Joe sent me a question about priorities. He feels his chosen career path is not one destined for the big bucks, but in pursuit of said career, he has racked up some debt. Fair enough, that’s a common situation. He also has some decent retirement investing options laid out in front of him by his employer.
The perennial question is whether it is worthwhile to wait before taking advantage of his employer’s matching retirement contributions in order to to use what cash he has available to pay off debt.
His full email and my response follow. Please feel free to add in your opinion in the comments. I am not a financial advisor and I know I have readers who have experienced all kinds of situations and have infinite wisdom as a collective.
I am 30 years old, and will be getting my BA in urban planning next Spring 2008. I have already incurred roughly $12,000 in subsidized student loan debt. I plan on going to grad school in international development, so I’m not “banking” on a super lucrative career (but who knows?). Anyways, aside from my student loan debt that I have and will continue to pile on, I have roughly $6,000 in car financing debt left. I currently have about 5 credit cards with small limits on each one totaling about $5,000 in debt, but a few of them have really high rates (one has 28% – yes I know I have to get rid of that puppy!).
Now, I work at a university where they allow me to contribute 5% to a Vanguard retirement account and they match 10% into my account. I signed up for it, but now I am thinking that was a mistake. Should I not get rid of the debt before I invest in retirement? Money is pretty tight for me since I am still a student so even if they take about $120 a month from my paycheck, that is still a relatively big chunk for me. Also, if I will not be going to grad school at where I am currently employed, or if I don’t have a career here (I don’t think I will), then wouldn’t it be wiser for me to opt out of the Vanguard retirement account since I would only put money into it for about a year and then close it out? Wouldn’t it be better if I just put the money towards eradicating debt?
Lastly, I have something called a CAP account where I earn between 7-8% interest which was left over from my last employer. I cannot put any money into that account and it has not made a lot of money over the years so I am thinking about cashing it out and using the funds (even if I lose 20% to the government) towards paying off debt. Also, I have another dormant retirement account with TIAA CREF worth about $1,100 so I am thinking of cashing that out to pay off debt too.
Do you think I am thinking wisely here or would you recommend a different course of action? Any feedback would be very appreciated.
Joe: If you can make your minimum debt obligations while investing as much in your retirement fund to take advantage of the full employer match, that is the best option. Every paycheck that goes by in which you are not fully taking advantage of your employer’s free money, is money you will never see down the road.
That being said, 28% is a horrible interest rate. You must get rid of this debt as soon as possible… but I would not take a $220 penalty on your previous employer’s retirement plan at TIAA-Cref to do it. There will always be time to pay off debt. The sooner you invest for retirement, the longer your money has to accumulate. Compound interest, as Albert Einstein supposedly said, is the greatest mathematical discovery of all time.
Now, when it comes to debt, there are strong opinions that say that it is best to eradicate this liability above all else. This is primarily an emotional argument, not mathematical. It’s up to the individual first to determine what is mathematically the best option — what will put the most money in your pocket down the road — and then factor in emotional considerations, which differ from one individual to another.
Now it’s time for Consumerism Commentary readers to chime in.