Should I pay off my credit card debt and student loan debt, or contribute the maximum amount to an HSA and Roth IRA, and contribute 10% to my 401(k)?
I currently have $3,000 in credit card debt and $12,000 in student loan debt. I am making three times the minimum monthly payment on both. I am currently contributing the maximum amount to an HSA and a Roth IRA, and 10% of my income to my 401(k) account. I would consider contributing less to my 401(k) account, but my company offers profit sharing (instead of matching our contributions) up to $5,000 invested. I’m trying to reach that amount but I may have to contribute more towards the end of the year to reach it. I work two part time jobs and all of that income goes to paying off my credit card debt. Should I lower my contributions to my 401(k), HSA and Roth IRA so I can pay off my debt quicker, or continue with my current strategy? If I continue what I'm doing now, I will have all of my credit cards paid off by the end of the year.
You will get many good answers that cover the entirety of your question, so I will offer one piece of targeted advice.
Credit card debt is very expensive. I will assume you are being charged 20% interest, or nearly that amount. So stop paying more than required on your student loans and focus on eliminating the credit card debt first. Don't stop the 401K contributions -- in fact, I applaud your desire to stretch and work extra in order to max out what you get from the profit sharing -- so if you have a shortfall you should cut back on the Roth contributions first.
I hope that by doing this you will eliminate the credit card debt sooner. Than, make yourself a promise NEVER to let a month go by without paying off that card in full. Never incur an interest charge again. Ever.
Congratulations on being such a strong saver!
As a proponent of a debt-free life, I would focus on the elimination of the debt, as long as you were committed to limiting your spending to more quickly pay off the debt. Eliminating debt payments from your monthly budget will increase your cash flow that can be invested for long-term wealth building. I'm not sure of your income, but $15,000 in total debt should be eliminated rather quickly if you focus on it!
Should you decide to continue to invest while paying off the debt, how should you prioritize your options? If your employers profit sharing contribution is contingent on your participation in the 401k, I would make this my first saving option to maximize the "free" money added to your account. Next, the HSA has triple-tax-savings and you may not be eligible for it every year, so this would be my second choice (if you are, in fact, eligible to contribute to one). Lastly, I would fund the Roth IRA. But again, I'd recommend focusing on the debt elimination and then you could more easily do all three!
Thanks for your question!
Here is what I would recommend:
- Make minimum payments on your student loan.
- Pay as much as possible towards your credit card first. This gets rid of high-interest rate debt and will then allow you to attack your student loan more aggressively.
- Once the credit card is paid off then you can increase your student loan payments again.
Regarding your invests - I would stop making HSA and Roth IRA contributions for the time being too. The best thing you can do to build wealth over time is stay out of debt. By temporarily shutting down investment contributions you are going to put yourself in a wonderful position to save even more aggressively once you're out of debt.
I would make my first priority getting out of credit card debt as soon as possible. Then pay off that student loan and before you know it you'll be making substantial contributions to all of your retirement accounts. Nice work!