Hey r/personalfinance, I just got a year-end bonus of $15k and I'm not sure what to do with it. I'm 29, have about $9k in credit card debt at 22% APR, a car loan with $10k remaining at 7% interest, and a student loan with $18k left at 4%. I also have a 401k that I contribute 6% to just to get the company match, and it currently has about $35k in it. My annual salary is $78k, and I have about $4k in my emergency fund right now. I'm torn between paying off my high-interest credit card debt, putting more towards my student loans, or maybe even investing some in my Roth IRA, which I haven't maxed out this year. I feel like getting rid of that credit card debt would be a huge relief, but I also think investing could give me more returns in the long run. My goal is to be debt-free in a few years and start focusing on saving for a house down payment. What would you guys do in my situation? Should I balance between paying off debt and investing, or just go all-in on one option?
Should I use my bonus to pay off debt or invest?
byu/damienfnit inpersonalfinance
Posted by damienfnit
12 Comments
> I feel like getting rid of that credit card debt would be a huge relief, but I also think investing could give me more returns in the long run.
No, you should absolutely pay off the credit card debt. That’s a guaranteed return of 22%, which you don’t usually get with investing. You should also think about using the rest to pay a chunk of principal on the car loan. Same reason.
The ELI5 answer is. You pay off anything that is more than the interest you make on investments, before you even consider investing.
Pay the card off. and set the rest aside for a rainy day. That would be my suggestion
(nice little bonus, with a title in hand, you can also lower your insurance by going liability with uninsured motorist).
Pay off credit card. That’s really bad debt – this shouldn’t even be a question in your head.
This is a no-brainer. The credit card debt has to go.
I can understand why you would think investing might be a better long-term solution, but average returns on a well-invested retirement account are around 10% over a 10+ year period, meanwhile you’re paying over 20% on those credit cards.
Pay off the card and as much of the car loan as you can. Now take all that extra cash you’re not paying on the credit card and put it toward the car until that’s paid off.
With those two things knocked out you can now funnel all that cash you’re saving into your 401k and Roth IRA for the long-term growth you’re looking for.
Pay off the credit card and throw the rest at the car. Keep investing in your 401k as you are now, but only when all debt is payed off should you use your bonus for anything other than paying off all your debt.
If you pay off your credit card, and half of your car, by next year your car will be paid off and the bonus can pay off all of your student loans.
Year after that would have more money every month because you have no credit card bill, car payment or student loan payment. Use those extra funds every month to put towards your 401k and then when bonus time comes around you can treat yourself to something with ZERO guilt about spending that bonus money. (Still invest some of it, but also have fun with some of it)
Credit card and car loan go bye
[removed]
Pay off the cc debt asap. With avg gains of 10% on sp500, it’s probably better to put the rest into roth ira than pay off your 7% interest loan. Don’t pay off your student loans early because the rate is very low.
Pay off CC ENTIRELY (and when you have a clean slate pay it in full every month) then put the rest towards the car.
Use the bonus to wipe the 22% card, then bolster your emergency fund, and prioritize the 7% car before investing beyond the 401k match. Rule of thumb: pay any debt over ~7% before investing, since that return is guaranteed. Does that order fit your house timeline?
Debt. Debt is an immediate return.
This sub has a wiki on managing a windfall, check it out. I’m pretty sure that a bot will link it below.
Put it all toward debt, though.