Expert: Gina Boykin - 6/7/2009

Question
I have always heard that you should pay off your credit card debt before you take any money to invest it.  I am currently in a situation where I have to regularly charge large amounts of money on my credit card (for attorney fees) and I don't see being able to pay this money off for 7 or 8 more years.  I may be able to pay it down in about 3 years.   I am 38 and need to start saving for retirement.  Should I invest any money I get or should I use it to pay off credit card debt?  The interest rate on the cc is currently 15%.

Answer
The reason many financial advisors say to pay off credit card debt first is that you are very unlikely to invest in something that will give you a higher return than your credit card.  For example, let's say you invest $1,000 in stocks or mutual funds and you get an average return of 12 percent, or $120.  That same year, you have $1,000 on a credit card or in a loan that is charging you 15 percent, or $150.  You are far better off "saving" $150 than making $120.

There is one exception to this, and that is if you have a 401K or 403B through your employer AND the employer offers a company match.  Some companies provide a 50 cent match and some provide a $1.00 match, for every dollar you invest.  That is a 50-100 percent return!  In addition, because your contribution is done pre-tax, you give less to Uncle Sam.  For example, if you invest $100 and your company provides a 50 cent match, you now have $150 in  your investment account before any market gains or interest.  Also, it may only cost you $65 to invest that $100 because you save $35 on your taxes (assuming 35 percent tax bracket).  So your paycheck goes down by only $65 dollars, and you have a $150 investment.

Outside of this, in general you are better off paying off your high interest debt (such as credit cards) as quickly as possible first.