401k, Credit Cards or Car Loan - Where Should Our Money Go?

[questions]

Any advice on this would be appreciated: My husband contributes 5% to his 401k and there is no company match. We have several thousand in credit car debt/car loans, etc. I’m thinking we need to reduce the contribution to start paying some of this down, but he thinks we should keep the same contribution since it’s tax free. I just think we’re losing more in the long run. Also, if car loans are at the same rate as our higher interest credit cars (which still isn’t too high, but it’s something), wouldn’t we want to make paying those down a priority? Pay loans first? Reduce contribution? What do you think?

[terry1156]

A little more information would be helpful. What is the interest rate on the credit cards and the car loan? From what you have written, this is what I would suggest:

I would stop the 401k plan - if you want to contribute to a retirement fund, set up a ROTH IRA instead. This will allow you to withdraw the money with no taxes (all interest earned is tax free) and will give you more options than the 401k.

If the interest rate on the credit cards and car are above 10%, I would pay those off first, if they are less, I would contribute to the ROTH IRA and pay off as much as I could on them.

[PrincessPerky]

I can tell you what we did, but it may not help.

DH switched paycheck signers (same job, new name) instead of resigning up for the 401K which was no longer going to be matched, we skipped it and are using it on our debt.

But I am not sure we would have gone out of our way to stop contributing. And it wasn't the first thing we did, just happened. When I talk to DH about new ways to spend less, I like to have two or three ideas, and not get upset if he only wants to do one of them. Though the more we do, the more he is likly to go along with anything. I think cause he knows I will bring it back up in a month or two!

I figure I will be in debt for a year or so (then the mortgage) but I will be married for life .

[Ima saver]

I think switching to a roth Ira is a good idea. I think you should contribute less to the 401 (or roth) for a while and use it to pay on your credit card debt. How much debt do you have and what interest rates are you paying?

[kristinecfp]

Stopping the 401K contribution could be dangerous. If you stop, when will you start up again? Will you have enough to retire when you want if you redirect your money from 401K to paying down debt? I love Roth IRAs, and recommend them all the time, but I know from experience that it is much harder to make yourself contribute to a Roth IRA than it is to have your employer withhold contributions for your 401K.

Instead of stopping your 401K to pay down debt, have you looked at other options? Such as cutting down discretionary spending (temporarily until you have a better handle on your debt), or refinancing your mortgage to consolidate your debts (only a good option if you can get a lower interest rate on your mortgage than you are currently paying on your credit cards and auto loan - also need to remember that any time you borrow against your home, you are putting your home at risk).

Just my 2 cents...

[Ima saver]

I would never get a loan against my home. Most that do, to pay off cc debt, just wind up back in debt again.

[Snoopy2645]

Yes I would cut everything to the bare minimum for at least a year & pay down the cc debt & try to take a balance transfer to 0% cc

MY dh is the same as yours he contributes to 401k & he has other things he should be paying off first including a truck loan & student loans but why would he listen to me!! Personally I always believe debt free first before anything else. ANd I am 29 with a house thats almost paid off & 3 kids Dh 31 has nothing except the 401k he just started everything else he has is owned by the bank!!!

[piannist]

Here's some more info regarding rates and amounts - the credit card debt is about $20K (yikes, I know). I've been playing the balance transfer game to keep the rates at 4% and under, but of course there are fees to keep that up and none of those rates are for life. Otherwise, we're looking at 16%. The car loans are at 5% and 6%, student loan at 6.1%. I'm considering just lowering the 401K amount so at least we're setting aside something (maybe from 5% down to 2-3%). We don't know anything about Roth IRAs except for them apparently being really awesome so I will look into that. We already lowered the rate on the mortgage and aren't comfortable adding any of our debt to the home loan. We've been on a super strict budget for several months now (no eating out, no entertainment, no extra purchases). We had a baby last year, and some unavoidable hefty expenses (replacing car with no advance notice as one of them). I've been very analytical about this whole thing for months now, watching where every penny goes, and I know all our money is going towards interest. I just don't know how we can save for the future if we can't pay for the past. Thanks for everyone's help.

[sweeps]

Kristine makes a good point about the pitfalls of shutting down the 401k. Everyone I know that stopped contributing to their retirement plan still has not started up again, years later.

Roth's are a great investment tool, but you have to have major discipline to keep making those contributions and to avoid the temptation to withdraw the contributions early.

I like your idea of reducing but not eliminating the 401k contribution. (It will be a good motivator to see that retirement balance building up.) Pay the minimums on the car loans and student loan. Stick to the budget and pay down that credit card debt with every dime you can squeeze out. It will take time, but you can do it!

[Tree0164]

How about posting a budget?

We can see if there is any place to trim the budget.

I wouldn't stop your 401k-you are probably not going to get much back in your paycheck.

Since you now have a new dependent, check your tax withholdings at work. Adjust it so your paycheck will be larger rather than giving the IRA an interest free loan.

I would make sure you have an emergency fund in place so you do not need to use the credit cards. Just $1000 or so.

Then I would focus on paying those credit cards offs. Your smart doing the surfing the balances that is how we paid off our debt (credit card debt free since 7/04 started with 20k as well)

[cmeekins03]

Since your company doesn't match, ideally you would want to open a Roth IRA account. The question becomes how much is the initial deposit required by the investment company to open the account. I haven't done much research but I know big insurance companies run these accounts as well so there are lots of places to check. With a Roth IRA you can setup automatic withdrawls from your bank account each month just like you essentially do with your 401k. If you would be more tempted to stop funding it, stick with the 401K.

Other advantages to the Roth IRA - more investment choices, no taxes on returns at retirement

Advantages of 401K - usually matching, don't pay taxes on the income right now, no annual fee to have account

The real question comes down to how much are you really saving if you stop funding the 401k account. Remember, it is reducing the taxes you owe. Checkout this website to see how much extra you would really be taking home: https://401k.fidelity.com/401k/tools...akehomepay.htm

Hope this helps!

[flash]

$20K in cc's, and eventually the interest is going to catch up, although even 4% on that is costing.

The advantage of the 401K is that it saves you from paying taxes on that income. Seriously, you need to look at how much that is saving you.

Putting money aside when your money burn rate is that high doesn't make sense. Yes, you need to contribute to a retirement fund, but at this rate it sounds like your bills will eventually consume every bit of that.

Think of it this way. If you keep that debt for 30 years, how much interest will you end up paying? I'm sure it outweighs whatever you could be saving in your 401K.

You need to sit down with a PLAN to apply what is going to the 401K to the bills NOW, pay off as fast as possible, stick to that plan/budget, and as soon as you have caught up start up the retirement, either 401K or Roth.

[BAGAGT1]

You didn't say what your household income was, but quite honestly, at 20K of CC debt plus a car note and student loans, unless your household income is in the six figure range, I would stop the 401k savings. I don't say that easily, as I LOVE the 401k, it is the simplest way to save for retirement, and I am HUGE on saving for Retirement. However, the kind of debt you are carrying would keep me up at night, so I would focus every available dollar to reducing the CC debt first, and once that is paid off, then I would begin to save for retirement again.

One caveat to my advice, I would only stop the 401k, if you don't plan on using the credit card again. If you get back into debt again, then you might as well keep on saving for retirement now, as you will need the money to pay the CC in retirement.

[Ima saver]

I agree with bagba, that much credit card debt would worry me to death. You need to put the cards away, quit using them and pay them off asap.