Zaphod for President

Deciding what to do with extra money is a wonderful problem to have, and one I’ve been struggling with for the past few days. Today I found a great article on the Simple Dollar which addresses this very issue.

I must be on the right track. The author agrees with each of my four financial goals, and goes on to assign a priority to each of them:

1. Pay off debts (i.e. the albatross around my neck)
2. Create an emergency fund (i.e. the ING account)
3. Invest it (i.e. Index Funds in a Roth IRA)
4. Capital improvement (i.e. fix my dumpy house)

This is all well and good, but I am left with a few questions. Should I eliminate all debts before I resume adding to the emergency fund? Should I fully fund my Roth IRA before spending another dime on home improvement projects? It seems to me that the most reasonable course of action is to divide funds among all goals. But how much should go to each goal?

Facts to consider:

• The bad debt costs 7.99% per year
• The emergency fund grows at 4.5% per year
• A decent index fund can earn more than 15% per year
• The “zillow price” of my home has plummeted 15% in the past 9 months, and I don’t think we’ve hit bottom yet.

Riddle me this: what is the most efficient way to allocate $5,000, given the above information?

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