This is one personal finance question that plagues many living paycheck to paycheck. Concerns about handling debt payments and still being able to tuck away cash for the future often lead to a hard choice between one or the other. If you are on the fence about using your cash to eliminate debt or using it to stuff your 401k, there is a lot to consider.

Reducing Debt

On some level, we all aim to live debt free lives. Paying off mortgages, credit cards, and other bills are what is in the now since we are faced with this matters daily. Retirement is far down the road (unless you invest for cash flow).  Excepting your mortgage, most of your debt probably charges a much higher interest rate than you could ever hope to achieve from any reasonably-safe investment (remember, if something sounds too good to be true…).

Whatever ‘extra’ money you have in the household budget should be used to pay down debts as often as possible. But there are other ways to make debt payments without having to resort to eliminating 401k contributions. Have you considered getting a second source of income – a part time job or side project – where all earned income is dedicated to bill paying until the debts are paid off? Have you considered selling items you no longer want or realistically need to survive? With Internet technology, there are many more options available to us to earn extra income than ever before. If you are not interested in high-tech methods, consider an old-fashioned yard sale to unload stuff and make a profit.

You also need to consider how much you are still spending. Are you using credit cards regularly without paying them off? If so, you are only adding to your own debt problems. Be sure you have a proper budget in place before considering turning 401k money towards your debts.

Saving For Retirement

There are two golden rules in retirement savings: 1. Start early and 2. Don’t Toss Free Money (assuming you still have a 401k match). If your employer is matching your contributions, you are wasting free cash that will serve you well in retirement. Even if you have large debts to pay off, you should still find a way to contribute at least something towards retirement right now. The earlier you begin contributing in earnest, the more money you have a chance to save. Starting early can allow you to contribute smaller amounts than if you start in your 30’s or 40’s and still save up a sizable amount. You can always change your contribution amount later, when you are more financially secure.

The decision to save more or pay down debt may not be an easy one but it seems that doing both simultaneously may be in your best interest. You will need a solid but flexible budget and a lot of discipline to make it work. While you may not be able to see your golden years, just imagine living then with financial concerns you have now. That may be enough inspiration to get out of debt and start saving more now.

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