Saturday, December 01, 2007

Save or Pay Down Debt? Tips from Kiplinger's

This guest post about savings vs. paying down debt came to me from the folks at Kiplinger's:

"Should I save or pay off debt? Borrow from my 401(k)? What if I don’t have extra money to invest?

Here’s what the experts in the December issue of Kiplinger’s Personal Finance magazine have to say:

Should I save or pay off debt?

Do a little of both. Invest enough in your 401(k) plan to capture any employer match. That will give you a return of 50% to 100% plus the security of a savings stash. Next, pay off high-interest credit-card balances, which can give you a double-digit return.


Then focus on whatever debt keeps you up at night.

Is it a good idea to borrow from my 401(k)?

Nope, not even to pay off debt. If you leave—or lose—your job, you generally have to repay the loan immediately or pay taxes on the money plus a 10% penalty if you’re under age 55. Even if you don’t take a tax hit, you’ll lose the compounded earnings your money would have accrued.

What if I don’t have extra money to invest?

Sure, you do. Here are three ways to come up with the cash:

1. Get your employer to help. You won’t miss money that comes off the top of your salary, and a company retirement match is free money. Or arrange to have part of your paycheck deposited into a savings or investment account.

2. Invest automatically. A number of mutual fund companies let you get around high minimums if you agree to make regular monthly investments.


3. Find extra cash. Put investable cash in your pocket by filing a new W-4 form with your employer to adjust the number of allowances you’re claiming. Another source of f ready cash: Raise the deductibles on your homeowners and car insurance, which can cut your premiums by hundreds of dollars a year."


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