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Contribute to 401k while paying off debt?


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I have about 7 years to retirement planning on age 68, but actually love my job wouldn't mind working till I'm 70, I'd still probably mess around with computer networking at my house. I'm a contractor to a Gov't agency.

 

I only have 40k saved in 401k currently due being dumb with money until recently.  Mainly have credit card debt 50k, 30% utilization, that will be paid down to under 2% utilization within 12 months.   Should I start contributing to 401k 8% which maxes  employer match?

 

Or just slam all my discretionary income to debt? Which is about $5000 per month.  My 401k mix has done very well with avg returns being 15% to 20 % pre covid and annual return about 5$ this year so far. Any ideas?

 

 

Edited by DebtFreeIn04
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7 hours ago, DebtFreeIn04 said:

Should I start contributing to 401k 8% which maxes  employer match?

You didn't mention the rate of employer match, but if it's 25% or more (often it's 100%), there is a good chance it is higher than any interest rate you are paying.  Plus you get investment returns on top of that.  I would max out the match.

 

7 hours ago, DebtFreeIn04 said:

Or just slam all my discretionary income to debt?

I would divert some discretionary income to an emergency fund even while still in debt.  A lack of cushion leaves you vulnerable, especially in this crazy time.

 

My personal priorities would be:

1.  Build an emergency fund at a reasonable rate of progress (doesn't have to be all at once).

2.  Max out employer match.

3.  Put any remaining discretionary income toward paying down debt.

 

Years ago, I inverted these priorities (3, 2, 1), and it led to a BK.

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3 hours ago, nemo said:

You didn't mention the rate of employer match, but if it's 25% or more (often it's 100%), there is a good chance it is higher than any interest rate you are paying.  Plus you get investment returns on top of that.  I would max out the match.

 

I would divert some discretionary income to an emergency fund even while still in debt.  A lack of cushion leaves you vulnerable, especially in this crazy time.

 

My personal priorities would be:

1.  Build an emergency fund at a reasonable rate of progress (doesn't have to be all at once).

2.  Max out employer match.

3.  Put any remaining discretionary income toward paying down debt.

 

Years ago, I inverted these priorities (3, 2, 1), and it led to a BK.

I like that plan. Employer match is if I put in 8% they match half of that so they put in 4% of my salary. 

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I would at least continue to put in the max amount your employer matches. Might not hurt to put a small amount into savings.. even if it's $25/week..adds up to $1300/year..having a cushion like that helps when you have car repair costs (battery/tires; also, if your employer offers a FSA/HSA to help with medical/dental expenses, be sure to look into that... putting aside enough to handle co-pays and deductibles for doctors visits helps your bottom line at tax time and keeps you from having to dip into credit cards if times get hard.  Some employers, like mine, allow me to roll over up to $500 unused funds from one year into the next.. but please... research all of that carefully.

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20 hours ago, Cactus Flower said:

I would at least continue to put in the max amount your employer matches. Might not hurt to put a small amount into savings.. even if it's $25/week..adds up to $1300/year..having a cushion like that helps when you have car repair costs (battery/tires; also, if your employer offers a FSA/HSA to help with medical/dental expenses, be sure to look into that... putting aside enough to handle co-pays and deductibles for doctors visits helps your bottom line at tax time and keeps you from having to dip into credit cards if times get hard.  Some employers, like mine, allow me to roll over up to $500 unused funds from one year into the next.. but please... research all of that carefully.

Thanks CF looks like I'm on track with your suggestions.  My 8%, employer will match 4% for 401k. Starts in April, paid monthly.  HSA is active. Been saving / hiding $150 cash in separate account.

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Just as a general rule, I say always contribute to a 401k, even if you're paying off debt. Given that 401k plans are most people's only retirement plan (plus Social Security), it's a no brainer.

We're all paying off debt. It could be a car loan, home loan, credit card, education loan, installment loan, etc. If we all used the excuse we have loans to pay off, few would contribute to a 401K or IRA.

Edited by Burgerwars
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