If you read enough different Personal Finance blogs, you find that there are a number of popular recurring themes. Ways to save on various purchases, how to plan for retirement, etc. The one that’s been haunting me lately is, as the title today says, saving vs paying off debt. There are some obvious choices to be made, such as paying down an 18% credit card or putting that money in the bank to earn .01% interest. (Uh, if it wasn’t obvious, pay the damned card!)

But, then there’s the grey area where the debate really has no conclusion, no right or wrong, just what’s right for you. First, a disclaimer. In the PF blogging community, it’s ok to disagree. Disagreeing isn’t a personal attack in this case, it’s just a different take on an issue. That said, It was two months ago that I read Are 401(k) and 529 Plans a Good Idea When You’re In Debt? I was part of the 78 comments that quickly went up after Joan Otto (Man Vs. Debt community manager) wrote this article in which she described how she’d prefer to go at her debt 100%, even to the point of sharing that she was sorry she or hubby even had their 401(k)s to begin with. She explained that they had a combined $44,000 in their retirement accounts averaging 8% return, but $59,000 in debt costing 14%. Ouch. I understand that’s an issue. The real issue that Joan shared was that their 401(k)s had no match. Game over. Really. Joan’s plan to pay off her debt with a vengeance was exactly the right thing to do.

What drew me in to the discussion was where Joan remarked that even if there were a match, she’d pass on it, and take The David‘s advice. If your employer is going to match the first few percent of your income dollar for dollar, my opinion is to take this free money. The match is usually up to the first 4-6% of income, which should leave enough funds so the debt repayment plan doesn’t suffer too much. Joan mentioned paying $2500 per month (wow!) toward the principal on her debt. That’s $30,000 per year. I don’t know their income, but even if we are looking at $100,000, I’d suggest steering the $6000 toward the match if there were one to be had. But that’s all hypothetical.  Let’s move on to a real situation.

My ‘friend’ (ok, it’s a close relative. Let’s stick with friend for this delightful anecdote) mentioned that she’d qualify for a refinance of her mortgage once her credit cards were paid off. $10,000 at 18%, so the $400/month she was paying toward the cards would take nearly 32 months to pay off. She told me that she stopped depositing to her 401(k) and I thought about Joan’s story. My friend’s company  had a match, 4%. This was $3000 left on the table. I looked at the numbers, and made an offer. I wrote her a check to pay off the cards, and she’d putting in $250/mo to the 401(k). Since it comes off the top, it’s $188 less in her take home pay. This leaves $212 to pay toward the $10,000. At the end of 32 months, she’ll still owe me $3,680, but her 401(k) will have $16,000 that wasn’t there before. Yes, the $16,000 is pretax, but she’s over 55, so if she changed jobs she can take it out with no penalty, just tax. At 25%, she’d still clear $12,000. I’m not forecasting any gain, in fact, she’s probably wise to keep this money in the short term bond fund for now, to know that it’s safe. And the refinance – once the cards show as paid on her credit report, the refi should save her another $200 per month.

There’s something admirable about killing the debt, I get that. I get that debt feels like a weight you just want to get rid of. But after nearly 30 years of matched 401(k) deposits, I see the power of compound growth on top of matching deposits. I see that I could have taken $200K over the years and paid off my mortgage by now, or I can have that $200K in debt and far more than twice that sitting in a retirement account. It’s tough to stay the course, especially when you look at how the S&P has crashed twice in the last 15 years. For most 401(k) accounts, I’d say to deposit to the match and that’s it, but walking away from that free money is a mistake, in my opinion. Keep in mind, most 401(k)s offer a low risk investment choice. Even though I might not choose it myself, it’s a good alternative to using the excuse of a ‘risky market’ to avoid saving altogether.

How have you handled the debt decision? Are you passing up a match in your retirement account?

written by Joe \\ tags: 401(k), Debt

A guest post from Joshua Rodriguez -
These days, the average American is no stranger to credit card debt. In fact, we love using our credit cards. But, after war and world-wide financial recession, many of us are starting to re-think our decision to use our cards so frequently. The truth is, more and more consumers these days are becoming interested in paying off their credit card debts. Although, at first glance, this task can seem a bit overwhelming, the truth is, it’s not that difficult. All it takes is a plan and you committing to it! Come on, I’ll walk you through it…

A Step By Step Guide To Getting Rid Of Your Credit Card Debts

Step #1: Preparing For The Battle – I’ve never heard of a fighter winning the belt without preparing first. The truth is, not using your credit cards is going to be a battle best fought with the right weapon. In this case, that weapon is your credit card profile. All this is is a list of your debts. In your list, you should include lender names, balances, interest rates, minimum payments, customer service phone numbers and pay-to addresses for each of your credit cards with a balance.

Step #2: Taking Advantage Of Your Qualifications – The lending industry is a very competitive one and, if you are a customer that is known for paying on time, they will compete for your business. One way that lenders do this is through balance transfer credit cards. If so, check out the market to see if there are any offers that provide lower interest rates than the rates you are currently paying. If so, apply and transfer your balances to lower long term rates!

Step #3: Commit To A Constant Payment – Your credit card minimum payments are based on your balances. When paying off your debts, this is a crucial factor. If your payments go down every time your balance does, you will NEVER pay off your credit cards! Your best option is to come use an aggressive plan of attack known as the constant payment plan. To do so, add up all of your minimum payments. Now ask yourself, “Is this all I can afford to send? Can I comfortably send extra?”. No matter what you decide, write down the total amount of money you can comfortably afford to pay towards your credit card debt. Now, you have to commit to sending no less than this month’s payments until your debts are completely paid off. If you do, you stand to save hundreds or even thousands of dollars in interest charges over the life of your debt. Which, will now be years less!

Step #4: Go After Your Highest Interest Rate First – Now that you have decided on a constant payment, it’s time to make sure that you get the most out of that payment. To do so, we need to attack the highest interest rate first with the debt stacking plan. Stacking your debts is a very easy thing to do. After all minimum payments are made each month, send an extra payment to the highest interest rate account with the remaining funds in your constant payment. By sending all extra funds to your highest interest rate debt, you will quickly pay it off. Once this happens, send all extra funds to your next highest interest rate. Continue to do this until all of your credit card debts are completely paid off!

The End Result

As a personal credit card debt consultant, I have seen this plan save quite a few people thousands of dollars and years in time paying off their debts! By following this plan, you will reduce your interest rates to the lowest rates you qualify for and attack your highest interest rates with aggressive payment plans! All it takes is a bit of commitment on your end and you will be debt free in no time!

About The Author – Joshua Rodriguez – This article was written by Joshua Rodriguez, proud owner and founder of CNA Finance. Join the discussion about this article on Google+!

written by Joe \\ tags: Credit, credit card, Debt

A Guest post by Darin Sewell

Today’s world is full of people that at one time or another had great credit but for various reasons now find themselves with bad credit. These people now find it hard to get approved for mortgages, car loans, and credit cards with good interest rates and many of them feel helpless and do not know what to do. If you are one of these people then the article below is going to give you an outline of how to fix bad credit and get back on your feet!

Figuring Out the Cause of the Problem

The first step to reversing your credit situation is to figure out why it dropped in the first place and address that problem head on. There are few common reasons for credit scores to fall and 99% of people with credit issues fall into one or more of these categories.

• Too Much Debt
• Missing Payments or Defaulting
• Not Enough Credit History

Too Much Debt – Sadly this is very common today, people were able to run up debt easily then the financial crisis hit and banks slashed credit limits and a lot of people suddenly had credit cards that were maxed out. In many cases payments also doubled making it all around bad situation.
The best way to address too much debt is to figure out what debt you can pay off the fastest; this is generally the account with the lowest balance. Do all you can to pay that account off then when it is paid off take the money that you used to pay towards it and add it on the next account in the list. You will be amazed that after you start paying off accounts and applying more to the next one your debt begins to shrink rather quickly.
I know this is easier said than done but if you are serious about getting to a better score you need to do whatever it takes. This means getting a part time job, eliminate some luxuries like cell phones, cable TV and other money absorbing expenses. Think about how much you could save and how fast your debt would come down if you were not paying those bills and putting the money into debt reduction!

Missing Payments and Defaulting – This one goes hand in hand with having too much debt. Generally, as your debt increases the payments do as well, eventually the payments can be more than your income and you start to fall farther and farther behind. Then the late fees and over limit fees start to pile on and before you know it you are in massive debt.
Honestly, the only way to remedy this problem is to either increase your income or reduce the payment amounts of your debts. Increasing your income is pretty easy; just grab a part time job. But that might not be enough because you are over your limit; the credit card companies can increase your rates and keep charging over limit fees, basically keeping you in this trap.
To counter this problem you need to get in touch with your lenders and explain to them what is going on. Let them know you want to pay them off but are unable to due to the amount of money you owe. Most lenders have some sort of program to help troubled customers; they will more than likely put you on a payment plan. You will lose the ability to use your account but that is probably a good thing!
Keep in mind that you may have to call many times in order to get in touch with the right person. Always be polite and never give up. In the end the lender will want to work with you because they need the money you owe them.

Not Enough Credit History – Many people today have bad credit scores or no credit scores simply because they never had any accounts that reported to their credit report. Commonly these are the people who pay cash for everything and make substantial use of their debit cards. It is only when they need some sort of financing that they realize the situation they are in. While it may seem like a tough spot to be in it is actually very easy to get out of.
To get out of the no credit history mess and start establishing yourself; you will need to work with secured credit cards, personal bank ones and department store cards. Generally the best place to begin is with a secured credit card. These cards work like a normal card and most report to the credit reporting companies.
The only catch is that you have to let the issuing lender hold money that you deposit in escrow; this deposit is equal to the limit on the credit card. Generally, this is about $250-$1000 and if you default the lender has a safety net, if you close the account you get your money back. Because of this safety net approval is almost guaranteed.
After you have a good secured credit card reporting for a few months, apply for a department store card, but make sure it reports to the credit reporting companies before you get it. Make a purchase here and there with it and always pay it off in full each month. After 6 months you will see a positive credit history being reported about you that will improve your credit score ratings. You can then move on to regular unsecured credit cards, just do not let yourself fall into the trap of running up to much debt.
As you can see there are no real magical ways to fix your credit in a few days or weeks, it will take time and effort on your part. But if you can stay dedicated to the process and stick to your plan you can start to make good progress in a 3-6 months and major progress after that. Just learn from your past mistakes, stay focused and keep moving forward!

written by Joe \\ tags: Credit, Debt

A Guest Post -

After graduation, most loan companies give you a six-month grace period and then expect you to start paying back your loan. The repayment plan is usually set to a ten-year schedule. If you have the money to pay the loans back, this is generally the best way to avoid high interest rates and pay down your principal. Most struggle with this type of repayment plan. Fortunately, there are ways to alleviate your monthly student loan burden. The first thing you will want to consider is loan consolidation. Consolidation allows you to pay one amount each month instead of sending payments to several different loan companies. It also gives you the option of lengthening your repayment schedule so you can pay back less money each month. Be aware that you will inevitably pay back more interest over the life of the loan using this method. Several different loan repayment options are now available.

The government offers an income based and income sensitive repayment option for those with federal loan debt. These plans calculate the amount you owe based on your monthly income and number of dependents. It is not uncommon for some to have a monthly payment liability of zero while on these plans. In addition, loan holders who work for a government or nonprofit agency may qualify for loan forgiveness after 120 consecutive monthly payments. Finally, there are other more drastic options out there for those who qualify. Deferments allow those who are unemployed, in school, or under a financial hardship to postpone payments for up to six months at a time. Remember that defaulting on your student loans will only mean trouble down the road. Even bankruptcy won’t allow you to get out of this responsibility. Before you default, call your loan company. They are usually willing to work with you on a repayment plan.

written by Joe \\ tags: Debt, student-loan

Today, I’d like to give the soapbox to a fellow blogger who has started a new project with great potential. You see, part of the cash/credit discussion often turns to (a) the fact that many get some kind of rewards back for running charges through their account. Our card puts 2% cash into a 529 account, and I’m expecting that account to pay for a semester of college, and (b) there’s no motivation to pay cash and ignore the reward. Now JM introduces Discount With Cash, which I hope gains some traction:

Credit cards are the highest tax on goods and services you have never heard of.  Merchants pay fees every time they swipe your credit card and of course they increase the price of what you buy to cover that cost. You are paying extra for the convenience to use your credit card. Is it worth it? Sometimes it is, but most times it is not. Especially with some businesses offering a discount when you pay with cash. That idea is the basis behind a new website, Discount With Cash. Discount With Cash aims to provide customers with a list of local businesses that offer a discount for paying with cash. Since Discount With Cash is in its infancy they are currently looking for anyone out there that knows of businesses that offer the discount. So next time you are at the register, ask for a discount for using cash. If you get one, make sure to share it over at Discount With Cash.

Interesting idea, JM, thanks for introducing it on my blog.
Joe

written by Joe \\ tags: Credit, Debt, Frugal