1. This is an incredibly well thought-out article. It is a huge problem that many people have to deal with now. I think this list is a great one, although, as with anything, there can be some tweaking done depending on the individual. I may lean a little more toward paying off the high interest debt first, even at the expense of the employer match of the 401k. But, it would probably depend the on the balance and interest rates of the debt.
    My recent post Mortgage Payoff Calculator, Pay Off Mortgage Early, Mortgage Pay Off Calculator

    • That's a good point Dave. The exact details probably do need some tweaking for each individual's specific situation. For example, if someone was later in life, I could imagine placing the debt payoff ahead of saving for retirement. However, if the individual is just starting their career, I imagine that it would be very detrimental if they had to go through their entire 20's paying off debt and not have saved a single penny for retirement. Because of this scenario, I suggested the split. But, as with any of this, none of the decisions are easy.

  2. Awesome list and plan. You have given me a lot to think about. Setting financial priorities has always been a struggle for me. It is like the chicken and egg thing. We have a similar plan to you with our ER fund and so far it seems to be working. Good news is we haven't had to tap into it yet.
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    • Thanks for reading Miss T! This is actually a very difficult decision-tree to make! Lots of variables to consider.

      That's good to hear you're making the emergency fund a priority! Do you have 6-9 months of expenses worth saved up in that?
      My recent post Account Hierarchy Paradox – Should Paying Off Debt, Saving for Retirement, Having an Emergency Fund, or Securing Health Insurance Be Your Highest Priority?

  3. Hmmmm I disagree with the big e-fund before debt-payoff peace of mind yes but at what cost? It doesn't make sense to me to put a bunch of cash in an account for peace of mind when the interest rate on other debt accumulates. It feels like running up the escalator to me and is a more expensive way to financial freedom than snowballing the debt first then the larger e-fund.
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    • Thanks so much for reading and getting involved in the discussion Andrea!

      It's absolutely a very difficult decision to make in choosing between e-fund and debt-payoff. Ideally, both of these things could be done at the same time. However, if funds are really tight, I'm still going to stand by my prioritization above.

      Here's my reasoning:

      Let's say that a young man has 50k in student debt and 20k in credit card debt accumulated from their 18-24 years. They are 25 years old now. He only makes 27k per year in his job, but suddenly, the company downsizes and lays him off.

      Without a sizeable emergency fund accumulated and no job/income, he won't be able to meet his monthly expenses OR pay off debt. Thus, that's why I say that even though it's not ideal, let the credit card debt sit (only pay minimum payment) and accumulate until you save up for an emergency fund.
      My recent post Account Hierarchy Paradox – Should Paying Off Debt, Saving for Retirement, Having an Emergency Fund, or Securing Health Insurance Be Your Highest Priority?

      • thepennyhoarder says:

        I like the advice. Personally, when I was trying to pay off my credit cards, I found it the tmost motivating to put half of my extra money towards savings and the other half towards my credit card bills. Although that was based more off of what made me feel best than sound financial reasoning. 🙂

        I just didn't want to get to the end of my debt repayment and feel like I had worked so hard all year to pay off the mistakes of the year before, only to start the new year with nothing.

        • Well said PennyHoarder. I think how a person “feels” about their finances is important though. It would really stink to go through the best career years of your life without any savings to show for it.
          My recent post Account Hierarchy Paradox – Should Paying Off Debt, Saving for Retirement, Having an Emergency Fund, or Securing Health Insurance Be Your Highest Priority?

  4. Crystal @ Industrial says:

    I'm just so happy that we don't have to choose. If we did, I'd prioritize it: Health Ins, Emergency Fund, and Debt and Retirement would be tied and get to split that part of the money.
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  5. Wow – quite a comprehensive plan for addressing the “debt vs retirement vs.emergency fund vs. insurance” paradox. This is an issue that A LOT of people struggle with – myself included! It’s so tempting to think lets tackle only the debt and then when I’m debt free worry about the other issues, but a wise person once told me “you can’t finance your retirement” so I’m more and more convinced that a hybrid approach is wise. I’ll keep pondering your points!

    • Thanks for reading Tracy! I actually didn't think about the hybrid approach until I read a book by David Bach, so it's definitely not a trivial issue!
      My recent post Account Hierarchy Paradox – Should Paying Off Debt, Saving for Retirement, Having an Emergency Fund, or Securing Health Insurance Be Your Highest Priority?

  6. I think that it's going to depend on your situation. If you can see the writing on the wall for a pending job layoff, for example, socking away as much cash as possible (while looking for a job) should be the priority. If you're unemployed, self-employed, or your employer doesn't offer health insurance, then I'd say getting catastrophic health insurance should be the highest priority. If neither of those things apply AND you have high debt, I'd say building up an emergency fund maybe 1-2 month's worth of living expenses would be the place to start, followed by heavy duty debt reduction, followed by retirement. (Or maybe retirement only up to the employer's match if you've got that available, then heavy duty debt reduction, especially if we're talking about high interest debt.)
    My recent post What Is Debt?

    • Thanks for commenting Jackie.

      I agree with you that 1-2 months worth of expenses in an emergency fund COULD be sufficient, as long as that emergency fund amount also included enough to pay your health insurance, car insurance, and home insurance deductible should a catastrophe hit.

      However, by the time you throw in all of these deductibles on top of 1-2 months of living expenses, you would probably be close to 6 months worth of expenses in your emergency fund account. Thus, I think I am still comfortable recommending the priority sequence discussed above. It's tough though to stomach delaying paying back debt, but I think it's a “lesser of two evils.”
      My recent post Account Hierarchy Paradox – Should Paying Off Debt, Saving for Retirement, Having an Emergency Fund, or Securing Health Insurance Be Your Highest Priority?

  7. Just wanted to let everyone know that I just updated the original account hierarchy post from January 2010 with this second priority list/order. You can view it at the following link –
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  8. Thanks for the post. I have long held that savings and debt reduction should go hand-in-hand. Savings is the key to the avoidance of new debt. If no new debt is added, old debt will be eventually be paid off if payments are made on time. Yes, saving money instead of using it to accelerate debt repayment will result in more interest being paid on the debt. But is the goal to get out of debt and stay out of debt, or is it to spend as little on interest as possible? Saving is the way to permanently eliminate the need for debt. Savings grows while debt is being retired. Over time, savings overwhelms debt.
    My recent post Never Go “All In” With Your Savings

    • Interesting perspective KC! I was approaching tackling savings and debt reduction at the same time strictly from a psychological perspective. However, what you mention makes sense as well.

  9. Nice article.

    Side comment: Only 0.3% of the college undergrads accumulate over $100k. So that is not nearly as a typical scenario as the media seems to paint.
    My recent post Finding the Market Value of a Used Car

    • Thanks for reading Jim. That's good to hear that such a small amount of grads finish with over 100k in debt. There must be some good grants and scholarships for Harvard and other private school these days.

  10. You refer to a monthly mortgage at step 4.5 however you never address saving for the down payment on a home/buying a home, an obvious pre-condition to a monthly mortgage. I am curious where you see home buying fitting into your hierarchy?

    • Very good question Cat! That definitely was not included above. However, it's difficult to cover every scenario/question due to space in the post.

      However, I would definitely place it either directly before or after step 4.3 – funding the IRA. Depending on how soon you want to buy, that would dictate whether you'd place it before or after the IRA.

      Another related topic would be whether or not one should pay down high interest debt before saving for a house down payment. While I haven't looked at an answer to this question in detail, I would probably say that you'd want to be well on your way to having your credit card debt paid off before saving for a house downpayment.

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