May 27, 2012

Do I Save or Pay Off Debt

Save or Pay DebtMany people wonder if they should put money in savings or invest, or if they should instead prioritize repayment of debt.

There are many different perspectives on this question; however it’s best to start by determining the type of debt involved, and it is typically a good idea to eliminate credit card and other high-interest loans before you do other things with your cash. On the other hand, you probably don't want to accelerate mortgage or student loans at the expense of saving for retirement.

Saving for retirement makes more sense once the high interest debt is paid, with one exception. If your employer offers a 401(k) plan and will match your contributions up to a certain level, you should consider funding it to that level, despite your level of credit card debt (assuming you are able to make the payments). Save or Pay Debt2

If you are overwhelmed in debt, you should consider selling your assets like stocks and using your savings to pay off your credit cards. If you are in a particularly bad spot, you can borrow up to 50% (or up to $50,000) from your 401(k). Note that you will have to pay the amount back immediately if you leave your employer.