© 2022 Fairygodboss. All rights reserved.
Paying down vs. investing
Hi all and happy 2020! [I keep hearing Barbara Walters in my head when I hear "2020"].
I *finally* have secured some steady income for Q1, albeit freelance wages, so no 401(k) match option.
Question: do I pay down a couple of credit cards first, or add to my self-funded 401(k), that's been lagging for two years? Thx!
Francesca Vanderwall
610
01/14/20 at 9:36PM UTC
Sorry that I'm late to the game on this post. But I agree with some of the commenters above...make a nominal contribution to the 401k (since that reduces your taxable income) and then focus on getting rid of those credit cards!
Once you're out of credit card debt, I'd recommend looking into some after-tax investing options as well. Whether that's a Roth 401k or a Roth IRA, it's good to diversify your sources of income in retirement.
Anonymous
01/16/20 at 6:37PM UTC
Thank you, Francesca. I do have a Roth IRA in addition to the 401k. Now I need to "feed" it. Happy new year!
Maggie BBusiness and Data Analysis Consultant
983
01/07/20 at 3:41PM UTC
I do a little bit of both!
Figure out what you can commit out of your budget, and then throw 10-25% of it at your 401k, and the rest at cleaning up those credit cards.
Good luck!
Anonymous
01/07/20 at 4:34PM UTC
Thank you - I appreciate your support. :)
Emily PehlGrab a mug - let's chat about life and careers
200
01/07/20 at 2:26PM UTC
I like the idea of doing both if there is a match. Without an employer match I would focus on getting out of debt. When you're out of debt invest that money in your retirement/brokerage accounts. When I was paying off debt I used the snowball method a la Dave Ramsey. I don't follow his methods exactly, but he is one of the best for getting out of debt.
My thought is that being out of debt gives freedom. When you don't owe someone else you really can do what YOU want with your money. Be sure to have a solid budget though all of this! Again, I think budgets are freedom not restriction. Tell your money how to work for you :)
Jennifer A
968
01/06/20 at 4:15PM UTC (Edited)
Daughter of a CPA here and a student of 'saving money'. My research indicates that you need to look at the interest rates. What interest rate are you paying and what interest rate are you getting in an investment. The higher one wins.
My plan to get our family out of debt was as follows:
On a spreadsheet do the following:
Add bills and interest rate paid - Sort list by interest rate and balance.
Add to worksheet, investments and interest rate received. Again sort by interest rate and then balance.
Pay (or invest) in the highest interest rate first. Since your debts are normally a higher interest rate, they will flow to the top. Once they are paid off OR if you hit an investment rate that is higher than a bill interest rate then invest before you pay off as you will gain money here. As you pay off each bill, the amount you pay to the bill goes to the next bill. You don't get to spend that extra money ... in this way payments and later investments grow like a snowball going down hill.
For me, I paid off the credit cards first and then my student loans. My husband's student loans have a lower interest rate than our home loan interest rate. Normally, we would have paid down the house first but when we looked at that combined with the mortgage tax exemption we found that it was better in the long run to pay his student loans first and that's where we are right now. It's been a few years but for the first time in my life, I feel like I have control over my money and it's not controlling me.
That being said, there are other things to consider like a safety net. Here is an article from Investopia that might help you make your decision. https://www.investopedia.com/articles/pf/08/invest-reduce-debt.asp
Anonymous
01/06/20 at 4:56PM UTC
This is so awesome, thank you. I'm afraid of the "s word" (spreadsheet), but I'm going to get better at it!
Jennifer A
968
01/06/20 at 5:22PM UTC
Good for you for working on your tech skills! If this is too much to tackle starting out of the gate, try using 3x5 note cards and then sorting them on the table. This way you don't have to worry about the technology and you can just focus on solving your issue.
Anonymous
01/06/20 at 11:36PM UTC
I *just* found 3x5 cards recently. Can I meet your dad? lol Give him a "thank you" hug for me.
Jackie RukaProfessionalHappyologist Thrive in your purpose.
2.07k
01/03/20 at 3:39AM UTC
Hi there, can you do both? For example, pay down your highest interest card per month and start putting away some monies each month toward your 401K? In the meantime, also look into lowering your monthly bills. My planner always starts with lowering monthly expenses , especially if you are paying down debt and trying to save. If you need a comprehensive plan, my certified financial planner will help you put a plan together for no cost.
Anonymous
01/03/20 at 4:04PM UTC
All good suggestions here, and yes! I have to look at my monthly expenses from 2019 and get moving on 2020. Once my CPA takes a look, I'd be glad to take you up on the offer of your CFP. I really appreciate your help.
Anonymous
01/03/20 at 2:26AM UTC
Thanks so much, Dawn - many smart, thoughtful options. I neglected to mention I'm a contractor, so I don't get a 401(k) match option. I do like #3 a lot and will keep that front/center with each check.
Dawn S. CrossGoals should scare a little & excite a lot
1.12k
01/03/20 at 1:53AM UTC
I have 2 different thoughts on this, so bear with me, this may get lengthy...
1). For your 401(k) - do you get a company match for any portion you contribute? If so, consider contributions up to what the company matches. If you don’t, you could be leaving “free” money on the table.
Most 401s allow you to change your contribution amount and funds investments when you wish. That being said, you can increase (or decrease) how much you are contributing through the year.
Additionally, see if your company does an auto-increase yearly. This is an easy way to increase your contribution painlessly as most companies allow you to auto increase 1 percent a year.
Now on to the 2nd thought...
2). For the credit card debt, are you just making the minimum payment? If so, think about paying more than the minimum on the smallest (monetarily) to pay it off faster, then tackle the next smaller one, making the normal payment, plus the amount you paid on the other bill. Then move on to the next and so on and so on.
If your payments are on time, call the credit card company and see if they would be open to lowering the interest rate (what’s the worst they can say, no?).
So, all of this truly leads to a 3rd option...
3). Do a combination of the above. Contribute to your 401 so you get the company match (free money!), start making payment on you bills as well.
If you receive a bonus yearly, use it on both as well and put some back for those rainy days. Say 1/3 to each.
Once you have paid down your debt, start paying yourself as well. Put funds away for a rainy day. Set a goal for yourself and go after it. You are worth it.
Janice Ferguson
111
01/06/20 at 1:56PM UTC
I have my credit cards listed not by amount owed, but by interest rate. The highest interest rate is about 25%! I've now got 2 credit cards payed off completely.
Anonymous
01/03/20 at 1:33AM UTC
This is tricky. It is almost always a good idea to avoid carrying a credit card balance. I believe the average interest rate on credit card accounts is about 15% so I’d think about your credit card first. That is very expensive and can put you at a disadvantage quickly, especially since credit card interest payments are not tax-deductible. And if your credit card is paying around 15% interest (or more) paying off your credit card debt is equivalent to obtaining a proven 15% return on your money.
Keep us posted with what you decide and congrats on securing a steady income! That’s big!
Anonymous
01/03/20 at 2:23AM UTC
Thank you so much for your POV, and thank you for the support. Resolution #1: get everything in writing so the income stays steady. I'll keep u posted for sure!
© 2022 Fairygodboss. All rights reserved.