Paying off CC debt vs maxing out 401k

[FoolFromAZ]

We have got around 45K of CC debt and we have got 280K left in our first and second mortgage combined and we also got car loan of 23.5K left. My DW and I together make 153K gross and we have been contributing to our 401K only for the past yr and we have around 8K so far. Currently our employers are not matching our 401K contribution. My DW does not like the idea of contributing to 401k as market is going down and our funds in 401K went nearly 40% in the last few months. she feels it wud be better to pay off the CC debt aggresively for next 2 yrs and then think about 401K. But I feel it wud be better to max out 401K now as everything is very cheap these days. What do you think we should do now? max out 401K or pay off cc debt agressively?

[maat55]

IMO, since you are not getting any match, paying down debt is a good option. But at the same time, you have to wonder if you are missing out on a firesale with the market low.

I would still aggressively pay down the CC's and auto debt. You partially qualify for a Roth also, you might keep that in mind for later.

[disneysteve]

What is the interest rate on the CC debt?

I basically agree with maat. Paying down high interest debt probably beats contributing to a non-matching 401k. But I also agree that this is probably the opportunity of a lifetime to be contributing to a 401k when prices are so greatly depressed. It is a tough call, but assuming the CC rate is high, I'd probably lean toward that. Don't forget to calculate in the value of the tax savings, though, when making a decision.

[jIM_Ohio]

I would allocate 20 percent of gross salary to the debt an 401k.

Probably about 10 percent to each. Pays off CC debt in 4 years and builds a good savings foundation.

[FoolFromAZ]

I have been moving the balance between my CC and my wife CC. I have nearly 17K on 0% apr expiring one yr from now. APR for rest of the debt between 2% to 7%. Do I still have to pay these cc debt off before contributing to 401k. like steve mentioned, I feel this is the best time to buy stocks. we can still send $1000 towards debt payment and contribute 31K on 401K per year.

[jIM_Ohio]

BOTH

You need retirement savings
You need to pay off debts

one is not more important than the other.

[GREENBACK]

If the APR for these debts is in the "2% to 7%" and particularly if it's more towards that 2% mark I would think it wise to definitely keep contributing to your 401k. Remember that the money you contribute isn't being taxed and your returns will one day be significant compared to the 2% APR on your current debts. The other thing to consider is that the longer you wait to start contributing to a 401k the harder it will be to get the gains you want at retirement.
With all that said, I would try to get the debt paid off for sure but focus on the future. Your debtors would like you to send them a bunch of money but they won't be there to help you one bit at retirement time.

[borbastic]

CC vs 401k

Without any company match, I vote for CC payoff. Your debts are very high and the teaser rates you are getting are a time bomb. If you slip up with a payment at any time or can't properly juggle your CCs, you may find yourself paying 30 % interest. Eventually the low rates won't be available to you. With such a high income, get a reasonable budget and you can clear these debts very quickly, then get on with your savings plan.

Would you borrow on your credit cards to save on your 401k? Thats what you are doing when you save in your 401k instead of paying your debts.

Remember that your goal is to increase your net worth. That is, your assets minus your liabilities. Your net worth is increased by the same amount whether you save or pay off debt.

Paying off credit cards gives you a tax free return of the interest you were paying. The 401k requires you to pay taxes on the income eventually.

If your company starts resuming a match, save the minimum amout to get the entire match.

[FoolFromAZ]

Without any company match, I vote for CC payoff. Your debts are very high and the teaser rates you are getting are a time bomb. If you slip up with a payment at any time or can't properly juggle your CCs, you may find yourself paying 30 % interest. Eventually the low rates won't be available to you. With such a high income, get a reasonable budget and you can clear these debts very quickly, then get on with your savings plan.

Would you borrow on your credit cards to save on your 401k? Thats what you are doing when you save in your 401k instead of paying your debts.

Remember that your goal is to increase your net worth. That is, your assets minus your liabilities. Your net worth is increased by the same amount whether you save or pay off debt.

Paying off credit cards gives you a tax free return of the interest you were paying. The 401k requires you to pay taxes on the income eventually.

If your company starts resuming a match, save the minimum amout to get the entire match.

thanks for the advice. Currently my intrest rates are very low and 10K of the 45K cc debt is on my wife's name. She can apply for few more cards, but we dont want to do that until the APR of any CC goes higher than what we are paying. my plan is max out the 401K (31K betweem me and my wife) and pay off the CC balance as much as we can, try to move the balance between my card and her card to keep the intrest rate lower. nearly 10K of the 45K debt has fixed apr. and 13K of the remaining will be 0% for next 1 yr. so far we have 14K in 401K (so we can take up to 7K as loan).
yes my wife's employer has started matching up to 4K but my employer will do it after 6 months.

Worst case scenario: if we miss the payment and apr jumps to 30%, as balance is distributed on several cards, if the apr goes high I wud need 7 to 10K immediately to clear that debt, for that I wud either open a card on my wife's name and move the balance to that card or I will try to get the loan from 401K or worst case borrow from our parents. up to 10K we can manage.

[Bernz]

I would go with the wife and payoff your credit cards first or at least half of it then move on. Debt immobilized people and instead of shuffling between credit cards, moving balances here and there you could be focusing on other financial aspects of your life. Buying stocks is probably good but with the big "if" in this economy, I'd say don't rush.

[ksluis62]

I would also vote for paying off credit card debt first. Dave Ramsey's book "Total Money Makeover" recommends addressing the CC debt first for most people with a decent income, and your income looks very good. Using the snowballing payments method, you should be able to eliminate debt quicky (2-3 years, or even faster). If interested, look at www-DueMinder-com to help you plan the payments and experiment with when you get out of debt based on how much you can pay each month.