Money Rehab with Nicole Lapin - "Should I Pay Off Credit Cards or Save For Retirement?" (Listener Intervention)

Episode Date: March 24, 2022

Lately, Nicole has been getting a lot of questions around paying down credit card debt versus saving for retirement— and we have good news! It's actually a topic she has tackled before on the show, but several hundred episodes ago (humble brag). So today, we're rebroadcasting a listener intervention with Money Rehabber Angelica who was curious about this very same topic a few months ago. Let's settle this once and for all, shall we? See omnystudio.com/listener for privacy information.

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Nicole Lappin. On today's episode, we're doing a listener intervention with the lovely Angelica. She had a question about how to decide between putting your money toward retirement options and putting all of your income toward paying off debt. I thought it was a question that a lot of you could relate to. It's a common conundrum. So thank you for bringing it to our attention. Angelica, welcome to Money Rehab. Hey, Nicole. Thanks so much for having me. I'm so excited to be here. So what is your question? So my question is, the company that I'm with for my full-time job currently, they have a great 401k and then they also have an employee stock option that I've heard is amazing.

And I mean, I'm not very savvy about investments or anything. That's more of my husband's forte. Whenever I hear people at work talking about it, I feel like, am I really missing out on a great opportunity to funnel more of my funds into those investment opportunities for my future? Or should I completely focus on like every extra dollar goes towards paying off my debt? Such a great question. And first of all, I want to reframe the idea that your husband knows about investment stuff and that's his thing and not your thing. Well, he knows more at this point in time. I'm still learning about it, but he's like geeked out on it totally. Okay. And then you are going to geek out on it too. And you know what?

You're going to be Miss Mama Investment. So right now, just to be clear, you don't have any money in your company 401k? No, I do from a previous company. And then we have an employee credit union that we put our savings into and a Roth IRA account. Okay. Okay, great. And what happened to the old 401k? That is a good question. I just thought about that the other day. So I need to pull out my paperwork and look at that. Okay, great. Well, it's still there. Yes.

Ideally, you would do an IRA transfer. So you would take that 401k and then you would put it into a Roth or traditional IRA. And we know the difference between the Roth and the traditional. I do not. Okay. So the difference is taxes. So you have with your husband, a Roth IRA through the credit union. Okay. So with a Roth, you pay taxes now. And with a traditional, you pay taxes when you're that sexy old Betty White, golden girls, ready to retire, and you pay taxes when you take it out. So a traditional IRA is pay taxes when you take it out in the same way as a 401k is taxed. So when people look at their 401k accounts and they're like, oh my God, I have a million dollars.

Oftentimes they'll get about half of that when they take it out because of taxes. And, you know, what I like about having some diversification there is that we don't know what's going to happen with taxes, of course, but I am going to bet that they're going to go up. There's only one way I think they're going to go. But to caveat that, we don't know what's going to happen with them. So we want to have some exposure to a retirement account that pays taxes now and some that pays taxes later. So in the pay taxes now, it sounds like you already have a Roth option, which pays taxes when also your individual or as a couple tax bracket is probably lower than it's going to be as you grow in your career, right? Because as you make more

money, you're going to be in a higher tax bracket. So the reason that I like paying taxes now, even though I don't like paying taxes in general, is that you're in a lower tax bracket. So that's going to be lower. And then taxes in the future are likely going to be higher. So if you take your old 401k, you can roll it over into a Roth or you can roll it over into a traditional IRA. So perhaps now to have a little bit of different kind of tax exposure, you could also get a traditional IRA with that old money. And that, again, the IRA part of this is individual retirement account. It's portable no matter where you go. You go to your credit union. You could get it at your bank. You can get it anywhere. You don't have to be connected to any employer. The 401k acts tax-wise just like the traditional IRA. So from a tax perspective,

there are some companies that also have Roth 401k options. So those would be taxed in the same way as the Roth IRA, but it's connected to your employer. And so I get nervous about having all of retirement connected to an employer and also that's connected to the stock market. We're actually the first generation that's ever retired using a 401k, which makes me very, very nervous in general because our parents' generation and the generation before that had a pension, had a social security, and now we're relying on what's connected to the whims of the stock market. And so that's why the earlier, the better when doing this, and also the more, the merrier. I think there's this conception that the 401k is like this darling of the retirement party, and she's the only pretty girl at the dance. That is just not true.

There are so many different kinds of options. I just think that the marketing people for 401ks probably did a better job than all the other options out there. Because there are so many options. So with the 401k at your company, you said there's a match? Yes. Yeah. at your company, you said there's a match? Yes. Yeah. And then they also have the employee stock options as well, where you can get like this stocks at a lower rate. Yep. So if you can, I would recommend putting as much as they're going to match at least in that. So do you know

the specifics of what the plan is? I would have to look back into it. I don't remember what it was specifically. That's okay. Yeah. You know where to find me if you have any additional questions. But yeah, I would do how much they are matching at least. And if you want to do more, that's great. But that's just free money. They're giving you free money to put toward your guys' retirement account. Is there any reason why you wouldn't do it? I've just been, like I said, like a hundred percent, every extra dollar I can go starts paying off my debt. So outside of my regular, like 15% that goes direct into my savings, I haven't really considered additional options because I felt like I need to just get rid of the debt first before I can start, you know, expanding my future kind of stuff.

But then I felt like maybe I'm missing out on a lot of opportunity and a lot of money that I could be putting towards my future if I'm not kind of, you know, moving my money around a little bit that way. Absolutely. kind of, you know, moving my money around a little bit that way. Absolutely. So I think you're in such a good place with a plan to get your student loans done with. If you still had credit card debt, this would be a different story, of course. But I would have you take a look at the interest rates only. So this is not like an emotional conversation. This is just a basic numbers one. So you said that your student loans are around 6%, right? You're getting about 10% in the stock market. And so a better use of your money over time is going to be in the higher interest rate

that you're going to be getting back. Now, if you told me that you had that 28% interest rate, now that would be bad news to put your money in the stock market at 10% because you're spending way more money on borrowing than you would be getting. So as you were looking, which is awesome, to prioritize the debt that you're paying off, I would also take a look at the interest rates across the board between your debt and between the return on investment. So some returns on investment are really low. So if you were telling me like, hey, I want to put my money in a CD that's going to get 0.5%, I'd be like, hey, sister, so you're spending 6% here. And this is 0.5% might not make the most sense. But if you're looking at something that's connected to the stock market, then it probably is just over time you're getting more bang for your buck. I would aim to match whatever your employer is giving because, again, it's free money. And then after that, you have your traditional IRA that's hopefully from the rolled over old 401k. And then because you've done all the things, you got the debt monkey off your back, you started this emergency fund, that 15% that you have been allocating, I always like to say pay yourself first and then from that, put that into what I

will soon call a Miss Independent Fund and then figure out how to allocate that money to different options. Hold on to your wallets, boys and girls. Money rehab will be right back. The money rehab will be right back. Now, back to business. Right now, the only investment accounts that you would have is the current Roth IRA at your credit union, right? Okay. And your husband, does he have anything? He's been playing with like Acorns and Robinhood and that kind of stuff. So like smaller things. He was

looking at penny stocks for a while, but we haven't done anything like big yet. Awesome. I'm so excited for you. This is going to be a whole awesome world. And just knowing you, you're going to totally crush it. So yes, I'm so, so excited. So I would take for right now, stay on course, of course, for your student loans, you know, and keep paying them off because you're eating away at the principal, which is going to pay dividends in the long run. And then figure out your old 401k

and how much is in there. Do you know approximately? I really don't. I totally forgot about it until like last week and I'm like, oh my goodness, I need to look at this. Yes, please. Please tell me what happens with it. I would love to know. Also, sometimes you could make too much money to invest in a Roth IRA. It's a legal loophole where you can do in two steps what you can't do in one. So if you can't put money into a Roth IRA because whatever, you make too much money, which is high class problems,

but you want the way that it's taxed, then you can roll over into a traditional IRA and then go from a traditional IRA to a Roth IRA. You said tax-free before. And so I just want to clear that up too, because if you're putting your money in one of those accounts, they're taxed advantage. They're not ever tax-free. Yeah. Yeah. Okay. Sorry. I misspoke. I meant like it's before, well, I was thinking like with my 401k and everything that's pulled out of my income pre-tax. Yes, exactly. Okay, good. Okay, great. You're on it. So how are you feeling? I feel very excited to take everything that I learned today and implement it. And I'll definitely be keeping you up to date and letting you know how I'm doing

with putting more towards my future and finishing up the rest of my student loan debt. I can't wait. I'm going to be like an ultra rich bitch. That's right. Watch out, world. Watch your back, Warren Buffett. Angelica is in town. For today's tip, you can take straight to the bank when deciding between putting your money toward paying off debt or contributing to a retirement account. Take a very close look at the interest rates of your debt and the return on investment of your retirement options. You don't want to be in a position where what you're borrowing is costing you more than what you're investing, right? So if your interest rate on your debt is higher than the return on investment of your retirement options, then definitely focus on your debt. But if the ROI

on your retirement investments is higher, I still want you to prioritize paying off debt, but you should try to tackle paying off debt and also contributing to your retirement. Your old lady or old man self will thank you. Money Rehab is a production of iHeartMedia. I'm your host, Nicole Lappin. Our producers are Morgan Lavoie and Catherine Law. Money Rehab is edited and engineered by Brandon Dickert with help from Josh Fisher. Executive producers are Mangesh Hatikader and Will Pearson. Huge thanks to the OG Money Rehab supervising producer, Michelle Lanz, for her pre-production and development work. And as always, thanks to you for finally investing in yourself so that you can get it together and get it all. You spend my money, money. You spend my money, money, money.

You spend my money, money, money.