401K Vs Credit Card

[supercar]

Hi,
I don't know if this question should be in General Discussion as this involves both investing as well as debt.

Situation: Credit Card Debt: $16,000 -- All in 0% APR until Aug 2011.
401K match 5% by company for First 5% and nothing after that.

Gross paycheck (Biweekly) 3150. Net after everything is around $2500


I currently put in 5% exactly into my 401K. After expenses I pay around 1000 to credit card every pay check. My thought is should I put in at least another 5% more ($200) into 401K bi weekly? My thought is I'm paying 28% tax on that $200 and by the time that money gets to my bank account, it probably becomes $140. Instead of losing this $60, I'm thinking I should divert it into 401k.

But this can be extrapolated to 15%, 20%, 25% towards 401K right? Where do you set the limit? What do you consider the optimal contribution without exceeding the max? Is it a good practice to put max yearly amount in 401K every year?

Thanks for your answers and time.

[photo]

Originally Posted by supercar

Situation: Credit Card Debt: $16,000 -- All in 0% APR until Aug 2011.

It's now the middle of August 2011. What will your credit card charge you for interest at the current time?

[jpg7n16]

Originally Posted by supercar

My thought is I'm paying 28% tax on that $200 and by the time that money gets to my bank account, it probably becomes $140. Instead of losing this $60, I'm thinking I should divert it into 401k.

What you should realize is that you are just delaying the inevitable. The money will either be taxed today or tomorrow, so you're not really 'saving' anything - just postponing.

Now taking the match gets you free money that you can never get again. Employers don't match over 5% to make up for you missing a year. You either get that match this year, or it's gone forever. So taking the match is critical.

But beyond the match things are different. The question then becomes, do you need the money more today or tomorrow?

With $16k of CC debt, you need the money today. CC's easily charge 15%+, and you won't earn that on investments (especially since you'll be taxed on withdrawal).


My suggestion to you is, only do the match until the CC debt is gone (as well as any other high interest rate debt). Then do as much as you can to the 401k.

[artwest]

Keep your 401k at 5% and throw all the money you can at your credit card debt and get that paid off as quickly as possible. It is always better to be debt free.

[JoshuaHeckathorn]

I agree with the others. Contribute 5% to your 401K to get the match and then pound away at your credit card debt until it's gone. Once it's paid off, vow to never carry a credit card balance again while you sock away the max in your 401K each year.

[BMEPhDinCO]

Kill the CC - that's a high amount to be carrying around.

Then open a RothIRA and put $400 a month into it...

Then, add more to your 401k

And make sure to save the other $600 you are putting on the card now so you won't need a card in the future!

[supercar]

Thanks for all your comments guys !