What Debt To Pay First?

[disneysteve]

Originally Posted by cooliemae

I would have to disagree that "time line doesn't matter." My wife starting contributing to her 401k plan 1.5 years after I did, she puts slightly a little bit more in her 401k each year, but because I started earlier than her, I'll have almost $100,000 more (assuming out contributions stay the same)!

That's a totally different point. You're right about that.

What I meant was that the fact that the credit card would be repaid before the 401k loan didn't matter. What matters in that comparison is the interest rate.

[cooliemae]

I guess I see CC debt and 401k debt as apples and oranges due to their nature.

401k is for the long term and the CC is short term.

Retirement is one of the things that constantly stays in my radar, especially continuing to see that if I want to live my current lifestyle when I retire, I'm going to have to save even more than I currently am.

So while the 12% savings may be a fact, I would advise taking the chance to earn over 35% by paying off the 401k debt first.

[disneysteve]

Originally Posted by cooliemae

I guess I see CC debt and 401k debt as apples and oranges due to their nature.

The nature of the debt doesn't matter. It is always financially more advantageous to pay off higher interest debt before lower interest debt. That's what will save you the most money and get you debt-free the fastest.

There are psychological reasons why you might want to do it differently, but from a strictly bottom line, dollars and cents point of view, paying the higher interest debt first wins every time.

[noppenbd]

Originally Posted by cooliemae

I guess I see CC debt and 401k debt as apples and oranges due to their nature.

401k is for the long term and the CC is short term.

Credit cards are only short term if you pay them off! Seriously though, keeping high-interest credit card debt around can have long term financial consequences.

[maat55]

Originally Posted by lp_fatcat

Thanks for the feedback. Just a few more details on my debt...

The 401K was taken out to pay for funeral expenses. The loan was a total of $8000 for 5 years. I took the loan out in December of 2007. I'm currently 32 years old and the payments are coming directly out of my paycheck. My job is pretty stable but who knows what can happen in the future.

The credit card was closed by the company after one late payment so there is no chance of me running up another balance.

I know that you shouldn't borrow money from your 401K so I guess my knee-jerk response was to pay it back first.

The only reason I would consider paying the 401 first, is because if you were to loose your job, that money has to paid back within 6 months or less, or you will penalized and have to pay the tax on it. Otherwise, the CC's are definatly first.

[lp_fatcat]

Hey Everyone!

Thanks for the valuable feedback! I paid off my CC, put the remaining in my EF and as far as the 401K loan is concerned well...

I submitted some applications for a part time job!

Thanks again!

[Aleta]

Congratulations on your decision. At least you had enough opinions to make a decision. You probably knew what you wanted to do from the beginning but needed other opinions to evaluate your decision.

[noppenbd]

I would add my congratulations. I don't think you can go wrong paying down debt. Choosing between the 401k and the CC debt is really splitting hairs if you ask me. Having either one is financially toxic, so whatever you can do to eliminate them will help your situation immensely.

[cptacek]

Originally Posted by lp_fatcat

I submitted some applications for a part time job!

Yeah! Yes, get that loan paid off in any way you can. With the payments going in every paycheck and your part time job, it won't take long.

[CreditExpert]

the credit card is the most costly short term loan, so it will be better to pay that off and then use the cash you have free to pay off the 401k loan asap.