Should I Contribute To My 401(k) or Pay Off My Credit Card Debt?

It’s been over a decade since the Great Recession swept through the nation, yet two-thirds of Americans said they still feel haunted by its effects in the way they work, live, save and spend, according to a study from Allianz Life Insurance Co. Many of the 2,000 baby boomers and Gen X-ers studied also said they had lower confidence in their ability to achieve financial security. This has only been worsened by the coronavirus pandemic and its affect on unemployment in the U.S.

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For workers who hold credit card debt, which is more likely to lead to a secure future: diverting what would’ve been their retirement plan contribution and paying off that debt instead or making their 401(k) plan a priority? Here are some pros and cons associated with each of these money moves.

The Pros of Paying Off Credit Card Debt First

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Related: 11 Steps for Paying Off Credit Card Debt in 2021

And the Cons

The Pros of Contributing To Your 401(k) First

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And the Cons

Katie Brewer, a certified financial planner and president of Your Richest Life Planning, a virtual financial planning firm for Gen X and Gen Y, said it was best if people could pay down debt while also building up their assets. She said people might want to consider cutting their spending by eliminating monthly cable or subscriptions, for example, and taking on temporary work to get more income.

“Once you start to make room in your budget, make sure you are (contributing enough to) at least get the match on your 401(k),” she said. “If you are contributing more than the match to your 401(k) plan and you are working on credit card debt, you might think about temporarily reducing your 401(k) contribution to allow more take-home pay to put toward credit card payoff. If you reduce your 401(k) contribution, make sure to put a reminder on your calendar to adjust it back.”

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Jeff Rose, a certified financial planner and founder of Alliance Wealth Management, is also the author of the Good Financial Cents website. He said there were lessons to be learned when workers contribute to their retirement plan. So they shouldn’t pay off credit card debt at the expense of saving for retirement.

“They should do both, even if it’s only putting the minimum amount in their 401(k),” he said. “This way they get familiar with their 401(k) and how the markets work. It might not be a lot toward their retirement, but it will be a valuable lesson learned in understanding how to read a 401(k) statement and a good introduction into mutual funds.”

Strategies To Eliminate Credit Card Debt

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You can’t become a 401(k) millionaire if you’re not contributing to your plan. According to Fidelity Investments, about 72,000 participants in their plans had a balance of $1 million or more at the end of 2014. What was the common thread among them? They contributed a significant amount of their salary faithfully to their 401(k).

If you are in deep credit card debt, devise a plan to pay it off. Keep your spending under control. Contribute as much as you can to your 401(k). Put your financial security first.

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