Wednesday, March 3, 2010

WFMW - Need Financial Opinion this may be the wrong forum in which to ask this, but I'm going to anyway.

I need as many opinions as I can gather on a personal financial decision.

Chip and I are undergoing a Total Money Makeover via Dave Ramsey's book of the same title. We have made a lot of headway on our debt (see tomorrow's update if you want to celebrate with us), but still have a way a go.

We have our baby emergency fund of $1000 in place.

We are knee deep in paying off our debt. We have tackled two smaller credit cards and eliminated them from our lives (happy dance!). We are about to pay off some medical debt and start in on one of our two remaining credit cards...both of which are enormous, I'm ashamed to say.

So part of Ramsey's teachings are that all retirement contributions should stop until debt is paid off. I currently contribute the equivalent of $450 a month into my 401k at work which is matched at 50% (in other words...along with my $450, work will put in $225 for me). I'm 30 years old, so this has a LOT of time to grow still.

We estimate that we can have our debt paid off in approximately 1 year at the rate we are planning to move. We hope to make it sooner, but 1 year is aggressively realistic.

I get that once we are debt free I can contribute even MORE to my 401k (which will pick up again as soon as debt is gone), and therefore get more matched, but the thought of losing 1 year of contributions makes me wary.

What would you do? Would you throw that $450 a month at the debt and knock it out more quickly or would you leave it alone and use what you have now in take-home pay to knock out debt while continuing to fund retirement? Am I just being too careful or am I being smart to want to keep funding retirement?

Asking for help will hopefully work for me. If you want to see what works for everyone else, head over to Rocks in my Dryer, who is guest hosting this week!


  1. Only YOU can decide what works best for your family and the level of security you need.

    If it were me, and it would take only 1 year to be out of debt, I would go for it. If you have no debt, you'll need less money to retire on. You'll be missing out on the employer contribution over the year - $225 x 12 months = $2700 in "free" money; but how much are you paying over a year for debt? If you double your contributions next year, will your employer still match 50% - making up for skipping this year?

    Paying off debt is investing in your retirement, too.

  2. Thanks Milehimama--

    I know that we have to make this decision for our family, but since I can't separate myself from this decision, I need objective outside opinions.

    Thanks for the advice. I totally get it and it makes sense. I just have to overcome my need to hang on to what is comfortable!

  3. What would I do? Personally, I'd stop the contributions and throw it at debt. But that's my opinion, you do have to do what *you're* comfortable with.

    If it stresses you out too much to stop, it might be worth it to stay in debt longer rather than be driven crazy.

  4. $450 a month is a lot! I would pay off the debt with it also. The interest rates on the credit cards are costing you way more than what you would possibly make in 1 year saving the $450 + 50% from your employer.

    Another thing to remember: You will need less money in retirement if you are debt free!

  5. Hey Kaye! I would absolutely pay off the credit cards. Those little jokers are like the devil in disguise. One year isn't too terribly long to take away from your retirement. I you do choose to pay off the cards instead of contributing, then make sure you get back on the band wagon as soon as the year is up. I am so happy for you and Chip making this progress! You guys are such a great example to the many people who struggle with the same thing.

  6. I'm with these other ladies. Definitely put that $450 a month towards debt. My husband and I are also going through Dave Ramsey's Total Money Makeover, and had to make this tough decision too. What does your husband think?

    Good luck getting Gazelle intense and blasting your debt!!

  7. Thank you all for the advice and encouragement. Obviously the choice isn't as difficult to make when you aren't emotionally involved, since you all have the same words of wisdom!

    Thanks, "Jill" (=)--I have no idea if you use your real name online, so I won't be the one to out you) for the added pat on the back. We're eliminating all of this excessive stuff off our backs so we can live like we were trying to in the first place!

  8. Suzanne--He's all for the stopping the retirement contribution so that we can follow Dave's plan to the letter. I'm more of a saver in the first place, so it makes it a bit harder for me. Obviously though, I need to let go and use it to knock out debt.

    Thanks again to all for advice!

  9. Throw it at the debt!!! As you saw from my post I agree with Ramsey that "Focused Intensity Supersedes math ANY day!!!" You need to yell, "CHEETAH!!!!" and run as fast as you can. The Cheetah sitting there licking it's lips and watching you intently!!! (Hope you get the illustration from Gazelle Intensity;) That's just my humble opinion! Great job on knocking out the two little debts and having a great plan for the rest!!!

  10. I think you should reduce your contribution to your 401k to $225. You will have the best of both worlds by continuing to get retirement contributions and the employer 50% match and have more to put against your debts.

  11. Anonymous--Just FYI...If my contribution drops to $225, the employer will contribute $112.50. They match 50% of what I put in.

  12. But you won't have $450 more to contribute to debt, you'll have $450 less whatever your taxes are on that. So what I would do is this: find a tool (I would think DR has one of these) that will let you compare the cost of the interest you are paying on the debt that will be reduced by your extra payment of say $350 or so (after taxes) and the value of the $675 you are saving. Personally, I feel sure I would stick with the 401k - but wait, that's what I did! :) We never stopped saving in our retirement plans while we were paying off our debt. I think it really depends on you, though. If you think that the emotional benefit of paying it off sooner is important, then it IS. We have loosely followed the DR plan and are debt-free except for our mortgage and have 6 months of expenses saved. But we also have quite a lot of money in our retirement accounts (> 2 times our annual income), which adds to my feeling of security. Whatever you do, don't ignore the emotional impact of your decision. We wanted money in our retirement accounts, so we kept doing that even while we suspended other investments. Keep in mind that DR's snowball plan isn't necessarily the best mathematical approach (better mathematically to pay highest interest first), but the emotional impact of seeing debts paid off is huge, and is part of what makes DR's plan so successful.

  13. My 2 cents....I'd stick with the 401K contribution. Or as the other commenter said - split it, 225 to 401K and 225 to debt reduction.

    I am in Canada and our equivalent to 401K is an RRSP. We get tax deductions for all RRSP contributions we make - if you also get tax deductions, take the refund money and sock that towards your debt as well.

  14. I would probably pay off the debt and then pay more on the retirement after it's paid off. I also suggest you never quit that job b/c that retirement plan is amazing! My husband and I have never had a deal that sweet with matching!

  15. THanks for all of the comments! I am floored that so many people took the time to put in their opinion! It is SO appreciated.

    Halberts--I am fortunate with our benefits. However, I'm a bit jaded because my last employer had 100% matching up to 8% of your income. It was sweet. Of course, they are closing their doors now, so I guess I'm better off for now anyway!

  16. I heard DR speak a couple of years ago and he said at that time that if your employer matches it is good to keep contributing -- if not, your losing free money. Now, I don't really remember in what context that was in. What we did was stop contributing at my work (which has no matching) and still contributed at my husbands (which when we was employed, they had matching). You could reduce it though and still get the benifit of free money but also freeing up some money for debt. I'm not one who should be giving advice b/c we totally need a money makeover but that piece of advice really stuck out to me. I love these kind of posts -- makes me realize we are not alone.

  17. If you don't feel comfortable not contributing at all to your 401K (BTW, nice contribution), than just lower it until the debt is PIFd.

    I was contributing $400 a month, but now do $200. You also need to factor in the taxes removed in your paycheck to see what a change it will be. $400 would still be a sizeable difference in your take home pay to pay down the debt.

    Do what is comfortable. And congrats on beating your budget by $1 in Eating Out. ;)

  18. Sheila's advice is excellent: You have to take into account the amount of money you're getting from the employer matching and tax savings, compared to the amount of debt you would pay off with that money. Don't forget to include in the tax savings the credit (if you qualify) on your annual tax return for retirement savings.

    Here's my credit card advice in case it may be helpful to you. Best of luck paying off that debt as quickly as possible!!