I always favor the 'Invest-your-way-out of debt' rather then 'Pay-your-way-out-of-debt' approach.

Most people don't like that approach because they think it is too risky due to a lack of understanding.

To pay off any debt is a short-term fix to your long-term problem. You still have time to tackle all the issues if you don't play it safe but play it smart. A bigger paycheck usually doesn't fix the problem. It can help in the short-term but is not a long term solution.

Have you considered to set-up a budget plan and an investment plan? Are you open to that idea at all?

I'm not sure I completely understand what you're saying but I'll try to respond.

I do have a budget with which I'm consistent and I've completely stopped any form of debting since 1/1/07. I have a list of all of my debts and keep a record of what I pay on them. I also keep a record of every penny that goes in and comes out of my life.

I DO have the ability to put money in a 401k at my job and a couple of people recommended I do that (people who I trust and who are 'mentoring' me concerning getting myself out of debt). I haven't started putting any money into my 401k because I'm really underearning right now. I really have less than what I need to be comfortable. That's why I am trying to decide if I want to just go ahead and put money in the 401k or keep paying off debts and at least get to a point where I'm more comfortable with my living situation. I do need to make more money and will continue to look for a better job but, as I said, I can't figure out if it would be better just to continue short term with paying down debt.

There has also been mention in this forum and other places of good debt vs. bad debt. A home mortgage for example, borrowed at 6% and deducted from taxes as an interest expense, reduces your tax burden, free up those dollars for investment. Your net cost may be 4% or less. Guaranteed student loans at 2-4% may also fall into this category.

Now ask yourself: "Is possible to invest at a rate higher than 4%?" There are several mutual funds with 30 year averages of 10-13% and more. Minion also talks about investments with a far greater return.

One of the greatest words I have learned is "Arbitrage".
From Wikipedia, the free encyclopedia:

In economics and finance, arbitrage is the practice of taking advantage of a price differential between two or more markets: a combination of matching deals are struck that capitalize upon the imbalance, the profit being the difference between the market prices.

So if you think of money as a type of "market" (think Forex trading) then the idea of "buy low, sell high" means if you have borrowed money below the rate of your invested money, you are earning a return off of that borrowed money, just like the banks do. What a concept!

To take this one step further, at least in understanding how banks earn money, think about your credit cards.

When you are issued a credit card, the bank shows that limit as a "receivable" since you have access to the full amount at any time. The more receivables they have, the larger their "holdings". By law, they are required to keep a reserve of 10% of their total holdings on hand. Therefore, they now have access to 90% of that "receivable" to reinvest. This balance they now can take and create additional credits with the FED and turn around and issue more credit cards, creating more receivables, creating more 90% reinvestment dollars, and so on.... TALK ABOUT A MORTGAGE CRASH? What would happen if this banking scam was ever disrupted? They are borrowing on dollars that don't even exist!

Now you know why you get credit card offers every day in the mail, and why so many of them can offer 0% or some other small number, far below the going prime rate.

Money is a game. Knowing the rules of the game, and the thinking of the other side will help you if you intend to win.

Well, it is good that you have a budget plan and stick to it and that you don't get any more debt on your balance sheet. That's a good start.

I have my problems with many 401k plans why I recommend to ask how much your company will match and don't invest a penny more then that. Plenty will disagree.

It's not a secret that I hate mutual funds but that's another topic.

So you try to figure out if you should fund your 401k or use that money short-term to pay off debt quicker?

Personally, I wouldn't do neither one of those but if those are the only two options which you want to choose from I would pay-off your debt.

It is nice that you have people you trust which mentor you but the question is if the info you get comes from a qualified source.

Are those individuals wealthy and financially independent and can their advice get you there as well?

If yes, then that's great.

But if they come from the 'hard-working-middle-class' which depends on a job, on their employer for income, and if they love mutual funds and rely on 401k plans for retirement, if they have the 'study-hard to get a good job with benefits mentality' then you may wabt to look for advice from different sources unless you like that life-style.

You can compare that to two blind people in a city which try to explain to each other how to get from point A to point B.

What other option is there? I've also been saving on my own. Just putting money into my savings account for short term emergencies.

I have to agree entirely with Dru. There is no general rule that works for everyone, and it takes looking at your debt situation and seeing if you can take advantage of it or not.

Your 401k is not the place to put your money for this purpose (arbitrage). The reason is that you cannot gain access to the money if your investments do as well as you think they will. For example, let's say you start putting money in your 401k and suddenly have enough to pay off your debt entirely. You couldn't do it!

But if you take extra money and invest it, and your investments pay off big, you could then take some or all of that money and pay off the debt entirely. As Dru brought up, the type of debt and interest rate are very important in making this decision. If it is 20+% credit card debt, then you are better off paying it down as quickly as possible and investing later. If it is low-interest tax-deductible student loans, then you are better off investing and keeping this somewhat good debt around.

Having money in semi-liquid investments like mutual funds also allows you to use these types of accounts as an emergency fund, serving 2 purposes. Just make sure whatever you invest in is diversified so that one single investment going down in value won't erode all your savings.

The other option is to invest your way out of the problem.

Pay yourself first. Invest. Get your asset column up. Use the cash-flow from that to pay off debt and finance your life-style.

I know several individuals who did that and were very happy they chose that option. It may not be what you want to do but I wanted to at least put that option on the table for you to consider.

You may not have the expereince with equity markets and don't want to pay a third-party for investment advice which may take that option off the table.

If you don't have the experience, don't want to pay for the advice and don't want to learn for various reasons then that option is definately off the table.

It depends on your personal preferences. Whatever option you choose good luck with it.

Thanks, I hadn't thought of that. Once I get a little bit of money saved up, this may be a good option and one that I'll consider.

Sure, no problem.

Here is an approach which may help you:

Set-up a money market account and transfer the same amount ($50,$100, etc.) every month into that account before you pay anything else. Do an automatic transfer if possible. The more you can put aside, the better.

The automatic transfer will prevent you from spending that money on something else. The same dollar amount every month will start to teach you discipline. It is very important that you stick to any plan that you put in place otherwise the plan is worthless.

This will get your investment budget started. You can also use that as an emergency fund or use the same approach to set one up.

You mentioned that you keep track of all your finances. That's great. See if you can work this one into your budget.

I'm wondering how you will have money to do either -- paying off debt or investing.

Step one is to be able to be able to make all your payments (rent, car, food, clothes, debt service). Seems like you are already there...but how much do you have free after making your base payments?

If the answer is "not a lot" -- then you aren't going to accomplish much either way. You need to increase your income and lower your cost of living so that you free up money each month to put to work either on your debt or on your investing.

Step two is setting up an emergency fund. At a minimum this should be three months of your living expenses such that you could lose your income completely for three months and still pay all your bills and buy food.

3 months isn't "Nirvanna" but it's a good target.

Then the next question is the one you are asking. If you are making all your payments....have your safety net....and have money left over each month....then...it depends.

20% credit card type debt is a no brainer....you pay that off before anything else.

5% debt is another matter. You should be able to beat 5% with reasonably low risk investing. If you are making more than 5% with your investments...it's better to invest.

Investment debt is like having employees. You are paying your employees 5% but if they are making 6%, you are earning a profit.

I wouldn't be investing in the 401k just yet either. Your 401k money isn't accessible to you. Invest in a mutual fund or similar investment that will return greater than 5% and not have the strings attached to it that a 401k.

Unless....your 401k contributions are matched 100%. You can borrow up to half your 401k....so if your money is matched...you still have access to "your" money, while your employers contribution sits there as "free money".

You have things you'll need to do well before retiring. Buying a house....buying a car...getting married...having kids. Having all your money tied up in a retirement account that you can't touch -- won't help you.

Good luck,

Lee

I found this post when looking for other information on paying off debts and retirement. You can look for debt and retirement on the FDN Solutions blog they have an interesting take on the matter. Here is the link to the post but I also copied the middle paragraph for you to read

With personal savings at an all time low having a plan to live debt free at retirement is very important. You may have a percentage of your income going towards your 401k or other savings plan but you will need to take into account that you will need your expenses to be very low in order to live on your retirement savings. As an example if you are receiving a pension of $2,000 per month when you retire and your bills amount to $3,000 then you will need to supplement that income to keep the lights on. This is where the personal savings will come into play. You can use that money that you set aside every month to help you with the bills and other medical expenses.