According to statistics, the average American holds $90,460 of debt

Are you wondering whether you should prioritize debt re-payments or your 401k contributions?

This can be a tricky question, and it might feel like there is no right answer. 

Fortunately, by weighing up the pros and cons and considering your financial situation you should be able to make a savvy and informed decision. 

Continue reading for some professional 401k advice.

The Advantages of Paying Down Your Debt vs Contributing to Your 401k

Most 401k advice will not direct you to prioritize debt payments over your retirement contributions. 

However, there are a few select circumstances where paying down your debt first could be a wise move. For instance, if you have credit card debt or debt will similar high rates of interest, the quicker you pay this off the more you’ll save in exorbitant interest rates. 

What’s more, once your debt is paid fully paid, you’ll have more money to put towards your 401k and any other plan for retirement you might have. 

The Drawbacks of Not Contributing to Your 401k

If you’re dealing with very high-interest debt, prioritizing this can save you money. 

However, if you hold low-interest debt, any good wealth management advisor will probably tell you to pay this off slowly, in conjunction with making contributions to your 401k plan. 

There are three main reasons for this:

  • When you contribute to your 401k, so does your employer (up to a limit)
  • 401k contributions count as tax-free income
  • Interest on your 401k plan is compounded

In other words, if you divert your 401k contributions to paying down debt, you might pay more in taxes. You may also miss out on employer contributions, unless they offer blanket contributions. 

Finally, you’ll also lose on compound interest. Most financial advice sources urge you to plan for retirement early because the sooner you start saving in a 401k, the sooner you can leverage the power of compound interest in your favor. 

If you forgo your 401K contributions to pay down debt, this can compromise your financial health in later years. It can also establish a habit of putting your retirement savings on the back burner. 

Currently, 41% of Americans say that it’s going to take a miracle for them to be able to retire. If you don’t prioritize your plan for retirement, you might join the 36% of Americans who believe they’ll never have enough money to stop working. 

Other Options to Considers

In most cases, it’s best to prioritize your retirement plan over eradicating debt. But what if you have multiple sources of debt, and the interest is eating into your ability to save for retirement?

Fortunately, there are a few options you can consider that might allow you to gain a better rate of interest, and still keep up with your 401k contributions. 

The first is debt consolidation. By consolidating high-interest debt, you might be able to get a better interest rate. 

You can also look into a zero balance transfer.

Do You Need 401k Advice? 

There are a lot of variables to consider when choosing between paying down debt vs contributing to your 401k. The most advantageous course of action will ultimately depend on your unique financial situation and needs. 

If you want to create a savvy retirement plan while holding debt, the best thing to do is to seek professional 401k advice. 

OmniStar Financial Group offers financial planning in Wilmington NC. If you’re looking for a wealth advisor in Wilmington, we are the people to speak to for focused, tailored advice. We don’t ever push financial products and are committed to helping our clients achieve comprehensive wealth management. 

Contact us today to set up an appointment and gain clear direction on your retirement planning and debt management. 

The post Should I Pay Off Debt or Contribute to My 401K? Professional 401K Advice appeared first on OmniStar Financial Group.

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