Carry a credit-card balance to save for retirement?

March 21, 2008

I'm starting my first job and would like to begin contributing to the practice's 401(k) right away, but I'm afraid I'll run short of cash to pay living expenses and medical school debt.

I'm starting my first job and would like to begin contributing to the practice's 401(k) right away, but I'm afraid I'll run short of cash to pay living expenses and medical school debt. Would it be crazy to contribute anyway if it means I might also have to carry a credit card balance, maybe $5,000 or so, for a while?

Not necessarily. The sooner you start saving for retirement, the better off you'll be in the long run, because the earnings on your contributions will have more time to grow. So assuming you'll pay off any additional debt as quickly as possible, it could be a risk well worth taking. That's particularly true if your employer will partly or fully match your contribution to the retirement plan, since the value of the matching contribution should more than make up for the credit card interest you'd pay.

And remember that the 401(k) contributions won't cut your take-home pay dollar-for-dollar, since they reduce your taxable income, so making the contributions may not prove as difficult as you think.