Invest or Pay Off Debt? If you are in the process of trying to pay down debt, should you still contribute to your 401(k), or should you focus all of your power on paying down debt first and then contribute?
This particular question is asked on a daily basis in the debt free community and the personal finance industry.
I answered a similar question in Episode 110 with Erin Lowry, but let's dig in a little more!
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Invest or Pay Off Debt – The Big Things To Consider
How Much Interest Are You Paying?
If you are paying a high interest debt – like a credit card – where interest rates can be from the high tens up to the high twenties, it is unlikely that you’ll be able to out-earn that credit card interest with any type of legal investment product.
Look at how much this debt costs versus how much you could earn if you were to invest.
If you’re paying 25% interest on a credit card, but receiving 7 to 10% from your investments, you’re losing money.
Does Your Company Offer a Match?
401(k) match is essentially free money that your organization is willing to give to you as a benefit of employment. Typically there is a minimum contribution on your part.
For example: If you contribute 3% of your salary, your employer will contribute an additional 3% of your salary into your 401(k) plan.
Or, for every $2 that you put in, your employer will give you $1 additional up to a certain dollar amount.
Whatever the match is, it’s a great deal and something that you don’t want to pass up.
When we were paying down our credit card debt, my job offered a match. I was so focused on paying down the debt that I completely ignored it. It wasn’t until the last six months of us paying down debt that I decided to take advantage of the match.
They ended up getting rid of the program, so I barely had an opportunity to get that free money.
I wish I would have taken a little bit of that money that I was putting towards my debt and pushed it over towards my retirement plan to take advantage of that match.
It is free money and it is a 100% return, which you’re not going to get anywhere else.
Personal finance is personal, so every situation is going to be different. My blanket-statement advice on this debate is to first focus on the high interest rates.
If you have any high interest debt, put your effort into getting rid of those balances first.
Any debt with the interest rate higher than 5% specifically should be your main priority.
If you have any interest lower than 5%, consider finding a balance between investing and paying down that debt.
The major factor is what feels right to YOU.
If debt is weighing you down mentally and stressing you out, it might be worth it to focus on that worry about investing later.
I’m always a fan of tackling debt first and getting that out of the way. However, if there is some type of employer match and you can work that into your budget, I'm a fan of taking the match first.
What has been your technique to this ‘debate?’ DM or email me to let me know!