Are We Going About This All Wrong?
October 18, 2007 – 11:10 amWelcome to Working For Financial Freedom. If this is your first visit please read about this blog. You can keep updated by subscribing by email or to my RSS feed. Thanks for visiting!
Back in the spring when we started paying off our debt we took at a look at what we were putting in our 401k. At the time we were putting in 8%. We decided to reduce it some to just put in the minimum that will give us the company match. We just couldn’t bring ourselves to stop contributing to the 401k completely and lose the company match.
This goes against what Dave Ramsey suggests in his book the Total Money Makeover. We’ve read the book and applied pretty much all of his suggestions and have paid off almost half of the debt we started with at the end of March. Dave’s reasons for making this suggestion is that “focused intensity” is important and the “power of focus and quick wins is more important in the long term to your Total Money Makeover than is the match.”
You know, I get that. I really do. I understand that a lot of getting out of debt is mental (including a person’s mentality when it comes to spending money and debt). But for us and our situation, I’m not sure that getting out of debt and having the fully-funded emergency fund done only 3 months sooner is worth losing $21,000+.
So should we take his advice and stop contributing to the 401k completely?
We plan on taking 1 year to pay off all our debt, and it might take us at the most 6 months to fund our fully-funded emergency fund of 3-6 months worth of expenses. During that time (18 months) we’ll have an additional $25,740 added to our 401k. That does not included earnings or dividends. The amount includes the money we contribute AND the company match.
If we were to stop contributing we would have an additional $10,682.10 during the course of 18 months. (Keep in mind that the amount we contribute to our 401k also reduces our taxable income. So let’s say we contributed $100 a payday to our 401k, we might only see $83 taken out of our check).
An additional $10,682.10 would move our debt-payoff/fund the emergency fund date up at the VERY most 3 months.
Are you with me still? So according to Dave’s plan as soon as we fully-fund the emergency fund then we increase our retirement contributions to 15%. So let’s say we had stopped our 401k, used the extra money to payoff debt and fund our emergency and THEN started contributing to our 401k again we’d have saved 3 months. How much could we put in our 401k in 3 months (at 15% + the additional money from the company match)? Our total contributions would be $4340.
Ok, on October 1st, 2008 we’ll have no debt and a fully funded emergency fund. We could be in one of two situations.
Situation One
1. Stopped contributing to 401k.
2. Got out of debt & had fully-funded emergency fund by July 1st, 2008.
3. Contributed 15% to 401k (+ additional company match) from July 1st-October 1st.
4. On October 1st, 2008 would have an additional $4340 in 401k.
Situation Two
1. Keep contributing at least the bare minimum to meet the company match to our 401k.
2. Be debt-free and have fully-funded emergency fund by October 1st, 2008.
3. By October 1st, 2008 would have an additional $25,740 in our 401k (NOT counting dividends that will have been deposited or change in the market)
Now I know the market goes up and down, but so far our YTD earnings are at 20.5%. Even if they were only at 10-12% I think we would lose out big time by not continuing to contribute because of the power of compound interest and the free money from the company match.
Are we doing it all wrong? Am I missing something here? Did I do the math wrong?
10 Responses to “Are We Going About This All Wrong?”
Whoa. I think you’re doing the exact right thing. While some finance gurus have excellent ideas, I don’t think they can be applied to every situation.
I think people should always contribute enough to get a company match on their 401(k).
By Kacie on Oct 18, 2007
Well, you probably know already what Dave would say, but I’ll share anyway…You are looking at the math and if you were good at math you wouldn’t be in this situation in the first place.
Now, I’m not sure I fully agree with him, but something to consider. I’ve had the same struggle. I did stop mine, but am considering starting it back. He only advocates doing this for a very short period of time. That is why I am going to start back. Due to some other influences in my life, we haven’t been able to be as aggressive in our debt payments as we had hoped.
One thing I think you failed to account for is the interest you will be paying between July and October. Probably not much, but something you need to factor in.
Look forward to seeing other replies!
By glblguy on Oct 18, 2007
Glblguy,
True. VERY True.
I think if we were really struggling to get rid of the debt I would have stopped the 401k. Or if we reach a point where we aren’t making progress we’ll reevaluate and probably stop it. But once we got our spending under control, and cut WAY back on so many of our expenses we were able to attack the debt with a vengence and still have a little to put on the 401k.
Good point on the interest. I totally forgot. I’m so not good at math, but we’ll have only have 1 debt to be paying on at the end, the truck loan. It’s at 4.95%. Our monthly payment is $505.11 and of that $57.99 goes to interest (that was this month). Next year even less will be going to interest, but just for discussion’s sake let’s say $58 a month in interest. $58 x 3 extra months = $174. Not too bad.
And I just realized my math was off in my original calculation for how much extra we would have if we had stopped contributing to the 401 back in the spring. We would have $10,682.10 extra over the course of 18 months instead of $8,700. let me fix that.
By Momof3 on Oct 18, 2007
Kacie,
Thanks for stopping by.
Well, I certainly hope so. But like glblguy reminded me, if I had been great at math I wouldn’t be in this situation in the first place. I keep tight tabs on our progress, so I might have to reevaluate the decision in the future. But for now I’m going to continue to be frugal, throw money at the debt, and meet the company match with our 401k (I’m so sorry Dave….)
By Momof3 on Oct 18, 2007
I’m terrible at math too…well, actually I can do it, I just HATE it
Also, I’m in debt with you, so hope I didn’t sound preachy…just saying what Dave would say
By glblguy on Oct 18, 2007
Oh no, you don’t sound preachy at all. I want honest thoughts on this. If I came on here asking if it was a good idea to finance a new suv, I’d expect the same kick in the behind.
By Momof3 on Oct 18, 2007
I’m with you on this one. I love Dave Ramsey, but back when my husband had a job with a 401K plan, we never stopped contributing. For me it was motivating to know that we had “free” money coming in (the company match).
By Lynnae @ Being Frugal on Oct 18, 2007
Lynnae,
The company match is great isn’t? I kick myself sometimes because my husband had been at the job a year before we ever started contributing.
By Momof3 on Oct 19, 2007
I agree with Kacie PF gurus advice is not always the best.
As I was getting out of debt. I always contribute to 401k and saved a little. I manage to do both (get out of debt and save). I lowered my 401k to 4%, but I did not stop the contibutions.
By Moneymonk on Oct 23, 2007