Wednesday, August 02, 2006

Should I save or pay off debt?

Robin recently emailed me this question about saving for tomorrow versus paying off debt today. I thought others might have the same question:

"Do you know what to do when there is debt to be paid off and the person is adding money to their 401K, i.e., should you back all the way out of the 401K to pay off extensive credit card debt?"

Robin, if your company is matching the amount you putting in to your 401(k), keep making those deposits! That matching amount is "free" money from your employer and you should do whatever you can to keep it coming.

That said, you could contribute just the maximum amount being matched...i.e., if your employer matches $50 for every $100 dollars you put in up to a certain percentage of your salary, like 3% or 4%, put in up to that percentage to make sure you get the full company match. If you are putting in more than the matching percentage...say 5% or 6%...you might consider scaling that back and then allocating that money towards your credit cards.

4 comments:

Andrew said...

I agree with your advice. Matching 401(k) money is a nice gift from your employer so why not take advantage of it? Once you match the free money then pay off those high interest debts asap. Once you have the debts paid off then you can look at upping your 401(k) contributions.

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