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Question:


If I receive a large sum of money, do I put it into my savings or pay off a credit card? My credit card balance is $2,300, with a 6.9% interest rate. I have an IRA (not a significant amount) and less than $5,000 in my savings account. I’m in my early 30s.
-CalJL


Answer:


It’s hard to know what to suggest without knowing what you mean by “a large sum.” If it’s large enough, you can run the table, paying off your credit card balance, maxing out on your IRA and putting some money aside for a rainy day. If the sum isn’t large enough for all that, then the IRA would be a good first priority.
 
Money saved for retirement at your young age and allowed to compound tax free at even a modest annual rate can leave you with a much larger sum when you need it. If you put $5,000 in an IRA and earn 7 percent a year for 30 years, you’ll end up with more than $38,000. You’ll also get immediate breaks on your federal and, if applicable, state income taxes when you make the contribution. That savings could then be used to take care of a big chunk of the credit card balance.
-Conrad de Aenlle



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