Paying off debt is never an easy undertaking. It takes patience, dedication, and sometimes it forces you to make some difficult choices. One of the toughest decisions when developing a debt payoff strategy concerns whether or not you should stop contributing to your retirement when you are paying off debt. In fact, we’ve actually had a few readers contact us in the last few weeks asking for our opinion on this issue.
When you search the internet for opinions on this topic, you will find a financial experts on both sides of the argument. Dave Ramsey, for example, falls squarely on the “stop retirement contributions immediately” camp. Meanwhile, the financial mega-site Nerd Wallet, argues the exact opposite approach and suggests continuing 401k contributions when paying off debt. It’s easy to see how someone could be confused by this conflicting advice.
All sides agree that the most important factor in deciding whether to stop retirement payments, is whether or not your company is offering a 401k match. A 401k match is effectively a “free bonus” onto your salary, where your company encourages you to save by matching the money that you contribute dollar for dollar. Some companies will match 401k contributions as high as five, or even ten percent of your salary, and it can be hard to pass up this free money under any circumstances.
To understand our point of view on the issue, you need to consider how we view retirement savings. I have talked previously about how I don’t want my retirement to be spent sitting at home, watching television, and struggling to find money for life’s basic necessities. Knowing that, I have always chosen to make retirement savings a priority. Remember, that there is no such thing as a student loan when it comes to retirement. The money that you have saved will be all that you have (outside of social security).
If your company is not offering a 401k match, then this decision is a total no brainer– throw everything you can against your debt. After all, undertaking a debt payoff is something that requires you to be all-in. If you aren’t 100% committed to throwing every available dollar against your debt monster, you will be making a difficult challenge even harder.
But when we were paying off our debt a couple of years ago, we NEVER stopped our 401k contributions. My company at the time did offer a substantial match, and in our minds– it felt like we would be limiting our future retirement possiblities by turning down that money. Since we were both fully committed to finding ways to save money on our daily expenses, and to exploring every avenue that we could think of for increasing our family’s income, we had total confidence that we would reach our goals.
So my advice to the people that have asked us to weigh in on the topic is that you should try to avoid suspending your 401K payments when paying off debt. When you setup an automatic retirement contribution from your paycheck, it feel like the money is never really yours to spend. This means that this money isn’t at your disposal for your debt payoff, and you will have to resort to other means to reach your goals.
Cut your spending, find ways to earn new money, and if after six months or so– you still can find a way to come out ahead each month– perhaps you should reconsider your approach. If you do manage to continue your 401k contributions during your debt payoff; when you do finish paying off your debt, your retirement savings will have continued to grow all the while.
Should You Stop 401K Contributions While Paying Off Debt is a post from: See Debt Run