“Dear Steve,
I owe $30,000 in credit card debt on two cards. One card there is 9.99% rate, the other is interest free until Dec. ’10 (after that the rate states 9.99% but is subject to change) I can make the minimum payments but not much else right now until my balances decrease. I have been using the snowball approach to debt elimination and I feel good about the results and just have to stay away from using the cards as much as possible. And I will continue to pay beyond the minimum payments as much as I can until the balances are paid off. I am also putting money into an emergency fund (thank you, your advise to others has helped me get a better understanding of right & wrong!)
My dilemma is whether to pay a portion of my debt with a portion of a mutual fund ($5000) or continue to just pay off as much as I can without touching the mutual fund. I have already reduced the amount I contribute to my 401K by over half to help pay off the credit card balances. (Not happy about that, but again, after reading your advice I know not to withdraw from my 401K!) Is the big question will the market out perform the 10% in interest I will be paying if I decide to try to pay off the balances without touching the mutual fund, with the realization that I will have to pay taxes on any gains I have had on the fund or is there more to it? I’m struggling to find the best approach to continuing to save for the future and eliminating this debt as quickly as I can. From the research I have done, it seems to be a pretty close debate either way which is why I’m probably struggling with this. I just don’t want to make a major error either way. Any advise would be greatly appreciated!
JJ”
Dear JJ,
Since the mutual fund is not in a protected retirement plan and you are aware of the potential tax implications from taking the money out and you are already on a good plan, I think the answer here comes down to what will make you feel best and more confident.
You may get tremendous satisfaction out of paying whatever taxes may be due on the profits from the mutual fund and reducing your debt and that’s fine. You may also feel better knowing you’ve got some cash saved in the market and growing and that’s fine also.
Unfortunately you’ve reached an area where the best decision is not one that is purely numerical but also involves how you feel about it as well. So how do you feel about it. All things being equal would you rather cash out or let it ride?
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