Use Focused Intensity On Debt First
Mike has a $500 tax liability right now. He's considering contributing to an IRA to reduce that number. Should he put money toward the IRA to reduce his tax bill?
QUESTION: Mike in North Carolina has a $500 tax liability right now. He’s considering contributing to an IRA to reduce that number. Should he put money toward the IRA to reduce his tax bill? Dave isn’t sure it’s worth it.
ANSWER: I recommend stopping your investment plans temporarily while you clean up your debts. That would mean that we don’t do IRAs, and we throw all the money we can gather up from anything toward the debt.
You’re going to invest $1,000 to save $250 of the $500 you owe. That still leaves you $750 off of what could have gone toward debt. What you focus on is what’s going to move. I want you to focus on the debt. Get the debt cleared. When you get the debt cleared, then you’re able to invest and do your IRAs and 401(k)s and those kinds of things fairly easily. But right now, it’s all going out to student loan payments and everything else. Your most powerful wealth-building tool is your income. When it is all tied up paying payments, it messes up your wealth building—your investments. We’ve got to clear the debt in order to have the financial muscle to build wealth.
I hate paying taxes, too, but that doesn’t mean that I’m going to allow my distaste for taxes to drive me into doing something that causes me to lose focus. I want you to completely focus on the debt as a temporary measure. In a year or two, you’ll be completely clear of that and be able to fully fund your IRAs—a Roth IRA preferably—and your 401(k). A Roth IRA would not give you any help with your tax burden. That power of focused intensity is a power that supersedes the investing mathematics on a short-term basis.