Reduce 401K contributions to pay off student loans faster?

[lootpacman]

Hi,

I am considering reducing my 401K contributions so that I may be able to pay off my student loans faster.

About Me
----------
Age: 25
Salary: $70K
Student Loan: $26.5K (was $33K 2 years ago) highest interest: 6.55% lowest: 3.25%
CC Debt: $1k (but it's on a 0% interest CC card, I'm in no rush to pay it)
Emergency Fund: $9K
Monthly expenses (rent, food, student loans etc): under $1.5K
401K contribution: 12%
---------------------------------

The part I don't understand is the contribution amount from my company.

They state: : "[company name here] matches 50% of your contributions on up to 4% of your eligible compensation for a maximum match of 2%"

Goals (once debt is low enough):
- Buy a car (not really needed, just for errands and small trips in the area, won't drive it to work)
- Save more

Is it a good strategy to reduce the contribution amount to 401K and increase the payments on student loans?

Your help is much appreciated.

[snafu]

Great question, I wish everyone in your decade could reach your terrific level of financial management. I suggest you check with HR or whoever gives info on employer's Retirement Plan. It's important to contribute the sum that captures all the free money offered by employer. You also need to know details of this 401K. Ask, what you are specifically buying with these contributions and what is the cost, sometimes called Management Expense Ratio [MER].

One of the most significant factors in retirement planning is the magic of long term compounding. It makes the smaller sums contributed at a younger age at the start of your career so valuable 35 years in the future.

What is the interest rate on student loans? I agree paying them down faster is a good plan but how sums are allocated by the grantor to principal and interest.

Finally, I understand the desire to buy a car and hope you'll review some of the various views and SA discussions. Perhaps offer some facts on what make/model you are considering an how you 'use' vehicles like commute, long auto vacation trips, etc. Do/will you pay for parking at work? Insurance issues.

[tripods68]

Assuming on $70K is gross - Net Pay $4166.00 (not married)

Apply $8000 EF towards student loan, that brings balance $18,500

Set aside $1000 EF (Use this as your only EF)

Pay off $18,500/12 months = $1541.66 monthly payment for a year without reducing retirement contributions.
$4166-1541.66 = $2,624.34 living wage

Can you live on $2,624.34 a month for a year?

[lootpacman]

Great question, I wish everyone in your decade could reach your terrific level of financial management. I suggest you check with HR or whoever gives info on employer's Retirement Plan. It's important to contribute the sum that captures all the free money offered by employer. You also need to know details of this 401K. Ask, what you are specifically buying with these contributions and what is the cost, sometimes called Management Expense Ratio [MER].

One of the most significant factors in retirement planning is the magic of long term compounding. It makes the smaller sums contributed at a younger age at the start of your career so valuable 35 years in the future.

What is the interest rate on student loans? I agree paying them down faster is a good plan but how sums are allocated by the grantor to principal and interest.

Finally, I understand the desire to buy a car and hope you'll review some of the various views and SA discussions. Perhaps offer some facts on what make/model you are considering an how you 'use' vehicles like commute, long auto vacation trips, etc. Do/will you pay for parking at work? Insurance issues.

Highest interest is: 6.55% lowest: 3.25%
** My student loan grantor applies payments to any interest due first and then the principal.
** I am two months ahead on payments so not much interest builds up and most of the money goes to the principal amount.
** 401K is in a target date fund with low expenses

As for the car, something $10K or below and toyota/honda/acura, but I don't really need one at the moment so I am holding off.

@tripod
That strategy sounds pretty solid, but it's a bit too aggressive at the moment (my company is currently going through changes).
Don't want to dip that much into emergency fund. Also making plans for the summer.

[tripods68]

Glad you approved.

Debt is like a disease - you can't treat it if you don't admit you have it.

I recommend you read: Total Money Makeover by Dave Ramsey.

https://www.daveramsey.com

[bjl584]

Just don't reduce it below the company match and you should be good. Don't leave free money sit on the table.

[Jluke]

Hold on to the cash.

Hold off on the car as long as you can.

12% is good for the 401k; don't change it. The minimum to get the company match is 4%. At your age, contribute more.

for the student loans, what are each of the balances? maybe you can pay one off in full using some of the EF.

Accelerate payments on the student loans -be sure that the loan provider applies the extra to principal and not future interest. they are shady that way.

What did you mean by summer plans? Hopefully it's not a $x,000 vacation.

[lootpacman]

Hold on to the cash.

Hold off on the car as long as you can.

12% is good for the 401k; don't change it. The minimum to get the company match is 4%. At your age, contribute more.

for the student loans, what are each of the balances? maybe you can pay one off in full using some of the EF.

Accelerate payments on the student loans -be sure that the loan provider applies the extra to principal and not future interest. they are shady that way.

What did you mean by summer plans? Hopefully it's not a $x,000 vacation.

Loan 1 - $2,938.50 @ 5.750%
Loan 2 - $3,738.26 @ 5.350%
Loan 3 - $4,020.92 @ 4.250%
Loan 4 - $7,937.22 @ 6.550%
Loan 5 - $8,193.32 @ 3.150%

I was considering just doing the match amount.

Summer plans is a $x,000 vacation (the flight is most of the cost). Mistake? I usually pay it off in cash upfront.

I know I can accelerate SL payments by at least $700 more ($1000+ overall) with a tighter budget.

[Jluke]

Loan 1 - $2,938.50 @ 5.750%

I was considering just doing the match amount.

Summer plans is a $x,000 vacation (the flight is most of the cost). Mistake? I usually pay it off in cash upfront.

I know I can accelerate SL payments by at least $700 more ($1000+ overall) with a tighter budget.

I would pay off Loan 1 with the EF now. You'll have 6k left.

then figure out a plan of attack for the next loan to payoff with accelerated payments. Probably in the order you wrote them out Loan1, then Loan 2, etc.

Keeping your 401k at 12% also has tax benefits. I wouldn't mess with that. The money you contribute now will have much longer to compound.

Your job now is to get rid of the Student Loans and save for retirement. Are you familiar with a ROTH IRA?

Your future could be more expensive (house, car, marriage, kids) so now is the time to set yourself up nicely.

Check out Mr Money Mustache, Millionaire next door (book), etc. I'm in a good spot financially, but if I knew this at 25...

[lootpacman]

I would pay off Loan 1 with the EF now. You'll have 6k left.

then figure out a plan of attack for the next loan to payoff with accelerated payments. Probably in the order you wrote them out Loan1, then Loan 2, etc.

Keeping your 401k at 12% also has tax benefits. I wouldn't mess with that. The money you contribute now will have much longer to compound.

Your job now is to get rid of the Student Loans and save for retirement. Are you familiar with a ROTH IRA?

Your future could be more expensive (house, car, marriage, kids) so now is the time to set yourself up nicely.

Check out Mr Money Mustache, Millionaire next door (book), etc. I'm in a good spot financially, but if I knew this at 25...

Yea I do I have a ROTH IRA, with a small amount. Will check out the sources you mentioned, I'm familiar but haven't delved too deep into any yet.

I will most likely take your advice and pay off Loan #1 by next week or so.

[autoxer]

I was considering just doing the match amount.

Summer plans is a $x,000 vacation (the flight is most of the cost). Mistake? I usually pay it off in cash upfront.

I know I can accelerate SL payments by at least $700 more ($1000+ overall) with a tighter budget.

Reducing your 401k deferral from 12% to 4% will increase your take home pay by ~$350/month. How much quicker will that allow you to pay off your student loans? When would you increase it back up?

[snafu]

I basically agree with Jluke, but due your focus and money management awareness, suggest you reduce 401 K contributions temporarily, still capturing all employer's total contribution splitting pay-off of SL #1 between EF and squeezing a bit of other spending categories for payday.

Next pay, add sum previously dispersed to SL #1, to SL #2, instructing and verifying it is applied directly to Principal, until balance clears. Repeat. The challenge is to clear SL #2, #3 by year's end.

When will you know how company changes might affect you? I believe you deserve the planned vacation if your employment remains stable and the expense is primarily limited to airfare. Air fare is all over the place, make sure you're checking prices Wednesday as that seems bargain day for airlines. Since you are experienced at managing finances, you might consider a 0% CC for flight.

If you are anticipating an Income Tax rebate, I'd apply it to SL #2 which will be your focus shortly. Of course, your current payments on remaining SL continue as arranged.

[lootpacman]

Reducing your 401k deferral from 12% to 4% will increase your take home pay by ~$350/month. How much quicker will that allow you to pay off your student loans? When would you increase it back up?

I would be able to pay off Loan #1 and #2 by early next year if I also applied some of my EF. Yes, I would increase it as soon as I knock off a couple loans, I've done it before.

Also Loan #4 is unsubsidized, not sure how much that matters.

I basically agree with Jluke, but due your focus and money management awareness, suggest you reduce 401 K contributions temporarily, still capturing all employer's total contribution splitting pay-off of SL #1 between EF and squeezing a bit of other spending categories for payday.

Next pay, add sum previously dispersed to SL #1, to SL #2, instructing and verifying it is applied directly to Principal, until balance clears. Repeat. The challenge is to clear SL #2, #3 by year's end.

When will you know how company changes might affect you? I believe you deserve the planned vacation if your employment remains stable and the expense is primarily limited to airfare. Air fare is all over the place, make sure you're checking prices Wednesday as that seems bargain day for airlines. Since you are experienced at managing finances, you might consider a 0% CC for flight.

If you are anticipating an Income Tax rebate, I'd apply it to SL #2 which will be your focus shortly. Of course, your current payments on remaining SL continue as arranged.

Your plan also sounds pretty solid. I could make a huge dent by the end of year. Also will have to call my SL company again to verify how the payments are applied.

*Not anticipating a Income Tax rebate.
*Yea was planning to use my 0% CC card for flight.

[lootpacman]

**Progress Update**
- I was able to pay off Loan #1
- @snafu my company changes may take effect this summer or later in the year

SL Total: $23.8K from $26.8K
EF: 6K

[JeffH]

That's awesome!

Remember to celebrate your wins. It makes it more fun!

And again