Should I Contribut to my 401(k)

[StevenXL]

Hi. I am a recent college graduate fortunate enough to have a good job in these tough economic times. My resolution for 2010 is to get my financial house in order.

I want to start contributing to my 401(k), but I have 7K in credit card debt at 15% APR. Should I pay off my credit card debt first, or should I begin to contribute to my 401(k) and get rid of my credit card debt (but at a slower pace).

One thing that might be important here is that my employer won't begin matching my contributions until I complete 12 months on the job. At the moment, I'm 6 months in.

Thanks,

Steven

[kork13]

Out of the chute, I would recommend you pay down the credit card debt as quickly as possible, putting as much of your spare cash into it as you can. But once you become eligible for your employer match, start contributing to your 401k up to the match. That's a 100% return on your dollar that tops even your credit cards.

Beyond that, continue paying down the CC debt as quick as you can, and once you've finished it off, move on to a Roth IRA. You're young, so a Roth offers significant advantages over unmatched 401k money. If you still have more money that you can put toward retirement, feel free to add to your monthly 401k contributions.

[StevenXL]

Thanks. That's pretty much what I was thinking as well, but wanted to make sure that there where no tax / rules that would turn my thought-process on its head.

I haven't looked into a Roth IRA, and I am not completely sure how they work. I will look into it, but first things first - pay down CC debt!

- Steven

[disneysteve]

I'm not so sure I agree. The knee-jerk answer is to pay the CC because the interest rate is higher than what your 401k investment can be expected to earn, but it isn't really that simple. There are taxes to factor in also. If you are in the 25% bracket, every $100 you contribute to your 401k only reduces your take-home pay by $75. You "save" 25% by putting the money in the 401k. Plus, you then earn money on that investment hopefully. Even if you get just a modest return of 5%, the total would far outpace the interest on the CC.

I also like to see people get into the habit of participating and saving regularly as early as possible. Perhaps you can start with a small contribution now, like 2 or 3%. Then once the match starts, up your contribution to the amount needed to get the full match.

Most importantly, live as far below your means as possible and get rid of that debt. And pay off those items in collections, too. Whether you agree with them or not, they are in your name and they are wrecking your credit score.

[jIM_Ohio]

Hi. I am a recent college graduate fortunate enough to have a good job in these tough economic times. My resolution for 2010 is to get my financial house in order.

I want to start contributing to my 401(k), but I have 7K in credit card debt at 15% APR. Should I pay off my credit card debt first, or should I begin to contribute to my 401(k) and get rid of my credit card debt (but at a slower pace).

One thing that might be important here is that my employer won't begin matching my contributions until I complete 12 months on the job. At the moment, I'm 6 months in.

Thanks,

Steven

Does the 401k have a match?

If they match half of the first 6%, or a quarter of the first 6%, contribute to the 401k up to the match (6%). The match is free money, do not turn it down.

Then come up with a budget to aggressively pay down the credit card debt. IMO you should be able to pay down the cc debt to zero in less than 1 year.

If you have a job which pays 35k year, saving 20% is 7k. 6% to 401k (many matches cap at 6%) and 14% to cc debt for example.

If you make more than 35k, apply 20% of income to 401k and cc debt, then create budget from there.

[am_vanquish]

Another thing to consider is the method of employer matching contributions in the plan. In some 401k plans, the employer match is based on the YTD average contribution rate of the employee. This is how my employer's plan works. In this case, you'd lose out by waiting to contribute until you're eligible. Check the fine print of your 401k plan - if your plan has a similar provision, then you need to contribute the amount needed to maximize the match beginning on 1/1/2010 ... or overcompensate later to get your average up.

Otherwise, I'd go with DisneySteve's advice - start at 2%-3% while still paying some of the CC debt off, then up the 401k contribution when the full match rolls around.

[Slug]

I agree with DisneySteve. Get started in the 401k plan at a very low rate and pay down the debt aggressively. Once you get started in the plan, you'll stay invested in staying invested.