Is it better to pay off your credit cards or put more money into your retirement or savings accounts? The  correct answer will require some balancing of numbers and understanding your personal situation. Here are a few things to consider if you’ve got some extra money and aren’t sure whether you should use it to pay off debt or increase your savings; or if money is really tight and you’re trying to decide whether it would be better to cut back on contributions to your 401K or other retirement account in order to pay more on your debt.

Pay Down Your Debt

Many people discover that paying down their debt instead of contributing to their 401K is a better use of their money, but it really depends on the type of debt you have and whether paying those debts is hurting your cash flow.

If the debt you carry is a vehicle loan or a mortgage, you should just pay those payments as scheduled and continue to contribute to your 401K account. It doesn’t not make sense to skip your 401K contributions to accelerate payments on a car loan or mortgage.

On the other hand, if most of your debt is in the form of high interest credit cards, you will probably want to change your mind! It can take twenty years or more to pay off credit card debt if you only pay the minimum amount required by the credit card company.

If you have credit card or high interest loan debt in the amount of $10,000 and an interest rate of 18% annually, you could accelerate your payments to pay this off within about 3 years. If you could pay $400 per month for 32 months, you’d bring these accounts to a $0 balance, and you’d pay a total of $12,628. Of course, if you had enough room in your cash flow to pay an additional $200 a month you could pay it off one year faster and save over $1,600 in interest. Once paid, you could contribute all of that into your 401K account or other savings plan. The faster you pay off high interest credit card debt, the more money you will save on interest.

If your cash flow doesn’t allow you to increase the amount of money you are paying to your credit cards because you are contributing to a 401K, it is probably in your best interest to skip the 401K contributions for two or three years to get your debt paid off- and then put all of that money into your 401K or other savings plan once you are debt free.

Your 401K Account

Most people understand the advantages of contributing to a 401K account- including the ability to reduce your income taxes since your 401K contributions are not taxed. Other tax benefits include the fact that the investment income your account earns is tax deferred, which reduces how much you pay in taxes right now. If you are lucky enough to work for an employer who participates in employee-matching, you actually get free money whenever you contribute to your account and the employer matches the contribution. A 401K account uses compounded interest, so the more you contribute at an earlier age the more you will have when you are ready to retire and it can really give you a big pay off.

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Debbie Dragon is a contributing writer for www.creditorweb.com, where she writes about credit cards and finance topics.