Choosing Between Paying Off Credit Card Debt and Funding Your 401k

Both options are good and if money is not a problem, surely everyone will want to pay for one as much as the other. angry woman with laptopBut of course, situations can be tough and most of the time the money left that can be put to our savings is barely enough for either option.

 

Do you need to choose between paying off your credit card debt or funding your retirement? Before you come up with a decision, let’s take a close look at each one and find out which one works best for you.

Credit card debt vs 401K savings

First, let’s take into account your 401k fund. This guarantees you 50% return of your investment tax free until the time that you receive the money.

What about your credit card debt? Federal Reserve reveals that 15% is the average interest rate on credit card accounts. That means your credit balance is increased by 15%, so paying it off is like getting the 15% from your money back. If you’re going to compare between 50% tax free against 15% taxed money, you might easily say you’ll prefer the latter.

However, don’t forget that your retirement fund waits until that time when you’ve actual retired and is qualified to claim your money. Your credit card debt on the other hand, increases by 15% monthly and continues to do so as long as you leave it unpaid. Obviously, it is requisite that you should pay your credit card debt first, to avoid further increase on your balance. Once it is paid off, you need to ensure that you do not acquire any more balances in the future so that in turn, you can focus your attention and your money to your retirement fund.

Credit card debt = 401K savings

What if you want to divide your extra money to simultaneously pay your credit card debt and your retirement fund?

Considering the cost of interest charged to your credit account each month plus the additional tax, it would work to your best advantage if you can erase your credit card debt in the shortest time possible. Consequently, you can devote your extra money to invest on your retirement fund in full.

Hence, when given a choice, it is more sensible to pay off your credit card debt completely before starting to invest on your 401 k fund. One way to cut down your credit card debt is by transferring your balance to a credit card that offers a much lower APR than the one you currently have. This way, you can lessen your paying time and immediately begin contributing to your retirement. If it seems too hard for you to deal with your credit card debt, you can ask for assistance from a legitimate Credit Counseling Service.

Keep in mind that as soon as you’ve cleared your credit card debt, you should concentrate investing for your retirement. The important thing to remember is to always have a reality check on your lifestyle and to know how to manage your finances correctly. Having good financial habits is the key to making the most of your money.

Elizabeth Roberts

Elizabeth Roberts

Liz Roberts and her team are continuously providing information to people who are ready to repair their credit and improve their credit score. Also NewHorizon.org team strives to empower the homebased and small business owners by bringing information that can help them to manage and grow their businesses. Let our 24+ years of business finance experience help you to get the financing you need! CONTACT US if need financing for your business.

1 Comment
  1. As a human being, we are entitled by our ability to think ahead and plan ahead for our future. If you are planning to retire, part of what you should consider is knowing what to do with your IRA or however many you have, is what you’re going to do with it once you retire. The right strategy depends on what kind of retirement accounts you have your nest egg in – be it a 401k, a Roth IRA, whatever – and all the applicable penalties. For instance, you could cash it all out once you retire if you’re over 55 at the time of retirement, to avoid penalties – it could save you more than a payday loans worth – but you should consult with a financial expert who knows how to get the most cluck for your buck.

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NewHorizon.org is an independent, advertising supported website. The owner of the site may be compensated in exchange for featured placement of certain sponsored products and services, or your clicking on links posted on this website. NewHorizon.org has not reviewed all available credit card offers in the marketplace.

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