# Better to contribute to 401K or pay off debt

#### strantor

Joined Oct 3, 2010
6,112
I don't have any qualms about sharing my financial info here because I have relative anonymity, so rather than laying out some complex scenario, I'll just post the facts. I have 35,000$in debt that I acquired while jobless a while back. It is split between 2 credit cards at 12%APR and 10.9%APR. Now my company offers 401K matching at 50% up to 6%, so if I contribute 12%, they will contribute 6%. I am currently paying ALL of my extra money to the credit cards to get them payed off faster. If I contribute anything at all to the 401K, it will be coming from the surplus I am currently using to pay the debt, thereby increasing the length of time to get them payed off and the amount I will be spending in interest. So far all of the friends/family I have talked to say that I am lucky to have 401K matching and that I should contribute, but I am not so sure. In my mind, if the interest I am paying in debt is higher than the interest I am receiving from the 401K then I am losing. I think I should not contribute a dime until I am debt free. Am I right or am I wrong? why? and... In the online literature I was provided for the 401K they had a little calculator for how much you will save up by the time you retire, given a projected yearly raise and a given contribution percentage. In my case, assuming I work 30 years, it worked out to about 1.5million. Now, if you assume I started work in 1980 and I am retiring now, take the rate of inflation from where it was back then to now, then apply that to the 1.5M, in 2040 that 1.5M will have the buying power of about 250,000$ 2010 dollars. That's hardly enough to live 5yrs. So what I am I contributing for? I was thinking that LAND never depreciates. It will always stay at or above the value you bought it at (regardless of inflation), so if I were to take the 1.5M and save it over the years, periodically buying random plots of land near the outskirts of growing cities, wouldn't I be better set up to retire, selling the land as necessary to live comfortable? should I forsake the "generous" offer I have on the table in pursuit of what others would consider folly?

What do you think?

#### debe

Joined Sep 21, 2010
1,320
Strantor, you are only young, advice from an old timer here Get out of debt first. You wont regret it.

#### jpanhalt

Joined Jan 18, 2008
11,088
Ditto. Getting out of debt is more important, but why not do both? That is, assuming you have concluded that 401K plans are a good investment and will not be nationalized to address Federal shortfalls in areas such as Social Security.

If anyone is thinking of Benjamin Franklin's advice to the contrary, remember that he was talking about government debt. Individual debt is not the same.

John

#### mbohuntr

Joined Apr 6, 2009
441
If you pay down the credit debt first, your paying yourself at the interest rate of the loans, then max out the matching amount for the 401. Later, if your still have more to save, , a Roth IRA offers a nice shelter from the (100%) probability that tax rates will be shooting up, and you will not feel the bite from the already taxed ROTH account. You can invest it into a nice safe dividend bearing investment and watch it grow.

As for land, you better have a feel for it, of you will not make much. Land adjoining an expanding (developing) area will be the best investment, as well as some forclosures in areas that are temporarily hurting. My daughter just purchased a NEW home adjoining an expanding exclusive retirement community. She paid less for the never lived in home than it cost to build, and it should appreciate nicely in the next ten years, We are thinking of buying the adjoining lots as an investment. If you buy property, be aware that property taxes might cost you more than you will ever make on the flip. The longer you hold, the more it costs.

#### jpanhalt

Joined Jan 18, 2008
11,088
Also, if you buy vacant land for investment, getting a mortgage is not quite the same as buying for a home. If the land has buildings on it, getting insurance is also different.

Some people make good money in real estate, but there is a lot to learn. From the sounds of it (i.e., deep in debt and just starting a new job), I suggest, as before, that you be very conservative. That new job could end overnight.

John

#### Heavydoody

Joined Jul 31, 2009
140
To get a better idea, you should do a time value of money analysis, converting both installment scenarios into present or future values so you are comparing apples to apples. Such analyses can be surprising. But even then you have to make certain assumptions, such as the expected rate of return on the 401k (assuming it will even be there in the future).

#### strantor

Joined Oct 3, 2010
6,112
That is, assuming you have concluded that 401K plans are a good investment and will not be nationalized to address Federal shortfalls in areas such as Social Security.
Not sure if I am to read that as spoken with a hint of sarcasm or not.

... expected rate of return on the 401k (assuming it will even be there in the future).
I get the feeling that you are both hinting at something there that I am totally in the dark about. Is there any reason I should fear my 401K being absconded by the government?

#### Wendy

Joined Mar 24, 2008
23,052
Naw, I don't think so. A 401 isn't as safe or secure as we'd like, as the last financial collapse illustrated, and current politics loves fear mongering. A lot of people lost almost everything in their 401's due to the corporate shenanigans. Nuff said. Unfortunately, it is the only game in town for retirement. Letting money sit idle doesn't work either, with inflation.

#### Kermit2

Joined Feb 5, 2010
4,162
In a very simplistic manner of explanation

Money under a mattress can't be 'lost' in a digital banking meltdown, or by EMP from a terrorist nuke.

#### strantor

Joined Oct 3, 2010
6,112
In a very simplistic manner of explanation

Money under a mattress can't be 'lost' in a digital banking meltdown, or by EMP from a terrorist nuke.
Wow, I guess I forgot to factor in global calamity. If we're going to take this down that road, the GOLD under a mattress would be a safer bet yet, considering it wouldn't take much to make "money" worthless. I still think land is a safe bet.

#### mbohuntr

Joined Apr 6, 2009
441

#### GetDeviceInfo

Joined Jun 7, 2009
2,118
from Canada so I can't comment on the 401k. In my mind, there are two kinds of debt. One that is backed by equity, and the other is not. Move out of the latter as soon as possible, which allows you to contribute to the former as soon as possible.

#### jpanhalt

Joined Jan 18, 2008
11,088
Wow, I guess I forgot to factor in global calamity. If we're going to take this down that road, the GOLD under a mattress would be a safer bet yet, considering it wouldn't take much to make "money" worthless. I still think land is a safe bet.
Just look at gold in the past year. Why has it been one of the best investments?

I don't consider gold as an equity investment (its appreciation is taxed as ordinary income); moreover, the government under FDR seized all privately held gold and gave effectively trivial compensation. Such things can and have happened in the US. However, I have known several individuals from China who escaped Mao to Hong Kong and the Philippines with only gold and the cloths on their backs.

To me, gold is like a safety parachute. You have it only to save your family's lives. Ask yourself, if the economy collapses or there is civil war as in Libya, and you are forced to emigrate, like so many of our parents and grandparents did from their homes, how much gold would it take so your family could survive for a few months?

John

#### VoodooMojo

Joined Nov 28, 2009
505
Rare Earth Metals is it for a rocket ride of investment return but it must be watched closely and remember to get out after your first killing and not be greedy.
China will probably control the output of rare earth metals much the same way opec does oil to maintain a high value.
gold can be whimsical
a beginning market for rear earth

tongue in cheek....

#### Duane P Wetick

Joined Apr 23, 2009
435
Here are Adam Smith's best investments (places to park your money to get the best return yield) in 1980, 1 being the best:
1. Gold
2. Oil
3. Silver
4. U.S. Stamps
5. Chinese Ceramics
6. Rare Books
7. U.S. Coins
8. Diamonds
9. Old Masters (paintings)
10. U.S. Farmland
11. Housing
12. CPI (consumer price index)

Knowing what you know today (31 years later), do you still think these are the best investments to grow your money? Notice where the stock market is on this list.

ie; Paper Money, Adam Smith ISBN 0-671-44825-0

Cheers, DPW [ Everyone's knowledge is in-complete. Albert Einstein]

#### K7GUH

Joined Jan 28, 2011
190
Gotta put my 2 cents worth in. If you are eligible to join a credit union, do so, and borrow some convenient sum (which you can afford to pay back), use the proceeds of that loan to pay off some / all of the more burdensome credit card. If you are the bold and confident type, go talk to the loan officer(s) at the credit union about borrowing enough to pay off one of the cards. The payments and the interest will be a lot less than those of the predatory lenders. It's worth a try. And yes, get out of debt first, then contribute the max to your 401k. Better yet, contribute the max to a Roth IRA first, then to the 401k. Consider investing the Roth funds in "The Dogs of The Dow", or at least in the "small dogs". It isn't 100% blunder proof, but is a lot better than 100% blunder.