HomeDebtKeep your credit card debt. It'll be good for you.

Keep your credit card debt. It’ll be good for you.

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, today I want to focus on just one.

Which comes first: investing or paying down debt?

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 crazy. 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?



  1. No 401 k match but I do have a pension. 401 is available but no match. I think some bands/divisions get a .18 percent match which is nothing. County government job in California.

  2. Always do what is in your best financial interest, even if it sounds counter-intuitive or goes against the Dave Ramsey/Suze Orman-type crazies.

    We get matched up to 2.5% for contributing up to 10% of income to the 401(k). It’s not much but it means a 10% contribution to the plan is actually 12.5%.

  3. I am proud to say I have an 8% match. I have gotten myself to the point where I can put 20% income into my 401k and max contributions every year. It is amazing in only the 2.5 years I have been here how it is doing.

  4. No match at all, which probably explains why I found your point initially so surprising — I max out my 401k while carrying student loan debt, but wouldn’t if I had any high interest debt.

  5. My husband’s job has company matching, so he contributes to it each month to take advantage of the free money aspect.

    I don’t have a retirement account yet and all my discretionary income goes to paying down debt.

    We killed the credit card debt already and arw paying off our first of three student loans this month!

    Once all of our debt is paid off, we will kick up our retirement contributions to 15% following Dave’s recommendation.

  6. Shouldn’t you factor in higher 401k contributions for years 3-22ish? That is when the minimum payment can be saved as well? If that is not going to the 401k, it’s at least in savings (I hope)!

  7. Not to mention you can never go back and catch up on your contribution for your 401K. My company matches 7%. I am on schedule to max out my 401K this year.

  8. I am extremely lucky and my company matches my 401(k) dollar for dollar, up to the IRS max. I feel very guilty not maxing my 401(k) as a result, but with a chronically ill significant other not working right now, having cash on hand is more important that maxing my retirement. I still think I am in good shape though. While I don’t have CC debt, I do have student loan debt. I am chipping away at it by paying more than the minimum, but I refuse to go Dave Ramsey on it at the expense of the realities of life.

  9. I put 15% in my 401k, which maxes it out, and my employer matches 5%. I also have a pension.

    That was a good example of of each individual needing to figure out what makes the most sense in their situation. Interesting!

  10. I would try to find balance and do both if possible. Pay off and contribute. I don’t think you need to do just one.

    We max out our 401ks. I get 6% match and my wife gets 5% match. We also have a 15% discount on company stock, but can only put 20% of our salary in, which I do. Plus the roths maxed out.

  11. I work for a church, and they don’t offer any sort of retirement plan. I’m 34 years old, have about $9,000 in a low interest student loan, and $16,000 in a 4% car loan. I also have a mortgage I could pay down. I have around $5,000 to either pay on debt or start investing. Which do you think I should do? And if it’s start investing in retirement, what avenue should I take?

  12. I don’t know why exactly, but I found this post to be ridiculous.

    Just so its clear, you are suggesting Jane keep her credit card debt around for 22 years?

    I think I find it so silly because you are only taking into account the numbers. As we all know, math skills did not help Jane when she was getting into credit card debt. It would be pretty difficult, I think, to stop using credit cards, max out your 401k, and also completely ignore the fact that you are still paying debt from ages ago. And, to not let it get you down, and to be gung-ho about all these goals at once. Its just not very likely. You’ve got to have steps in a plan, you won’t be successful if you just do all the steps at once.

  13. Jane’s bad habits will end up with her borrowing money again and again, so to defer from changing her behaviours, she should invest? What has Jane learned?

    That doesn’t make sense to me. Pay your CC, build up an emergency fund, pay down all other debts, and then invest.

  14. Another way to phrase this is, if you get a 5% match for a 5% contribution, you are earning 100%. 100% >> 20%.

  15. My husband’s job doesn’t have a 401k, just a pension that we cannot contribute to. We haven’t started a retirement plan on our own yet, but we should since we are in our 30s. Right now we are in full-on debt repayment mode, so it is hard to get out of that mindset to allocate some of our cash to a retirement fund. You gave us something to think about!

  16. My employer gives us a flat match. As long as the employee puts in a min of 3%, employer puts in 8%. I put in around 10% and get the 8%.

  17. I worked for a small biotech company from 2010-2012 that gave a 50% match on up to 4% of my salary. Since then I’ve been working for a larger pharmaceutical company that gives a 100% match on up to 6% of my salary, and they also have a pension plan. I’ve been putting in 10% of my salary, so with the match I’m actually investing 16%, which I think is pretty awesome!

  18. I work for a university but I’m a grad student and not actually an employee so I don’t have access to a 403(b), much less a match. I have to use a spousal IRA for retirement savings at the moment because my income is not “earned.”

  19. It’s so interesting to see all your options guys.
    I’m lucky because since I’m employed everything is taken care of by the governament (or state or public service don’t know how to explain this).
    So retirement is taken directly from my pay, and also what we could consider healt insurance, since it’s public.
    also very lucky because I don’t have any debt. Never had.
    The unlucky part is that I don’t get to decide anything…

  20. My company offers a 401k match. I would rather put my 401k on hold and attack my debt first. Once the debt is cleaned up I could increase my 401k later.

  21. I just started working for my company, so I won’t qualify for a 401K until next month (I’m still technically in my “trial period,” though my boss has already seen my value and actually already gave me a raise!). Once I start contributing, my company will match up to 4%. Though my husband and I have a mortgage and student loan debt, I plan on maxing out my contributions to the 401K. This is my first “real job,” and it will be my first investment into retirement. Here’s to being an adult!

  22. Ninja, question for you. What percentage are you allocating to taxable retirement savings that are not cash. I suck at this and was curious what you are doing.

  23. I am (sort of) in the same boat as Jane. I don’t have any credit card debt, but I do have about $24,000 in student loans at a fairly high (for student loans) interest rate, around 6%. I am 23 years old.

    Here’s how I tackle things:

    6% automatic deduction from pay to go to 401K. My company will match 50% of my contribution until they hit 3%. I do the 6% to get a total of 9% into my 401k.

    Then I go after my Roth IRA. I am on track to max out for 2013. I will then focus on maxing out my Roth IRA for 2014 (should be possible by August, but maybe before).

    Until the Roths for 2013/2014 are maxed, I have been making the minimum payments on my loans (~$300). Once I have maxed my Roth, I’ll be putting all of that money toward my loans.

    While it sucks to be in debt now, the 6% cost for 5-6 years is significantly less than the 6% gain (or 50%+ on my 401k) over the next 40 years of my life before retirement!

  24. Federal employee. I put in 15% and get a 5% match. I usually don’t even consider what pension or social security will give me when I calculate retirement. I would rather be completely sure my TSP can cover me.

  25. Maybe this sounds, as someone in the UK might say, “naff,” but I intend to write for a living, and have no plans to ever retire (I do plan to save up plenty of money, though!). If you do something you love, there’s no need to retire. It’s sad that jobs have become something you do for the next however many decades until you can finally retire. I feel like that’s such a modern concept. Why not just do what you love for the rest of your life? Maybe I’m oversimplifying, and of course, there are people who get too sick to keep working. That’s another story entirely.

    Anyway, that’s just my view. Make of it what you will.

  26. I work for the government and have no debt. 10% of my pay is put into my pension and my employer puts in 14% of my salary. I cannot touch that 14% until I work for 10 years. I also put money into my 403b (260/paycheck) with no match. I also max out my ROTH IRA and after the ROTH is maxed out, I invest in my taxable account.

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