The purpose of Money Talk is to improve readers' financial capability with research-based personal finance information.
Friday, October 27, 2017
A Proposed Rank Ordering of Wealth-Maximizing Actions
At the 2017, Financial Planning
Association (FPA) meeting, Dr. Greg Geisler from the University of Missouri-St.
Louis presented research on a hierarchy of steps to maximize wealth. In
other words, if people have discretionary income to save or reduce debt, what
should they do first?
According to Geisler, Step #1 is
to contribute to a matched employer 401(k) retirement savings plan and/or a
health savings account (HSA). Interestingly, thetax savings on many employees’
contributions to an HSA increases wealth by more than an employer match on the
same employees’ 401(k) contributions.In such
cases, the maximum allowable HSA contribution should be made prior to the employee
contributing to a 401(k).
After deposits to a matched 401(k)
and HSA, which were called Steps 1a and 1b, Geisler suggests the following
order of wealth-maximizing actions:
¨Step #2: Pay off high-interest debts in order
of their after-tax interest rate. For example, various credit cards.
¨Step #3: Put savings into a 529 higher education savings account
if an individual is a resident of a state that offers tax savings for
¨Step #4: Make unmatched contributions to an
employer retirement saving account.
¨Step #5: Pay off moderate after-tax interest
rate debts in order of their after-tax interest rate. For example, low-interest
rate credit cards and an auto loan, home equity loan, and student loans.
¨Step #6: Make deposits to taxable
This hierarchy is not “set in stone,” however.
There may be excellent non-tax related reasons for not following these financial
steps in exact order, such as saving for a house down payment and building an