[ARCHIVED THREAD] - Financial advice needed (Page 1 of 2)
Posted: 6/7/2006 7:37:20 AM EDT
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Well, the divorce is damn near over. Just paperwork now. I am about 15 k in debt on credit card. I have nothing taken out of my check for 401k since starting the divorce. Should I start the 401k back up now, or wait till I get my CC paid off. The 401k stuff is pre-tax, and I'm gonna get killed this year on taxes with no house to deduct. Thanks TXL |
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I disagree. Don't start up the 401K until you have the debt cleared and an emergency fund in place. I believe that Dave Ramsey recommends 6 months of expenses as a good amount. I do agree on the 2nd job (if you can't get OT on your primary job) to get this cleared ASAP. Good luck. |
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Yet another anonymous internet commando giving financial advice... Pay off your credit card debt first. You probably pay a lot more in interest than you'd earn socking it into your 401k. Paying off your personal debts first is also the morally right thing to do. FWIW... 
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TxLewis.....contribute to the 401k. It will save you tax dollars and have a company match (I assume) and a return which with all three totaled should EASILY exceed the interest on the CC balance. It is the wise and prudent thing. And will put you money ahead in the long run. |
The c/c is getting interest, he's not saying he's walking away from the debt. No moral issue here. Tx- you can also call the c/c and ask them to lower the interest rate, worst that can happen is that they say no. |
It depends on the 1) interest rate on the credit card debt 2) the average return on the 401k during that period and 3) whether the company matches contributions. Let's say that the credit card debt is 21%, the return on the 401k is say 10% and the company matches dollar-for-dollar... he'll end up with a 1% loss if he puts the money into the 401k rather than pay off the credit card. |
You need a new calculator..... |
I know credit card companies are nameless, faceless monoliths of greed - but if someone owed me 15K and they were putting thousands dollars into non-essential purchases or investments - that'd be wrong. It's not his money - he owes that to someone else. But, to each his own. |
How so? Please explain my error. |
He hasnt said he is behind on the CC, so the question (as I understood it) was how much to accellerate the CC payoff. If he is behind, then the CC should be priority one. It depends upon what his matching situation is. Assuming a 50% match, he is losing money long term by not contributing. Even a 25% match is probably more than his CC interest rate unless he is in default. Then consider the effect of compounding over time. He has also mentioned taxes this year - 401k contributions will reduce his taxable income a little. |
Seems to me that he'd lose money by stretching out his high-interest debt rather than using the 401k to overcome that loss. Compounding interest works both ways. |
Using your figures: Put $1 into 401k - it's matched and there's now $2 in the 401k. At a 10% return, at the end of one year you've got $2.20 in the 401k for a $1 investment. On the debt side, with interest, you now owe $1.21 on teh $1 of debt you didn't pay off. You are 99 cents ahead by putting the money in the 401k. Edited to add: There's no guarantee that a 401k will appreciate but it is certain that you'll pay a lot in interest on the credit card, so factor that in. You probably should put in enough into the 401k to get the full company match and then pay off the cc. |
If you owe someone 100 dollars and the interest is 21% then you owe (at the end of the year) $121. If at the end of that same year you put the $100 you owed them into a 401k and then your employer matched it you would have $200. Next lets add the tax advantages. To pay that $100 dollars off you need to make 125. Then if you get a 10% return on your 401k it is worth $220. So if you invest 100 dollars in a 401k you have 220 If you pay off a cc bill with that same 100 it really cost you 125 because taxes are more than cc interest. Over simplified.....but. |
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concentrate on paying off your CC debt FIRST. Putting a lot into savings (401k) WHILE being in CC debt is just taking small babysteps forward while taking big backward steps. I do concede, though, if your company matches a certain percent, you SHOULD put that much into your 401k. That's FREE MONEY, and it would just be stupid not to take FREE MONEY from your employer. |
I don't think this is quite right. Credit card companies compound interest daily so you end up paying interest on the interest your cards occur do you not? |
You started the year investing that $100 and now you have a net of $79 (subtract the cc debt). Looks like a loss to me.
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$100 debt on CC at 21% APR. Total endebtedness at end of 1 year = $121. Places $100 in 401k, company matches 100% = $200. 10% return on $200 = $20. Total in 401k at end of year = $220. $220 - $121 = $99 = 1% loss. The_Macallan is right, IF he does not pay off any principal on the CC during the year and if his CC interest rate is 21%. TxLewis will most likely lose money on paper initially because of the $15k CC balance accruing interest. Long term the match and compounding should exceed the additional interest accrued in the few extra months it takes to pay off the CC. Think long term, especially with 401k money. EDIT: Calculations based upon after-tax dollars, even though I am well aware that 401k is pretax dollars.  Dont know what ax bracket he is in. |
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One other thing - 401k can have a negative return this year, his credit card interest will never have a positive return. In a bad, or even mediocre market year, he could have loss in his 401k AND still have his high credit card debt at the end of the year. Stop the leak in the boat before you upgrade the engine. |
Tex, I'm gonna go with this as well. I know my financial situation is different, but this is the better "long run" scenario. I mean, with the market bubble, you may find yourself a nice condo or small house b4 the end of the year. Maybe you won't, but if you do, you have a tax shelter and may be able to tap into the equity on the house to pay the debts. Personally, I would aim for that goal....talk with a RE person about forclosures in the area or consider a multi-familty property. |
It's a judgement call. Also depends on how long his investment horizon is. He MAY be able to make back the initial loss incurred by extending his cc debt payoff schedule if it's a long enough timeframe and good 401k vehicle. |
| You know the percentage you are getting with your CC, pay it off first and then bump up your 401k, once it is totally paid off then get back into your 401k. If you can manage to pay it off while still contributing enough to get the match then all the better but, you are paying a known rate on your CC and I'd be willing to bet that the percentage on your credit card is higher then the mutuals in your 401k will return over the short term. |
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I'd go with the 401k first, to get whatever matching they give you. The market(or at least whatever you invest in) would have to drop 50% to erase the matching, which isn't exactly a common occurence. If the market drops 50%, I think we'll have bigger things to worry about. Also, if you had previously been putting money into the 401k, perhaps you can take a loan against that to pay off the credit card. I don't know if that's smart or not, but it may be an option. |
You guys do some funny math. The starting point is -$100 if I use your examples. Using the $100 dollar debt @ 21%. Paying $100 off on your credit card saves you $21 dollars in interest. Not having to pay $21 is essentially a 21% return on investment. Not paying anything into the 401(k) nets you $0. Paying off credit card net result = you save $21. Putting $100 into the 401(k) using your assumptions: Places $100 in 401k, company matches 100% = $200. 10% return on $200 = $20. Total in 401k at end of year = $220. He earns $120. If he doesn't pay anything on his credit card (assuming no penalties) his debt increases from $100 to $121. For a net loss of $21 because $100 in debt is where he started. $120 - $21 = $99. He makes more money buy putting into the 401(k) even if it had a lower return than 10%. |
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Thanks guys. I am in the top tax bracket Not hurting for money, just in debt. Will do 401k up to matching right now, free money and all. 401k earning about 10% on average cc debt at 7.99% just could not get my brain kick started on it. Again, thanks all. TXL And fwiw, I look at debt as a tool, not a moral issue. I pay interest, there is nothing immoral about paying to use someone elses money. It's a commodity like everything else. TXL |
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To know the true answer you need to know the dollar amount you are paying in intrest a month.(if you answered this already sorry, I may of missed it.) If it is higher than the dollar amount that you recieve just in matching funds a month from your 401k then it still makes more sense to pay off the CC first. Even if you are getting 100% return on money by taking the match, if in actual dollars that amount dosen't equal the actual dollars you are paying in intrest then you are losing. Example me - Matched funds = $140 a month. Intrest paid in CC bill= $0 a month You however could be in a totally different boat. |
| I'd go with the others that say the best route is to get whatever 401k matching you can get and pay the CC off with the rest. I get a good feeling every time I get the zero-balance CC statement, plus that credit is available if you have something unforeseen like a health issue with you or your kids, parents, etc. If you put everything into the 401K and then need the credit it might put you in a tight spot. |
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You made the right choice. Everyone seems to be looking at 401K money in the short term. That company match will be working for you over the long term. Everyday you go without it, is a day that you are losing money. A couple of hundred dollars now will turn into a whole lot of dough in 30 years. Compounding is cool like that. eta: In fact, if you plan on maxing out the 401K at some point, you can NEVER make up those lost funds. |
Also, if he's in the top tax bracket(35%), he has to earn $153 to take home $100 to pay towards the credit card. If he has to pay 21% interest on that, so he needs $121, then he has to earn $186. I'm too lazy to do all the math again with those numbers. ETA: In case I didn't explain it fully, he's using $153 to pay off that card and save $21. Versus investing that $153, getting matching on it, and then return on investment as well. ($153 + return) > $21 ETAA: That should be ($153 + return) > ($186-153 + 21) . I should ahve just done all the math! It would be nice if they set something up where you could pay off credit-card debt tax-free. 
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The return on 401(k) investments I've seen is nowhere near 10% currently, and is accompanied by market risk. Your 'investment' in paying off your CC debt is the interest rate currently being charged. Unless your CC rate is extremely low, paying it off seems pretty attractive. Getting that rate down if you can't pay it off right away is pretty important. Either by finding a balance transfer 'teaser rate' good for as long as you can find, or calling your CC company up and telling them you will do a balance transfer unless they slash your rate. Each 1% reduction translates to about $150 over a year. Looking ahead, for the rest of the year, if your employment is fairly certain to continue, you could plan to pay as much on the CC as possible and then make your 401(k) contribution later in the year in time to get the matching, but be sure that you will be able to make enough contribution by year-end to max the matching. Also, consider refiguring your W-4 withholding allowances to reflect your new income tax situation due to lower taxable income, but also a change in filing status if unmarried at year end that might increase your income tax. You might be able to help your cash flow that way -- you want to neither over-withhold (free loan to the government that you could be using to pay off CC ) or under-withhold (unhappy surprise on April 15). |
Huh? He had 100 dollars in liability and $100 in assets. 1. He could use his 100 dollars to pay off his liability and then have 0. 2. He could invest the money and have $220 in assets and $121 in liability. If he then took the $121 out of investments to pay the liability he would have $99. The choice is between $99 and $0. Not between $100 and $99. |
That's what I'm doing. 401K up to the company match, the rest to CC and other consumer debt. Only $53K to go and I can put the divorce behind me. |
Investing in the market while still having large personal debt is intuitively not a good idea, but in the long run CAN work out well. But... a few years of market losses can really destroy that plan. It's a judgement call, IMO. |
Take $121 out of his 401K investment? Now without a stiff penalty and some taxes, right? |
And he can't take it out of his 401k the next year to close the debt without penalty for early withdrawal. So he'd have to get that $121 not from his $220 he has in his 401k from his NEXT year's contribution he would have made to the 401k. |
That's how I see it. Personally, I wouldn't invest until I was out of debt (minus the house). Everybody is different, though. |
1) 401k up to the company match. 2) Pay off your CC as quickly as possible 3) Max out a Roth IRA if you qualify 4) bump up your 401k contributions |
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I don't worry about 15 K in cc debt. I do ok, it was giving my wife 3100 a month that put me there. CC interest is at 7.99 company matches up to 4% on 401, so I can put enough in for the rest of the year to get there. Taxes are gonna fucking kill me though, in april TXL |
You can deduct your wife's allimony. *ETA* I want to be your ex wife! 
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Was not alimony. Not tax deductable. That was till we sold the house, which, she took her sweet ass time doing. Now, its only 1800 a month, which not really a problem, but I don't get to buy a new BMW anymore. TXL |