Two approaches to debt elimination

Nearly every financial adviser — from accountants to brokers to books — advises that debts should be paid off in a particular order: from highest interest rate to lowest interest rate. While this method makes sense from a mathematical point of view, it makes less sense from a psychological point of view.

The Traditional Approach

Assume a typical young woman in her mid-twenties who awakes one morning to realize that she's in debt and who decides to do something about it. She might be burdened with the following hypothetical liabilities:

  • $20,000 college loan at 5%
  • $8,000 credit card balance at 12%
  • $2,000 computer loan at 10%
  • $3,000 car loan at 4%

Most financial gurus would advise that the debts be paid off in the following order:

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Making early retirement happen

In today's CNNMoney "Ask the Expert" column, a 33-year-old reader wants to know if he can can count on an early retirement.

I'm 33 years old and have $75,000 saved in my 401(k). I make $70,000 a year and contribute 10 percent of my salary to my 401(k). My company then matches the first 6 percent. Am I on track to retire at 55, or should I open a Roth IRA to supplement my 401(k)?

As you might expect, Walter Updegrave, CNNMoney's "expert", notes that early retirement presents two distinct problems:

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More about...Retirement, Planning