Pay extra on debt or invest in your 401k?

If you're comparing whether you should throw some extra money towards your debts to pay them off faster, versus whether you should throw that extra money towards an investment (such as a 401k), especially when there's an employer match and/or a tax reduction involved with your investment, you can use this website to help you simulate that comparison.

Obviously, you should always pay at least the minimum monthly payments on all your debts, do your own research, and consult with your financial and tax professionals as needed.

No.

Maybe, maybe not. The conventional wisdom in favor of taking a deferal is that a person could avoid paying taxes in high tax brackets during their career, and instead take your withdrawals in lower tax brackets, maybe even much lower tax brackets during retirement.

Ultimately you should do your own research, consult with your tax professional, and decide on a personal strategy that works for you.

Just set your tax bracket to 0 when you run your numbers if you won't get a tax deferal as part of the contribution you're considering. That field is labelled "tax bracket" because that's easier for humans to understand, but the math behind the website considers it more as a current-year "tax reduction."

Here's a few examples:

Your salary is 100k. Your employer will match 100% up to 6% of your contributions. You decide to contribute 6% to get the match, but nothing more. You should input 6000 as your contribution, and 100 for the employer match.

Your salary is 100k. Your employer will match 50% up to 6% of your contributions. You decide to contribute 6% to get the match, but nothing more. You should input 6000 as your contribution, and 50 for the employer match.

There are other FAQ items for you if you're contributing over and above the employer match or if you have no employer match, so be sure to read those if they apply to you.

Just set the employer match percentage to 0. If you're running the numbers for a 401k contribution, you'll still likely have some tax deferals as part of the numbers you're considering.

You'll need to run two sets of simulations. Run the first one using the dollar amount of your contribution which will be matched, and using the percentage of the contributions which will be matched. Then run the second simulation using the dollar amount that won't be matched, and set the employer match to 0.

The math behind this website isn't set up to handle this. For example, suppose that $1000 of your investment contribution was in the 22% bracket and $3000 was in the 12% bracket:

One option would be to run two (or more) sets of numbers. One set would use 1000 as the contribution and 22 as the tax bracket, and the other would use 3000 as the contribution and 22 as the tax bracket.

Another option would be to calculate an overall average (not using this website), and then input the overall average as your tax bracket. For example, you could figure the overall average using ((3000 * .12) + (1000 * .22)) / (3000 + 1000).

This isn't really a question, nor is this strategy always mathematically optimal. You should run the numbers (using this website, or not) to find a strategy that you like. But ultimately, you can use (or not use) any strategy you like. You do you.

Not really, the math that this website uses doesn't account for any interest that your investment might earn. If your investment doesn't involve an employer match and/or lower your tax burden in the current year, then the math used by this website will always favor debt reduction.

In the real world, you'd just compare the interest rate that your debt costs you versus the interest rate that your investment can/should/will earn for you, and then go with whichever is higher, taking your risk tolerance into consideration as well.

You can run the numbers considering any kind of debt.

Be aware that this website does not account for any tax deduction that your debt might provide you, such as a tax deduction for mortgage or student loan interest. Those deductions are usually either small or increasingly rare, but you'll have to account for those on your own.

Additionally, the math behind this website only accounts for simple interest compounded monthly at whatever rate you input. It can't account for things like variable rate mortgages, teaser rates, credit card balance transfers with a 0% period, etc.

The math behind this website isn't set up to handle this. For example, suppose that you had a $3000 debt at 18%, and a $1000 debt at 7%:

One option would be to run two sets of numbers, one using 3000 as the debt balance and 18 as the interest rate, and the other using 1000 as the debt balance and 7 as the interest rate.

Another option would be to calculate the overall balance and the overall interest rate, then input those numbers. You might try something like this to get the overall interest rate: ((3000 * .18) + (1000 * .07)) / (3000 + 1000). In this example, the result would be .1525, so the overall interest rate would be 15.25. All fields on this website only accept integers, so you would probably input 15.

This website uses the same logic as described in this writeup from NerdWallet, and if you run a simulation using the same numbers they describe in that article, you should get similar results (though with some very slight differences, likely attributed to the fact that there are multiple ways that interest can be compounded and/or the way that numbers are rounded). You also always have the option of viewing the javascript that the simulation uses if you are technically adept at such things.

It was built with the United States in mind. Your mileage may vary if your country's tax and/or retirement investment system is different.

NerdWallet has a good writeup.

No.

This website should not be considered financial or tax advice. The author of the website is not a financial or tax advisor, does not work in any financial or tax related disciplines, and does not claim to be a financial or tax advisor. This website should not be considered a substitute for consulting with your financial and tax professionals who can advise you about your own specific needs.