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Author: hberes One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 25242  
Subject: Re: 401k or reduce debt? Date: 5/12/2001 11:45 AM
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Sounds like a simple question with a "foolishly" simple answer, right? But I'm a bit confused. I have a large load of debt ($25K) half of which is at 9.9% permanently, and the other half is at 2.9% until Oct 2001, when it will go up to $12.9. So, it's not as bad as an 18% credit card debt.

As for my 401k, if I invest into my 401k the $10,500 allowable amount, it will reduce my taxes by $3000. Here is my company's 401k matching plan:

<<Company Matching Contributions
To encourage you to contribute, the Company contributes one dollar for every
before-tax dollar you contribute, up to 3% of your pay; and 50 cents for
every before-tax dollar you contribute between 4% and 5% of your pay.You
must complete one year of service before matching contributions are given.

Investment Choices
You may choose to invest your contributions in any of a number of investment
funds and your earnings are tax sheltered as long as they remain in the
Plan.>>

So, the question is, do I invest in the 401k when I could be putting those funds toward my debt? It seems to me that the company won't match me until I have invested for a year. I know I will pay $3000 more in tax if I don't, but it could be worth it longer term if I don't have the debt hanging over my head. Is someone a whiz with a calculator out there? :)

Thanks!

Kidneygirl


To me, "You must complete one year of service before matching contributions are given." means that you must be with the company for at least a year before you're eligible for matching funds. You might want to get clarification on that.

The general rule of thumb is to never pass up free money. If you're eligible for matching contributions, you should put enough money in your 401k to get all the matching you can. After that is where the decisions come in.

It sounds like you don't have enough money to max out your 401k and pay more than the minimum on your debts. You have:

12.5k @ 9.9%
12.5k @ 12.9% (2.9% until Oct.)

I would throw every dollar you can at the 12.9% debt, especially while it's still 2.9%. You're paying:

* $103.13/mo interest on the 9.9% debt
* $30.21/mo interest on the 2.9% debt which will turn into...
$134.38/mo interest on the 12.9% debt
(with a $12,500 balance each)

So, at best you're paying $133.34/mo just in interest on your debt. I'm sure you could find a better way to spend $133.34 every month than in interest. I would focus on eliminating your debt as soon as possible. Your money should work for you, not against you.

-H
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