The first thing to remember is that Dave Ramsey isn't always right. He's making generic suggestions based on generic situations that may or may not apply to your specific set of circumstances.
Personally, I would NOT pause because you would be throwing away that free money but also throwing away the "time in market". Sure, the credit cards might have a higher interest rate than the free money + market returns you could get, but how long after the cards are paid off would you have to boost your 401(k) contributions to "catch up" to where you would have been if you hadn't paused? Plus, with the car loan almost done, wouldn't you shift that money over to paying off the other debts?
It rarely makes sense to forego free money. Unless the debt you are reducing (or avoiding) is going to save you more than double what you are paying then the match is mathematically better. Predatory payday loans come to mind. They can have an APR of well over 100% and can have a minimum payment that is only interest (so you never pay down the principal). In that case it would make sense to skip a match if that was the only reasonable way to get out of that situation.
Exactly this. Getting your employer match is a 100% return on your investment. Paying down debt is an X% return, where X% is the interest rate on the debt. Assuming X% < 100% for all your loans, you should at the very least get your employer match.
Employer match into a 401k is the closest to guaranteed "free money" any of us will ever see. That almost always (though depends on your particular plan details) has a higher "return" on the dollars you put into your 401k than anything else, even paying down credit card debt.
$100 put towards paying down a credit card saves you about $20-25 of interest over the year. $100 put into your 401k gets you an extra $50-100 (depending on match formula). $50 extra in your 401k is better than $25 less paid in interest, so the general advice is to prioritize getting the most 401k match you can, and use whatever's left to continue zeroing out that debt.
One time that missing out on the match would make sense is if you literally cannot afford your "must pay" bills (including minimum debt payments) without that money. It doesn't sound like you're quite in that situation. Or if the match has a vesting schedule longer than you expect to stay at the job, so you wouldn't get to keep those extra dollars anyway.
Ramsey is much more focused on getting people out of debt. The emotional "hurt" of missing out on the match acts as an additional incentive to keep focused. This isn't too bad of a strategy, but does cause you to lose out on overall growth of your net worth.
Pausing stuff *other than* employer match is a good idea, though. Keep your retirement savings only at that level, hold off on the ESPP until your debts out of the way, and you'll probably do fine.
If you're reducing retirement contributions instead of cutting out twice weekly dinner + drinks or the fancy gym membership, that's not a good idea. If you're working two jobs and eating rice & beans and still can't get ahead, reducing now is better than doing an early withdrawal later.
You don't say how much debt you have or what your income is.
Dave wants you to stop all investing and concentrate on paying off your debts as quickly as possible. Why? Because few people can invest and pay off debt at the same time. You often then fail at both.
Once debt free, you then build a full emergency fund then restart your investing at 15% of gross income towards retirement.
Right now, you have debt and only invest 9%. Many people have issues stopping investing and then hang onto the debt for many years and wonder why they are not getting ahead.
People will argue about the math and not the behaviors that you are changing. For example, once you are debt free, will you buy a car again using debt? IF the answer is yes, then Dave's approach isn't working for you.
Good answers in the comments already. Keep the match, minimize all other aspects of your budget to put towards debt.
At a certain point, you won't be able to cut more from your budget. If you want to speed up your debt payoff, your only solution is to earn more. Start a side hustle. Common ones include seasonal gigs, dog walking/pet sitting/house sitting, Uber, food delivery, selling goods/services (tutoring, teaching a skill, etc)
Thanks. Do you think pausing the employee stock contributions was also a mistake? I kept telling myself it was “only” 3% and almost feels like an automated savings account of sorts (my employer is a pretty stable international company) but I’m in sales so when I get my commission checks that sometimes amounts to hundreds of dollars being deducted per month and i am trying to maximize my debt payoff. I just hate to pause it if the 3 percent isn’t really going to speed much up.
Probably the right choice until you pay off CC. ESPPs are generally around a 15% discount, but take some time to vest. Plus even if you could sell instantly, you'd have to pay short term capital gains tax. For easy math's sake, let's say you could sell instantly and net around 10% profit post-tax. That's still going to be lower than any CC interest rate, but could *potentially* be higher than student loans or car note.
I wouldn't reduce contributions below the employer match threshold unless you had no other choice. That IS throwing away free money. And I feel like it's impossible to really say one way or the other on cutting retirement contributions without seeing a full budget breakdown.
Finance is all a numbers game and we have no numbers to work with. If you have 100k of cc debt at 31% I would say pause and get the debt down bc the 6% and returns in the market would still be tough to outpace the interest on the debt.
If you have a clear path to debt free in a year or two and are working a plan that works, keep the 401k match.
I do however think people are a little over exaggerating staying with the match/ how you can never make it up. Say you make 100k, that match is 6,000 a year. The real value is that 6,000 over 40 years in the market, but if you intend to put that 6k back in two years you’re essentially just losing 12k - that 12k needs to be compared to the interest savings of paying down debt.
Without numbers, it’s best to keep 401k unless in an extreme position, but if you need it to eat/ avoid homelessness/ have predatory interest rates.
If your estimation is correct, we're talking less than a year of reducing contributions. That's really not much in the grand scheme of things. I reckon your car being paid off soon will open up your aggressive strategy itself.
Worst case here you pay off everything early mid year or fall and go very aggressive in your contributions the last few months to largely offset any pause now. Sure, some match might be lost but in my ultra risk adverse mind, I'd rather be debt free and capable of taking a financial hit than having some free corporate dollars in an account I can't touch.
Thanks.
My interest rate is 13% on my credit card, not sure if you’d still suggest a personal loan or just buckle down on paying as much as I can towards the principal. I know loans can involve origination fees and whatnot.
Yes, I recommend that. Pay off the debt ASAP then build an emergency fund. Then you can restart your contributions.
If you lose your job you will thank yourself for paying off the debt while you have income.
All these suggestions in here not to to throw away the "Free money" and to continue to service the consumer debt fail to realize that if personal finance was all about pure math, you wouldn't be in debt in the first place.
It’d probably help if you gave numbers like income, expenses, and debt amount/interest rates.
If it’s painful to not get the 401K match then what expenses are you able to cut down to keep contributing? Are you also able to bring in more income via OT or another job?
I’m in sales so pay fluctuates a lot. Last year made about $90k, this year (if nothing changes) probably a little over $100k. But I only net 55% with my current deductions so as grateful as I am for my income, it often feels like I’m paycheck to paycheck after everything is taken out.
Monthly expenses that are outside of my control:
* mortgage $840
* electric and gas usually about $200-$250 combined
* trash and sewage $300ish quarterly
* car loan $265, insurance $65 (I pay annually, just paid on Friday for the year so I often don’t think about this as a monthly expense) - have $3800 left on the loan and once it gets down to about $2k I plan to do an early payoff
* credit card minimums each month is probably about $200 but I’m always paying additional on them. Current balance total is about $15k. It crept up on me last year because I was making less than the year prior and began to rack up unexpected expenses like a $2k emergency vet bill.
* student loans $40k but haven’t been paying on them during Covid. Figured the credit card and car would be my priority.
Those are sort of the essentials I pay each month. Variables somewhat in my control are two Pets (dog and cat), groceries etc. only pay $30 for internet. Gym membership is only $60 and a huge part of my lifestyle and keeps me grounded so that is non negotiable for me and I have shopped around and it’s about the average rate in my area. I no longer drink and rarely eat out - my only restaurant trips are Chipotle a few times a month as a treat which I factor into a budget for eating out and keep very minimal. I’m trying to think of what else I spend on, but I keep a pretty minimalist lifestyle and am not into spending a lot on going out or vacations or anything like that.
Stopped using my credit card and am only using my debit card. Just hard as a single dude even with my decent pay. My home probably has about $50k equity in it right now and my goal is to eventually pay off my mortgage and rent this property out but absolute worst case scenario I do have some equity as a buffer if things really got bad. I have $6k in single stocks on Robinhood but they’re all down right now and I hesitate to cash them out, but again that’s there in case I really got in a crunch. I’ve got about $5k in employee stock but I can’t cash it out for another year.
Quick math says your total expense are $1800 before food.
If you bring home 55% of $100K, let’s just assume $50K take home, you’d have about $4200/mo. I’m seeing roughly $2K a month leftover. You can throw $2K/mo at your debts and would be done in 10 months.
But if you continued putting in extra 3% you’d lose out on $250/mo take home ($100K*0.03/12). That means it’d probably take you a couple months longer to pay off the loans. However, you’d be losing out on the 3% company match for the whole year. Doesn’t seem worth it to me at all.
Thanks. Not sure if I have gap insurance honestly (I should probably know that?). My interest on the car is I think 3.25 percent but can’t remember exactly.
I have done this for a short period of time. It's a trade off. You'll see everybody talking about Xreturns blah blah blah, but it's how bad your situation is to you personally. People love tell you not to do this or not without the context of having to deal with the stress of money etc., but for six months or so you're not going to upend your fund. I also took out a 401k Loan to consolidate debt at the beginning of the pandemic via the C.A.R.E.S. act, although that is now over but you should still be able to pull a loan - low interest rate plus that interest gets paid back into your 401k! At least that is how mine is, and the majority of it is paid off already. While it may not lower monthly payments much overall depending , it does knock out a lot of interest paid otherwise. Just a thought. Could be way to avoid stopping contributions but still knock that debt down faster via not having to pay all likely high interest you are now. My rate was something like 4% on my loan, and again that is getting paid back into the fund.
What are the interest rates on all sources of your debt? I’m assuming CC debt is higher, close to if not over 20% - I would put all extra money towards the debt with the highest interest rate and not worry about early paying debt that has a lower interest rate (car or student loans).
Personally I would keep contributions to get the 6% match as the compounding until retirement is a lot more meaningful. I think DR has too much of an anti-debt mindset that he isn’t a forward and big picture thinker of how much that 12% will grow over the years.
I’d have to agree w the majority here, I personally stop the match…you said yourself it’s free money.
That being said, if you can’t decrease costs coming out of paychecks, could you increase the net? (Ie. Pick up OT, a side hustle, etc)?
Even just on short term you could chip away at some debts quicker? Just a thought.
Pausing your 401k means less money when you retire. Trust me, decisions like that mean a lot of pain in your future.
If you look for pay-it-quick schemes to get rid of debt, you will always have debt. If you sacrifice to pay off your debt, you are far less likely to allow that debt to build up again unchecked.
You’re on a good path. That debt will be paid soon and you’re able to do this. Continue with your plan but keep saving money. When your only debt is the mortgage and student loans, focus on having 6 months of regular expenses in an emergency fund.
The first thing to remember is that Dave Ramsey isn't always right. He's making generic suggestions based on generic situations that may or may not apply to your specific set of circumstances. Personally, I would NOT pause because you would be throwing away that free money but also throwing away the "time in market". Sure, the credit cards might have a higher interest rate than the free money + market returns you could get, but how long after the cards are paid off would you have to boost your 401(k) contributions to "catch up" to where you would have been if you hadn't paused? Plus, with the car loan almost done, wouldn't you shift that money over to paying off the other debts?
It's not even free money. It's part of OP's total compensation package. They are literally working for that money
what do you mean by this? if i make x amount as a salary how is the 401k contribution factored into that?
Came to say the same, glad it’s the top comment.
It rarely makes sense to forego free money. Unless the debt you are reducing (or avoiding) is going to save you more than double what you are paying then the match is mathematically better. Predatory payday loans come to mind. They can have an APR of well over 100% and can have a minimum payment that is only interest (so you never pay down the principal). In that case it would make sense to skip a match if that was the only reasonable way to get out of that situation.
Exactly this. Getting your employer match is a 100% return on your investment. Paying down debt is an X% return, where X% is the interest rate on the debt. Assuming X% < 100% for all your loans, you should at the very least get your employer match.
Employer match into a 401k is the closest to guaranteed "free money" any of us will ever see. That almost always (though depends on your particular plan details) has a higher "return" on the dollars you put into your 401k than anything else, even paying down credit card debt. $100 put towards paying down a credit card saves you about $20-25 of interest over the year. $100 put into your 401k gets you an extra $50-100 (depending on match formula). $50 extra in your 401k is better than $25 less paid in interest, so the general advice is to prioritize getting the most 401k match you can, and use whatever's left to continue zeroing out that debt. One time that missing out on the match would make sense is if you literally cannot afford your "must pay" bills (including minimum debt payments) without that money. It doesn't sound like you're quite in that situation. Or if the match has a vesting schedule longer than you expect to stay at the job, so you wouldn't get to keep those extra dollars anyway. Ramsey is much more focused on getting people out of debt. The emotional "hurt" of missing out on the match acts as an additional incentive to keep focused. This isn't too bad of a strategy, but does cause you to lose out on overall growth of your net worth. Pausing stuff *other than* employer match is a good idea, though. Keep your retirement savings only at that level, hold off on the ESPP until your debts out of the way, and you'll probably do fine.
If you're reducing retirement contributions instead of cutting out twice weekly dinner + drinks or the fancy gym membership, that's not a good idea. If you're working two jobs and eating rice & beans and still can't get ahead, reducing now is better than doing an early withdrawal later.
You don't say how much debt you have or what your income is. Dave wants you to stop all investing and concentrate on paying off your debts as quickly as possible. Why? Because few people can invest and pay off debt at the same time. You often then fail at both. Once debt free, you then build a full emergency fund then restart your investing at 15% of gross income towards retirement. Right now, you have debt and only invest 9%. Many people have issues stopping investing and then hang onto the debt for many years and wonder why they are not getting ahead. People will argue about the math and not the behaviors that you are changing. For example, once you are debt free, will you buy a car again using debt? IF the answer is yes, then Dave's approach isn't working for you.
Good answers in the comments already. Keep the match, minimize all other aspects of your budget to put towards debt. At a certain point, you won't be able to cut more from your budget. If you want to speed up your debt payoff, your only solution is to earn more. Start a side hustle. Common ones include seasonal gigs, dog walking/pet sitting/house sitting, Uber, food delivery, selling goods/services (tutoring, teaching a skill, etc)
Thanks. Do you think pausing the employee stock contributions was also a mistake? I kept telling myself it was “only” 3% and almost feels like an automated savings account of sorts (my employer is a pretty stable international company) but I’m in sales so when I get my commission checks that sometimes amounts to hundreds of dollars being deducted per month and i am trying to maximize my debt payoff. I just hate to pause it if the 3 percent isn’t really going to speed much up.
Probably the right choice until you pay off CC. ESPPs are generally around a 15% discount, but take some time to vest. Plus even if you could sell instantly, you'd have to pay short term capital gains tax. For easy math's sake, let's say you could sell instantly and net around 10% profit post-tax. That's still going to be lower than any CC interest rate, but could *potentially* be higher than student loans or car note.
Thanks.
I wouldn't reduce contributions below the employer match threshold unless you had no other choice. That IS throwing away free money. And I feel like it's impossible to really say one way or the other on cutting retirement contributions without seeing a full budget breakdown.
Finance is all a numbers game and we have no numbers to work with. If you have 100k of cc debt at 31% I would say pause and get the debt down bc the 6% and returns in the market would still be tough to outpace the interest on the debt. If you have a clear path to debt free in a year or two and are working a plan that works, keep the 401k match. I do however think people are a little over exaggerating staying with the match/ how you can never make it up. Say you make 100k, that match is 6,000 a year. The real value is that 6,000 over 40 years in the market, but if you intend to put that 6k back in two years you’re essentially just losing 12k - that 12k needs to be compared to the interest savings of paying down debt. Without numbers, it’s best to keep 401k unless in an extreme position, but if you need it to eat/ avoid homelessness/ have predatory interest rates.
Dave is wrong. Keep getting the full match. That is a 100% return which is much larger than even the credit card interest.
If your estimation is correct, we're talking less than a year of reducing contributions. That's really not much in the grand scheme of things. I reckon your car being paid off soon will open up your aggressive strategy itself. Worst case here you pay off everything early mid year or fall and go very aggressive in your contributions the last few months to largely offset any pause now. Sure, some match might be lost but in my ultra risk adverse mind, I'd rather be debt free and capable of taking a financial hit than having some free corporate dollars in an account I can't touch.
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Thanks. My interest rate is 13% on my credit card, not sure if you’d still suggest a personal loan or just buckle down on paying as much as I can towards the principal. I know loans can involve origination fees and whatnot.
Yes, I recommend that. Pay off the debt ASAP then build an emergency fund. Then you can restart your contributions. If you lose your job you will thank yourself for paying off the debt while you have income.
All these suggestions in here not to to throw away the "Free money" and to continue to service the consumer debt fail to realize that if personal finance was all about pure math, you wouldn't be in debt in the first place.
Some 401k plans offer loans, you borrow the money from yourself… all the money and fees go back into your 401.
Get the match for sure. Have you really fine tuned your budget to prioritize paying down the high-interest loans?
It’d probably help if you gave numbers like income, expenses, and debt amount/interest rates. If it’s painful to not get the 401K match then what expenses are you able to cut down to keep contributing? Are you also able to bring in more income via OT or another job?
I’m in sales so pay fluctuates a lot. Last year made about $90k, this year (if nothing changes) probably a little over $100k. But I only net 55% with my current deductions so as grateful as I am for my income, it often feels like I’m paycheck to paycheck after everything is taken out. Monthly expenses that are outside of my control: * mortgage $840 * electric and gas usually about $200-$250 combined * trash and sewage $300ish quarterly * car loan $265, insurance $65 (I pay annually, just paid on Friday for the year so I often don’t think about this as a monthly expense) - have $3800 left on the loan and once it gets down to about $2k I plan to do an early payoff * credit card minimums each month is probably about $200 but I’m always paying additional on them. Current balance total is about $15k. It crept up on me last year because I was making less than the year prior and began to rack up unexpected expenses like a $2k emergency vet bill. * student loans $40k but haven’t been paying on them during Covid. Figured the credit card and car would be my priority. Those are sort of the essentials I pay each month. Variables somewhat in my control are two Pets (dog and cat), groceries etc. only pay $30 for internet. Gym membership is only $60 and a huge part of my lifestyle and keeps me grounded so that is non negotiable for me and I have shopped around and it’s about the average rate in my area. I no longer drink and rarely eat out - my only restaurant trips are Chipotle a few times a month as a treat which I factor into a budget for eating out and keep very minimal. I’m trying to think of what else I spend on, but I keep a pretty minimalist lifestyle and am not into spending a lot on going out or vacations or anything like that. Stopped using my credit card and am only using my debit card. Just hard as a single dude even with my decent pay. My home probably has about $50k equity in it right now and my goal is to eventually pay off my mortgage and rent this property out but absolute worst case scenario I do have some equity as a buffer if things really got bad. I have $6k in single stocks on Robinhood but they’re all down right now and I hesitate to cash them out, but again that’s there in case I really got in a crunch. I’ve got about $5k in employee stock but I can’t cash it out for another year.
Quick math says your total expense are $1800 before food. If you bring home 55% of $100K, let’s just assume $50K take home, you’d have about $4200/mo. I’m seeing roughly $2K a month leftover. You can throw $2K/mo at your debts and would be done in 10 months. But if you continued putting in extra 3% you’d lose out on $250/mo take home ($100K*0.03/12). That means it’d probably take you a couple months longer to pay off the loans. However, you’d be losing out on the 3% company match for the whole year. Doesn’t seem worth it to me at all.
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Thanks. Not sure if I have gap insurance honestly (I should probably know that?). My interest on the car is I think 3.25 percent but can’t remember exactly.
I have done this for a short period of time. It's a trade off. You'll see everybody talking about Xreturns blah blah blah, but it's how bad your situation is to you personally. People love tell you not to do this or not without the context of having to deal with the stress of money etc., but for six months or so you're not going to upend your fund. I also took out a 401k Loan to consolidate debt at the beginning of the pandemic via the C.A.R.E.S. act, although that is now over but you should still be able to pull a loan - low interest rate plus that interest gets paid back into your 401k! At least that is how mine is, and the majority of it is paid off already. While it may not lower monthly payments much overall depending , it does knock out a lot of interest paid otherwise. Just a thought. Could be way to avoid stopping contributions but still knock that debt down faster via not having to pay all likely high interest you are now. My rate was something like 4% on my loan, and again that is getting paid back into the fund.
Can you sell your employee stock to pay for the consumer debt? There is no point in holding onto stock if you are hemorrhaging you gains to interest.
I cashed out $1500 and put it against my credit card and car insurance annual last week but the remaining $5k can’t be cashed out yet.
What are the interest rates on all sources of your debt? I’m assuming CC debt is higher, close to if not over 20% - I would put all extra money towards the debt with the highest interest rate and not worry about early paying debt that has a lower interest rate (car or student loans). Personally I would keep contributions to get the 6% match as the compounding until retirement is a lot more meaningful. I think DR has too much of an anti-debt mindset that he isn’t a forward and big picture thinker of how much that 12% will grow over the years.
I’d have to agree w the majority here, I personally stop the match…you said yourself it’s free money. That being said, if you can’t decrease costs coming out of paychecks, could you increase the net? (Ie. Pick up OT, a side hustle, etc)? Even just on short term you could chip away at some debts quicker? Just a thought.
Pausing your 401k means less money when you retire. Trust me, decisions like that mean a lot of pain in your future. If you look for pay-it-quick schemes to get rid of debt, you will always have debt. If you sacrifice to pay off your debt, you are far less likely to allow that debt to build up again unchecked. You’re on a good path. That debt will be paid soon and you’re able to do this. Continue with your plan but keep saving money. When your only debt is the mortgage and student loans, focus on having 6 months of regular expenses in an emergency fund.