I recently was faced with a decision that I believe many people have faced while trying to get out of debt. In an effort to pay off debt as quickly as possible, one would obviously like to direct as much money as possible towards debt repayments. Cutting back on luxuries or items you consider frivolous to start your debt snowball is not necessarily that difficult a decision to make, but you have to be determined to cut back in those areas. However, one category where the decision can be difficult and not really clear-cut is whether one should stop making contributions to your retirement plan, either a 401k, 403b, or other retirement savings vehicle in order to free up more money for debt repayment. I think there are several factors which can come into play when deciding which option is right for you.
- Age- I am in my mid-thirties, and while I have a strong desire to become debt free as soon as possible, my retirement age is getting closer and closer. By stopping my contributions, I am basically delaying my retirement. On the other hand, the younger you are, the longer you can contribute to your retirement savings, so stopping for a short period of time to pay off high interest debt may not hurt you too bad.
- Whether your employer offers matching contributions- If your employer offers matching contributions and you stop contributing to your 401k, you are leaving free money on the table. Many employers match the first few percent of your salary that you contribute, or match 50% of your contributions up to a certain percent, which is what mine does.
- How much debt you have and when you expect to pay it off-I looked at the time-line I have set up for paying off my debt, and I hope to have it paid off by the end of the year, even with contributing to my 401k. However, I could shave several months off this time frame if I stopped my 401k contributions. If the time frame were longer, I might consider stopping my contributions to shorten that period of time.
For me, after I though about it for a while, I decided it did not make financial sense to stop my 401k contributions completely, nor would I feel very comfortable doing so. I would be missing out on my employer match, which is 50% for the first 5% I put in. None of my CC debt has a higher interest rate than 50% , so what I am doing now is to put in the amount up to my employer match. If my employer did not make matching contributions, I would have to think really hard about whether or not I would stop making contributions, and I have a feeling I might do so. But the automatic 50% return is too good for me to pass up.
One thing this dilemma has inspired me to do is to try to pay off my credit card debt as fast as possible, and focus on earning more and spending less in order to speed up the process. What are your thoughts on this issue?
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