To contribute or not to contribute?
That is the question when trying to pay off debt. This is a question we battled with when I started working again. The financial experts are all over the place with this question. Some folks are adamant that you should not contribute while you are trying to get out of debt. Others say you should. So what should you do? Let me take you through my thought process.
Most people think about time. How much time can I afford to not make retirement contributions? For me, it wasn’t so much about time, since I knew how long it would take to pay off our debt as long as we stayed intense. For me, it was about other benefits and our ability to keep traction on our plan.
Can you pay your bills?
You should never invest if you can’t pay your bills. It doesn’t make sense to borrow money to pay your monthly bills so you can put money into your retirement plan. Too often I see people do this, just to end up taking money out later to pay off debt. If you take money out of a retirement plan, you will pay a 10% penalty plus your tax rate. Now you are further in the hole than you were before!
Does your company match 100%?
If you work for a company that matches your contributions, you are missing out on part of your compensation package by not contributing to your retirement plan. When a company determines how much to pay you, the company factors in the maximum cost of benefits (health insurance, retirement, life insurance, etc). Any benefits you do not take advantage of are savings to the company. I hate leaving that money on the table.
I have been very fortunate to work in an industry with incredible retirement matches. Over the last few years, if I put in $1, the organization puts in $1.60 or $1.80, up to 5% of my pay. That’s some serious money to leave on the table. I’m making 160% to 180% on my money instantly.
Are you making good progress paying off your debt?
If you are having trouble getting traction on your debt payment plan, would stopping your retirement contributions help you make some traction?
If you are putting $100 a month in your retirement plan, you would probably have an additional $85-$90 per month after taxes to put toward your debt. That may be the extra boost you need to start getting some traction, especially if you have a lot of smaller debts.
Making the decision to stop your retirement contributions means you need to get a fire under your ass. Generate some extra income and slash your expenses so you can get some breathing room and get that debt paid down. This should not be a 10 year plan. This should be a 2-3 year plan, depending on how much debt you have. You need to get the mess cleaned up so you can start saving for your retirement and living your dreams. No cable. No vacations. If you are willing to sacrifice your future, you need to sacrifice right now.
We have slashed our expenses and both do side work to generate extra income. Each month, 50% – 60% of our take home pay goes to debt repayment. The contributions that I make to my retirement plan (after taxes) is 1% of our take home pay. By making that retirement contribution, I decrease our debt payoff by $116 per month. That also means that I have $455 per month going into my retirement plan (including the match). The $116 is not going to move our debt free date but the $455 will move up my retirement date.
Is there a correct answer for everyone?
That’s the easiest question of all because the answer is no. Everyone’s situation is different. You need to look at your situation and determine what is right for you. If you need help making this decision, leave a comment or send me an email at firstname.lastname@example.org.
Are you contributing to retirement while getting out of debt? Does your employer match your contributions?