401k vs pay down debt

[seanf12]

I am currently maxing out my 401k contribution at the full, annual amount of $22,500, while also following the debt snowball method, for which I am on track to have all non-mortgage debt paid off in 20 months (while still maxing out my 401k). I was considering decreasing my 401k contributions to the same level of my employer match, and instead take those funds and put them towards the debt. If I pay those extra funds towards my debt instead of 401k, I would have all of my non-mortgage debt paid off in 15 months instead of 20. Of course, I would lose the tax advantages. What are your thoughts, is it worth getting the debt paid off 5 months faster, or should I continue with my current strategy of maxing out my 401k while still following the debt snowball and getting things paid off in 20 months? Thanks!

[pizzadude]

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@seanf12 wrote:

I am currently maxing out my 401k contribution at the full, annual amount of $22,500, while also following the debt snowball method, for which I am on track to have all non-mortgage debt paid off in 20 months (while still maxing out my 401k). I was considering decreasing my 401k contributions to the same level of my employer match, and instead take those funds and put them towards the debt. If I pay those extra funds towards my debt instead of 401k, I would have all of my non-mortgage debt paid off in 15 months instead of 20. Of course, I would lose the tax advantages. What are your thoughts, is it worth getting the debt paid off 5 months faster, or should I continue with my current strategy of maxing out my 401k while still following the debt snowball and getting things paid off in 20 months? Thanks!

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Have you run the numbers on how much interest you'd save by paying 5 months faster ?  Unless it's a significant amount, I'd be inclined to keep saving in your 401K.  In my own experience, it's hard to restart savings once you stop automatically contributing. 

[seanf12]

@pizzadude  Good call out.  So I would be saving around $2800 in total interest if I paid it all five months faster.  And you're 100% right, I'm more than used to the automatic contribution and turn it off and I wonder how hard it would be to turn it back on.

[markbeiser]

If the 401k has enough in it, consider taking out a 401k loan to pay off the debt, then pay off the loan while continuing to contribute to the 401k.
You would be paying it back with post tax funds, but the interest you pay on it goes back into the 401k.

[PNWRambler]

Interest rates and 401k match are factors as well.  5 months is significant over a range of 15-20 months.  If you have a match, I might reduce my 401k down to the match only vs maxing it out to pay off a little faster, but personally I wouldn't completely stop it and miss out on the match.  

[CorpCrMgr1]

The old saying is pay yourself first. A good percentage of people that borrow on the 401k or any savings don't pay it back. 

[ptatohed]

If you switch to avalanche you'll reduce the amount of interest you pay and the time it takes to pay off the debt.  If your debt has notably high interest rates, I would consider dropping your contributions down to the match but be diligent about returning it to max contribution after you pay off your debt.  Good luck.  

[TriniQueen1]

Hello

I personally agree. I have similarly utilized "401K funding" to payoff debt and used some as a down payment on a home purchase. Even with the employer match, please consider the growth (5-7%) that your money could be earning vs the interest (20-30%) you are paying on the debt. I felt the pinch with the aggressive 401k savings and loan payoff, yet I gained tremendously more than what the 401k yielded!

For example, I used $20k for the home downpayment which in just 3 years, the equity gained is $180k, and now I NEVER keep a balance after the closing statement dates on my credit cards; always ) interest. I save my Cashback bucks from (1 - 5%) on my credit cards as a savings as well to help stay out of debt. Tough at first but it has become "second nature" and feels great keeping my utilization quite low. 

[Citylights18]

I would just go with 401k up to the employer match. You can always contribute more by Decembrer 31st if you have the funds.

[SouthJamaica]

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@seanf12 wrote:

I am currently maxing out my 401k contribution at the full, annual amount of $22,500, while also following the debt snowball method, for which I am on track to have all non-mortgage debt paid off in 20 months (while still maxing out my 401k). I was considering decreasing my 401k contributions to the same level of my employer match, and instead take those funds and put them towards the debt. If I pay those extra funds towards my debt instead of 401k, I would have all of my non-mortgage debt paid off in 15 months instead of 20. Of course, I would lose the tax advantages. What are your thoughts, is it worth getting the debt paid off 5 months faster, or should I continue with my current strategy of maxing out my 401k while still following the debt snowball and getting things paid off in 20 months? Thanks!

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I'm probably in a minority but I think it's a good idea to concentrate on paying down the debt.