Paying Down Debt Is the Smartest Thing in the World, Right?

When you see an article about paying down debt, right away, you have to see that it's a sanctimonious piece about how you should be responsible and strike everything off your shopping list other than dried bread once a day, right? Well, this isn't one of those articles. There are times when paying down debt doesn't really make that much sense?

Before you decide that paying down high interest debt should come before anything else, consider what matching 401(k) retirement account contributions can do for you. You need to consider financial possibility before you decide what to do.

If your employer has a matching contribution policy on the company 401(k) plan, that's free money in your retirement account. If you could take the money that you would be paying down debt ways, and if you could put it in your 401(k), you would get just as much money for free from your employer. It's unlike anything else that's on the table for you.

Just do the math. If you have a car loan for instance, and you're paying 8% on it, when you get a little extra cash, you might be tempted to pay this down - to get this parasite off your hands. However, what happens if you paid into your 401(k) retirement account? Right away, you get several thousand dollars and a month’s matching contribution. That's like 100% return. What’s 8 percent compared to 100 percent?

This works elsewhere too. Your credit card debt charges you about, what - $500 a year? That still doesn't compare to the several thousand dollars you get for free contributing into your 401(k).

But this only works for as long as you haven't maxed out your employers matching contribution limit. Most employers have one.

Paying down nonrevolving debt is also not a good idea. Nonrevolving debt is the kind of thing you have with your credit card. You have a fixed spending limit, and when you pay the credit card company back some, right away, it gets placed on your credit limit. You get to spend that money again - it revolves right back around.

So this does make a certain amount of sense when you compare it to paying off something like a car loan or a home loan that doesn't revolve right back around. When you pay $1000 off of your car loan, you don't get to an instant $1000 credit to spend on something to do with your car. The moral of the lesson is that you have to prioritize when you are paying down debt. Revolving debts comes first, and nonrevolving debt comes next.