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Now that you have paid off all your non-tax-deductible debt with an interest rate over 8%, there are 4 things you can do with your pay yourself first money.  Any of these is a good choice.

1. Use it to make extra payments on your remaining non-tax-deductible debt.

   This is the safest option.  You need to pay off your debt before you retire, and by paying it more quickly you have guaranteed savings.  However,  in the long run you should be better off by investing in your tax-deferred retirement account (IRA, 401k) as long as your return is higher than the interest rate on your debt.
   
   

2. Use it to invest in your tax-deferred retirement account, and use the tax savings as extra payments on your debt.

   This option is also relatively safe, but you will experience some volatility in the stock market.  You can slowly start learning about investing.
   
   

3. Use it to invest in your tax-deferred retirement account, and use the tax savings to contribute to this account as well.

   If you earn $60,000 per year and contribute $6,000 (10% of your earnings), if your marginal tax rate is 30% you will get $1,800 in tax savings.  When you contribute the $1,800 to your retirement account it will generate another $540 of tax savings.  When you contribute the $540, it will generate another $162 of tax savings, etc., etc......

   In order to have the same after-tax money as in #1 and #2 above, you will have to contribute about 15% of your earnings to your retirement account.  You can then do what you want with any tax refund.

   With this option you will probably have the most money when you retire, but market volatility may keep you awake at night.  If it does, pay down your debt first.
   
   

4. Use it to invest in your retirement account, and do what you want with the tax savings.

   With this option you will have more money to spend right now, but less money when you retire.

    

Tax tip:  Pay yourself first by payroll deduction or automatic bank transfers to your retirement account or mortgage.

Revised: February 20, 2009