Right now, our payments for our debt is exceeding our income, so we’ve stopped 401k contributions to help make the difference up. However, in a few months, we should be at the point where we can actually afford to make payments within our income. I’ve been debating if it would be wise to start adding to the 401k as our debt goes down. Dave Ramsey says no, but I really don’t like the idea of not contributing for a couple years, and losing my match.
So, our options are to just pay off debt, get out of debt quicker, and lose the benefits of compounding interest for a couple more years. Or, we can start bringing the 401k back up, and have more money for retirement, but take longer to pay off debt.
Anyone been in this situation before? What do you think we should do?
My approach is a bit “out of the box” but here you go: Deposit to the 401(k) right up to the matching amount. If your cards are over 8% or so, borrow back from the 401(k) to pay the cards. Stop charging on the cards, or you will be in debt forever. But if you are in the 25% bracket, you can deposit $2000 to the 401(k) and be out of pocket just $1500. Even if the match is 50%, you now have $3000 in the 401(k) and access to borrow $1500 to use to pay off the cards. Yes, it’s juggling a bit, but depending how much you owe and at what rate, you may find yourself with a great balance and no debt in 5 years, vs paying the high interest cards, but making no 401 deposits and missing out the match.
Joe