A couple of days ago, Tricia from Blogging Away Debt wrote about her dilemma as to whether to participate in a 401K plan or to reduce your debt. Another common dilemma is whether to use your money in the savings account earning 5% to pay off your credit card debt which you are paying 18%!

I’d thought I’d add write about my opinion about this subject matter. Truth of the matter is that there is no set rule as to what you should do. Doing the math is not the only thing you have to look at. But rather, I think one should consider his or her own situation. This is how I would look at it.

1. Do you have an emergency fund?

Having a three to six months (maybe more) worth of emergency money in your money market account or simply in your savings account is a smart thing to do because anything can happen. Layoffs, company go bust can happen any time. If you do not have an emergency fund, then you should be saving up for that rather than using what you have to pay down a chunk of your debt.

2. How stable is your job?

If you work in the the public sector and have job stability, then perhaps you do not need to have six months worth of rainy day savings. Perhaps you can make use of some of that emergency fund for debt reduction, or you can comfortably go ahead and enroll in your company’s 401K plan (assuming you have a solid debt reduction plan).

3. Do you have disability insurance?

Does your company provide you with disability insurance? Do you have one. If you do not have one, then you certainly need more emergency money.

4. Are you living on two incomes?

If your spouse loses his or her job, you do have sufficient income to cover your household expenses? If not, then perhaps adding to your emergency fund rather than paying off a big chunk of your credit card debt may be the better solution.

Ask yourself what happens if…..

If you are still not sure, ask yourself what if you lose your job? what if you get injured and are disabled even temporarily? Would you have sufficient funds to tie you through a difficult period? If you do and have surplus cash, then by all means pay off your credit card debt or contribute more to your 401k plan even if you have some debts to clear. But if you cannot weather an emergency, then save more for the rainy day.

This entry was posted on Friday, January 12th, 2007 at 03:33 and is filed under News. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.