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Question: Chris - I'm expecting an annual raise on my next paycheck of 3-4%. In the past, I've taken part of that and increased my 401k contribution. I'm currently at 6%, which is the ceiling for my employer's matching contribution. I also have about $6,000 in credit card debt. This year, because of the stock market's performance, would it be smarter to not increase the 401k contribution and use those dollars to pay off my credit card debt instead? Thanks very much for your time. Nadine. Shoreline, WA.
Answer: It's a good financial choice on your part for two reasons. First, the key to this strategy is that you're taking full advantage of your employers match. The real return kick in a 401(k), 403(b) or comparable retirement plan comes from the employer match.
What's more, paying off the debt will earn you a nice return. I don't know what interest rate you're paying on your credit card, but let's say its 14%. By getting rid of the credit card debt you'll have earned the equivalent of a 14% return on your money. That's a hefty return in any market, let alone this one.
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Chris Farrell Marketplace Money personal finance guru
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Comments (2)
This is sound reasoning, and advice to be followed--except that "because of the stock market's performacne" is NOT the reaosn to decrease contributions. It is the reason to INCREASE contributions--buy when the market is DOWN.
The reason to pay of credit card debt is the return you get on getting rid of credit card debt, whether the stock market is falling or rising.
There is a company called Credit Card Debt Reducers who is supposed to reverse interest, late/overlimit fees, and other charges.
Have you heard of them?