The 401K Taboo While in Baby Step 2

What?  I have to stop my 401K to get out of debt?  That's what Dave says.  So I guess I better do it!  Wait?  Doesn't Dave say to use common sense with this finance stuff and not to do ANYTHING just because some guy on the radio said so?  Why does Dave say to stop all saving while going through Baby Step 2?  He says that this finance stuff is 80% behavior and 20% finance (math) and that is 100% RIGHT.  He is essentially saying that it's very likely that you're not going to work through this plan if you don't commit to it.  Can you commit to it?  If you can't commit, go on, get out of here, the rest of this is definitely not for you.  If you are one of those people who likes the idea of getting out of debt, and might pay a little here or there on a debt, but don't actually sit down each and every month and make out your budget, then we (or Dave) can't help you very much.  And trust us, we know those people, we talk to them every day.  They are super happy for us, they pat us on the back, they are so glad that WE could pay off so much debt, but don't actually think in their minds that they could do it either.  Do YOU think you can do it?  If you do, read on.

The Myth. I have to miss out on my company's 401K match while in Baby Step 2 (Debt Snowball).

Dave's Truth. Yes you do.

The Real Truth. Just like everything else, there should be a COMMON SENSE rule of thumb.  There is a common sense rule of thumb for keeping cars, to know whether or not you should sell your car(s) add up the value of all your cars, and if the total value is less than half of your annual income and you can get out of debt in two years or less and you like them, you can keep your cars.  

Why two years?  Living on a scorched earth budget is no fun.  We agree with Dave that the longer you take, the more likely you are to lose your resolve and the less likely you are to get out of debt.  We're at the 15 month mark, and though it's a struggle, we can see the end in sight.  I don't think we'd feel the same way if we had another three years to go still.  We would want to stop our retirement and everything else to bring that time down.  No car and no amount of money in retirement is worth it if you've been a slave to creditors your entire life.

Obviously we're not in Baby Step 4 yet, so putting 15% toward retirement now is not even remotely feasible and would cripple our ability to get out of debt.  However, our company gives a generous match, and we didn't want to miss out on tens of thousands of dollars of free money by stopping contributions completely.  We decided The Abbett 401K Rule of Thumb (based on the Ramsey Car Rule of Thumb) would be, "If you can contribute to your company's retirement plan, solely up to the match, and still get out of debt within two years or less, then you can keep your 401K contributions (solely up to the match).  If there is no match, stop all contributions until Baby Step 4."  

So what does that look like in real life?

Meet Paul.

Paul is 34 years old and has been working at his company Vandr Corp for two years, earns a salary of $80,000 and has contributed 4% to his 401K since he started. Vandr Corp matches the first 4% of each employee's 401K contributions.  Paul's take home pay (after his 401K Contribution has been taken out) is roughly $4,550 per month.  Paul is on Baby Step 2 and he has $24,000 in debt to pay off.  Paul's monthly expenses come out to about $2,000 (beans and rice, rice and beans).  He has just about $2,200 to put towards debt every single month.  He will be finished with Baby Step 2 in about 11.5 months.  Stopping his 401K would only have meant an extra $184 to put toward debt per month.  He would have been out of debt only 1 month sooner.  If he were to have stopped his 401K, he would have missed out on $6,400 ($3,200 of his money and $3,200 of free money from his company) plus any gain for that year.  If you take that $6,400 and put it into an investment calculator, by the time Paul retires, he would have missed out on $269,385.  That is INSANE!!!   

Yes, we know that personal finance is 80% behavior and 20% math, but at the end of the day, by stopping our 401Ks, even for a short amount of time (1 year) we would literally be missing out on hundreds of thousands of dollars in retirement.  Stopping our contributions would have shaved only 2 months from our debt snowball, and we knew we had the discipline to see it through.  Though we could finish in 2 years, we even worked extra jobs to bring in income to make up for what we were putting in our 401Ks, and actually ended up earning more than that!  We replaced what we were contributing and then some, meaning that we sped up our snowball even more than we would have by stopping our 401Ks. 

There is nothing WRONG with stopping your 401K to instill a sense of discipline in your Financial Journey, and we highly encourage it if you need to.  But we want to dispel any myth that it is required.  There are so many things we do because Dave says so, he's Uncle Dave, but before you stop your 401K just because he says so, run the numbers and see if it's right for your family.  

1. Are you going to get out debt any faster because you stopped your contributions?  If so, how much faster?  
2. How much money would you be missing out on over the course of your lifetime?  Check Dave's Retirement Calculator here!
3. Is this common sense?
4. Will you stick to your plan and do whatever it takes to become debt free in two years or less?

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