Adam (a staff writer at Get Rich Slowly) wants you to “challenge yourself” by replacing the the standard ‘pay yourself first’ advice with:
Only pay yourself first if you deserve it.
Now, Adam isn’t suggesting that you stop saving that 10% to 15% of your gross income that the bulk of the personal finance blogosphere recommends …
… what Adam is really asking is:
Should You Stop Funding Retirement to Focus on Debt?
[This] is one of the most heavily debated dilemmas in personal finance. Unlike “spend less than you earn” or “track every penny you spend”, there’s no cookie-cutter answer to this question. Variables such as age, career, risk tolerance, and even personality type make each individual situation unique.
This is a good line of questioning – and I encourage you to read his article – but, unlike Adam, I think there is a “cookie-cutter answer to this question”:
You should always ‘pay yourself first’ …
… but, where you place that money depends on where you earn the greatest after-tax return.
Keeping in mind that a “dollar saved is a dollar earned”, it could be in:
– Your 401k, potentially earning 8% plus the value of any employer matches (in an earlier post, we calculated this as providing another % point or two to your long term return),
– Your debts, potentially saving 10% to 30% interest on high-interest car, credit card, and consumer loans,
– Your real-estate investment strategy, potentially earning 15% to 25% in long-term rental increases and capital appreciation,
– Your seed capital for your new business, potentially earning 50%+ in future profits and windfall gains on the sale of the business,
But, is unlikely to be found in paying off low interest student loans (saving 0% to 5%) or mortgages (saving 4% to 6%) or in investing in low interest savings such as bank accounts, bonds, or CD’s (earning 1% – 5%).
Blindly plonking your money into your 401k, or paying off debt, or paying down your mortgage is not the way to get rich(er) quick(er) … 7m7y readers always look at their options in terms of greatest contribution to reaching their Number.