Should I reduce my retirement contribution to pay down debt?
Posted on February 08, 2006 by Him and tagged credit, debt, retirement, simple_ira
If you haven't noticed, we are drowning in a crapload of debt. Between the two of us, we have eight credit cards (down from 20+ a year ago) and about $18K in credit card debt. Because we are also trying to save for a wedding, right now we're only putting an extra $100/month towards the highest rate card (mine at 20.99%, eek, I know). This feels like using a band-aid to cover a gaping wound. We need some sutures!
In order to speed up the process of paying those pesky cards down, I'm thinking of reducing my Simple IRA (a 401k-like plan for small businesses) from 6% to 3%. In doing so, that will free up $80/month that will all go towards credit card debt reduction. When our debt is all paid down, then I'll put my contribution to 6%. My company matches dollar-for-dollar up to 3% of my salary, so in essence I'm still going to be receiving 6% when all is said and done.
We've already looked at our monthly budget and think that we've trimmed most of the budgeting fat. Do you think that this is a good idea?
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Without a doubt. Get the match and move the leftover cash towards that high rate card balance. Is your credit good enough to get a 0% balance transfer offer?
As long as you are getting all the match from your employer, I'd sure put the rest toward debt. 20.99% is pretty hard to beat in the market.
I'd also make sure I was putting some towards an emergency fund.
Great blog! I just linked you up on mine!
Hazzard
Also try to see if you can get that 20.99% rate reduced by calling them (if you haven't done this recently).
abileneblues | Feb 10, 2006
We reduced our retirement contributions down to the employer match (can't beat 100% return) to get out of debt. While it's a little more risky for us at 40 than it would have been earlier, I should be able to save much more once we're not paying out all that interest.
Hey, thanks for the comment on my site. I am pulling for you guys to become debt free. My number one advice? Focus, focus, focus! If ya fall down, get right back up. That's what your plan is for, to show you what to do when you mess up. As for the retirement, I would DEFINITELY reduce it to just the match.
Trackback sent from Retire at 30 on Feb 13, 2006:
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Every year you have a maximum of retirement savings you can put. Once the year goes by, that allotment goes away. You can't recover from not putting retirement money.
Don't reduce retirement contributions.
If you have to, reduce spending on other areas. Try to make a more reasonabily priced wedding. Balance trasnfer to credit cards with better interest.
As long as you are not INCREASING debt, you should keep your retirement savings. Just stop increasing the debt, and pay a bit more than needed, and it will go away in time.
Doing a side business or job for a while to pay for the credit card debt is also a good idea.
It's not a bad idea, especially for the short term, but there's a question you need to consider:
Are you currently contributing money to your employer-sponsored retirement plan with pre-tax or after-tax dollars?
With pre-tax contributions, once you draw them out of the plan, you'll be hit with the taxes plus an early withdrawal tax if you're under 59-1/2 years old. After tax dollars escape these penalties.
Good luck!
cory | Feb 8, 2006
Absolutely, you're never going to see a return of 21% on that $80 a month, and you're still getting your employer match, so by all means, redirect that money to your high rate debt reduction.
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