Q&A: When to pay down debt and when to save for retirement

March 20, 2009

I currently hold a credit card with a $5,000 balance and a 15 percent interest rate. I was wondering if I should decrease the amount I am contributing to my retirement plan through work and put the "extra" dollars toward the credit-card debt.

Q: I currently hold a credit card with a $5,000 balance and a 15 percent interest rate. I was wondering if I should decrease the amount I am contributing to my retirement plan through work and put the "extra" dollars toward the credit-card debt. I am currently contributing 10 percent of my income to the plan, and my employer matches up to 3 percent. What are your thoughts?

A: Most financial planners typically encourage people to eliminate any debt with an interest rate at 8 percent or above. In your case, you should reduce your retirement-plan contribution to 3 percent and put the excess toward the high-interest-rate debt. This way, you are still taking advantage of the employer match while freeing up some extra money for the credit-card debt.