Filed under → Your Next $500
Where does your next $500 go?
Answer six things. Then watch the money fall through the list, filling each bucket in order until it runs out. Debts get paid smallest balance first, which is not the cheapest way to do it and is the way people actually finish.
This is the “match”. It is free money from your employer, and roughly half the people who are offered one do not take all of it. The exact deal is on your benefits site, written like “50% of the first 6% of pay”.
Tap everything you carry, then set roughly what is left on each. We are not asking what any of them charge, because it does not change the order: these get paid smallest balance first. The size is the whole decision.
Strictly, the debt is the better return and should get every dollar. Todd puts ten bucks a week in anyway, so the habit is already running the day the debt dies. You are allowed to buy that. We will just show you the price.
Interest you stopped paying, match you were handed, growth on the rest. In a savings account it would be $520.
this year. You did not earn more or spend less. You changed the order.
And when the top bucket is full, everything moves up.
The order is not a one time answer. Kill the credit card and that $200 drops into the next bucket by itself, without you deciding anything.
The order matters most in the first few years. After that, the only thing that matters is that you did not stop.
Get the newsletter →The numbers behind this
The market is assumed to average 10% a year and a savings account 4%. Ten percent is roughly the long run S&P 500 average before inflation. It is an average, not a promise, and some years are ugly.
The credit card is assumed to be 24%, a personal loan 12%, a car loan 7.5%, a student loan and a mortgage 6.5%, and a medical bill 0%, because those are close to normal right now. Your own rates are on your own statements. We do not ask for them, because they do not change the order here.
The debts are ordered by size, not by rate, and that is a choice. Paying off a debt is an investment that returns exactly its interest rate, guaranteed, with no tax and no bad years, so the cheapest possible plan pays the dearest debt first. This is not that plan. It pays the smallest balance first, because a debt you actually finish beats a spreadsheet you abandon in month four, and the payment from each dead debt rolls onto the next one. The page tells you what that costs you in dollars rather than pretending the two are the same. A mortgage stays out of it entirely.
The 401k match is a one time return, not an annual one. A 50% match is 50% on the day it lands, and never again on those dollars. It is still the best single thing on the list, and it does not roll over. Skip a year and that year is gone.
Two rules are not about returns at all. A month of cash comes first because without it the next transmission goes on the card and you pay off the same money twice. And the emergency fund gets built before you invest, because growth you have to sell in a bad month was never really growth.
What is not in here. HSAs, which beat almost everything on this list if you have one. Traditional versus Roth. Income limits, vesting schedules, state taxes, and the fact that money in a paid down house gives you nothing back until you sell or borrow. Contribution limits change most years, and the Roth cap used here is about $7,000 a year.
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Gone. Back to the defaults.