HomeDebtFinancial Priorities.

Financial Priorities.

First things first, apparently I’m a little late to the game, but I made a Facebook fan page last night for Punch Debt In The Face (See the new widget in the sidebar on the right?). I don’t really get why that’s better than my Facebook profile page, but for some reason people tell me it is. I also don’t know why likes are important on a page, but again, someone told me they were. Would you take a moment to head on over to my new fan page and gimme a little Likey Likey. If you do, I will…well… do absolutely nothing for you. Sorry, just being honest.

Alright, on to the content…

Do you have an income? Do you have expenses? If you answered yes to either of those questions, you darn well better have some financial priorities in place.

While there are a million different things we could talk about in regards to financial priorities, I want to focus on just one. Which comes first: investing or paying down debt? Hey, speaking of…

Which came first, the chicken or the egg?

Answer: Chuck Norris.

In all seriousness, I think financial priorities are something most of us think we have figured out, but don’t always truly understand. Today I’m going to show you why investing in your 401K is often a better option than paying down high interest credit card debt.

Let’s look at an example:

Jane, makes $50,000 year. She’s 30 years old and her employer fully matches 5% of any contributions she makes to her 401K plan. Jane also has $5,000 in credit card debt, at 15%. What should Jane do, pay down the card as quick as possible, or start building up a nice little nest egg for retirement?

A 15% APR, on a $5,000 balance, means Jane will be paying about $62/month in interest. If she made nothing, but minimum payments, it would take her a little over 22 years to pay that sucker off. She’d also pay $5,729 in interest over that time resulting in a total payment just shy of $11,000. Yikes, that $5,000 original bill became a whole lot more expensive. Better pay that sucker off ASAP, right?

Now let’s examine the investing route.

Jane would be investing $208/month in her 401K if she contributed 5%. Her employer matches that and gives her another $208. If she earned a doable 6% return on this money, and never got a raise in her life, she would end up retiring at age 67 with $683,030 in her 401K. Not bad at all.

If Jane decided to postpone contributing to her 401K, she could use that $208 to make accelerated debt payments each month. But let’s not forget, that 208 number is pretax, so in reality she’d have about $175 extra to throw at her credit card. With the additional payment, Jane will now be credit card debt free in 20 months and will have only paid about $673 in interest. Sounds a heck of a lot better than the 22 years it was going to take in the first example.

Here’s where it gets interesting.

Wanna know what Jane’s 401k would look like if she didn’t start investing until after she became CC debt free? She lost nearly two years of company matching and compound interest, resulting in $596,388 in her 401K. That’s $86,642 less then if she started investing at age 30.

Guys and girls, this point is SOOOO important it can not be overlooked. It is absolutely in Jane’s best interest to start investing in her companies 401K, even though she is not debt free. If she waits until she has her credit card paid off, she loses a crap load of money. I know this seems to go against the grain. Credit card debt is evil, don’t get me wrong, but that doesn’t mean it should always be at the top of our financial priorities.

Obviously, in a perfect world you will have enough discretionary income that you can not only contribute to your retirement, but also pay down your debt quickly. I always have been, and always will be a DEBT PUNCHER, but only when it is in your best interest.

Does your employer offer a 401K match? (I’d like as many people as possible to answer this question since I’ve heard a lot of the retirement benefits in the private sector have been getting cut left and right). Are you taking full advantage of that match? If not, you’re stupid. I’m sorry, you just are. You are literally giving up FREE money. In Jane’s situation would you go the way of Dave Ramsey and still pay down your credit card first, or would you let number’s guide you and start contributing to your retirement?

p.s. Like me on Facebook, I’m desperate 🙂



  1. There are a lot of things I really like about working for a small company, but the lack of benefits and RRSP (like a Canadian 401k) matching isn’t one of them. I WISH my boss matched my contributions or something. I would totally contribute the maximum if she did. But alas.

  2. Ugh I’m self-employed and have to save for my own retirement, so I have a Roth IRA. I’m always a little envious of people with matching 401k’s, I would totally do that if I could!

    • I’m jealous of your SEP IRA eligibility. You can contribute the lesser of 25% of your income, or 49,000 tax free to your own IRA!!! That’s 3 times more than us with 401ks and TSPs. Great opportunity for front loading your retirement vehicle and reducing your realized taxable income.

      • Well thank you for the comment. I must say I’m confused as I thought there was a 5k limit across the board. I only make 30k (before taxes) so 25% of that is $7,500. If I did that and then paid taxes, it doesn’t leave a lot to live on. Not that I mind the frugal challenge–hubby’s income helps–but we have other savings goals too (emergency fund, cash for our next cars, downpayment on house). I wonder where I got that 5k limit idea.

  3. My company has a 401(k) match of 75% of up to 8%. It’s extremely generous, and I take full advantage maxing out my contributions each month and year. I’m very grateful for it, so I’m doing everything I can while it lasts, and hopefully it lasts for my entire career.

  4. No match for my 401(k). But since I am a government contractor I get a fringe benefit per hour and that entire fringe benefit goes into my 401(k) which works our to be a pretty healthy chunk of change.

  5. I’ve got a SIMPLE IRA through my work which I max at $11,500 and get a 3% contribution of gross earning from employer. Hubby maxes 401(k) and gets a 100% match on the first 7% (love this). That doesn’t leave a ton of extra cash, but what we do get is paying down extra principal on the mortgage as otherwise we’re debt free. Thanks for letting me brag. 🙂

  6. Company I work for matches my RSP contribution, and HELLZ YEAH I take full advantage of it. Hubby’s company does the same, and both our employers offer pension plans. We also have RSP’s with our bank (automatic withdrawls to fund the RSP have been in place for years). Retirement’s still a lot of years away, but I’m glad we got to contributing to our retirement early in the game.

  7. Great post. Love the Chuck Norris joke. Have heard tons of them at home.

    I debated the debt vs 401(k) thing myself for about 3 seconds. Since I will now be getting a match, it makes no sense not to take free money. A 100% return on investment can’t be beat.

    PS–Not gonna like you on Facebook until I get a page of my own. Just haven’t gotten around to it yet.

  8. My company does not match- they stopped doing so in 2009, right before I joined the team. It’s not as rewarding to invest, which is a bummer. Keep crossing my fingers that they’ll bring it back next year!

  9. My company matches 25% up to 4% which isn’t huge, but hey, it’s free money. And actually I think it’s a smart way to do matching: you have to contribute 16% to get the maximum match, which works out to 20% of my salary put aside for retirement every year – which is what I think is necessary to save to be reasonably sure of a good retirement. There’s also vesting to take into consideration – it vests gradually over the first several years of employment.

  10. Haha, I don’t understand the benefits of fan pages as opposed to profile pages either. I would love to learn more than “do what people say + a miracle happens = huge following”

  11. Just “like”-d Punch Debt in the Face on FB! Love that photo of you and Parker…

  12. My employer matches my RRSP 100% up to 4% of my salary. We are in debt, but I still put that money away every 2 weeks. I tell everyone they’re crazy if they don’t take advantage of the free money the company is giving us!!

  13. Investing in your 401 K is important even if you do not have a match. As a teacher, I do not have a match, but instead I earn a pension.

  14. Fabulous! Any way you could get every person ages 18-21 to read this? I was so lucky to have my dad basically hold my hand and get all of my retirement options squard away with my first job at age 22…10 years later I am so grateful he did. I vividly remember talking to my peers at work (some my age, some 20 years older) who kept saying, “Oh, I don’t have enough money” or “Oh ya, I’ll totally sign up later”. I wonder how they are doing today.

  15. I’m Australian and we don’t have 401k, Roth IRA etc. But our laws require that all employers contribute a minimum of 9% on top of our salary to a superannuation (retirement) fund. From the very first day you go to work, even if you’re 15 and flipping burgers at mcdonalds you will be receiving payments into your retirement fund without you having to do a single thing. My employer actually provides 10% which is above the minimum, as do many others. On my salary of $63k this means $6300 per year automatically gets put into my fund and I still have my whole salary (less tax) to deal with debt repayments if needed. I’m also eligible to contribute more from my after tax salary and receive government matching up to $1500 per year.

  16. Company matches up to 3%. Not great, not terrible. There is one co-worker who refuses to put anything in his 401(k) because “he doesn’t like our options and can get better returns on his own.” …we’ll see how that turns out.

  17. I work for state government- mandatory 5% of my salary goes to a guaranteed 5% return account with the state matching over 100% of my contribution. I could choose to defer additional money, and it would go to a more traditional retirement account, but there is no matching on those funds so I haven’t done that.

  18. I work at a not-for-profit without 401K so I’ve been doing my own IRA. But, starting in January we will have 401K with company match (percentage still unknown) — excited about that!

  19. Great advice. Unfortunately, of all the many jobs I’ve had in my young career, I’ve never worked for a company that offers a 401k match. I rarely even have a 401k. Last year I had one for the first time ever and I maxed it out, without a match. My jaw always drops in horror when someone tells me they’ve opted to not invest in their company’s 401k plan even though their company would match their investment. That’s just. Plain. Stupid.

  20. I get a 6% match plus another 4% of my salary (regardless of match) contributed by my employer if they meet their financial goals (which I have heard they always do).

  21. No 401K here in Canada. I do love the original point of financial priorities though. We all have a list of things that we say we want. The reality is that our spending proves otherwise.

    The more I read your blog the more I love it!

  22. I guess I’m the only one who lost money investing in a retirement account. Hence, I hate when I see those “doable 6%” rate of return numbers put up. I was a sucker for it. Better make those mutual fund, stocks, and bonds recommendations specific with that 6% rate of return. Otherwise you would be doing your readers a desservice.

      • How about looking at historical averages of the S&P 500. The average there alone is 10%. Six percent is reasonable. You lost your money because you pulled it out of the market. Investing shouldn’t be emotional, you let it be. It’s as simple as that.

        You find me an investment vehicle that has outperformed the market over a 20+ timeframe and then we can chat, but the FACT is nothing (cash, real estate, etc) comes close to the gains of the market. Nothing.

        • Dollar cost averaging and rebalancing the risk/reward portfolio according to age should be mentioned at least? There are many who still don’t know about those crucial elements for investing for retirement. Also, be careful of your faith in the market.

  23. My employer matches 5%, but debt leaves me with a feel all sticky and gross. I sleep better knowing i’m kicking my debt’s ass.

  24. I think it also depends on how much your family needs to live on. After taxes and health insurance my husb brings home about 2800$ a month for our family of 5 to live on. 2 of my kids are disabled. Our mortgage is 1400$, which is the same as the rent we paid before buying our home. Our grocery budget is $550 a month for 5 people, 2 with special dietary needs. Other than the mort, we only have school loan debt, and live a very frugal life. But if we took advantage of my husband’s work matching program, we wouldn’t have enough money to make it every month.

    You have to live first, and you are very fortunate to have a govt job, reasonably secure.

  25. […] Ninja wrote about investing in a 401(k) vs paying off […]

  26. Self-employed, so no matching. I contribute 15-20% each month to retirement accounts, though (flat amount each month, so the % varies based on how much I bring in that month). Also have about $30k from previous employment with matching.

  27. I use my retirement account to invest in gold a few years a go when gold was between $272 by the year 2000. right now gold is around the $1600 i pretty much have a back up plan when the bad economy truly hits us.

  28. […] Personal Finance News: One of my favorite personal finance bloggers, Debt Ninja, posts in his usually hilarious way about why you should invest in your retirement before paying off your debt, even if it’s a 15% interest credit card debt (source: […]

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