Suspend 401k Contributions?

[LadyT]

I currently contribute $200 per month to my 401k, which gets me a company match of $100. I've been reading advice from various financial gurus (Dave Ramsey, etc.) saying if you have credit card debt (which I do, right around $9,000 that I am earnestly working on paying down) and a small or non-existent emergency fund (which I do ... a small EF that I am currently working on building up) that you should suspend 401k contributions temporarily and use that money to pay off debt/save. Hearing this advice spurred me to do some research, and I came up with the following options.

Option 1: Staying the course. I currently pay $300/month towards my CC debt, and I have not incurred any new debt in 1.5 years. Not including any windfalls I might receive, and not taking into consideration any changes in my current CC APRs, at the rate I am going I won't pay off my CC debt until July 2012.

Option 2: Cut my 401k contributions in half, giving me an extra $100/month to put towards my CC debt. I would shave one year off my current timetable and be done by June 2011.

Option 3: Cut my 401k contributions entirely and put that $200/month towards my CC debt, paying it off in December 2010.

Option 4: Cut my 401k contributions entirely and put $100/month towards my CC debt and $100/month in savings. (I currently have $130/month set up to go into savings.)

Note: I just turned 48, and have been with my company 1.5 years. My 401k is still quite small (around $3,200).

Please give me your input and help me decide!

[GREENBACK]

I would personally continue contributing to the 401k. The longer you wait or put off contributing the smaller your value will be at retirement. At 48 you need to put as much in as possible. Also, it's a very good time to be investing right now while the market is down. It might take a little longer to conquer your debt but you will never be able to make up for not contributing to your retirement. Unless you have really extreme apr's on your cc's I would definitely try to focus on retirement accounts.

[KTP]

hmm, lets see:

Your 401k match means you are instantly earning a 50% return on your investment.

Unless your credit card interest rate is higher than 50%, I think it is a no brainer to keep getting that 401k match.

Try cutting a tiny bit out of some other area (give up cell phone? we all used to go without them) and apply that to your CC debt or EF.

I would almost give up cable tv before I would give up a guaranteed 50% return investment!

[LadyT]

Originally Posted by GREENBACK

Unless you have really extreme apr's on your cc's I would definitely try to focus on retirement accounts.

These are my balances and APRs:

Card 1 (27.24%): $1,600
Card 2 (24.99%): $200
Card 3 (18.95%): $1,200
Card 4 (14.90%): $400
Card 5 (12.65%): $500
Card 6 (12.90%): $5,000

Yes, the APRs are quite high. I have a bankruptcy on my record from 4 years ago. As I stated in my earlier post, I have not charged anything in the past year and a half, which is when I got my current job (which pays a decent salary) and began paying down my debt (which was $13,000 at the time). Believe it or not, some of these APRs have been decreased in the last 6 months! I also have been able to consolidate some portions of the higher-interest balances to my lower-interest cards as I have paid them down, so hopefully Card 2 will be gone in the next couple of months.

[mom-from-missouri]

When card 2 is done, are you planning on paying card 2's money to card 4??

[disneysteve]

Originally Posted by KTP

Your 401k match means you are instantly earning a 50% return on your investment.

Unless your credit card interest rate is higher than 50%, I think it is a no brainer to keep getting that 401k match.

I agree. Basically, you are asking us if it is better to earn a max of 27.24% on your money or if it is better to earn 50% on your money. It makes no sense to pass up the 50% return.

[LadyT]

Originally Posted by mom-from-missouri

When card 2 is done, are you planning on paying card 2's money to card 4??

I know Card 4's balance is the next lowest, but given that its APR is one of my lower rates, I'll probably put the extra toward Card 1. I've already paid off three of my higher-rate cards.

[mom-from-missouri]

But by getting rid of card 4, showing it paid could help raise your credit score and possibly lower the apr on the others?? just an idea.

I guess though the most important thing is that you are applying that money on towards another one.

[Slug]

Continue contributing to the 401k enough to get the match. Put the rest towards the credit cards. Pay off card 2 quickly and see if it helps your credit score and APR. Attack card 1 next until you understand whether there is a true benefit to getting 0 balances on the other cards from an APR perspective. Continue to negotiate with the card companies at every opportunity.

You asked a good question, and I wish you success in paying down all that debt.

[swanson719]

Keep investing enough to get the company match, but not a dime more. Then go to some different banks and see if you can get a personal loan for the $9,000 and pay off the credit cards with that. This would basically lower your interest rate and consolidate the debt onto one bill a month instead of several. DO NOT go to a debt consolidation company to do this. If you can't get approved for a personal loan, then keep the course you're on.

[creditcardfree]

In your case, I would stay the course that you are on. Where the market is, the match and your age are what convince me you need to keep investing.

I would look for other ways to bring in another $100-$200 per month. Sell things on ebay, take surveys, part time job, reduce your expenses, increase insurance deductibles to lower premiums.

And definitely keep looking for lower rates that you qualify for, but do not pay balance transfer fees unless it makes financial sense. In other words, run the numbers before you pay a fee to transfer.

[feh]

Originally Posted by GREENBACK

I would personally continue contributing to the 401k. The longer you wait or put off contributing the smaller your value will be at retirement. At 48 you need to put as much in as possible. Also, it's a very good time to be investing right now while the market is down. It might take a little longer to conquer your debt but you will never be able to make up for not contributing to your retirement. Unless you have really extreme apr's on your cc's I would definitely try to focus on retirement accounts.

+1

Given your company match and the undervalued market right now, put as much as you can into your 401K.

This assumes that you have some plan for paying off the cards, but I wouldn't decrease retirement savings to do it.

[emilywebster07]

I would continue contributing to my 401k.

[watsoninc]

Although I would want to continue contributing to my 401K, I would actually temporarily suspend contributions and get out of consumer debt, provided that I could do it under two years. I just think there is a good amount of risk in the situation you described; for example, if everything stays stable at your job, you're fine, but suppose you lose the job. The past bankruptcy, lack of an emergency fund, and high rates are also particularly concerning. It would be great for you to get those snakes out of your life, so that you can obtain financial solvency.

You can always contribute more to your retirement once you are done, but it is hard to build momentum and focus while simultaneously funding retirement and paying down debts. Without the debt, you wont have so many cash flow constraints, and you can totally invest generously towards your retirement.

[rizzmo]

Congrats on your changes in spending! I would stop contributing to the 401k and put everything towards your debt. I would pay smallest to largest to gain momentum. Over the smaller time period the differing interest rates won't really make much difference.

Retirement is important, however 401k contributions do not help if you become unemployed or something unfortunate happens. After you debt is paid off you can start contributing to get you maximum match.