Ask the Harvard MBAs: Should I save for retirement while paying down credit card debt?

January 10th, 2008

onmyowntwofeet.jpgLast week, personal finance rockstars Manisha Thakor and Sharon Kedar, authors of On My Own Two Feet: A Modern Girl’s Guide to Personal Finance, kindly answered a bunch of questions on this blog. You can read the Q&As here (part 1) and here (part 2). Manisha and Sharon also agreed to answer five questions from you. So far, we’ve only received one (answer below), which means we get four more freebies. If you have a personal finance question for these two Harvard MBAs, post it in the comments by Monday.

Rachel asks: I’d love to hear some advice on how all these savings and retirement ideals fit into credit card debt. My income has stabilized but I’ve got a little debt from starting my business — should I be stashing money anywhere else besides into paying this off?

M & S answer: Ahhh, your question warms our heart. It’s such an important question that we actually devoted a whole chapter of our book (Chapter 10) to it! The short answer is that your goal is to balance the two rather than take an all or nothing approach. Our argument is that while focusing solely on paying down your credit card debt is mathematically the hands-down answer, practically, if you wait to start saving until all your debts are paid off, odds are high you won’t get there. (It’s like saying you’ll start dieting AFTER your local grocery store stops selling premium ice cream in your favorite flavor!) We go into much more detail in our book, but our favorite plan of action is the following:

  1. First and foremost, make the minimum required payment ON TIME, EVERY MONTH on all outstanding debts.
  2. Save $2,000 as a “starter” emergency fund.
  3. If your employer has a 401(k) type plan that offers a “match,” contribute as much as you need to get the full match.
  4. Continue to build up your emergency fund to at least 3 months (ideally working up to 6 months) of your essential living expenses.
  5. Now pay more than the monthly payment on any credit card debt. (If your debt is $5,000 or less, pay at least an extra $50 a month EVERY month; if your debt is between $5,000 and $10,000, pay an extra $100 EVERY month; and if it’s over $10,000, pay an extra $150 EVERY month until all that debt is wiped out.)
  6. Now if you want to buy a home, you can start saving for a down payment.
  7. If you don’t want to buy a home (or already have one), keep saving for retirement.

One important caveat: These are rules of thumb. The final choice is always up to you. If your credit card debt is making you dry heave every time you think of it, well, by all means swap steps (4) and (5) and accelerate the debt pay-down first. Our primary point is that getting in the habit of saving is like starting to floss your teeth. Once you get going, you wonder how you ever did without. This is why we think it’s so important to do at least a little saving while you are working off your debt. Finally, go you for being interested enough in your personal finances to ask us a question — that speak volumes about your mojo!

Have a personal finance question for Manisha and Sharon? Post it in the comments by Monday.

Entry Filed under: Money honey,Q&As

4 Comments Add your own

  • 1. annie  |  January 10th, 2008 at 3:31 pm

    Hi all,

    I love your books and appreciate all the great career and financial advice. My question is how aggressive should I be about investing my retirement funds in the current economy? I’m 23 with a brand new 401(k). I know I shouldn’t be afraid to choose riskier options at my age, but I’m worried this option might backfire pretty badly in the short run. I hate to sound like an alarmist, but what do you recommend as far as how to invest during uncertain times? Thanks!

  • 2. Michelle Goodman  |  January 10th, 2008 at 3:40 pm

    hi annie, many thanks from all three of us. i’m passing your Q on to M &S now… will post the answer asap.

  • 3. annie  |  January 11th, 2008 at 3:03 pm

    awesome. thanks. i ask because although i know i shouldn’t think about dipping into retirement funds before my time, i am itching to freelance someday, or work for myself, or volunteer, or feed my wanderlust – anything to get out of 9-5. with miserable office politics and commuting and my god, daily interaction with difficult people, i don’t see myself in the cube until i retire. so being able to contribute to a 401(k) and receive a company match while i can is a nice, if short-lived, benefit. i’d like to have some savings that’s growing on its own even if i’m not able to add anything. in the meantime, i’m building emergency savings in the event i cuss my boss out and get the boot or quit, more likely with each passing workday…thanks again. your book is a great inspiration! ever consider writing one that’s freelance writer/writer-specific?

  • 4. Michelle Goodman  |  January 12th, 2008 at 12:02 am

    annie, i think you’re smart to take the company match as long as you’re being offered it. “it’s free money,” my mom always would say. we’ll have your MBA answer by monday…

    you’re welcome again, and to answer your question about my writing another book that’s more freelance specific, YES. you will be hearing about this in the coming weeks.

Leave a Comment

Required

Required, hidden

Some HTML allowed:
<a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>

Trackback this post  |  Subscribe to the comments via RSS Feed

Who I am

Hi, my name's Michelle Goodman and I've been freelancing since 1992. I'm author of My So-Called Freelance Life and The Anti 9-to-5 Guide. Read my full bio here.

Books I've written

My other blog

Popular articles

My Twitter handle

Posts by category