Ramsey’s Wrong: Why You Should Get the Employer 401(k) Match Before Paying Off Credit Card Debt

Paying off credit card debt is important, but investing up to your employer 401(k) match first makes the most sense mathematically.
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Written by Erin El Issa
Senior Writer

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Here at NerdWallet, we want to help you get the most out of your money. If you’re working on paying down credit card debt, you may be confused about whether or not you should be saving for retirement. Financial guru Dave Ramsey says no, but we disagree. Here’s why.

Who’s Dave Ramsey?

Dave Ramsey is a popular financial guru and radio host. He is anti-debt and anti-credit card and he believes that you can work around needing a credit score. We tend to disagree with him, because we believe credit cards can be used to rack up useful rewards and having a great credit score opens up a lot of doors for you. But we can agree on one thing: Credit card debt is the worst.

As the most expensive form of financing, keeping a balance on your credit card can cost you thousands in interest pretty quickly. Because of this, we think you should pay off your high interest credit card right away, but not at the expense of your 401(k) match, a benefit Ramsey thinks you should ignore until your debt — all of it, besides your mortgage — is paid off completely.

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Math is fun: Why you should save up to the match before tackling your credit card debt

If your employer doesn’t offer a sponsored retirement plan, like a 401(k), you can ignore this. Likewise, if your employer has a 401(k) option but no match, pay off credit card debt first. But if your employer is matching your contributions, you would be passing up free money if you chose not to participate.

Most 401(k) matches will earn you a guaranteed return of 50-100%. That’s a hard return to match. Still not convinced? Let’s do some math!

Here’s the scenario: You have a credit card balance of $15,000 and an interest rate of 18%. You get paid once a month and your 401(k) contributions are in a Roth 401(k), so the money has already been taxed — this simplifies the case and keeps tax savings out of the equation. You have $1,000 per month to put toward your credit card debt and retirement savings.

If you put 5% of your income into your 401(k), that’s $200 a month, giving you an additional $800 a month to put toward credit card debt. It will take you 22 months to pay off your debt and you’ll incur $2,436 in interest. If you don’t contribute to your 401(k), you’ll put the entire $1,000/month toward debt, paying it off in 17 months and incurring $1,833 in interest.

By directing the entire $1,000 toward debt, you’ll save $603 in interest. However, if you instead pay that $603 and take advantage of your employer match for 22 months, you’ll earn between $2,200 and $4,400 (50-100%) in matches alone, and that’s before you consider the magic of compound interest.

By forgoing an additional $603 in interest, you’ll earn between $2,526 and $4,834 in matches and interest. This means by investing up to the match while paying off debt, you’ll optimize your finances by between $1,923 and $4,231. These numbers don’t lie — Ramsey’s wrong.

Ramsey does recommend putting 15% toward retirement after paying off debt and saving up an emergency fund. The five months’ difference between our debt payoff plan and the Ramsey plan will be spent aggressively saving up an emergency fund while continuing to forgo the employer match. We also recommend saving for emergencies, but don’t believe it’s necessary to ignore your retirement savings while doing so.

Bottom line: Paying off your credit card debt is important, but investing up to your employer 401(k) match first makes the most sense mathematically. If you want to optimize your finances to the fullest extent — contribute to get the match and pay your credit card debt off aggressively with the remainder of your discretionary income.

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