'Help! Should I focus on paying off loans or investing in a 401(k)?'

David Bach, Contributor

Welcome to Asking for a Friend, Grow's new money advice column. Got a question for one of our money experts? Email us at

Dear Asking for a Friend,

I just became eligible for my company's 401(k) plan and they'll match up to 3% of my contributions. The only problem is I promised myself I'd prioritize paying off my $43,000 in student loans. I realize saying no to a company match isn't a good move, so I'm torn about what to do.

I've made cuts in my spending and have been teaching myself impulse control, all with the target of ditching this debt. I use the avalanche method, so I pay the minimum on most of my debts, and then I put the most money into the one with the highest interest rate. But this company match is really tempting.

I am wondering if accepting the match is ultimately better for my financial health, even if I reach my debt-free date a bit later.

Do you think I should ignore the offer of free money from my company's plan and stay focused on paying off my loans, or delay the satisfaction of crushing this debt and take the free cash?

Thank you,

Want to Be Debt-Free

Dear Want to be Debt-Free,

Your question is one of the most frequently asked questions I get: "Should I pay down my debt or save?" It's a great question. Many experts recommend you pay down your debt first, then save. They're wrong.

When you focus all of your attention on paying down your debt, the experience can be both frustrating and depressing. It can take years. And many people who concentrate only on paying down their debt never turn to actually investing, which means they can lose decades of time to save and invest.

By not saving and investing, you're falling behind on the miracle of compound interest that takes place the sooner you start.

My answer to your question is that you should do both. If, for example, you have $200 a month available to pay down your debt or save, I suggest you to split that $200 right down the middle. Put $100 towards your debt and $100 towards what I've called your "Pay Yourself First" Account. In this case, that account is going to be your 401(k) plan.

Many experts recommend you pay down your debt first, then save. They're wrong.
David Bach
NYT bestselling author

To pay down the debt, I would continue using the avalanche method, as you mentioned. I call this method "DOLP," which stands for Done On Last Payment. It's a great approach that I feature in my book "Debt Free for Life."

Then, immediately, sign up for your 401(k) plan at work and take advantage of that "free money" your employer is offering you. You're too smart to ignore the free money with your employer's matching contribution of 3%.

Free money is really hard to find, so take advantage of it.

Your 401(k) plans provide four major advantages to investing.

  1. They are tax deductible, meaning you won't pay tax on the money you put into the plan until you take it out.
  2. The money grows tax deferred until you take it out, usually after the age of 59 and a half.
  3. The money can be invested automatically out of your paycheck before you will touch it, and that makes saving and investing easy. You won't need a budget or discipline to succeed.
  4. They work. Today there's nearly $6 trillion now in 401(k) plans. People who use them build wealth, plain and simple.

People who don't use their retirement accounts at work usually can't afford to ever retire. Then one day they lose their job and they've got nothing to show for decades of work financially. Don't be that person.

Free money is really hard to find, so take advantage of it.
David Bach
NYT bestselling author

Finally, remember that compound interest is basically a miracle. Consider this: Save just $10 a day, or $300 a month starting when you're 25 at 10% annualized rate of return, and by the time you're 65 you could have $1,780,000.

Wait until age 35, just 10 years later, and do the same math. Three hundred dollars a month invested at 10% will be worth $664,000 when you're 65. Wait until age 45 to start, and you could have $234,000 at 65. Wait until you're 55 and, at 65, you would have $68,000.

The moral of the story here is, don't wait! Start today.

Good luck,


David Bach is one of America's favorite financial experts and a 10x New York Times bestselling author. His latest bestseller is "The Latte Factor: Why You Don't Have to Be Rich to Live Rich." He's the cofounder of AE Wealth Management, one of America's fastest growing RIAs.

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