When you are in debt, is the whole Pay Yourself First still applicable?
And by the way, just who is impressed by Bossy’s use of the word applicable? Plus, you should hear her say it. Kind of like a mouth of marbles. Marbles made of peanut butter.
Anyway. This Pay Yourself First issue keeps coming up — on this site and on way better sites that actually know a thing or two about finances.
But on the other hand, Bossy has heard her whole life that credit card balances are the very first thing that should be paid off, and you see where that advice has left Bossy.
Bossy found the following advice in a Consumer Reports article, which is kind of ironic because if we weren’t such consumers we wouldn’t be in this pickle to begin with but anyway: not only does the following suggest paying off debt before paying yourself, but it says to pay off the highest interest loans first, and not those with the smallest balances:
“We’ve said it ourselves, and we mean it: Build your savings automatically by direct-depositing part of your income first into a tax-deferred retirement plan, such as a 401(k), 403(b), or IRA, and then, if you have more to invest, put money into after-tax investments such as a savings account or no-load index fund. Ideally you should put the maximum allowable amount into your tax-deferred investments before moving on to the taxable ones.
But does that suggestion hold if you carry large balances on your credit cards or have other high-interest loans? No. Unless you are making fabulous returns on your savings and investments—higher after taxes than the double-digit costs of your credit-card debt—deal with your debt first.
Focus first on paying off your highest-interest debt. Pay down, say, an extra $500 a month until that account is paid, then move on to the next-highest account until it’s all paid off.”
What do you think?