All Financial Wisdom

Cashflow Hierarchy

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Cashflow hierarchy, as in where to put your cash, can be difficult to come up with.  I came across this article written on whitecoatinvester.com where he lists the priority of debt and investing.  I copied the following from there:

1) Pay off high interest debt.  Any credit cards or consumer debt at 8% or higher should be paid off ASAP.  Honestly you should have never accumulated this.  Live like a resident until it is gone.

2) Invest in tax-protected accounts.  If you are a resident max out your personal and spousal Roth IRAs.  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%.  These include most current student loans.

4) Consider investing in other accounts that offer a tax break, such as 529s (kid’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%.  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.  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) Don’t carry any debt into retirement.  Losing the safety net of on-going employment income makes this a risky affair.  It’s one thing to get foreclosed on when you’re 30. It’s entirely different when you’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.  This strategy has whispers of “Pay yourself first” and I can get behind that.

Does this cashflow hierarchy change your financial decisions?

References:

http://whitecoatinvestor.com/student-loans-vs-investing/

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