Max out the 401k or pay down debt? (It’s Dilemma #1 in that story)
For me, that’s been my struggle in deciding what to do about this dilemma in 2008. Because clearly, I put a lot of money into my 401k plan in 2007 and hardly paid down debt though I did a good job tackling the dental bills which my insurance declined to cover instead of creating more credit card debt.
So dear readers, I understand that I should both save and pay down debt because I can. Now my problem is that I want to know if I should max out the 401k or not. Matching is all well and good. Basically with matching, I can save 12% of my salary with the minimum contribution to get it. That’s easy. My problem is that to get a grip on all that credit card debt and still live without racking up more debt, should I max out at 20% at the beginning of the year and ease off to have lots of cash to pay off debts in the second half of the year? Hm. That’s a new strategy I hadn’t considered yet. *ponders*
Goal Plan A:
1. I could max out my 401k contribution at X%.
2. I could halve my credit card debt in 2008 with ~$750-800 a month in payments.
Goal Plan B:
1. I could put in the minimum to get corporate matching which would still save me about 12% of my salary annually.
2. I could put $1200 a month towards credit cards.
3. Build back my Emergency Fund to $4k.
*******
I simply hate budgeting. I only hate it because I can’t keep track of what I actually spend. Even if I pay for it all by credit card and download into Quicken, I still seem to lose track of stuff. I am trying as best I can to move simply to paying for stuff with cash or by debit card only. Budgeting, as a discipline doesn’t actually bother me. I think I make enough and realize how I frivolously spend money to know I can stop buying stuff and not feel deprived. Heck, I checked Quicken and in the last 3 months, I haven’t bought any yarn for me. I didn’t even notice it. (2007 Rhinebeck spending was either ‘Gifts Given’ or ‘Vacation’ budget line items in Quicken, and not ‘Crafting’. The handmade soaps I bought there went over well with my knitting group last night.)
Now, I have to wait till my 2008 paychecks start rolling in, but I think I can get all my monthly fixed expenditures down to one single paycheck. (I usually get two per month.) That means, I can divide the second check in two parts. About $600-700 more to credit cards, and the rest into my pocket to spend on everything else, the variable monthly expenses, savings, etc. so I don’t rack up more credit card debt. Is this a better budgeting path for me?
I dreamed that scenario up because I wanted to see how I could make Plan B work. I am having the absolute worst time figuring out what to do.
The only good thing is that all of this includes doing laser eye surgery as built-in cost for the year with Medical FSA funds. Without question, I have the money for it. My last dental crown will be about $1000, but I’ve decided to wait a tad longer so I can get my teeth whitened first.
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{ 3 comments… read them below or add one }
Well, I suppose if you wanted to take an analytical approach to this you would estimate what you think the market will return over the next few years versus how much interest you are paying on your debt. However, I don’t think you should follow this approach.
I hate to get all Suze Orman-ish on you but debt is more than numbers, it carries some serious emotional baggage that I’m sure you’re aware of. Removing debt allows you so much more freedom in your life. Think of how many decisions you make based on how much debt you have. Now remove that debt and you’ll have one giant less thing to worry about or consider. Priceless. Reducing debt is like a George Forman grill but instead of knocking the fat out of a greasy hamburger, it knocks the fat out of your financial decision making allowing you more freedom to enjoy your life.
So contribute enough to get your company match but focus the rest on your debt and building up that emergency fund (i.e. your Plan B). I wouldn’t try to front-load your 401(k) at the beginning of the year since I think having a consistent, automatic budget every month is important plus I don’t see the benefit unless you know the market will be lower in the first half of the year than the second half.
p.s. I hate budgeting too and tried to get on the Quicken or MS Money train many times but failed. Now I just keep two Excel spreadsheets. One that itemizes all of my recurring monthly expenses (rent, utilities etc.) so I know how much “free” money I have to play with and the other that tracks all of my accounts (retirement, brokerage etc.) each month so I have a running tally of my net worth. This works for me but I only analyze my big purchases. I’ve gotten into a financial rhythm where I don’t overspend on the small things so I can safely ignore them.
Good luck.
I’d choose Plan B simply because I’d want to be rid of that CC debt – pronto.
I think you’ve realized that saving is easy. They take the money out of your paycheck every month, you never see it, and at the end of the year you have big balances in your account. I think that’s why you tend to want to go that route, because it’s easy, and saving for retirement is a good thing.
Paying off debt and controlling your spending are much harder. These are your shortcomings, your greatest “fiscal challenge”. I think that 2008 should be the year you tackle these things.
Take a page from your new friend Single Ma’s book. Be debt-free and fabulous!