Put money toward 401k or credit card debt?
July 22, 2016 2:15 PM   Subscribe

Do I put pennies toward my empty, matched 401(k) or pennies toward my slowly accruing credit card debt?

Hi all,

I am eligible for a 50% employer match (up to 6%) to my 401(k).

I have ~$4000 credit card debt at a 13.24% interest rate on one card.

I live paycheck to paycheck, and often I fall short, so I continue to add around $200/$300 to my credit card each month to cover me between paychecks, then usually pay like half of that when my bill is due. Point being, I am continuously accruing debt, little by little.

Since I have an employer match, that's pretty much 'free' money, or so all the articles tell me. I definitely can't afford a 6% contribution, but I thought maybe I could try a 1% or 2% match, which would be $40-$80 a month. I know it's not much, but I'm in my 30s and this is the first time I've even been able to have a retirement account of any kind so I feel like I'm very behind and need to do what I can to try to build some kind of fund.

My math is poor, but as far as I can tell, I should just scrap the whole 401(k) thing until my credit card gets paid off. But what if my credit card never gets paid off? Then I never get to retire?

I live very frugally, but in a very expensive city and am single. I cannot move to a cheaper area because my career requires me to be here. My income is going up as I get raises, but my cost of living keeps going up too, so unless I get some major windfall soon, assume that my income/living circumstances/spending habits won't change any time soon. What is my best choice: Putting a teeny bit of money in my 401(k) or continuing to tackle my never-ending credit card debt?

Any suggestions other than 'make more money' or 'spend less money' to help my circumstances improve?
posted by anonymous to Work & Money (19 answers total) 2 users marked this as a favorite
Without any alterations to your situation or lifestyle? Try and pay off that credit card first, full stop.
posted by deadwater at 2:19 PM on July 22, 2016 [2 favorites]

Well, you're not actually putting money toward credit card debt if you're accruing more debt every month. In effect you'd be borrowing money from your card to put into retirement, and I don't think you'll find anyone who thinks that's a good idea. Keep working toward paying down the card.
posted by Huck500 at 2:21 PM on July 22, 2016 [11 favorites]

I am continuously accruing debt, little by little

I wouldn't use the word "little" in this situation. This is a debt emergency considering the ongoing principal accrual rate and interest rate. To answer your stated question, no, do not fund the 401k.

Other suggestions... Bankruptcy? Cut up your credit cards and negotiate a settlement?
posted by supercres at 2:22 PM on July 22, 2016 [4 favorites]

I should just scrap the whole 401(k) thing until my credit card gets paid off. But what if my credit card never gets paid off? Then I never get to retire?

Your read is correct. Pay down/off credit card. You need to work a little lower down on the hierarchy of needs (savings, emergency buffer) before you start worrying about retirement. Lots of people retire without 401ks
posted by jessamyn at 2:23 PM on July 22, 2016 [1 favorite]

Scrap the 401k contributions for now. The amount that you are losing to interest debt outpaces the gains you are getting from the employer match.

You would be better off paying down the credit card as fast as possible, then contributing to your 401k at an accelerated pace in the future.

If possible, you should also try to save up an 'emergency' fund that you do not touch except in true 'emergency' type cases.

Also, consult the Personal Finance subReddit, where you will find a treasure trove of good advice given to people in similar situations to yours.
posted by BrandonW at 2:23 PM on July 22, 2016 [2 favorites]

Any money in your 401K can't help you until retirement, while if you keep going accruing debt eventually you will max out your credit cards, especially if some unexpected expense comes up. Pay off your credit cards as much as you can. Furthermore, you are basically in an ongoing financial crisis, and I think having money in a 401k gives an inaccurate sense of financial security.
posted by permiechickie at 2:23 PM on July 22, 2016 [6 favorites]

Put the money toward your debt. While the employer match is free money, carrying credit card debt costs you money.

As for improving your circumstances, spending more than you earn is not sustainable over the long term. It's sustainable short term (as you're doing), and you may go on for quite a long time gradually increasing your debt, but eventually something will have to give. Hopefully your circumstances will change and you'll be able to pay down the debt; if they don't, you'll eventually stop being able to afford the minimum balance and/or hit your credit limit, either of which will mean that you lose access to credit. I believe you that you can't earn more or spend less right now - it's unfortunately a far too common situation for people to be in - but keep your eyes open and realize that at some point, something will need to change.
posted by insectosaurus at 2:24 PM on July 22, 2016

How's your credit? If it's good enough to qualify for a 3% balance transfer (with 0% interest for XX time), I'd look into doing that first. The $120ish one-time hit is likely worth it.

Next, you need to figure out a way to stop adding $100-$150 to your debt load every month. Sell stuff? Second job? Drive an Uber? Something to get you an extra, say, $50 a week (to give you some cushion).

Once you are not adding to your debt monthly, then you can at least consider adding in a 401K contribution. Numbers wise, you're probably better off focusing on debt elimination first, BUT, there is something about the 401K contribution coming right off of the top of every check that makes it easier to be disciplined about that money (since you never get to touch it).

But then, emergency fund and debt paydown need to be your priorities.
posted by sparklemotion at 2:26 PM on July 22, 2016 [10 favorites]

Generally, nobody is approaching in earnings percentage-wise the level of their debt.

Don't spend money on +4% and ignore -15%. Crush that debt and then save, save, save.
posted by Sphinx at 2:29 PM on July 22, 2016

I live paycheck to paycheck, and often I fall short

If there is anything at all you can do to not fall short, you need to do that ASAP, because that credit card debt, at that interest rate, is going to eat you alive.
posted by zippy at 2:30 PM on July 22, 2016 [12 favorites]

You need to pay your credit card. I figured this would be the case (your matching is tiny compared to the amount your credit card is increasing), but I thought I'd actually do some modelling.

  1. No inflation/current value of money.
  2. Starting assets: $0, starting liabilities: $4000.
  3. Credit card interest rate is 13.24% indefinitely and has an infinite credit limit (this is not obviously not that reasonable)
  4. 401(k) average growth: 7% annually.
  5. Average deficit of $125/month.
  6. All interest is calculated monthly.
From this, I ended up with the following results to your net worth after 30 years from now:

$0 to 401(k), -$125 to credit card: -$785K
$50 to 401(k), $25 matching, -$175 to credit card: -$924K
$100 to 401(k), $50 matching, -$225 to credit card: -$1.064M (yes, million)

Basically, you need to fix your deficit. That said, if you don't fix your deficit, you aren't going to make it any better by borrowing from your credit card to pay for your 401(k), which is what you are proposing doing.
posted by saeculorum at 2:33 PM on July 22, 2016 [7 favorites]

Generally with matching, it's advisable to take that free money off the table before anything else. But you said you can't afford it, which is a big red flag. You should not (effectively) borrow from your CC to fund your 401k in any case. Full stop: you need to kill your debt.

Secondly, it's time to budget. Budgeting is the biggest single improvement you can make to your financial health (probably more than getting a big raise). It's important that you understand where your money is going, and what you're getting for it. Budgeting is a judgement free zone -- you don't need to live like a pauper, but you really do need to know what you spend money on. Without really understanding that fully, it is impossible to make better decisions about your spending. You will find that "spending less" becomes almost automatic when you you have a budget, simply because you think just a tiny bit harder about your expenses up front.
posted by so fucking future at 2:43 PM on July 22, 2016 [3 favorites]

It sounds to me like you're asking whether you can go $40-80/month more into debt each month to get your 401k matched.
posted by aniola at 2:53 PM on July 22, 2016 [2 favorites]

Yes, budget. Where are you going over into your credit card every month?

Two - find one of those balance transfer offers. Your bank may actually offer you one so they can centralize all your money.

People do retire without a 401k, and then they have to get a job so they can live. Don't put off the matching too long. Get a handle on your budget. Find a way to get out of a 13% interest credit card- because that's an insane amount to be paying in this low rate control environment.

Living expenses can be defrayed by shacking up - no roommate possibilities? Maybe a slightly longer commute (which usually translates to cheaper rent)? Get a bicycle instead of paying train/bus/other? (also, on the commute thing - many companies in cities offer transit-check discounts that help pay for commuting costs as a free benefit)

Also, part of budgeting should be working with who you need to pay bills to in order to have your bill cycle match your pay cycle. That way you won't need to gap-cover expenses with your credit card.
posted by rich at 3:02 PM on July 22, 2016

> I cannot move to a cheaper area because my career requires me to be here. My income is going up as I get raises, but my cost of living keeps going up too

Your raises are not outpacing your losses. It is possible that you cannot afford your career.

Can you pivot into a higher paying career? A lower paying career in a more affordable area?

> unless I get some major windfall soon

Windfalls are nice, but won't be enough. You have to change things under your control to get back to a sustainable trajectory.

You're falling short by around $3,000 a year. You can probably expect to live another 50 years. You'll probably stop working at some point in there, and your medical costs will likely rise as you become older. Your unpaid debts will grow larger with interest, and inflation is likely to continue. Thus, even a $150,000 windfall ($3k * 50 yrs) today wouldn't solve things. You would need a windfall many times larger than that.

> Any suggestions other than 'make more money' or 'spend less money' to help my circumstances improve?

The specifics are up to you, but ultimately those are the only two options. Just as you wouldn't expect to gain weight without eating more calories than you burn, you're not going to get out of debt without making more than you spend. You have to get to a point where ($in - $out) is a positive number.

Good luck! This stuff is hard, but you're doing awesome by asking questions and trying to figure out how to make it work. You'll get there!
posted by SemiSophos at 5:27 PM on July 22, 2016 [2 favorites]

Yeah, you're right to be concerned about the prospect of never saving for retirement, but going deeper into credit card debt to do so isn't the answer. So for the question you asked: pay towards your credit card.

But I'd suggest you come back to AskMe next week with a question about how to improve your financial situation, including lots of details... we can't really help you without the specifics, all we really can say is "make more and/or spend less." If you share the details, there's a good chance we'll have advice for you.

(For example, I feel like there's probably some way for you to keep your living expenses from increasing enough to eat up your raises, but it's hard to say without the details.)
posted by EmilyClimbs at 6:55 PM on July 22, 2016 [1 favorite]

Absolutely pay off your credit card debt first. Definitely agree with those saying you should look at doing a balance transfer or otherwise restructure your debt so that you can either get lower interest or some interest-free promotional period. Then, once it's paid, you need to keep from accumulating a balance again. Cut up your card if you have to. Figure out a way to live within your means, otherwise you'll end up right back where you started. Sorry if this becomes the "spend less money or make more money" advice you're hoping to avoid, but there is literally no other way to get out of this situation and up to at least break-even status, to say nothing about saving money for retirement in a way that will be useful to you. Continually having to use your credit card to cover a paycheck shortage is not sustainable, and will eventually bankrupt you.
posted by Aleyn at 8:00 PM on July 22, 2016

Is there a Dave Ramsey group near you? This is just the kind of financial dilemma often discussed at the meetings from what I understand from a friend who leads some of the meetings.
posted by Elsie at 6:42 AM on July 23, 2016 [1 favorite]

Is bankruptcy, now or in the future, an option? If so, that could possibly matter. I'm not at all an expert, but according to a quick web search, a 401k MAY, in some circumstances, be exempt from creditors' claims in a bankruptcy situation. I'm not saying fund your 401k and then declare bankruptcy, and probably everyone here know why that's a dumb idea, but I think it's worth contemplating all the possibilities to get a better understanding of your situation.
posted by J. Wilson at 7:05 PM on July 23, 2016 [1 favorite]

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