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Old 08-17-2007, 09:05 PM   #21
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20% interest? That's mind-boggling! What kind of debt is that?

Your job is stable, you make 98K a year. Can you get a 28K personal loan from a bank?
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Old 08-17-2007, 09:48 PM   #22
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Also you should consider your period of non-participation in your 401k like a loan. After paying off your debt, you should continue making payments and switch them to your 401k, increasing contributions above what the employer matches until your "loan" is repaid.
I agree. I would pay of the loan as fast as possible, then continue the payments into your retirement account(s). The 20% is after taxes. If this were an investment, consider you tax rate. If your tax rate is 28% (wag), before taxes, it is roughly equivalent to 20/(0.72)=~28%. You can't get a guaranteed return on investment this good anywhere. You want to get rid of this ball and chain.
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Old 08-18-2007, 01:44 AM   #23
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Pay off the high debt first.... ASAP!
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Old 08-18-2007, 12:08 PM   #24
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What makes this decision a whole lot easier is the interest rate you're paying on the loan. 20% (ouch). Unless you can get better than a 20% return investing your money, I'd definately pay off the debt first.
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Old 08-18-2007, 12:20 PM   #25
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A thought or two: To keep the 401(k) match you must be vested. If you're already vested, the match is very powerful, and the reduction in income taxes you get helps, too.

When I was on a debt-eliminating streak from 2001-2005 I was single, renting, had a secure job and was vested in my 401(k). I was also able and willing to relocate if it were to become necessary. Given these circumstances I contributed more than the match to my 401(k), paid my debt down aggressively, managed to get lower interest rates and had no after-tax savings (emergency funds).

I plotted things out and found that there was a most efficient ratio between savings and debt reduction after taking into consideration matching, tax savings and cc interest charges during the period of the debt elimination. However I chose to be more aggressive in paying down my debt and less efficient (in theory). In other words, on paper there was a savings/debt-reduction split that would have left me with more money than other splits.

I sold my nice truck and bought a sedan that was more fuel efficient, had lower payments, cost less overall and cost less for insurance.

I was able to consolidate my debt onto a family member's low(er)-interest rate card. That helped a lot, but mixing finances and family is rarely advisable.

I guess the summary is that how you split your 401(k) savings, after-tax savings and debt reduction is a personal choice. There may be a most efficient split on paper, but you have to consider other factors like how much it would hurt to lose income, have to move, etc.. But whatever the choice, there are many ways to reduce your expenses and interest rates that may not be immediately obvious, and those help no matter how you split your money.
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