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Pay off Student Credit Card Debt or Pad the 401K?

Millions of young college graduates are finding themselves trapped in the worst job market since the early 1980s. And it's been quite the wake-up call for a generation that's frankly had it pretty easy to this point.

The unemployment rate for individuals 27 and younger with at least a bachelor's degree has doubled since two years ago, and the National Association of Colleges and Employers has also estimated that corporations will hire 22% fewer graduates than last year. Good jobs are scarce, and many Gen-Y'ers are simply swallowing their pride and moving home to wait tables until the job market improves. Not a bad gig if you can negotiate free rent and food from Mom and Dad.

If you were lucky enough to land a solid job, one of the things you may be wondering about is how to allocate your income to pay down credit card debt while still investing for the future. This happens to be one of the most common questions we receive from college grads entering the workforce for the first time - "Should I pay off credit card debt or contribute to my employer-sponsored 401K?

The answer is simple - it depends!

Of course, paying down high-interest credit card debt should be a top priority for anyone, regardless of age. However, I also believe it's extremely important for young workers to develop a habit of investing regularly and watching their money grow (hopefully).

If doing both means incurring some additional interest charges while you take a little longer to pay off the credit card debt, I think it's probably worth it. In other words, unless you have an exorbitant amount of credit card debt, there's really no reason why you should wait until you've paid off all your debt before investing in a retirement plan.

So, let's get back to the original question. If your employer matches 401K contributions, the first thing you should do is contribute at least what's required to get the full match. That's generally 6% of your salary.

Next, take a look at all your basic living expenses and budget how much you can afford to pay towards credit card debt on a monthly basis. Remember, the goal is to pay off the high-interest debt as soon as possible so you can invest more for the future and save on taxes.

Live as frugally as you can when you're just starting out, maximize your student credit card payments, and don't forget to keep track of exactly how long it will take you until you become debt free. You'll want to start a little fund on the side so you can throw a party for one when that day arrives.

As your income grows and the debt disappears, increase your 401K contributions until you've reached the maximum, and you'll find yourself well on your way to achieving the financial security you desire.

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Joshua Heckathorn's picture

Joshua Heckathorn was President of Creditnet, is a credit expert and has been featured on CNNMoney, FOX Business, Yahoo Finance, The Street, and many other national publications during the past ten years.  He received a Bachelor of Science in Management (Finance) from Brigham Young University's Marriott School of Business and earned his MBA from Seattle University.

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