest. He maxes out his employer matched 401K. How should Nick prioritize his disposable income?

First, max out your 401K contribution, especially if your employer offers any matching funds. A tax-sheltered investment will lower your taxable income and so much the better if by adding to this, it puts you into a lower tax bracket. The savings of a lower bracket can be huge. And the matching money is literally free money.

Your debt is an emergency.

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The next rule applies to everyone. Get rid of debt. Even before investing. On average, your money will make 7% a year when invested. Even if your debt interest percentage is less, getting rid of the debt is the most important thing.

Buckle down hard for a year or two to get rid of any debt. Work a second job, stop going to dinner, whatever it takes. The only debt this rule does not apply to is mortgage debt. It’s a poor investment to throw your newly freed up money to extra mortgage payments, that money goes to investments.

If you needed cash ASAP, imagine having to wait to sell your house to get it. If that money is invested in something like Betterment, you can have cash on hand within a week.

The debt is paid, now what? Get a few thousand dollars in an emergency fund. Largely your investments will be your main emergency fund but it’s good to have a few thousand dollars that are instantly liquid. Now take the money you were putting toward the debt and put it toward your investments.

Follow this advice and when your mid-life crisis comes around, you’ll have plenty of cash for a red convertible.

Show Notes

Betterment: Automated investing.

Lending Club: A peer-to-peer lending company.

Money Chimp: tax brackets.

Candice Elliott - Senior Editor
Candice Elliott is a substantial contributor to Listen Money Matters. She has been a personal finance writer since 2013 and has written extensively on student loan debt, investing, and credit. She has successfully navigated these areas in her own life and knows how to help others do the same. Candice has answered thousands of questions from the LMM community and spent countless hours doing research for hundreds of personal finance articles. She happily calls New Orleans, Louisiana home-the most fun city in the world.

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