Should You Suspend 401k Contributions to Pay Off Debt?
If you are carrying a heavy debt load and have been making contributions towards a 401k account, you may be wondering if it’s time to suspend 401k contributions and pay off some debt. Adjusting your cash flow to pay down debt is usually a good idea, but how valuable is it for you to stop saving money towards retirement in order to do so? This is a common question that people who are carrying thousands of dollars in debt have, so you need to take an honest look at your finances and decide what debt payoff strategy would be right for you.
Calculating How Long it Takes to Become Debt Free
One of the first things you need to do to determine if suspending your 401k account to pay off debt is a good idea, is to calculate how long it will take you to become debt free. If you are realistically able to pay off your debt within 18 months using the money you were putting towards the 401k account, it might be a good idea. If you will still have a few thousand dollars in debt while eliminating your 401k contributions, you won’t really gain anything from making such a drastic change. In this case, you will be better off continuing making contributions to grow this important savings account, and slowly hacking away at your debt load as you can.
Suspending 401k Contributions
If you do decide to suspend 401k contributions, you must make sure that you are only using those funds to pay down your debt. If you end up spending that money on frivolous purchases or don’t even account for the extra money, you will be giving up more than just the face value of that allocation. Remember that 401k contributions are tax-free and you are making a very valuable investment by building up that account. Stopping payments towards this account and just spending the money now will have a negative impact on your financial future. As long as you are putting the entire sum towards your debt payoff strategy, you will be putting yourself in a much better financial position in the long-run.
Stopping contributions to your 401k account is a personal decision and one you need to make when you have an accurate idea of your financial situation. If you think you can pay off your entire debt load within two years, suspending contributions may be a wise choice.