Pros and Cons of Paying Off Credit Card Debt or Saving in 401 (k)

It’s been more than a decade since the Great Recession swept the country, but two-thirds of Americans said they still feel haunted by its effects on the way they work, live, save and spend, study finds Allianz Life Insurance Co. Many of the 2,000 baby boomers and Gen Xers surveyed also said they were less confident in their ability to achieve financial security.

See: 20 recession-proof investments

For workers with credit card debt, which is more likely to lead to a secure future: hijack what their contribution to the pension plan would have been and pay off that debt instead or make their 401 (k) plan ( k) a priority? Here are some pros and cons associated with each of these money moves.

The Benefits of Paying Off Credit Card Debt First

It will eliminate the often high, non-tax deductible credit card interest rates.

Reducing your credit card balance to zero will improve your credit score, which will help you earn a lower interest rate if you’re in the market to buy or refinance a home. Your credit score can also be a factor when you apply for a job or purchase auto insurance.

This will free up money for saving, investing and creating wealth.

Related: 11 Steps To Pay Off Credit Card Debt In 2021

And the disadvantages

This will divert money away from your retirement savings goals and possibly prepare you for a frugal retirement lifestyle.

This will deprive you of the tax deduction you will receive from your 401k contribution if you first paid off your debt.

Misappropriating funds from your 401 (k) plan to pay off credit card debt could cause you to miss out on your business’s matching contributions.

The benefits of contributing to your 401 (k) first

You will build a retirement nest egg. Young workers have the gift of time when it comes to their ability to accumulate wealth. Not taking advantage of this time horizon is a lost opportunity that you will never get back.

You will receive a corporate match on your contributions, which is free money and instant return on your deferrals.

Money contributed to a 401 (k) is done on a pre-tax basis, saving you money at tax time.

The money will be put in your retirement savings and out of reach for unnecessary spending.

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And the disadvantages

Money not diverted to pay off credit card debt will force you to pay high interest rates on credit cards that last much longer.

The interest rate on your credit card is probably higher than the return on your 401 (k). So your credit card interest rate could be 15%, but the return on your portfolio is likely to be much lower than that.

Having high credit card debt decreases your financial security. Diverting money from paying for these cards delays your path to financial freedom.

Katie Brewer, certified financial planner and president of Your Richest Life Planning, a virtual financial planning company for Gen X and Y, said it was better if people could pay off their debts while building their assets. She said people might consider cutting expenses by eliminating monthly cable or subscriptions, for example, and taking temporary work to earn more income.

“Once you start making room in your budget, make sure that you (contribute enough to) at least get the match on your 401 (k),” she says. “If you are contributing more than the equivalent of your 401 (k) plan and are working on credit card debt, you might consider temporarily reducing your 401 (k) contribution to allow more of the take-home pay to go to. devote to paying by credit card.. If you lower your 401 (k) contribution, be sure to put a reminder on your calendar to adjust it. “

Pay attention: 16 key signs you’ll still be in debt

Jeff Rose, Certified Financial Planner and Founder of Alliance Wealth Management, is also the author of the Good Financial Cents website. He said there were lessons to be learned when workers contributed to their pension plan. So they shouldn’t be paying off their credit card debt at the expense of retirement savings.

“They should do both, even if it’s just putting the minimum amount in their 401 (k),” he said. “That way they get to know their 401 (k) and how the markets work. It might not be much for their retirement, but it will be a valuable lesson learned in understanding how to read a 401 (k) statement and a good introduction to mutual funds.

Strategies to Eliminate Credit Card Debt

Limit your spending. What you save by cutting expenses can be used to reduce your credit card debt.

Consolidate high interest credit card debt to a lower interest rate card through a balance transfer.

Find a reputable credit counseling agency for help with your spending.

You can’t become a 401 (k) millionaire if you don’t contribute to your plan. According to Fidelity Investments, approximately 72,000 plan members had balances of $ 1 million or more at the end of 2014. What was the common thread between them? They contributed a significant portion of their paycheck to their 401 (k).

If you’re heavily in debt on your credit card, make a plan to pay it off. Keep your expenses under control. Contribute as much as you can to your 401 (k). Put your financial security first.

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This article originally appeared on Should I contribute to my 401 (k) or pay off my credit card debt?

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