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[kryptonite]

I have a question for those of you who are savvy about personal finance.

Here's the situation. I have significant credit card debt from a period a few years ago when I had a back injury that was not covered by health insurance. I couldn't work for about three months, so my savings were depleted and all the medical expenses went on the credit card.

Now, I have a great job, and I'm earning enough that I am able to save some for retirement, start to pay down the credit card, and put some into savings.

Would it be best to postpone paying into a retirement fund and put all of that money into paying off the credit card? If I do this, I will be able to pay off the credit card in about 8 months.

I'm starting to save for retirement at a late age, by the way, as so many workers in the creative arts do.

[ideagirl]

Would your employer offer matching contributions if you were socking money away in a retirement account? If not, definitely pay off your cards first. Even if they do, consider paying off your cards first--that's what Suze Orman says. Read her answer to Scenario Number 2: http://www.msnbc.msn.com/id/21793722/

I know everyone says "contribute to retirement accounts to take advantage of interest compounding over time," but credit card interest also compounds over time--in the opposite direction to what you want. So if your cards are at 15%, even looking long-term (i.e. now until retirement), your retirement accounts are expected to average maybe 12%... so while you're socking away money in the retirement account to get that 12% compound interest, you're simultaneously losing money at a faster rate by leaving those balances at 15% on your cards.

So the only way it would make sense to contribute towards retirement before the cards are paid off is if they're at less than 12%. But in your case even that probably wouldn't make sense, since your cards could be paid off in 8 months--i.e., you shouldn't be comparing your credit card interest to the long-term return on stocks (12%), you should be comparing it to the return you can reasonably expect from your retirement account in the next 8 months. Given how the stock market's doing lately, ugh, that's not pretty. Frankly, -12% seems more likely!

So the only way it could possibly make sense is if your employer matches your contributions. And even then, you still should do the math: what interest rate are your cards at, and what will you pay in interest if you pay them off in 8 months, vs. in however long it would take if you diverted some money into a retirement plan instead? If you contribute X amount to retirement in the next 8 months, how much will your employer contribute? Is what they'll contribute enough to offset what you'll lose in interest by letting that credit card debt sit there? Probably not... hence Suze Orman's answer, at that website above.

[prytania3]

Pay off the credit cards first. There is no investment in the world (except maybe shorting mortgages and the housing industry) that is going to bring in the type of percentage return the credit cards will cost you.

For example: Credit cards 15% interest
                  Savings or investment 8%

It behooves you to pay off the credit cards first.

[clean]

Im in the Pay off the debt first crowd.  I suggest you pick up a copy of Dave Ramsey's Total Money Makeover.

He is so hard core about getting out of debt that he would stop all retirment savings while you are in debt, even missing the match.  Part of the reason is that missing the match brings pain.  We avoid things that hurt, so we will avoid going back into debt.

Finally, when you are out of debt, think about how much extra you could save when you are sending to your investment accounts what you used to be sending the credit card companies!

Good luck,

clean

[kryptonite]

It seems that there is a consensus here: paying off debt before saving for retirement is the way to go. I will work on this this week. And check out that money makeover book.

Yes, I do get matching funds paid by my employer. Well, they don't match the amount I put into my TIAA-CREF account, but they pay a smaller amount than I do, which is a percentage of my salary.

Another possibility occurred to me...if I put everything I have in two savings accounts toward the credit card debt, that would wipe out about 75% of the debt. Perhaps using savings to pay off debt is better than using money that had been going to retirement savings. The problem with this scenario is that I would have to start building up my savings again from scratch, and would be without an emergency fund for a month or two.

[clean]

You have savings AND debt? 

If you think about it, most credit cards are run by banks.  You are essentially lending the bank money at 2% (your savings account) to borrow it back from them at 18+%.

Dave Ramsey's book would have you use all but $1000 (your baby step 1 beginner emergency fund)  of your savings to pay down the debt. 

Baby step 2 is to stop all savings of any kind, make minimum payments on everything, and dump everything else on the smallest debt. Once that is paid off, dump everything on the next smallest one.

After you are debt free, it wont take long to fully fund an emergency fund of 3 to six month's worth of expenses.  (Baby Step 3).

You will also need a written budget.  His book will help formulate one too.

IF you can get rid of almost 3/4 of the debt in one fell swoop, why not do it?  Think about the day that you will actually be working for yourself and get to keep your income instead of working and sending it all to the bank!

Break the chains of debt bondage!  There is a reason it is called MASTER Card.

clean

[ideagirl]

Another possibility occurred to me...if I put everything I have in two savings accounts toward the credit card debt, that would wipe out about 75% of the debt. Perhaps using savings to pay off debt is better than using money that had been going to retirement savings. The problem with this scenario is that I would have to start building up my savings again from scratch, and would be without an emergency fund for a month or two.

Do it! It's pointless to have savings accounts when you're still paying down credit cards! So you're without an emergency fund for four to eight weeks--IF an emergency arises during that time, then you'll have to pull out the credit cards again to pay for it. So? That would leave you no worse off than you are now.

[pedanterast]

You have savings AND debt? 

If you think about it, most credit cards are run by banks.  You are essentially lending the bank money at 2% (your savings account) to borrow it back from them at 18+%.

Dave Ramsey's book would have you use all but $1000 (your baby step 1 beginner emergency fund)  of your savings to pay down the debt. 

Baby step 2 is to stop all savings of any kind, make minimum payments on everything, and dump everything else on the smallest debt. Once that is paid off, dump everything on the next smallest one.

After you are debt free, it wont take long to fully fund an emergency fund of 3 to six month's worth of expenses.  (Baby Step 3).

You will also need a written budget.  His book will help formulate one too.

IF you can get rid of almost 3/4 of the debt in one fell swoop, why not do it?  Think about the day that you will actually be working for yourself and get to keep your income instead of working and sending it all to the bank!

Break the chains of debt bondage!  There is a reason it is called MASTER Card.

clean

It sounds to me like she has investments and debt.  Here we go again.  We need to know the match percentage and the rate on the debt, not just knee-jerk Dave Ramsay Dave Ramsay Dave Ramsay. 

[pedanterast]

Tried to modify my post.  What do they give you, two minutes?  Here's my revision:

It sounds to me like she has investments, and savings, and debt.  Here we go again.  We need to know the match percentage on the retirement plan and the rate on the debt, not just knee-jerk Dave Ramsay Dave Ramsay Dave Ramsay. 

But yeah, savings and debt at the same time most likely does not make sense, although if the debt is 2.9% tax-deductible student loans it actually could.  Prytania may have 15% credit cards; I don't.

The math may be beyond the OP's understanding but to simplify:  say the match is 3% and you are putting in 5%.  Every five dollars you put in gets you $8; 8/5 = 1.6 so if the credit card rate is less than 1.6 times you think you can earn on your retirement fund, that argues towards contributing to the retirement. 

That's an oversimplification because the higher the university contribution, the greater the dollar amount, regardless of the ratio, but it's a starting point.

Baby step #1 might be the ideal thing for this poster but it is too oversimplified.  My guess is she has no emergency fund and so there could be liquidity issues.

Stopping all savings, when one form of savings (the retirement match) is free money, is bad advice in many cases.  Clean flamed me for this before and got pretty personal about it.  Recently he's been ducking the issue.  Never has he provided any empirical support for his point of view.

Maybe I will change my screen name to Dirty but Clean has to stop with the generic Dave Ramsay advice and tailor himself to individual situations more, in my opinion.

[bigsky]

Tried to modify my post.  What do they give you, two minutes?  Here's my revision:

It sounds to me like she has investments, and savings, and debt.  Here we go again.  We need to know the match percentage on the retirement plan and the rate on the debt, not just knee-jerk Dave Ramsay Dave Ramsay Dave Ramsay. 

But yeah, savings and debt at the same time most likely does not make sense, although if the debt is 2.9% tax-deductible student loans it actually could.  Prytania may have 15% credit cards; I don't.

The math may be beyond the OP's understanding but to simplify:  say the match is 3% and you are putting in 5%.  Every five dollars you put in gets you $8; 8/5 = 1.6 so if the credit card rate is less than 1.6 times you think you can earn on your retirement fund, that argues towards contributing to the retirement. 

That's an oversimplification because the higher the university contribution, the greater the dollar amount, regardless of the ratio, but it's a starting point.

Baby step #1 might be the ideal thing for this poster but it is too oversimplified.  My guess is she has no emergency fund and so there could be liquidity issues.

Stopping all savings, when one form of savings (the retirement match) is free money, is bad advice in many cases.  Clean flamed me for this before and got pretty personal about it.  Recently he's been ducking the issue.  Never has he provided any empirical support for his point of view.

Maybe I will change my screen name to Dirty but Clean has to stop with the generic Dave Ramsay advice and tailor himself to individual situations more, in my opinion.

Pedanterast, it sounds like you are taking things personally and turning advice for others into attacks on you. Clean doesn't need my defense but he has offered the best financial advice on this forum, hands down. Whether his advice is grounded in Ramsey's book or not shouldn't matter, it is simply his opinion.

[wanna_writemore]

I'd keep putting enough into retirement to get the match, and use the savings to pay off the CC debt.  If you really can't handle not having savings, just drastically lower the amount you put into savings (instead of $500, $50 or $100).  Or just use most of the savings.  It's also amazing how much most of us can save if we REALLY focus on it - just a few months of real frugality can make a real difference for a lot of people.

[kryptonite]

Thanks all. This is helpful.

I received my first paycheck from my new tt job just one week ago. My financial life is looking much, much brighter already. Before starting my new job, I was a contract worker for many years so I needed to hang onto the savings as a cushion for slow times.

I've lived on a limited income for many years, so I already have a budget and keep close track of monthly expenses. I've managed to handle this debt for two years now, with no late payments and making several payments a month most months, despite not having a predictable income stream. Things will be much easier financially for me going forward.

I'm still marveling at the concept of matching funds! It's a novel experience. Life is much easier as a regular employee.

And speaking of ease of life, I'm also marveling at how shockingly unfair it is that the self-employed and other workers have to pay so much more for individual health insurance - and pay with after-tax money no less - than those who get it through an employer.

[ideagirl]

And speaking of ease of life, I'm also marveling at how shockingly unfair it is that the self-employed and other workers have to pay so much more for individual health insurance - and pay with after-tax money no less - than those who get it through an employer.

Welcome to America. Every other country in the developed world has universal healthcare...

[pedanterast]

I don't take what Clean says personally nor do I view it as an attack on me.  It obviously isn't.  I just think his advice is too cookie-cutter.  Too one-size-fits-all.

[pedanterast]

So lately I've had some time to research this Dave Ramsey that Clean is always talking about.  #1 and importantly, the guy went bankrupt.  I mean literally.  He declared personal bankruptcy.  So now he is giving financial advice?  Pretty shaky.  He has a bachelor's degree but no advanced degree or credentials I was able to find.  Correct me if I am wrong.  Also he apparently approaches financial planning from "an Evangelical Christian perspective."

You guys can do your own research but I am not the first person to question Ramsey's advice, and thus Clean's advice, for offering "cookie cutter" solutions.  Other sources have referred to them as "overly simplistic" and so forth.

So, Clean, two questions:

1)  Do you have a financial relationship with Ramsey?  Do you profit from promoting him?
2)  Is your PhD in finance from an AACSB accredited program?

Just curious!