Pay down debt or Pay off 401k???
A number of people have asked me if it makes sense to put money into a 401k or pay down debt first. There are two parts to this answer:
First part: Absolutely put in the amount into your 401k that you receive a match on. If your company matches the first 3%, put 3% in. If your company matches $2,000, then go for it.
The second part of this answer depends somewhat on you.
If you are truly, sincerely, absolutely ready to build your financial future and crush your debt, then you should pay down your credit card bill. If in the back of your mind, you are worried that once your bills are down that you might go crazy and spend like tomorrow again and rack up that debt all over again, then put more in your 401k.
I hope you are the former. However, you have nobody to fool here but yourself. Do not forsake your future by spending on credit cards. Do not forsake your future by not paying off your debts. Do not forsake your future by never putting money in a 401k.
Here is how I did it.
While I was going full-tilt trying to pay down my debt (I was determined not to rack up debt again), I put 7% of my salary into my 401k.
Later, as I got close to my goal of paying down debt, I lowered by 401k match to 2% the minimum to get full match at my company.
Then, when I was very close to paying off all my credit card debt (I couldn't stand it), I took a loan against my 401k and immediately paid off my cards. I then just as aggressively paid myself back.
Then, after I paid off my 401k load, every few months I increased my 401k deductions by 1%. Eventually, I raised it up to enable me to contribute the full amount possible for a year.
posted by FortressArchitect at 10:35 PM
2 Comments:
Folks, don't take a loan out of your 401K for things like that! Here's suze orman explaining it:
"I want to make sure you avoid two bonehead moves. Whatever you do, don't you ever use a Home Equity Line of Credit (HELOC) or a loan from your 401(k) to pay off your credit card debt!
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Same goes with 401(k) loans. When you contribute to a 401(k) you use money that has not yet been taxed. But if you borrow against your 401(k), you will repay it with after-tax money. Then that money you have used to "repay" your 401(k) loan will be taxed again when you eventually make a withdrawal in retirement. I think being taxed once is plenty."
Besides, 401(k) loans are actually incredibly dangerous. You typically have just five years to repay the loan, but if you decide to leave for a new job -- or are fired -- you will need to repay the entire loan amount within a few months, or else the unpaid loan balance will be treated as a formal withdrawal from your account and you'll be hit with income tax on the amount of the withdrawal. Plus, if you are younger than 59 1/2 you are also going to get stuck with a 10 percent penalty.
$401k ..... thats a lot of amount!
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