What would be a better use for this small sum of money?

Question

I got a pay out from a 401k from a previous employer. It's a check for under $1,000 but I can't decide what a more practical use for the money would be. Should I invest it in my rollerover IRA for retirement (I'm only 28 and that's my only retirement savings vehicle and I don't make many contributions to it), or should the money go towards paying some bills and paying off a couple of small credit cards and then spending the remainder on myself?

I'm just looking for some opinions of what others would do.

I've already paid the taxes on it (since they gave me a pay out) and if I invest it into my rollover IRA I will have to make up the difference in taxes before they will accept it. But that will over $900 additional in my IRA.

And the credit cards are not that much. I'm looking at about $300 from Best Buy, and $300 from Belk. Though those are both pretty high interest cards.

Answer 1

Lisa, it comes down to the interest rate of your cards vs. the return you can expect to get on your IRA. If the cards have a rate of, say, 20%, paying them off is similar to getting a guaranteed 20% return on your invesment. You can probably expect your IRA to return in the neighborhood of 10% per year, assuming it returns similarly to the stock market. So paying off the credit cards in this case would be a much better "investment" decision than adding to your IRA, even considering penalties.

Answer 2

If it were me, I would use the money to pay off my credit card debt. Then I would take the money that I would normally use to pay my monthly credit card bills and put that into my IRA. Also, it never hurts to spend a little money on yourself now and again. Try and put a set amount into your IRA every pay day, even if its only $10 or $20, its amazing how it will add up over time.

Answer 3

If you invest it it will be worth far more when you spend it. However if you pay off credit cards - you will save money on interest. Myself, as it is a small amount - I would go for paying off the credit cards. If there is more than $500 then invest it. If less then spend it on something that you can see again and again to remind you of your luck!

Answer 4

you should probably use the money to pay off the small credit cards, pay some of the bills, and then contribute the remainder, however small, to your IRA account so that it'll help you more in the future.

Answer 5

What kind of APR are you paying on your credit card(s)?
...and what kind of balance do you have on your credit card(s)?

My preference is to only use credit card(s) for their convenience (security and rewards programs) and never use them for credit. Generally I've never seen anything enticing abt borrowing with a credit card (except back when there were those nice 0% APR for up to almost 12 months!, and no balance transfer fee either!). I borrowed then.

The current APR's on cards are something like mid to high teens; I'd avoid any debt with them now if that's at all feasible.

Answer 6

Pay off all credit cards then save the rest so that you will not get into credit card debt again!

Answer 7

Dollars and cents rules say to pay off any debt that is charging you interest first. Whatever you choose to do with the leftovers is up to you. (You certainly shouldn't put money in a savings account when you have interest adding up somewhere else.)

Answer 8

Use All of it on debts........I would pay as much as possible on Credit Cards.

Answer 9

Roll it over. If you don't it's considered a distribution and you have to pay taxes and penalties.

Answer 10

Do you have a house?