Investing on Stocks / 401k / Roth IRA while having CC debt

[FoolFromAZ]

I have got around 40K of CC debt. But everything is spread around 8 cards. ( 25K on my name and 15K on my wife's name). APR varies from 0% to 6%. Only 4K of 40K is currently 0% and will go over 10% once promotional period expires. APR on the rest will not go more than 6%. I have got only 6K in my emergency fund.

Now my question is, I have 2.5K left every month after paying off all my bills (mortgage, car payment, minimum cc payment, utility bills, etc.,). Should I send that 2.5K towards paying off CC debt or send it to my saving account to build my emergency fund or increase my 401K to max out (currently I contribute 6% of my income and my wife contribute 15% of her income to 401k). we have only around 20K in retirement account so far.

or instead of increasing 401K conribution, can I invest on stocks or mutual funds or roth IRA?

[disneysteve]

I would invest in the 401ks only enough to get the full company match. That is an instant 50% return on your money and obviously none of your credit cards is charging 50% interest.

After that, I'd put all extra money toward two things: building your EF and paying off the credit cards, starting with the highest interest rate and and working your way down to the lowest rate.

How much do you need in your EF? What are your monthly expenses? I'd go for 3 months of expenses for now until your debts are repaid and then build it to 6-8 months.

[kork13]

Personally, I would split it around, to make headway on all areas. What are your total CC payments? $900, just guessing? Make double payments on your cards. With the remaining $1600 (again, guesstimating), send $1000/mo to EF, $400/mo to a Roth, and put the remainder toward your 401k.

My reasoning: you've got three problems--debt, low EF, and low retirement. By splitting them up, you can make progress in all three areas. Sure, some would say take out the debt pronto, but liquidity is also important, particularly right now. So that's my advice, and I'm sure you'll get some very good ideas from others.

[FoolFromAZ]

I would invest in the 401ks only enough to get the full company match. That is an instant 50% return on your money and obviously none of your credit cards is charging 50% interest.

After that, I'd put all extra money toward two things: building your EF and paying off the credit cards, starting with the highest interest rate and and working your way down to the lowest rate.

How much do you need in your EF? What are your monthly expenses? I'd go for 3 months of expenses for now until your debts are repaid and then build it to 6-8 months.

monthly expense is 5K. I think 3 months expenses should be good. I thought after EF, It would be better to invest on stocks/roth IRA as my APR on CC debt will not go over 6% and chance of getting more than 9% returns through stocks/401k is very high as everything is cheap currently. Am I right on that?

[FoolFromAZ]

Personally, I would split it around, to make headway on all areas. What are your total CC payments? $900, just guessing? Make double payments on your cards. With the remaining $1600 (again, guesstimating), send $1000/mo to EF, $400/mo to a Roth, and put the remainder toward your 401k.

My reasoning: you've got three problems--debt, low EF, and low retirement. By splitting them up, you can make progress in all three areas. Sure, some would say take out the debt pronto, but liquidity is also important, particularly right now. So that's my advice, and I'm sure you'll get some very good ideas from others.

Thanks Kork. Yes you are right, cc debt min payment is around $800. I was kind of thinking not to pay off cc debt as APR will not go high unless I miss the payment. I was thinking as I mentioned in my other post, send 2.5K everymonth to EF until it has 15K. After that max out 401K or/and max out roth IRA.

[disneysteve]

I thought after EF, It would be better to invest on stocks/roth IRA as my APR on CC debt will not go over 6% and chance of getting more than 9% returns through stocks/401k is very high as everything is cheap currently. Am I right on that?

If the max CC rate is 6%, then yes, I wouldn't rush to pay that off. Pay more than the minimum so it doesn't take forever, but also work on retirement. Fund the 401k up to the full match and then fund a Roth up to the max. Do that for both you and your wife. I think that would be a perfectly reasonable way to go.

[FoolFromAZ]

If the max CC rate is 6%, then yes, I wouldn't rush to pay that off. Pay more than the minimum so it doesn't take forever, but also work on retirement. Fund the 401k up to the full match and then fund a Roth up to the max. Do that for both you and your wife. I think that would be a perfectly reasonable way to go.

Yes intrest rate will not go higher than 6% as I recently moved some of the higher intrest or variable cc balance to my wife's account as she got offers like 3.9% for the life of the loan, 0% for 1 yr and 6% after that,etc.,

[reptile411]

Get out of debt #1. Its so much funner investing when you have no debt. I don't consider a house or a car payment as debt but CC for sure can kill you. CC debt is what cause my parents bankruptcy several years ago.

[disneysteve]

I don't consider a house or a car payment as debt but CC for sure can kill you.

There are millions of people who are upside down on their mortgages who would certainly disagree with you. Also lots of folks, including many who have posted their stories here, who are buried due to car loans.

[ea1776]

Get out of debt #1. Its so much funner investing when you have no debt. I don't consider a house or a car payment as debt but CC for sure can kill you. CC debt is what cause my parents bankruptcy several years ago.

Well, they are definitely debt and in many cases can be a sign of living beyond your means. For example, I've paid "stupid tax" by buying a brand new car out of college. I needed a car, yes, but not one that expensive, and certainly not a NEW one.

Investing while in debt just depends on the debt rates and individual circumstances. I would never pass up a company match. Never, unless I absolutely was forced to.

If you have a 6% debt and you expect to make an average return of much greater than that in a Roth (tax free too), then mathematically it is smarter to fund the Roth. And in my opinion, the 401(k) can be a great option for funding-retirement-while-in-debt candidates, because you get a tax break NOW (when extra cash-flow will really help you out with paying down that CC debt) rather than LATER (Roth case, when you are expecting to have a higher standard of living in retirement and don't necessarily need the tax-break as badly). Of course, that depends heavily on tax-bracket situation, as well as what you think our Congress will do in the future (I expect taxes to go up in the future, which makes the Roth very attractive now).

[kv968]

I'd usually be all for putting some money in a Roth since the interest rates are relatively low on most of your cc debt. However, with the recent cc laws that were just passed and your pretty substantial amount on them, I might be more inclined to put the money towards them. Reason being, cc companies are most likely going to start raising the rates on everyone and if they do, you may get stuck with rates that you never saw coming. You may have excellent credit and be able to move the amounts around and keep a lower rate, but it's just something to keep in mind until you get the balances lower.

[snafu]

Yikes, answers to your original post depend on your specific circumstances. Are you upside down on your mortgage or do you have substantial equity [this can be dependent on location]? How stable is your employment? wifes? What benefits would you be eligible to receive in a worse case scenerio? People need to know before difficulties arise.

Personally, I would run the numbers to determine outcomes. Fund 401K to match, ROTH to tax advantage/benefit. Review monthly expenses to reduce discretionary spending. Work out how much you need to pay monthly to clear 0% CC by end of promotional date. Follow Ramsay plan by targeting any small balance and moving to next target with those additional sums.

I wish consumers were required to add up how much they pay out in interest and fees each year. How many hours do you need to work to pay just the interest/fee portion of your debt?