Get out of Debt or Save for Your Future

Are you in debt and struggling to get by? Are you working full time and making contributions to your 401k plan? If so, do you ever wonder if you should stop making those contributions until you can pay your debt off? If these thoughts have been running through your head and you are stressed that you might never get out of debt, we have the answer for you.

It’s not a surprise to see how many people fall into debt these days. Whether it’s from student loans, falling behind on the mortgage, car loans, bills, or simply just a bad habit of over spending, it can happen to anyone but what is most important is to take control as quickly as possible and get out of debt. If you end up at the end of each month with little money left over to put towards debt let alone think about having an emergency savings, you need to consider an alternative way to cut out costs. Choosing not to pay off credit card debt may lead to not being able to save for retirement or start saving at all.

Savings for retirement is important but paying interest on borrowed money is only going to make it more difficult to accumulate assets. So any credit cards with high rates should be paid off first while still setting aside some money for retirement. Remember by increasing assets or reducing debts it will improve net worth.

What you should do is determine the amount due on your credit card versus what your 401k balance would be in the amount of time you expect to pay your debt off in.

You have two options. Take the money from what you would contribute each month to your 401k and put it towards paying off your debt, meaning you would stop your contributions to the 401k during this time. Your second option is to continue contributing to your 401k but only pay a certain amount to debt each month. You need to figure out which option works better for your situation.

To figure out which option works best for your situation compare the amount of debt that would be paid off versus the amount your 401k would increase.

Simply use a calculator to figure these numbers out. To estimate how much debt is to be paid off, create a simple table.

Put the beginning credit card balance in the first row. In the second row put how much interest is owed for the month. You’ll calculate this by taking the amount owed multiplied by the annual interest rate being charged divided by 12.

Add row one and two together and subtract row three, which is the amount of the payment for the month. The result is row 4, the ending balance, which becomes the beginning balance for the next month.

A second table can be created as well for your 401k plans.

The first row is for the beginning balance. Add to that the second row, which will be investment earnings. The third row is for new contributions. The total of these three rows will be the ending balance, which is for row 4. Once again, the ending balance from one month will be the beginning balance for the following month.

Don't forget to include any employer matching contributions. They can make a big difference in your account growth. Compare the results to see which would work better for your situation.

You need to decide whether or not by stopping the contributions to your 401k and putting them towards your debt will help eliminate your debt faster or take some of the contributions and put it towards your debt while still saving for your retirement. It’s up to you to decide what to do but remember its important to get out of debt as soon as you can but also important to think about your future. If you don’t start thinking about your future it might sneak up on you faster than expected and its better to be prepared financially than to have nothing at all.

For more information regarding financial planning and other great financial resources please go to http://www.inchargeorg.org.

     

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