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We Do the Math: Save for Retirement or Pay Off Credit Card Debt?

Should you save for retirement or pay off credit card debt? If you’re carrying a card balance, you may be wrestling with whether to put all your resources into attacking the debt, or start building your retirement nest egg while you slowly pay off debt.

Which one will give you a better net worth? There’s no simple answer. For some people the situation may warrant clearing credit card debt first; for others, it’s better to start investing right away. To figure out which scenario is better in a given situation, we’ll need to do some math. Don’t worry, we’ll show you how to do it in a few easy steps.

Step 1: Gather important numbers about your debt and your retirement plan

First, look through your credit card statements and accompanying information to pull up the following numbers:

  • Credit card debt. You’ll find this on the front of your credit card statement.
  • Credit card interest rate, or APR (Annual Percentage Rate). You’ll find this further down on your statement, in a section labeled “Interest Charged” or something similar.
  • Minimum payment. You’ll find this in your card’s terms and conditions, under a discussion about how minimum payments are calculated. It will probably be a percentage, but there may also be a flat sum.

Next, consider any retirement plan you are enrolled in or have available. What is the average annual return? You can identify past returns by reviewing your retirement account statements. For example, your 401(k) plan account may list your annual return. Note that past returns don’t guarantee or predict future returns, but we’ll use the average annual return as a proxy for future returns in this case, knowing that if our portfolio takes a long-term downward turn, our calculations will change.

Finally, how much extra do you have in your monthly budget that you could put toward credit card payments, retirement investments, or both?

Follow along as we consider a hypothetical debt situation and retirement opportunity. Let’s say there’s $500 in our monthly budget, which equals $6,000 annually ($500 x 12 months = $6,000) to put toward debt or retirement.

Currently, the balance on our credit card is $5,000. Our APR is 22%. Our minimum monthly payment is 3% of our outstanding balance or $25, whichever is greater.

Our employer offers a 401(k) plan. For the sake of keeping this illustration simple, we’ll say our employer doesn’t match employee contributions and we choose to make taxable contributions with a Roth designated account within the 401(k).

In reality, you might choose instead to make tax-deductible contributions to a traditional retirement account. With a Roth 401(k) there are no immediate tax benefits, which makes our calculations simpler and therefore better suited for this purpose.

We’ll say the default investment in our 401(k) is a target-date mutual fund with an average annual return of 6.3% since its inception. We know that future performance is unpredictable. But to run the numbers for the retirement vs. debt decision, we’ll apply an annual return of 6% to our retirement account.

We’ll look at the retirement account and credit card balance after five years to compare the two choices: 1) making minimum payments on our card balance so we can start investing right away, or 2) putting all our extra money toward our credit card debt before we consider retirement investing.

In both scenarios, we’ll assume that we won’t make additional charges on our credit card. In addition, we’ll contribute to our retirement account when we have money available to invest.

Step 2: Calculate net worth if you prioritize retirement savings over paying off credit card debt quickly

In this scenario, we’ll see what happens if we only make minimum payments on our credit card so that we can get started investing for retirement right away. Your credit card statement should state very clearly how long it will take to pay off your balance if you make minimum payments.

You can also find an online calculator to help you with these calculations. Here’s the information we’ll enter for our example (you can put in your own numbers from your real-life situation):

  • Current credit card balance: $5,000
  • Annual percentage rate: 22%
  • Proposed additional monthly payment: $0

Who Pays When Loved Ones Leave Debt Behind?

Losing a loved one — a parent, spouse, or sibling — is difficult enough. But what if your loved one left mortgage, auto loan, or credit card debt behind? Will you now be responsible for paying those bills?

In most cases, no. Creditors can’t force you to cover the unpaid debts of loved ones who have died. But the money that your loved ones owed might cut into or even eliminate any inheritance that was meant for you or other survivors.

What usually happens

When people die, the money they owe creditors — everyone from their mortgage lender, to their auto loan providers, to their credit card companies — is collected from their estate. The estate in this case is defined as the money and assets owned solely by the deceased.

This might mean that the house your parents owned has to be sold to pay off any mortgage debt they owed. Their car might have to be sold to pay off credit card or other debts.

Whatever is left after these debts are paid off remains in the estate of the deceased. If your parents wanted to leave money behind for their children and grandchildren, the amount they wanted to bestow will be reduced by however much they owed creditors at the time of their death.

It can get more complicated

Of course, that’s the most basic course of action. In reality, money matters can get more complicated after the death of a loved one.

This is especially true when you lose a spouse. In most states, you won’t be responsible for any debt that your spouse left behind when he or she died, as long as the debt was accrued in your spouse’s name alone. If both you and your spouse share a credit card or a mortgage, then you will be responsible for making payments on that debt after your spouse dies.

If you live in what is known…

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Google has expanded its payment solutions with the Google Payment API, which lets merchants and developers offer their users to pay with credit and debit cards saved to their Google Account. Payment options include a credit or a debit card previously saved via Android Pay, a payment card used to transact on the Play Store, or a form of payment stored via Chrome. They can use these saved payment options in third-party apps and mobile sites, as well as in Google Assistant.

For users, the API means faster checkout as they are more likely to be able to have a saved card when they see the option to pay with Google on supported apps or sites. For developers, the API means faster checkout, more conversions, increased sales, and fewer abandoned carts.

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After 10 years working for various digital marketing agencies, I jumped ship and went freelance in 2005. Though making the switch was stressful, I’ve never looked back. Freelancing has given me control over my schedule, put an end to my mind-numbing commute, and allowed me to work from anywhere. (See also: 7 Things I Learned About Money After I Went Freelance)

Of course, all that freedom assumes one big thing — that I’m getting paid on time. If late payments are derailing your freelance dreams, listen up. Here are eight ways to make sure you always get paid on time:

1. Track everything

Getting paid on time starts with you. That’s why organization is one of the life skills every freelancer needs. Keep meticulous records of all work completed and the payment status of every invoice. I rely on a basic Excel spreadsheet that’s organized with the following headers: Client Name, Project Description, Hours/Rate, Amount Invoiced, Date Invoiced, Date Payment Received, and Notes (for tracking important communication with clients and the dates any payment reminders were sent).

2. Invoice immediately

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3 Ways Student Loan Debt Can Affect Your Mortgage Application

You’re ready to buy a home, but you’re also paying back federal or private student loans. Will this make it more difficult to qualify for a mortgage?

Yes. But that doesn’t mean qualifying for a mortgage while paying off student loans is impossible. Here’s what you need to understand before starting the home buying process.

Debt-to-income ratio

When determining whether to approve you for a mortgage, lenders look at something called your debt-to-income ratio. This ratio shows how much of your gross monthly income — your income before taxes are taken out — your monthly debts eat up. If your debt-to-income ratio is too high, lenders won’t approve you for a mortgage because they worry that you won’t have enough money each month to handle this significant payment.

It’s important to remember that mortgage lenders aren’t as concerned about your total student loan debt as they are about the size of your monthly student loan payments. Lenders typically want all of your monthly debts, including your new mortgage payment, to equal no more than 43 percent of your gross monthly income. So, if your total debts — again, including that new mortgage payment — are at or under that percentage, your odds of qualifying for a mortgage loan are higher.

Your student loan payments are considered part of your monthly debt by lenders. For example, if you are paying $300 a month on your student loans, your lender will count that amount when calculating your debt-to-income ratio. If that $300 payment pushes your debt-to-income ratio past 43 percent, you might not be able to qualify for a mortgage.

A deferment won’t help

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5 Myths About Credit Cards That Won’t Go Away

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The idea of evaluating a person’s creditworthiness goes back as early as 1899, when Equifax (originally called Retail Credit Company) would keep a list of consumers and a series of factors to determine their likelihood to pay back debts. However, credit cards didn’t make an appearance until the 1950s, and the FICO score as we know it today wasn’t introduced until 1989.

Due to these timing differences, many U.S. consumers hold on to damaging myths about credit cards. Let’s dispel five of these widely held but false beliefs and find out what to do to continue improving your credit score.

Myth #1: Closing unused cards is good for credit

Remember when United Colors of Benetton used to be all the rage and you shopped there all the time? Fast forward a decade; you don’t shop there anymore, and you’re thinking about shutting down that store credit card. Not so fast! Closing that old credit card may do more harm than good to your credit score.

Your length of credit history contributes 15 percent of your FICO score. If that credit card is your oldest card, then closing it would bring down the average age of your accounts and hurt your score. This is particularly true when there is a gap of several years between your oldest and second-to-oldest card. Another point to consider is that when you close a credit card, you’re reducing your amount of available credit. This drops your credit utilization ratio, which makes up 30 percent of your FICO score.

What to do: Keep those old credit cards open, especially when they are the oldest ones that you have. Just make sure that you’re keeping on top of any applicable annual fees and they’re not tempting you to spend beyond your means.

Myth #2: Holding a credit card balance is good for credit

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2. Due

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3. PocketSuite

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