You just turned 30 years old, and are still have credit card debt hanging over your head. While you were out partying and paying off student loans during your 20’s, you realize that you haven’t saved a nickel for retirement. The debate begins in your head. Do I pay off the $10,000 of credit card debt or do I save the maximum I can in my 401(k)?
The Dave Ramsey’s of the world would always say to pay off debt first before saving in a 401(k). These are the personal finance situations where I don’t agree with a Dave Ramsey because it really does depend on your personal situation.
The first thing I would look at is whether your company offers a 401(k) plan that has a match. For example, if you put away 6% of your salary and your company matches 3% it would be an instant 50% return on your money if you stay with your company long enough to earn the match. Some companies may also offer a discounted stock purchase plan that would give you a 10% or 15% discount on the stock. Especially with the 401(k), the match, and the time value of money getting started on a matching 401(k) plan is likely to be a good idea if you are 30 years old.
When you consider your overall debt, it is important to pay off all of your non-deductible debt such as credit card loans as other debt because some debt such as your home mortgage will have a tax advantage for you. Some of these loans may be able to be consolidated into a low interest rate or temporary zero balance rate which could help you keep your overall balances lower. I am a big fan of paying off your lowest dollar balance card vs. the highest interest rate card because I am a believer that seeing a victory only leads to more victories.
Doing a thorough analysis is an important step in choosing retirement savings vs. debt, but I truly recommend doing both versus one or the other and here is why. Being financially successful is as much emotional as it is financial. Smaller win in your money get you to believe you can have bigger wins— it makes you smart emotionally. You work hard to pay off your debt, but if you see nothing in retirement you may feel defeated. The same is true if you save a lot for retirement, but never pay down your debt. Setting realistic goals and growing your assets while reducing your debt will help you feel emotionally good about achieving the ultimate goal of being debt free and having financial independence. Don’t let the math fool you because crunching numbers isn’t the only financial analysis you should do.
The next decade will be here before you know it . . . .
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Ted Jenkin, CFP®, AAMS®, AWMA®, CRPC®, CMFC®, CRPS®
Co-CEO and Founder oXYGen Financial, Inc.
oXYGen Financial, Inc. co-CEO Ted Jenkin is one of the foremost knowledgeable professionals in giving financial advice to the X and Y Generation.
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