Financial Planning for Generation X & Y Women
 
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Expert Q&A Archive

06/18/2004
Should I pay off debt instead of contributing to my 401k?
I am a 29 year old woman who inherited some credit card debt due to divorce. I then let it get out of hand and now owe close to $20k. My question is this: I am a state employee who contributes to a retirement fund and pays $100 in to a 401K per month. Should I reduce, or eliminate the $100 contribution and use the $70 or so after taxes towards debt? There is a $300/year employer match on these funds..
Charlotte Anne Bond:
expert info »
I hate to say this, but it is my opinion you should keep up with the 401k and suffer through paying off the debt. As much as it hurts that 401k money will not be made up later and making it easier to pay off might cause you to do it again.

You would do better to find where you can cut expenses such as finding a less expensive home or a less expensive car... or trying to take your lunch to work with you a day or two a week more often than you are now.
Gerri Detweiler:
expert info »
I wouldn't recommend you stop contributing to your retirement fund until you find out if there is another way to pay off your debt. That's especially true because your retirement fund offers matching contributions, which makes that money you contribute immediately worth more.

The first thing I'd recommend you do is create a repayment schedule that shows you how to pay off your debts in the fastest way possible. One of my favorite tools for doing this is the Zilch software at www.zilchworks.com. It offers a free trial download. (Note: I don't have any ties to this company.) See if you can create a repayment plan that will have you out of debt in 3-5 years, which would be the typical length of time for someone with your amount of debt.

Once you start playing with the numbers, you may see that an extra $50 -- $100 a month will significantly cut the amount of time it takes to pay off your debt. If that's the case, consider a part-time job or business to supplement your current income and retire that debt more quickly.

It would also be a good idea for you to track every penny you spend for a month. Look for ways to make changes in your spending -- without getting so tight with your money that you end up overspending later.

Another suggestion is to keep trying to negotiate your interest rates down on the cards you have. The lower your rates, the faster you'll be able to pay those balances off. Check your local library or DebtSmart.com for Scott Bilker's book How to Talk Your Way Out of Credit Card Debt. You'll get plenty of pointers there.

If you find you don't have any room in your budget to pay more than the minimum payment on your credit cards, and increasing your income is not an option, then you may want to talk with a credit counseling agency about whether a debt management program is the right way to pay off your debt.

Finally, make sure any and all accounts you held with your ex are closed to future charges and monitor your credit report monthly if you think he might be tempted to open new accounts using your information as a cosigner. Unfortunately, it happens!
Gail V. Marquet:
expert info »
You're still young enough to accumulate a nice 401K after you pay off the credit cards. Stop the 401K contribution - $300 employeecontribuiton is not worth it at this point. Take the extra $100 and any extra money you can find and put towards paying off the debt.
Frank Wells:
expert info »
Without knowing a lot of information, I would suggest finding the money from a source other than your retirement. The matching funds are a great benefit that you would sacrifice without your 401k contribution, in addition to the tax benefits.

Also, a budget exercise can help uncover other potential savings that may be used to pay your credit card debt. Here is one of many budget worksheets. Once you have completed your budget, look for ways to direct money to your credit card, and more for retirement or other financial needs.
Susan Saleem:
expert info »
I believe you should do all you can to take advantage of the match offered by your company. That is a 100% return on your money. Have you tried negotiating with your creditors to see if you can get a lower interest rate? Is your financial picture bad enough to consider bankruptcy? Perhaps you can meet with a debt counselor and have your debts negotiated. for you. This will go on your credit report but at least it shows you took responsibility.
Bret Duvall:
expert info »
Contributing to your 401k plays a huge part in your retirement years. It is hardly recommended to cut from retirement contributions and put towards debt. Do you currently own your home, or do you rent? If you do own there are a variety of options to consolidate credit card debt and lower your monthly payments with a nice, low fixed rate. You might consider a well established credit counselor that specializes in setting a fixed monthly program for you and works with your current credit card lenders. Bottom line, retirement savings is the most important aspect
in saving. I recommend using any house, car or any other liquidation of assets in order to get the revolving debt paid down.
Carrie Bailey Morey:
expert info »
First and foremost, tear up the credit card if you haven't already done so! It's hard to give you a concrete answer without knowing more information... Like what your interest rate is on your credit card, or will your employer still continue to put 300.00 per yr. towards your 401k if you decrease your contribution? Right now you are getting 25% more value from your employer by contributing ... and that's a good rate... However, the MOST important thing is to pay off that debt. Not knowing your monthly budget, do you have any extra funds that you can put towards your credit card debt? In my opinion, you need to put all the money you can towards that credit card debt. Most credit cards charge an interest rate of 14-20%--that's really high! I would look at your monthly budget (and if you don't have one--that would be the first thing to do) and see where I could cut in order to pay off that debt as quickly as possible.
JoAnn Bunten:
expert info »
Is there any other area of your life where you could cut back expenditures
to pay off the credit card debt? I'm afraid that the extra $70 or so per month won't go very far in paying down a $20k debt. You will be losing your one potential retirement nest egg (+ your $300 employer match). The $300 employer match is a 25% return on your investment; that's a lot to give up. I'd recommend cutting back somewhere else if at all possible.
Delores Lenzy - Jones, CPA, CIA:
expert info »
Like you I garnered a very large amount of credit card debt some years ago. For me it was frustrating because all my paycheck seemed to go towards credit debt. You can extinguish your debt with good a financial plan and commitment to sticking to it.

My recommendation would be for you to continue your 401K contribution. This is one of the best forms of tax-free investing. One avenue you might consider is looking at your monthly controllable expenses (items you can cut) and use those savings towards debt extinguishment. For example, you could save money by taking your lunch to work or skipping some social activities. You will be surprised how quickly these costs add up.

You ultimately have to chose a plan is best for you.
Connie K. Marmet:
expert info »
Is the debt spread over multiple cards? If so consolidation may help you establish a plan to pay the debt off sooner. There are a number of good credit counseling organizations--and some not so good ones. You should check with the Better Business Bureau in your area. Also by using the budgeting forms on the Wise Up Women website you can do "what if" scenarios with different allocations between paying off the debt and the retirement fund. If at all possible do both, it's never too soon to start saving for retirement and your employer match is a real incentive to save through the retirement plan.
 

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