Editor's ChoiceCategories Credit Type Issuers Blog

Paying Off Credit Card Debt Versus Funding Your Retirement Plan

01/05/2008

Money magazine’s latest issue has a few interesting writeups. One of them is about whether to pay off your credit card debt or contribute to your companys’ 401k plan.

The article focuses mainly on the math side of the equation. On the one hand, contributing to your 401k and simply paying your credit card minimums results on you paying interests (which works to about 14% these days for the average credit card holder). If you have bad credit, that makes it worse.

The good thing about contributing to your 401k plan is that if your employer matches your contribution, then you will automatically be earning a great return simply from the match (which could be 50% up to the first 6% of salary or more).

Aside from the match, and depending on your investments inside your 401k plan, your 401k could potentially grow, or decline.

Hence, if we look at this situation, it is a rather complex one. It is complex simply because there are many assumptions to be made. What this article fails to point out is that the final decision will more often be based on our attitudes towards credit card debt and saving for retirement. Here are a few questions to ask yourself if you are caught with a decision like that :

1. How did you get into credit card debt?
2. Is your spending out of control?
3. If you pay off your credit card debt, are you likely to get into debt again?
4. Do you have an emergency fund?
5. Are you spending within your means? (somethings running a credit card balance can be a strategic decision).
6. Are you on track with regards to saving for your retirement?
7. Do you have an emergency fund?
8. What is your take home salary relative to your credit card debt?
9. How long will it take to pay off your credit card debt if you paid the minimums?
10. How soon do you want to be credit card debt free?

In some cases, the decision is very clear cut. If you can afford to pay off your credit card debt in a year of two, then it may make sense to do so. Or if your employer has no matching policy in your retirement plan, then it also makes sense to pay off your credit card debt as soon as possible. For those who have no emergency fund (or not enough), then saving for an emergency fund should be the priority over saving for retirement or even reducing your credit card debt.

In most other cases, there is a fine balancing act and the truth is that there is no right or wrong answer. Try to work out the math under reasonable assumptions. But in my opinion, having a plan that feels comfortable for you will probably work best.

RELATED POSTS

Leave a Reply

Your email address will not be published. Required fields are marked *


*


Privacy Policy Terms and Conditions About Me Disclosure Contact Me

Newsletter Sign Up

Name

Email