Cashflow hierarchy, as in where to put your cash, can be difficult to come up with. Â I came across this article written on whitecoatinvester.com where he lists the priority of debt and investing.Â I copied the following from there:
1) Pay off high interest debt.Â Any credit cards or consumer debt at 8% or higher should be paid off ASAP.Â Honestly you should have never accumulated this.Â Live like a resident until it is gone.
2) Invest in tax-protected accounts.Â If you are a resident max out your personal and spousal Roth IRAs.Â If an attending, max out your 401K, SEP-IRA, HSA and any other retirement account that allows you full marginal tax rate deductions.3) Pay off non-deductible loans between 5% and 8%.Â These include most current student loans.
4) Consider investing in other accounts that offer a tax break, such as 529s (kidâ€™s college accounts), UGMAs, and backdoor Roth IRAs if your circumstances merit.
5) Invest in risky assets in a taxable account (stock mutual funds or investment properties).
6) Pay off loans with after-tax rates of 3%-5%.Â These include most mortgages.
7) Pay off loans with after-tax rates below 3%.
8) Invest in safe assets in a taxable account such as CDs, bonds, and savings accounts.Â If these types of assets return to historic norms (4-5% returns) instead of their current 1-2% returns, then it is okay to invest in these prior to paying off very low interest debt.
9) Donâ€™t carry any debt into retirement.Â Losing the safety net of on-going employment income makes this a risky affair.Â Itâ€™s one thing to get foreclosed on when youâ€™re 30. Itâ€™s entirely different when youâ€™re 70.
Following his advice, I should not pay off my car loan, which is at 2.09% and instead max my 401K and Roth IRA.Â This strategy has whispers of “Pay yourself first” and I can get behind that.
Does this cashflow hierarchy change your financial decisions?