Get Your Full Employer Match. If You Have Credit Card Debt, I Think You Should Probably Pay That Off First.
Hi Friendos,
It’s still summer and 401k summer school is still in session. Retirement saving…so boring, so important. Like so many parts of adult life!
This week’s lesson is about getting your full 401k employer match if one is on offer. I’ve written about employer matches before: in 2023 I went through the basic math of employer matching and last month I dove into some finer points of employer “catch up contributions.” It’s worth dwelling on why you should prioritize getting your full employer match.
Reason #1: It is part of your compensation! You would never say, “Hey Boss, I worked a full week but don’t worry about paying me my full paycheck…I’ll just take part of it this time.” Unthinkable! But…if you don’t get your full 401k match, you are turning down money. Get your money!
Reason #2: It offers massive investment returns without risk. Let’s say your employer will fully match your 401k contributions up to 3% of your pay and your gross salary is $86k/year. If you put in $3,440 during the year, your employer will also put in $3,440. That’s doubling your money, a 100% return, guaranteed. You can’t get that in the stock market or the bond market or in private credit or anywhere. It’s an incredible investment offer, available to small-fry individual investors who set aside money from each paycheck. Take the deal!
What if you have credit card debt? Common wisdom among financial types is to prioritize getting a full employer match before paying down credit card debt. The reasoning is that an employer match offers a return of 50%-100% (depending on how it is specifically configured), while paying down credit card debt is a return of ~20%-25%. Obviously 50%-100% is more than 20%-25%, therefore employer match should be prioritized.
My view is that there are emotional and psychological aspects of handling money that should be given weight when determining financial priorities. Typically, a “mathematically correct” analysis of a financial situation entirely omits these emotional and psychological factors because they cannot be quantified in objective dollar terms. This often results in the wrong answer for a particular person’s situation. In my own life, I have had multiple occasions when I knowingly made the “wrong” decision in favor of the better-for-me option.
Credit card debt weighs on a person in ways not fully measured by the amount of interest paid. Further, most people can be fired in an instant but that credit card debt will still be there even when the job is not. Most of the time I think it’s best to focus on getting rid of today’s credit card debt before providing for your future self (with retirement saving), even if you miss out on some employer match.
Next week 401k summer school is taking a week off. See you in August!
-Stephanie
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