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Penny wise, pound foolish
For starters, you probably shouldn’t be investing while in debt unless you can reasonably expect to outperform the interest rates that you’re paying. In other words, if you’re carrying high interest consumer debt, you should focus on getting out of debt instead of building your portfolio.
Of course, this is a bit of an oversimplification. On the one hand, it ignores important things like building at least a minimal emergency fund. On the other hand, it ignores things like the free money that comes from employer matches on your retirement contributions.
Another consideration relates to contribution limits… There are annual limits on how much you can contribute to things like IRAs, and if you skip a year, you can’t go back and make it up. Would I pump money into an IRA instead of paying of credit card debt at 20%? No, but these sorts of things are still worth keeping in mind, especially when thing .
Developing a strategy
Here’s a thumbnail sketch of how I’d approach things. Note that for the first step, I’m assuming that you have enough to cover all of your minimum payments plus make the 401(k) investment. If not, you should obviously focus on your debts.
- Invest enough to get your 401(k) match
- Pay off all non-deductible, high interest consumer debt
- Jump back on the investing bandwagon
There’s certainly no harm in carrying a mortgage while building up your nest egg. In fact, if you wait until you’ve killed off your mortgage, you’ll find yourself in a huge hole by the time you turn your attention to the future. Not only will you be way behind the curve at this point, but you’ll also have missed out those IRA contributions that I warned you about earlier.
Anyway, enough about my view… What do you think?
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