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URL:  http://boards.fool.com/greetings-mz00m-my-standard-reply-has-always-23028627.aspx

Subject:  Re: Retirement vs. Snowball Date:  9/14/2005  10:30 AM
Author:  xraymd Number:  210677 of 308454

Greetings, mz00m, my standard reply has ALWAYS been to fund the retirement accounts to the max every year. The reasoning is that they have a hard deadline: once you miss the opportunity to fund for that year, you can't go backwards in time to do so. But you can indeed find ways of repaying debt faster (higher income, less spending, judicious balance transfers to lower interest rates, etc). Reverse time travel is not yet possible!

Further, a dollar saved now given your youth is going to have that much more power later - just apply compounding equations against it to see on the far end how big today's dollar with all of its earnings gets for each additional year it accrues interest income. That's why the younger you start, the more potent the outcome.

So now you have my answer. Even as I struggled to pay off nearly $150K in student debt, I STILL fully funded my retirement accounts first. In my opinion, that (even contrary to the standard Fool viewpoint) is where one's first dollars should go (if you are not hemorrhaging money in the form of interest rates north of 20%) and debt retirement ought to come AFTER savings are incrementally set aside month by month, or paycheck by paycheck, to meet (or get as darn close as possible to) the annual limits for a Roth IRA every year. That may call for a shift in your perspective about how much of every dollar you make is really yours to spend NOW. In my opinion, it would be a good idea to think of your salary as being, say, $10K LESS than you really are paid so that the $10K "excess" does go every year, year after year, towards a Roth for you and for your wife.

The usual savings scheme is this:

1)Save into the 401(k) that amount which is matched by your employer

2)Then switch to save that amount which maxes out your Roth IRA (you have until TAX DAY of the FOLLOWING year to finish making your contribution; that is, 2005 Roth contributions may be made until April 17, 2006 - a bit later than April 15 since in 2006 it falls on a weekend)

3)Then switch back to save the remaining amount you are allowed to put into your 401(k) even if not matched

4)Then continue to save to taxable retirement accounts to the point you are satisfied with your annual put-away

Of course, if you are also retiring debt, you have to divert some of your income stream towards doing that. But in my view, saving the percent of your income necessary per month or per paycheck to meet goals 1) and 2) above should really be given first consideration before your next dollars go towards debt payoff. Once you are no longer in debt you could then divert your snowball to 3) and 4), since good financial behavior leads to debt that gets, and stays, paid off!

xraymd
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