An Article of Interest
6 Money Dilemmas (Part 1 of 3)

As you invest your money, shop for a home or tackle any one of the many financial decisions you have to make over your lifetime, do you sometimes wish you'd paid more attention in math class? Do you find yourself having to "run the numbers" and wondering how? To help, we've taken six common financial quandaries and done the math for you. As you'll see, the solution isn't always black and white, and the "right" answer may depend on things that you can never know for sure, like your tax bracket in 2020 or how your investments will grow.
Emotional considerations may tip the balance. Even if the math favors buying stocks over prepaying your mortgage, say, you may simply sleep better being out of debt. So this guide will walk you through the caveats as well as the calculations. Come up with your best call.
Pay off a credit card or fund your 401(k)? You should do both. If you can't, pay off the plastic first. In an ideal world, you'd wipe out your costly debts and save for retirement. But in the real world, you may not have enough cash to do both at the same time. Of course, you must pay at least the minimum on your credit card every month. So the question is: Do you put the rest of your available cash in your 401(k) or devote it all to your credit card?
By paying off credit-card debt, you get a guaranteed rate of return equal to your interest rate (the average is 14 percent today). But if your employer matches your 401(k) contributions, that's a 50 percent return (assuming the typical 50¢-to-the-dollar match on the first 6 percent of your salary). Hard to beat. Or is it? The 50 percent match is a one-time gift; the 14 percent interest will compound every year. At some point the cost of that interest will overtake 50 percent. So if you have a big credit-card balance, attack that first.
Let’s say you're deciding what to do with $250 a month. With a $5,000 credit-card balance at a 14 percent rate, your minimum payment is $125 a month. Suppose you put the rest in your 401(k). Because you don't pay taxes on that contribution, you can actually invest $174 a month (assuming a 28 percent tax rate). Keep paying $125 a month on your credit-card balance, and you'll need 55 months to wipe it out. But, if you earn 8 percent annual returns and get the standard 50 percent match, you'll amass $17,271 in your 401(k).
If you plow your entire $250 toward the credit card, you'll pay it off in just 23 months. Then you could devote all your spare cash to your 401(k). By the end of the original 55 months, you'd have $18,515 in your plan. The one-at-a-time approach beats splitting your money because 55 months of paying 14 percent interest outweighs the 50 percent match.
If your credit-card debt isn't that big, and you can pay it off in just a couple of years even if you split your cash, go ahead and fund both goals. You'll get the benefit of the 50 percent match. The bottom line: If you have a big credit-card balance, wipe it out before you open a 401(k).
Save in a Roth 401(k) or a regular 401(k)? Wish you could shelter your retirement savings from taxes, but you make too much to contribute to a Roth IRA? With the recent arrival of the Roth 401(k), you may have, or may soon be getting, a second chance at tax-free income. Grab it. With a traditional 401(k) you invest pretax dollars and pay taxes when you withdraw money; with the Roth you pay taxes on what you put in but nothing on your withdrawals. About a quarter of employers have rolled out this option, and a majority of plans will likely offer it by 2009. Unlike a Roth IRA, a Roth 401(k) has no income caps.
Let's say that you contribute the maximum of $15,500 to your 401(k) and you're in the 28 percent tax bracket. Assuming an 8 percent annual return, you'll end up with $72,245 tax-free in 20 years with a Roth. If you go with the traditional 401(k) instead, you'll also end up with $72,245 in 20 years, but you'll pay taxes on the withdrawals. At the same 28 percent tax rate, you'd be left with $52,016 you could actually spend. When you fund the traditional 401(k), however, you shelter $15,500 from taxes. But even if you invest that $4,340 tax savings outside your plan, you'd have to earn well in excess of 8 percent a year to equal your Roth total after taxes.

By: Janice Revell, www.money.cnn.com