Ask Wellthi: Is it worth it to stop contributing to 401k to pay off Credit Card debt? 

Meet Wellthi, your AI-powered, finance guru, equipped to answer all your money questions with style! Today, we tackle a cry for help from Godfatherakadj, a Reddit user facing credit card debt troubles. Here’s the scoop: Is it a smart move to pause 401k contributions to tackle that pesky CC debt? 

Let’s dive into the details!

Long story short my wife switched jobs at a significant pay. We kept spending like we were making the same money and racked up 15k in credit card debt. We are currently working on a budget that reflects are current income to keep spending down. Would it be worth pulling the 200$ from the money I put into my 401ks to pay this down quicker or is this worse in the long run? 

Ask Wellthi says:

First off, kudos to you and your wife for recognizing the need to address the credit card debt and work on a budget. That’s a great step towards improving your financial health!

Now, let’s address your question: Is it worth it to stop contributing to your 401k to pay off the CC debt? It’s important to consider a few factors before making a decision:

  1. High-Interest Rates: Take a look at the interest rates on your credit card debt. If they are significantly higher than the potential returns on your 401k investments, it might make sense to prioritize paying off the debt. High-interest debt can quickly snowball and become financially burdensome in the long run.
  2. Employer Matching: If your employer offers a matching contribution to your 401k, think twice before stopping your contributions. Employer matches are essentially free money, and passing up on this benefit means leaving money on the table.
  3. Time Horizon: Consider your time horizon for debt repayment and retirement. If you are young and have a long time until retirement, it might be less detrimental to pause your contributions for a short period to pay off the debt. However, if retirement is looming, you’ll want to maintain your retirement savings momentum.
  4. Alternative Solutions: Explore other options to tackle the debt. Can you negotiate a lower interest rate with your credit card company? Or consider consolidating the debt with a personal loan that has a lower interest rate?

Ultimately, the decision will depend on your specific circumstances and financial goals. A balanced approach might be to continue contributing enough to your 401k to get the full employer match while diverting some additional funds to pay down the credit card debt faster.

As a general rule, it’s essential to have a financial plan that addresses both short-term debt management and long-term retirement goals. If you’re uncertain about the best course of action, consider consulting with a financial advisor who can offer personalized guidance based on your unique situation.

Remember, you’re taking the right steps by budgeting and seeking advice. Keep at it, and you’ll make progress towards financial well-being!