Should I stop contributions to my 401k to reduce CC debt?

[jim_smith_ta]

Back story: I have always had CC debt. Most of it (about $15K) was on a card with a really low rate (prime + 1% or something, right now it is about 4.5%). So it didn't seem like that big of a deal, because the rate was so low.

Recently we had some extra expenses, my wife uses her card for a small at home business, and other factors have really upped our total cc debt. So much so that it scared me (about $44k in January).

That being said I have a good job, and I have had it for about 13 years, so we can make all of our payments, but just barely. When a bonus from work or tax return comes in I put most of that to the CCs (I have lowered the total CC debt to $39k as of now).

I have about $150k in my 401K, and am currently contributing 11% to it (company matches between 50-100% up to the first 7% contributed).

If I change my 401k contribution to 0%, that would give me almost $800/mo to put to CC debt. I figure that I could pay off the CC debt in 3-4 years, and then I would up the 401k contribution to the max.

Is this a good idea? Or should I leave the 401K contributions as is (it actually increases 1% each year automatically), and pay off the CC debt the old fashioned way, by cutting expenses?

Some more info, I have a wife who stays at home with our three kids.

I guess I'm looking for information to decide if it pays to stop contributing to the 401k for a while, to get out of debt, or if the 401k will pay off in the long run because of the time value of money, and the company match?

[JoshuaHeckathorn]

$40K in credit card debt is scary, especially if you can barely make all your payments when times are good. Since it sounds like you can still cut expenses, that's what you need to do first. Show us your expenses, and maybe we can provide some insight.

I'm always hesitant to cut retirement contributions when there's room to cut other things first. You're getting a match, which is free money, and I'm assuming you have a long way to go before retirement. If you do decide to cut your contributions, I would only cut it to 7% so you're still getting the full match.

[BuckyBadger]

Well, no, you didn't ALWAYS have credit card debt. You didn't pop out of the womb owing credit card companies money. But it looks like you've been maintaining the status quo for 13 years with $15k in credit card debt.

I would recommend strongly that you pay this off by looking at your spending habits. If you pay it off with retirement money you have learned NOTHING and in a few years you'll be right back where you started -- owing credit card companies many thousands of dollars.

You should post your numbers -- ALL of them, income and expenditures -- here and look really hard at where you are spending money and how much you are spending on what. Maybe temporarily decreasing your contributions would be the answer, but that would probably be a small part of an overall spending reduction/debt repayment plan.

You need to learn how to save your money and you need to learn how to not get back into debt. Neither of which will happen if you just stop contributing to pay off debt.

[jim_smith_ta]

Thanks for the lecture. Seriously. I know everything you are saying is true, sometimes you just need to hear it out loud (written on the internet?).

I'm going through the July statement right now...grouping expenses into categories. I assume that is the best way to start?

[riverwed070707]

Try mint.com or something similar. It will take a look at your past few months and categorize a lot of your expenses for you. You'll need ot make some tweaks as it isn't 100% accurate but its a good starting place.

Also when you say "july statement" that leads me to believe you are only looking at your CC spending. You need to be looking at every penny that left your wallet - debit cards, cc, cash (which is obviously hard to do post-spending, but you need to contiunue it into the furture so make sure these expenses aren't overlooked)

[bjl584]

Back story: I have always had CC debt. Most of it (about $15K) was on a card with a really low rate (prime + 1% or something, right now it is about 4.5%). So it didn't seem like that big of a deal, because the rate was so low.

Recently we had some extra expenses, my wife uses her card for a small at home business, and other factors have really upped our total cc debt. So much so that it scared me (about $44k in January).

That being said I have a good job, and I have had it for about 13 years, so we can make all of our payments, but just barely. When a bonus from work or tax return comes in I put most of that to the CCs (I have lowered the total CC debt to $39k as of now).

I have about $150k in my 401K, and am currently contributing 11% to it (company matches between 50-100% up to the first 7% contributed).

If I change my 401k contribution to 0%, that would give me almost $800/mo to put to CC debt. I figure that I could pay off the CC debt in 3-4 years, and then I would up the 401k contribution to the max.

Is this a good idea? Or should I leave the 401K contributions as is (it actually increases 1% each year automatically), and pay off the CC debt the old fashioned way, by cutting expenses?

Some more info, I have a wife who stays at home with our three kids.

I guess I'm looking for information to decide if it pays to stop contributing to the 401k for a while, to get out of debt, or if the 401k will pay off in the long run because of the time value of money, and the company match?

Careful with your math. Dropping your 401K will give you more tax exposure, so you may not actually see the full $800 in your pay each month. Maybe you have already accounted for that, but if not then keep it in mind.

I wouldn't drop your contribution to 0. As long as you are able to make your payments and aren't drowning, then I would cut it back to the match, no more. Take the free money that your company gives you, and use the rest to pay down your credit cards.

[jim_smith_ta]

Also when you say "july statement" that leads me to believe you are only looking at your CC spending. You need to be looking at every penny that left your wallet - debit cards, cc, cash (which is obviously hard to do post-spending, but you need to contiunue it into the furture so make sure these expenses aren't overlooked)

I meant Bank statement. We really don't use CC for much anymore...almost everything is paid with debit cards.

[jpg7n16]

I'd also drop to the max company match and focus on debt reduction - by focusing on budget reduction.

Start seriously considering options to reduce your monthly expenses. And start with the largest items first.

I like to say: don't start evaluating your budget by deciding whether or not to switch to generic soap. Start with the big numbers (namely, housing and car expenses).

[LivingAlmostLarge]

I wouldn't. I would cut the budget. List it and I bet we can find $800 to pay to credit cards instead of cutting retirement.

Cutting retirement is the easy way out.

[photo]

You could cut the 401(k) contribution to 7% because you don't want to walk away from the free money your employer gives you. But, if you use that extra money to pay off your credit card bills, there are a lot of things you can do to cut other expenses, especially since your wife stays home.

I'll bet you could cut your clothing and entertainment budget in half and still live quite well.

[FoolFromAZ]

I am not sure if this is the right advice. I would take loan from 401k and pay off the CC debt. Its like paying intrest to yourself instead of paying to CC companies. Importantly, I will cut all the CC after paying them off and cut down all the other expenses to pay off the 401k loan as soon as possible.

I exactly did the same. I once had close to 55K in CC debt. Now I dont have any cc debt but I have nearly 35K as 401k loan which I have been paying off aggressively, deducted from my pay check every pay period. So I get less as a net income, which I use for monthly expense and whatever remaining will go into emergency fund.

[MonkeyMama]

Personally, I would find more income rather than cut retirement to $0. Get a second job, have wife work, etc.

You didn't say how old you were? The older you are, the less cutting retirement is an option. IT's one thing when you are 25 and stop retirement for a couple of years. Entirely different if you are 45.

I think cutting back the retirement is an okay temporary solution (maybe down to match), but it has to come with a commitment to stay out of debt. Otherwise, then you just have less in retirement, and are back to square one. As someone said, it's really the *easy way.* Finding more work, cutting the budget to bare bones, etc., will give you more motivation not to get back to square one again.

[jpg7n16]

I wouldn't. I would cut the budget. List it and I bet we can find $800 to pay to credit cards instead of cutting retirement.

Cutting retirement is the easy way out.

Personally, I would find more income rather than cut retirement to $0. Get a second job, have wife work, etc.

.. As someone said, it's really the *easy way.* Finding more work, cutting the budget to bare bones, etc., will give you more motivation not to get back to square one again.

I think there's a slight problem with this thinking - the thinking that it has to be EITHER cut budget or cut retirement.

I stand by my earlier post that you should do BOTH. (though don't cut retirement to less than the match)

For me, it's not a matter of 'the easy way out' - it's a matter of, "am I doing everything intelligent under my control to get out of high interest rate debt?"

And the list of intelligent things includes trimming/slashing your budget, reducing excess savings contributions, increasing income if necessary, refinancing the debt to reduce interest costs, etc.


My point is: it doesn't have to be only one or the other. Do as much as you can!

[MonkeyMama]

I think there's a slight problem with this thinking - the thinking that it has to be EITHER cut budget or cut retirement.

I stand by my earlier post that you should do BOTH. (though don't cut retirement to less than the match)

I think that is what I said?

I just felt cutting retirement *all the way to $0* was way too extreme though (& one sided).

I completely agree!

[JustBill]

OP - the CC debt obviously concerns you and on a personal level (we are talking personal finance here) you would feel better and likely be more productive without it. Given the high dollar amount of CC balance and the fact that eliminating it seems a priority, I would do everything possible to establish a plan to retire the balance within most, 24 months. Including expense reduction, find a way for you and DW to earn part-time cash, and yes I would stop the 401k contribution if you're committed to a plan and apply every cent to your CC debt.

Once you've gotten rid of the CC debt you can re-begin retirement savings and stop fooling around with 11% contributions and start maxing out all options. You'll make up for the lost employer contribution quickly and enjoy peace of mind without the CC burden. Exercise caution using previously mentioned 401k loans, today you never know when that 13 year career will end rendering that 401k loan due in full in 60 days when you have zero income and becoming an early penalized withdrawal.