Paying off Credit Card Debt vs. Contributing to a 401k Retirement Plan
1. The credit card interest rate (usually between 9% and 29%).
2. The 401(k) matching rate (usually between 25% and 100%).
Many companies do what's known as "matching contributions" where the company will also contribute to your 401(k) when you contribute. The amount they contribute varies, depending on the plan, but often it is a large fraction of your contribution, such as 25% to 100%. You can think of that matching rate as an instant guaranteed return on investment. Typical matching rates might be 100% for money up to 3% of your salary, which would mean a 100% effective rate of return if you put in 3% of your salary. You would be wise to at least contribute 3% of your salary to your 401k retirement plan to get that matching benefit- it is essentially FREE MONEY. Another matching example might be 25% up to 6% of your salary for example. In investing, you will rarely ever find a deal this good. Usually contributing at least up to the amount you need to get full matching contributions is the way to go.
What if your company doesn't have any matching or has a lower matching contribution benefit- is it still beneficial to contribute to the 401(k) rather than pay down other debt? That question becomes a lot more difficult to answer. If you have a lot of debt at high interest rates (12% or more), then paying it down as quickly as possible would be good. However, you still do need to consider investing it in your retirement plan. Historically, stocks have returned around 10% to 11% a year, so, if you have a lower interest rate debt, you are giving up on opportunity lost if you don't contribute. If your debt is at a very low interest rate (such as a mortgage, which might be from 4% to 9% interest rate), then your opportunity lost is more than your interest rate, so, it should be prudent to invest your money. Also, the money going to a 401(k) or other retirement plan may have tax benefits depending on your situation. Retirement money also compounds tax-free, which has further future benefits. You can always split your decision and contribute a small amount to your 401k and paying down debt with the remainder of your pay.
Some cautions on investing in a 401(k): Do you homework first. You need to pick investments that have a level of risk you're comfortable with, and you need to keep a close eye on fees. Consult a financial professional that you know you can trust if you need help choosing from your menu of investing options.
See also:
Good Debt vs. Bad Debt (gardenandhearth.com)