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:
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: