401k question with pole!

[rasczak]

Currently I contribute 1% of my earnings to my 401k with my employer matching that by 50%. They are now going to match 100% of my 401k contributions up to 6% of my salary. Things are real tight but I am seriously considering going up to that 6% max.

I am currently paying down debt at a rate of $300 a month, and with the increase in my 401k contributions I would only have $75 a month left to pay down my debt. It's not a whole lot and would take me forever to pay it down. How should I measure this to determine I am making the right decision financially?

What are your thoughts?

Thanks!

 

[pontifex]

i'm surprised that your company is adding to the contributions. most are taking away contributions.

 

[Vette73]

What kind of debt (i.e. can you write off the intrest on taxs) and what intrest rate does it have?


But without knowing that I have to give the standard answer of DUH!!! yea go up to 6% at least.

 

[rasczak]

yea, there was a negative change in our stock plan so they are making up for it with this. It's nice I have to admit, I really want to take full advantage of it, but it would hurt us at the moment to do so.

 

[KB]

What is the interest rate of the debt and what type of debt is it? If it is credit card debt with high interest, then pay that off first. If it is school loans with a low interest rate take your time paying it off.

You really want to increase your 401K contributions ASAP to the max the employer matches. Thats free money you are losing because you aren't paying in 6%.

 

[JohnCU]

Originally posted by: Marlin1975
What kind of debt (i.e. can you write off the intrest on taxs) and what intrest rate does it have?


But without knowing that I have to give the standard answer of DUH!!! yea go up to 6% at least.

 

[rasczak]

Originally posted by: Marlin1975
What kind of debt (i.e. can you write off the intrest on taxs) and what intrest rate does it have?


But without knowing that I have to give the standard answer of DUH!!! yea go up to 6% at least.

I have a few high interest credit cards, nothing I can write off on a tax. One at 23% and another at 18%. My wife has three cards as well but they all have a lower interest rate than mine so I've been working to get my cards down first. I have had a bad credit history, but I over the past two years I have made up a lot of ground with the goal of working to get my credit score up to the high 600's to low 700's.

 

[kranky]

One way to look at it is that by increasing your savings by $2700 a year, you will earn a $2700 profit (from the extra company matching). That's what you'll gain by increasing your 401k contribution to 6%. You can compare that to what you're paying in finance charges on your debt over a year. Chances are the 401k will be a clear winner on paper.

However, in today's environment I think it's very wise to avoid debt. So personally, even if I would gain more by increasing my 401k contribution than it would cost me in finance charges on my debt, I would still focus on paying off my debt first, particularly if it would take forever to get it paid off.

Do you have 3-6 months of expenses saved?

 

[rasczak]

Originally posted by: KB
What is the interest rate of the debt and what type of debt is it? If it is credit card debt with high interest, then pay that off first. If it is school loans with a low interest rate take your time paying it off.

You really want to increase your 401K contributions ASAP to the max the employer matches. Thats free money you are losing because you aren't paying in 6%.

This is why i am agonizing over this decision. that would total $2700 a year in free money.

 

[IHateMyJob2004]

Another 401K thread where the OP doesn't say WHERE THEY WORK.

I'm assuming it is 100% match on company stock only. And if so, what company you work for is of importance. Anyone who gave responses already without knowing this is a fool.

 

[rasczak]

Originally posted by: kranky
One way to look at it is that by increasing your savings by $2700 a year, you will earn a $2700 profit (from the extra company matching). That's what you'll gain by increasing your 401k contribution to 6%. You can compare that to what you're paying in finance charges on your debt over a year. Chances are the 401k will be a clear winner on paper.

However, in today's environment I think it's very wise to avoid debt. So personally, even if I would gain more by increasing my 401k contribution than it would cost me in finance charges on my debt, I would still focus on paying off my debt first, particularly if it would take forever to get it paid off.

Do you have 3-6 months of expenses saved?

Unforutnately no. I have been (and still am to a degree) terrible at saving money. This 401k has been a godsend since I cannot touch it. I have tried to do so, but things always pop up. Car repairs, daughter's dental bills ($200 grand alone right there) and various other unforseen expenses. Plus the gas cost really nailed us since i have to drive 25 miles one way to work. I really would love to save that much for catastrophic events but I can never get a foothold to do so.

 

[rasczak]

Originally posted by: IHateMyJob2004
Another 401K thread where the OP doesn't say WHERE THEY WORK.

I'm assuming it is 100% match on company stock only. And if so, what company you work for is of importance. Anyone who gave responses already without knowing this is a fool.

I've been leery of giving out that kind of info. It's not company stock that they are matching. They are matching my plan through Vanguard. I am currently enrolled in the Vanguard Target Retirement 2040 Fund. If you need more info I am willing to give it to you.

 

[IHateMyJob2004]

Originally posted by: rasczak

Originally posted by: IHateMyJob2004
Another 401K thread where the OP doesn't say WHERE THEY WORK.

I'm assuming it is 100% match on company stock only. And if so, what company you work for is of importance. Anyone who gave responses already without knowing this is a fool.

I've been leery of giving out that kind of info. It's not company stock that they are matching. They are matching my plan through Vanguard. I am currently enrolled in the Vanguard Target Retirement 2040 Fund. If you need more info I am willing to give it to you.

Oh .... that's fine then.

Honestly, index funds are better, but you have to play the hand that is dealt to you. For someone not big into investing, you probably should do the match.

 

[kranky]

At those interest rates, and since you don't have an emergency fund, I would take the $225 you were going to put in the 401k and split it between savings and paying down your debt. Get the debt cleaned up then increase the 401k contributions.

Yes, a 401k is great because you can't touch the money but you need to address the other things first IMHO.

 

[AlienCraft]

Originally posted by: pontifex
i'm surprised that your company is adding to the contributions. most are taking away contributions.

Amen to that.
Max it out while the matching contribution is high.
Free money.

 

[rasczak]

Originally posted by: kranky
At those interest rates, and since you don't have an emergency fund, I would take the $225 you were going to put in the 401k and split it between savings and paying down your debt. Get the debt cleaned up then increase the 401k contributions.

Yes, a 401k is great because you can't touch the money but you need to address the other things first IMHO.

What if I were to bump up to a 3% and use the other 100 month I was using to pay down bills to start up an emergency fund? This way I kinda get my foot in there for the 401k plus I can still paydown some of my debt.

Also if anyone has some good tips on budgeting I would greatly appreaciate it. You can point me to a website or books, I'm fine with either one.

 

[krotchy]

Can you take out a loan against your 401k through Vanguard? I know my company's Vanguard 401k plan allows you to borrow against it, though I forget the exact details.

If so you should max out your 401k, then take out a loan from that 401k with the bonus employer money in it, pay off your credit card debt, and then pay back the 401k loan at the much lower rate than the credit card's are at. Plus any interest ends up in your 401k as well.

Of course this all hinges on you being responsible with your credit cards from that day on, and always paying off your full balance and no charging what you can't pay off.

 

[kranky]

Originally posted by: krotchy
Can you take out a loan against your 401k through Vanguard? I know my company's Vanguard 401k plan allows you to borrow against it, though I forget the exact details.

If so you should max out your 401k, then take out a loan from that 401k with the bonus employer money in it, pay off your credit card debt, and then pay back the 401k loan at the much lower rate than the credit card's are at. Plus any interest ends up in your 401k as well.

Of course this all hinges on you being responsible with your credit cards from that day on, and always paying off your full balance and no charging what you can't pay off.

Borrowing against a 401k can be very dangerous - if you change employers (or get let go), the loan is due immediately or if not repaid they treat it as an early withdrawal. Either way, a bunch of cash is going to be needed, which is not a good position to be in when changing jobs.

 

[Vette73]

So how much CC debt do you have?
Can you cut back on some stuff to pay if off faster?
Can you get a new credit card, since you said your credit rating has gone up, and move all your dent to 1 low intrest rate card?


But you really need to cut back on anything and everything. You have cable? cut it. You eat out? don;t, take your lunch to work and cook basic meals. and so forth.

 

[rasczak]

Originally posted by: krotchy
Can you take out a loan against your 401k through Vanguard? I know my company's Vanguard 401k plan allows you to borrow against it, though I forget the exact details.

If so you should max out your 401k, then take out a loan from that 401k with the bonus employer money in it, pay off your credit card debt, and then pay back the 401k loan at the much lower rate than the credit card's are at. Plus any interest ends up in your 401k as well.

Of course this all hinges on you being responsible with your credit cards from that day on, and always paying off your full balance and no charging what you can't pay off.

I wouldn't want to do that, as it doesn't have much in there at the moment. Plus I was going to do that in the case of a true emergency. Such as flying to Paris for a rock concert hehe. Joking aside, I had thought about that, but it's trying to be creative like that that has put me at this point in the first place since I wasn't to disciplined with my cards previously. I'm thinking, I may just pull down a second job go full 6% and use the second job to pay down my debts. Hopefully i will have enough time to go to school to fulfill some of the requirements for me at this job.

 

[CPA]

Pay off the debt first. The psychological feeling of getting the debt paid off is worth more than the small difference of gain you will get with the additional 401K contribution. Plus, once the debt is paid off, roll the monthly payment into the 401K.

 

[rasczak]

Originally posted by: Marlin1975
So how much CC debt do you have?
Can you cut back on some stuff to pay if off faster?
Can you get a new credit card, since you said your credit rating has gone up, and move all your dent to 1 low intrest rate card?


But you really need to cut back on anything and everything. You have cable? cut it. You eat out? don;t, take your lunch to work and cook basic meals. and so forth.

So how much CC debt do you have?
$4200 loan from bank 14.25%
$500 Visa 18.99%
$450 Dell 23.99%

Can you cut back on some stuff to pay if off faster?
I've already cutback on our cellphones and may drop 2 tiers on my internet connection plus drop our landline to the most basic. This would save approximately $100 a month. I've also asked my wife to call her cards to negotiate on getting the interest rate down on her card as well. Plus we don't eat out too much anymore. We've cut our monthly budget for food from $600 to $400 which i think Is feasible without starving us.

Can you get a new credit card, since you said your credit rating has gone up, and move all your dent to 1 low intrest rate card? Unfortunately, no i cannot. my credit score is in the tank at the moment, hence why I have been trying so hard to payoff these cards and build up my credit.

 

[dullard]

If you pay your credit cards down $300/month, then after 18 months, you'll have $250 in cash and no debt: net total of $250.

If you instead keep the credit card balances where they are at and put $300/month more into the 401K, your final total in 18 months will depend on how the stock market behaves:

Case 1) Stocks lose 10% every year: You'll have $10,068 in stocks and $5150 in debt: net total of $4918.
Case 2) Stocks are stagnant: You'll have $10,800 in stocks and $5150 in debt: net total of $5650.
Case 3) Stocks gain 10% every year: You'll have $11600 in stocks and $5150 in debt: net total of $6450.

So which would you rather have: (A) $250 in cash and $0 debt, or (B) $11600 in stocks and $5150 in debt. Mathmatically, even if the stock market continues to do bad, you'll be nearly $5000 better off if you put it in your 401k.

Plus, your 401k is virtually untouchable and history shows that most people in your situation will just go on a spending spree if the credit cards are paid off. So, really your most likely comparison would be this: (A) $5150 of worthless crap and $5150 in debt, or (B) $11600 in stocks and $5150 in debt.

Best option: put your money in the 401k until you get the maximum possible employer match. Then scrimp and save even more than you do now to pay off your debt at the same time. Yes, it'll be painful for a little bit. But you can do it. There is no reason to have high speed internet, multiple cell phones, AND a landline. Cut the landline completely and you will save hundreds of dollars a year. You'll never miss it.

 

[crystal]

That 6% you put in give you a return of 100% on the spot. vs high teen% on your debt. I said, increase in the 401K and look at some way to cut cost & pay off that dept. $400 per month for 2 people are plenty - I am sure you can go lower than that, no more going out until those debts are pay off. And what are you waiting for, cut/drop cell & internet to the basic.
How is your time? With the holiday coming up, you &/or wife can get a part-time job and pay off that dept in no time.

 

[rasczak]

Originally posted by: crystal
That 6% you put in give you a return of 100% on the spot. vs high teen% on your debt. I said, increase in the 401K and look at some way to cut cost & pay off that dept. $400 per month for 2 people are plenty - I am sure you can go lower than that, no more going out until those debts are pay off. And what are you waiting for, cut/drop cell & internet to the basic.
How is your time? With the holiday coming up, you &/or wife can get a part-time job and pay off that dept in no time.

I have two little ones. As far as time is concerned I have some on the weekends (friday included) so i may try to go back into the restaurant industry to help pay this down.