The 401(k) and Debt

Posted by: Sophie H. | Dec 09,2007


I’ve mentioned before that paying off debts makes sense before putting the money into a savings account because even the most attractive interest rate on a savings account is going to be lower the most attractive rate on credit card debt.  Say you have a 5% return on a savings account.  Who out there has a 5% APR on their credit card?  Not many, so whatever you gain from a savings account is going to be immediately drained by whatever interest your paying on a credit card.  The awful truth about credit cards is that even a highly attractive rate on a credit card is still pretty unhealthy when compared to other types of loans.  

However, there is one notable exception to this rule.  A bank savings account is one thing, but a 401(k) is something else entirely.  Even land or other investments are not nearly as reliable as a 401(k).  This depends on the investment, of course, but in a general sense, 401(k)’s give you the most for your money.  An employee matching fund of 50%, which is common, is going to totally overmatch what your going to be paying out in credit card interest.  No one has a 50% credit card interest rate.  So it makes sound logical sense to put money into a 401(k) account before you work on paying off credit card debt.  For a 100% matching payoff, it’s even more of a no-brainer.  

However, this doesn’t mean you have license to go hog wild with your credit card.  Nor does it mean that you shouldn’t be aggressive about paying off debts.  It only means that you should jump at the chance of a 401(k) matching fund.  Ideally, you should do both: pay down high-interest debt and put money into a matching fund.  I’m not advocating putting all your eggs in one basket.  You shouldn’t pay the bare minimum on a credit card bill just so you can funnel that money into your 401(k).  This is especially true if you have very high debt and very high interest.  You’re going to want to get out from under that regardless.  I just want to stress that you should prioritize when it comes to savings and debt.  Raiding your 401(k) early could cost you, so you need to always keep your debt situation in check.  

Sponsored Resources Ads by Google