Good thing I haven't made any changes yet then. Thank you for clarifying that.
Well, at the risk of unclarifying things, let's assume...:
- Debt is $10,000 at 8% payable monthly over 10 years. That gives a minimum monthly payment of $121.33.
- $1500/mo pre-tax is available; marginal rate is 28.4%
With this much, you could
1) put $1330.55/mo into the 401k and use the remaining after-tax ($1,500 - $1,330.55) * (1 - .284) = $121.33 for the minimum debt payment, or
2) put the entire $1,500 * (1 - .284) = $1,074.00/mo toward debt payment, or
3) something in between - in other words, pay some extra on the loan and contribute something less than the maximum to the 401k.
With option #1, the loan is paid after 120 months and the 401k has some balance, depending on investment returns.
With option #2, the loan is paid after 10 months (with a payment of $693.03 in the last month). 401k contributions start in month 10 with $532.08, and continue at $1500/mo for months 11-120. After month 120 the 401k has some balance, depending on investment returns.
For an example option #3, if $500/mo extra is paid to the loan, the loan is paid after 18 months (with a payment of $51.05 in the last month). 401k contributions are $633.22/mo for months 1-17, $1428.70 in month 18, and $1500/mo for months 19-120. After month 120 the 401k has some balance, depending on investment returns.
In sum, no matter which of the 3 options one chooses, after 120 months the debt is paid and there is some balance in the 401k account. We could look at all possible debt payments between $121.33/mo and $1,074/mo to see which gives the highest 401k balance after 120 months.
Of course, there is one other assumption to make: the return in the 401k.
We then find three possibilities:
1) If the 401k return is
less than the debt interest, the best thing to do is put
all the money toward the debt2) If the 401k return is
greater than the debt interest, the best thing to do is
make the minimum debt payment and put the rest of the money to the 401k.
3) If the 401k return
equals the debt interest,
all choices give the same result.
Although it is possible to have 401k returns exceeding 8%, the odds are much lower than for a similar "pay debt vs. invest" analysis around mortgage pre-payments when mortgage rates are ~3.5%.
Personally, I'd take the guaranteed 8%.