Should I stop my 401K contributions?

[frugalbabe]

I am looking for opinions. Dh and I currently put 10% of our income into our 401K and with the company match that is about 13% of our gross income. My debt reduction plan is just not going as fast as I need it to (impatient I know). What are your thoughts/opinions on temporarily suspending our contributions until our debt is paid down, I am looking at a time frame of a little over a year or so. Doesn't DR recommend getting the debt paid first? We won't be taking anything out just not growing it right now. It kills me to stop putting in when stocks are so low and to lose the company match, but the best we've ever done is 4% growth and my stupid debt averages at an interest rate of 7%. We just need to get these debts paid down to get some more breathing room but I'm wondering if I will regret it later.

[madhen]

I have asked myself that question SO many times. I just can't bring myself to stop the 401K contributions. It is totally logical and rational, but that little bit that goes toward retirement every paycheck is like my psychological safety net. I don't know if I'm worried that I won't use 100% of my recovered contributions toward debt, or that I won't resume contributing afterward, or that I'll be so far behind that I'll never catch up to the level I would have if I had continued to contribute. I just know that I have to keep putting money toward the day I can take this job and, well, you know the rest...

[nodmicks]

I know Dave says yes but we didn't stop ours. I just couldn't understand the reason. We ran a tax calculator and making that 6% to the 401 K them barely effected the bottom line of the paycheck coming home.

[Greebo]

Yes, Daves Plan says stop retirement contributions *short term* (during baby steps 2 and 3) while you eliminate all debt but the house.

Yes, its very hard to do, especially when you give up a company match.

BUT - 10% of your income? That will go a LONG way to eliminating that high interest debt and removing the risk of *being* in debt from your life.

So Yes, I'd say go ahead and stop the contributions, pay off the debt, build up the emergency fund, then get back to putting in not just 10%, but 15%, towards your long term retirement. Reading your sig, you've got about 16k to pay off before you get out of all non house debt. How much faster will you have that paid off if you bring home 10% more of your income? (Even after tax adjustments which will make it more like 7%)

[Denvergirlie]

What is your employer match? Sounds like 3%, is that if you contribute 6% or more?

I never stopped mine when I was in BS2 and getting rid of debt, but I did lower it to the company match. So I contribute 6% for a 3% match.

I'm still in BS3.5 of save downpayment for house as we do not own, so the 6% is all I contribute... of course I've lost every dollar of contributions thufs far this year.... grr.

[Russ]

I look at it this way ( warped thinking maybe).

That 10% you are putting in your 401K, are you making the same interest percentage as you are paying on your loans?
Say you are paying 15% on your CC. If you make 5%(pipe dream) on your 401k, that means you are still going backwards 10%.

[frugalbabe]

Thanks guys. Yes I was trying to decide between dropping it all together or going down to the 6% for the company match I have decided to drop it all together. After taxes that will be an extra $500 a month that I could really use right now. It's just so against my nature I hold that 401K sacred. But in the immortal words of DR I have to pay my stupid tax. I'm not too worried about using it for non-debt purposes bedcause I am so driven on this debt reduction.

[Greebo]

Stopping your 401k to eliminate debt will only fuel your resolve to be debt free all the sooner, too.

[Lorelei]

I wouldn't stop the contributions because of the tax advantage, employer match & the market being so low right now. You might consider, as Denvergirlie suggested, dropping to the lowest amount your company will fully match to free up some of the money. I would think that if you stop contributing completely you'd regret it. This is a good time to be buying stock (I've been focusing on watching the # of shares grow in our account; the dollars are depressing), so unless you think the entire market will crash completely staying the course is best.

Edited to say - I posted about the same time you did. Good luck with your decision. I'll leave my comments for you to peruse, but I do support your doing what you feel best for your situation.

[Greebo]

I wouldn't stop the contributions because of the tax advantage, employer match & the market being so low right now. You might consider, as Denvergirlie suggested, dropping to the lowest amount your company will fully match to free up some of the money. I would think that if you stop contributing completely you'd regret it. This is a good time to be buying stock (I've been focusing on watching the # of shares grow in our account; the dollars are depressing), so unless you think the entire market will crash completely staying the course is best.

But ... The market does not have to crash completely in order to still lose a lot more. It has a long way to go. What you're saying sounds to me like timing the market, not investing when it makes sense personally to invest.

In 1929, after the BIG crash, the market continued to decline significantly for years, steadily, over time.

Dave's philosophy, and I agree with it, is that one should eliminate the debt and the risk that goes with it as a higher priority than investing for retirement, because it *is* a short term sacrifice.

If something happens to aggravate that risk, and the OP has to pull the money out of the 401k and take a huge tax hit to avoid bankruptcy or foreclosure, then the OP would have been better off never having put the money in, provided it went to eliminate that risk instead.

[frugalbabe]

Yeah I'm not stopping the 401K because of market volatility I am used to looking at my 401K and saying "Gee there goes another $16,000 woo hoo!!" We are just so close every month to barely having breathing room if anything major were to happen (dh gets sick, major vehicle breakdown etc). We would quickly plow through our EF and be looking at using the cc's again. If I get these last three debts gone that frees up over $600 a month. I hate stopping it but right now I am feeling a very strong need to finish killing the cc and actually owning my vehicles. And Greebo is soooo right I am looking at stopping the 401K as a punishment for my absolute stupidity in managing my money, I am selling a bit of my future to pay for the mistakes of yesterday and I hate myself for it. So I vow NO MORE after this.

[Denvergirlie]

Good plan then, especailly if money is tight and your snowball is small.

By the time I got a snowball rolling it was substanal and stopping my 401K would have only netted me another $150 - $200 a month, I didn't need that to still become debt free in just under 18 months.

Once again this is personal finance, so things will and can be adjusted based on your personal situation.

[Lorelei]

Greebo - "What you're saying sounds to me like timing the market, not investing when it makes sense personally to invest." No, dollar-cost-averaging. NOT jumping in and out of the market but staying in even when things look bad. Historically, when the market improves, it zooms rather fast. Those that take their money out (or stop contributing) and try to "time" when to get back in often lose out on the best gains. Those that stay in usually reap a better long-term gain.

Frugalbabe - obviously you know your own situation best. I spoke from my own personal experience. Years ago I wanted to stop our contributions for a short time and my husband talked me out of it. He was right and we are better off because we didn't stop contributing to the 401K while we paid off debt. Everyone's situation is different, however, and you need to do what feels best for you.

[Greebo]

Lorelei - Ok - thanks for clarifying. I absolutely agree, long term is best. I still think, however, that debt elimination first (if you NEVER are going to go back into debt, that is) THEN retirement savings.