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Do what is best for you. Might be hard to figure out but take the advice and see how it feels. My cc debt was consuming me. I actually pulled from my 401k and paid it off. I was about 30 then and getting married in 2 years. Then I had a fresh start and less stress. Now I’ve doubled down on my 401k contributions and am debt free. I feel great. Yeah I was taxed for it but it was worth it to me
OMG... as someone who works in Finance who just stumbled upon this post - some of the advice on here is frightening... Never - and I can’t say this more emphatically - NEVER - pull money from your 401k to pay off credit card debt. This is the WORST advice I have ever heard. I have heard this misconception before from people who take loans from their 401k and literally just do not understand what they’re doing. This could turn into a really long post - but please talk to a Finance professional to help you. When you take a loan out of a traditional 401k - you pay taxes TWICE - yes twice! So estimate 20-25% when you retire and 25% or so when you repay the loan with after tax dollars. The first post is correct when they say save up to the match. Free money is free money. Not sure what your credit looks like, but a great way to save on interest is to move the debt to a zero percent offer with another credit card - and just make sure to never use that card for any purchases. There are ways around paying a lot of interest - but it depends on your credit history.
^they just said that doing both isn’t working.
Unlike most people on here, I understand the struggle. In general yes it’s better to pay off debt than save if you’re in a lot of debt, which I am too! Don’t let the trust fund kids of this industry tell you you’re losing money by not saving. You’re losing more in interest by not paying off your CCs.
And, btw, we’re human. When you feel like you’re making no progress on your debt it’s REALLY easy to just take from savings. Then you’re in a worse place than you started.
Dear god you are all so dumb
It’s not just the 401k vs cc
If you’re struggling to make your payments and carrying any revolving debt, you’re a lay-off away from defaulting on a loan and wrecking your credit. Which will make every loan you ever apply for dramatically more expensive, which then further increases financial pressure on your secured assets that you really need (house, car)
And you’ll lose your job in a downturn in which case your 401k is fucked as is your match
Don’t listen to these idiots. It’s not just about returns. It’s about risk adjusted returns and a margin of safety.
Get safe first.
Sincerely,
A former investment banker who is way better off than all the other people in this thread and doesn’t take it for granted for one second
Rule of thumb is to pay off bad debt before you invest. Ideally, yes, put away as much as the company matches, but if you can’t do both, get rid of the debt.
The math (and CC interest calculator) says...
If you put $250/month into a 401k with a 50% match, you'll get a $125/month ($1,500/year) return. That's without figuring in investment growth or tax benefits.
That same $250/month put toward a credit card balance at a 20%APR will save you somewhere around $400/year in interest.
$400 vs. $1,500.
Always. Take. The. Company. Match.
From someone who paid off a lot of debt, while contributing to get the maximum company match. I ate a lot of ramen, drank a lot of really cheap beer, and bought super-cheap clothes for about 3 years to do it.
EDELMAN1 Da real MVP 💰
In what respect is it not working?
Ultimately you have to do what works for you. But the reason the received wisdom is to always contribute to your 401k, assuming your employer matches, is that the rate of return on your contributions is likely between 50-100%.
That will be much higher than the interest in your credit card debt. So by saving into your 401k you’ll pay off your debt slower, but overal you’re finances will improve more.
In contrast you can pay nothing into your 401k and throw all your money at the CC debt. That’ll pay off your debt quicker and cost less interest as a result. But you’ll end up worse off overall.
Don’t listen to people who think you have to have a trust fund to think that saving is the better option.
This only applies if your employer matches your contributions. If they don’t, then chuck it all at the debt.
Put as much into your 401k as your company will match, otherwise you’re literally turning down free money. Usually that’s 6-7%, but based on company’s policy.
Paying off CCs/debt in general is tough, but as long as you’re paying more than the minimum due, you’re productively chipping away at it. Obviously, stop putting new charges on it.
Maybe a better question for Finanshbowl
Keep in mind you often only actually get the 401k match once you’re vested, which can be ~3 years with the company. If you’re planning on leaving earlier you still get the tax benefits but not the 50-100% return that’s usually cited in these calculations.
Pay off the debt first. Assess why you are in debt that is difficult to pay off. Make a budget for yourself. Every dollar should have a home. Consider using cash for any play money to help you build discipline. I’m of the camp that you should also have a liquid emergency fund before investing anything. It’s your own insurance policy to prevent more debt.
1. Budget
2. Pay off debt
3. Build 3-6 mo expenses as liquid emergency fund
4. Contribute to 401k
Even though logically it makes sense to pay 401k for company match ASAP - the approach above will lead to more peace of mind, less debt, and more empowered approach to your financial life. Follow the steps and you will be maxing your 401k in no time
Usually you can take a loan from your 401k that's very low interest. It comes automatically out of your paycheck. Might be something to consider to wipe out high interest CC debt.
@edelman1 I’m confused - the OP isn’t talking about taking money out of the current 401k, just not contributing to it until CC debt is paid off. Or am I totally reading this wrong (which is usually the case on here 🙇🏽♀️)
The interest is way higher than SD1 lined out. I think it’s more like 1200-1500 a year in interest. I agree free cash from company is good but getting rid of the worry is almost worth it.
Pay off the CC! Never carry a balance!
Agreeing with Director 2. Also, before you contribute to a 401k, you not only need to get your debt paid off, but you also really need to having an emergency savings of at least 3 months built up. If you lose your job you'll need it to get by while you look for something else, you don't want to have to borrow it from your 401k, because as the finance person above said, you'll pay taxes twice on it. Saving for the long term is important, but you have to take care of the short term first.
I was in a lot of debt a few years back, and through sacrifice and making good money freelancing - I managed to get back on track financially.
First thing I did was paying off all debt, credit cards, student loans, car loans, my parents - every bit off it. The feeling of doing the last payment is amazing. Best day ever.
Second thing was to save up an emergency fund. Now I can survive for 5-6 months if anything happens.
Thirdly, with $750-1000 saved a month in just debt payments, I’ve ramped up my savings from nearly nothing to around 20-25% of my earnings in 401k, stocks, IRAs, crypto and cash.
The lesson of paying off your debt the hard way, makes me extremely cautious of ever accruing new debt. Now I always read the fine print. I do the interest rate math to see how much it will really cost me. I pay yearly fees instead of monthlies. I try to keep track of where all my money goes. I always ask myself if I really need something, or if I should save the money towards a house instead. I know I sound like an accountant, but it feels infinitely better.
The moral of the story is that for me, paying off debt was the best place to start. It taught me lessons I wouldn’t have learned, and without the monthly debt payments I’m saving at a much more rapid pace. I feel somewhat in control of my finances for the first time in my life, and it’s a good feeling.
Good luck!
TBH nobody knows who’s correct without the actual figures to make the calculation.
Bootstrap kid here, the advice that i haven't seen yet seems the most practical and least popular to me, but have you thought of getting a second job and using the income from that to pay down your debt?