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Roth vs Pay Down Debt

Chris Farrell May 6, 2008

Question: I’m 26 years old, and have no credit card debt, no car loans, no student loans. I max out my 401(k), and have a six-month emergency fund. Pretty good, right? But I also have a mortgage and a $40,000 second mortgage (which is structured as a home equity line of credit).

Over the past year, I’ve saved up about $5,000. My question is, should I put this money into paying off the home equity line of credit, or should I start a Roth IRA? I know the Roth IRA has higher returns over the long-term, but in my gut, I REALLY want to knock off that home equity line of credit. What should I do with the $5,000. Seattle, WA

Answer: First of all, I admire your financial acumen. I know that I was nowhere near as financially savvy as you are at your age. You’re saving for retirement. You have a nice emergency stash. And no debt other than your mortgage and home equity line of credit. It’s great.

If I were you, I would pay attention to your instincts: Go ahead and tackle that home equity line of credit. It’s a smart move.

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