401K before credit card debt? or other way around?

[mariec99]

I just read an article recommending that you pay off all credit card debt (really any debt over 8%) BEFORE you contribute to your 401K. Would you recommend that?

[sweeps]

Usually, but not always. Some credit card debt is cheap -- even 0%. Paying it off at the expense of your retirement would be a bad move.

Also many people find it very hard to get into the habit of saving for retirement if they stop or never get started in the first place. Contributing at least a little towards retirement while paying off credit card debt is a good idea. Especially if your company is giving you a 25%-50% match.

[pearlieq]

To me it would really depend.

How much credit card debt? At what interest rate? How much are the minimums?

Unless the situation were dire, I would tend to push for a 401k contribution equal to the amount of the company match. Between that bonus, and the tax advantage on the money, a 401k contribution can have less of a net impact on your paycheck than you might think.

If it were a choice between a 401k contribution or making the minimum payments, of course you would choose the CCs.

But if the choice were more along the lines of contributing to the 401k and paying off the CCs in 24 months or just simply paying off the CCs in 18 months, I would probably opt for the 401k contribution.

[creditcardfree]

As Dave Ramsey might put it, would you borrow on credit cards to fund your retirement?

The answer would be no.

If you can be credit card free in 18 mos or less, you should stop your 401k to use to pay off the cards. If it's longer then...at least invest up to the amount your company matches. Just my opinion it's really personal choice. Seems like not investing, might scare you into paying off that credit card debt faster!

[poundwise]

Factors others have mentioned matter... but without further information, I would say that I would be inclined to invest in a 401K up to the point of company matching per year and the rest would go toward paying the credit card debt.

[mariec99]

This may be a stupid question, but who the hey is Dave Ramsey?

I'll third the match angle.

in this day of funding your own retirement, that company match is essentially part of your pay, if you don't contribute enough to get it, you are leaving some of your paycheck at work.

yes, I would slash and burn to what extent I had to (I did) to eliminate the credit card debt - mine was at 0% but certainly wasn't going to stay there, I wanted it out of my life - but that's really the easy part, it's not letting it happen again that takes planning and discipline.

Dave Ramsey is a financial talk radio show host and anti-debt guru.

his views are a tad extreme as he doesn't believe you should have any credit cards at all and 0 debt (no car loans, student loans, etc - if you have them you should be fanatically dedicated to eliminating them.)


his radio show can be interesting to listen to but he doesn't spend much time talking about the more complex issues of finance, it's mostly just him talking a listener down off of a financial ledge and helping them see what they can do to sort things out.

[Elgin526]

We're paying off our CC and still contribute over the amout my company matches. I'm 30 and the more money we save now, the more it will be worth in 30-35 years. Time is our biggest asset right now and I'm not giving up compounding earnings. We'll have the CC paid off in less than 2 years and it's just not worth giving up the 401k contributions. Besides, our CC is at a 0% rate for the next 11 months anyway. Even if we took our contributions down to 0%, we'd only pay off the CC maybe 1 month earlier than we would if we kept up the contribution.

I'd run the numbers both ways. How much faster will you pay off your CC debt if you stop contributing all together? How much faster will you pay off your CC debt if you just drop your contribution to the company match? If the answer to either (or both) of these questions is "not much" then it's not worth stoping. If the answer is "by quite a bit" then drop the contribution. But make sure you start right back up again as soon as the debt is paid off, and contribute the absolute maximum amount you possibly can to help make up for lost time!

[Ima saver]

I would definately keep contributing to a 401. I was not lucky, my husband and I never worked for any place that offered them. But the power of compound interest is so great when you are young!

[greedy4chips]

I would continue to contribute to the 401k and move any credit card debt to a lower rate credit card...even if it takes 2 or 3 to carry your current balance. I would then continue to move it to a 0% card when the rate goes up after the promotional period ends.

Other option is taking out a home equity loan since the rate is less and the interest is tax deductible, but this would be my very last option due to its lack of appeal.

If you are younger than 30 you cannot afford to not contribute to a 401k!

[mariec99]

Do they even offer 0% cards anymore?

[MarianneJ]

I am on the side that says "Keep contributing to your retirement"! My thought is that I one day *hope* to be in a much better financial position, so I am not going to throw away that future right now by not investing in it and planning for it. Just because the present absolutely stinks financially is not a good reason to punish my future. Does that make sense?!

Maybe this is a better way to put it.
I don't want to throw away my future paying off my past.

Yes, I like that one. It makes me sound all philosophical and stuff!

[TinyFish]

I'd say that financially, it probably makes more sense to pay down the credit card, unless you have a very low rate. However, psychologically, it might be better to get into the habit of funding the 401K, if you aren't too badly in Credit Card Debt and are working hard to pay them off and keep them that way.

-TinyFish

[greedy4chips]

Originally Posted by mariec99

Do they even offer 0% cards anymore?

I got 2 offers today! I get up to 30 a week, but usually 10-15/wk.

[Jaynen]

I would say unless you 401(k) is averaging significantly more than the prevailing interest rates for consumer loans or mortgages, then borrow from your 401(k) to pay off that debt. That way you're paying the interest back to yourself; and if you're a homeowner, you can file a lien against your primary residence to secure that note and write off the interest that you are paying back to yourself. Pretty cool, I think.

[Fizgig]

Let's say your company matches 50%. That's a 50% return.

Let's say your credit cards are freaky high at 24% or something. That's a 24% return for whatever you pay down.

50 > 24, so fund your 401k up to the match.

(I'm simplifying by not considering tax implications, but that's the general idea.)

[Ima saver]

I get the 0 % offers on cc 's every day too! I don't think I would borrow from my 401 if I had one.

[MarianneJ]

I still disagree - Even if you are spending more on credit card interest than your retirement plan is averaging. It is way too easy to say you'll pay off the debt and then start saving for retirement and then never do it because you've run up more debt. Also, you lose all that time which is the name of the game in retirement accounts.

Then again, I am still not out of debt after 4.5 years of this mindset...so my situation is a little different, and definitely colors my view. I am definitely envious of those who can just buckle down and pay off their debt in a year or two.

[meaghanchan]

I'd put in *something* (even just $50 or $100 a month, or to the company match) to retirement, just to get in the habit, even if you have credit card debt. However, I'd put the rest- and make that as much as possible- towards the credit card debt.

That's what I'm doing- and when the credit cards are paid off, I'll have a big chunk of change every month free to put to either retirement or shorter-term savings.