To Save or Not To Save
The exact question and answer in every personal finance problem will
be different. However, some things are a given in all situations,
while others depend on how much extra money you have each month. In
most cases, a good general rule of thumb is to put all your money
toward paying off debt before investing, but you should do the math
yourself before making a final decision since some cases will
differ. Your personal financial goals will also have an affect on
your decision, as one path could delay improving your credit score
by several years – but if you're not planning on using your credit
any time soon, it may be the best option for you.
401(k) vs. Credit Card Debt
Video: Understanding the Benefits of a 401K
Most 401(k) plans usually come with a pretty tempting perk – the 50%
employer match, along with coming out of your paycheck before they
calculate tax. Don't let that sway you though, especially if you are
on a tight budget. Let's say you have $250 to spare each month and
decide to split that between your $5,000 in credit card debt at 14%
interest, and a 50% matched 401(k). Your credit card debt will be
completely eliminated after 55 months, and your 401(k) will have
$17,200 in it, if you have an 8% rate of return. Now compare that to
$18,500 in your 401(k) over the same 55 months if you put the entire
$250 per month toward paying your credit card debt first and get rid
of that debt in just 23 months. However, if you have a large budget
to put toward either, check to see the maximum contribution for your
401(k) plan. If your available budget exceeds the maximum
contribution, run through a few mathematical scenarios like the one
above to see which would be most beneficial – contributing the
maximum with the rest going to your debt, splitting your budget
50/50, or more of a 70/30 split – over the same time period. You
should also consider the fact credit card debt, if balanced
properly, can help your credit score. If you keep a balance lower
than 30% of your credit limit and then focus your efforts on the
401(k), you'll have two birds with one stone. One quick tip for paying
down your credit card debt faster – make a payment every time you
get paid. In other words, if you plan on paying $100 per month on
your credit cards, pay $25 weekly to make the interest re-calculate
based on the new, lower, principal.
Video: The Risks of Withdrawing 401k Funds
401(k) vs. Student Loans
Depending on your financial goals, student loans could be neutral, or bad. If you need or want to have another debt anytime soon – such as purchasing a home or car – you should focus on paying off your student loans as soon as possible. It is best to have all of your student loans paid before buying more debt. Otherwise, work out the numbers to see what would be your best option. Figure out how long it would take to pay off the loan at the normal payment, and make that your base time frame – unless you wish to buy debt before that date, then make a time frame that suits your financial goals and work from there. Use the same scenarios as you did for the credit card debt as a kind of blueprint for figuring out which is your best path, keeping in mind that student loans only affect your credit insofar as late payments and total debt. So long as you keep making payments on time, you don't have to worry about it affecting your credit score negatively, but creditors will count the loan amount and calculate your ability to pay the student loan along with the new loan – which is precisely why you should pay it off before buying more debt.
Financial Advisors
ING Financial Service
(781) 768-4800
Merrill Lynch
(915) 534-3100
Smith Barney
(305) 674-3311
Wachovia
(800) 473-3119
Morgan Stanley
(212) 761-4000
Wells Fargo & Co
(415) 396-4000
Brookstreet
(914) 777-3393
NBS Financial Services
(805) 497-2497
Tow Financial Advisors
(818) 906-9301
Apex Financial Service
(631) 728-6600
American Consumer Credit Counseling
(866) 826-7038
Wilmington Trust Wealth management
(866) 829-1929
Genesis Financial Management
(866) 496-2651
Pan American Financial Advisors
(210) 682-2121
Lane Bridgers Associates, LLC
(856) 638-1855
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