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Ask Dave

Retirement or Debt First?

Jack is a little out of whack on the order in which he invests and pays off debt.

QUESTION: Jack in Utah wants to know if he should lower 401(k) contributions in order to pay off their car and home. Dave reviews Baby Step 3.

Dave's ANSWER: You should stop all 401(k) contributions temporarily if you want to get out of debt while you knock out the car. As soon as the car is paid off, I would finish my emergency fund of three to six months of expenses.

At that point you are debt-free except the house and you have an emergency fund in place. That's what we call being through Baby Step 3. Then restart your 401(k) saving at 15% of your pretax income. All the other money that you can squeeze out of your life and budget should be thrown at the mortgage until it is gone.

As soon as the mortgage is gone, you've got nothing left to do but Baby Step 7, which is to max out everything and become very wealthy and give a whole bunch of it away.