This Michelle Singletary column on the Washington Post website has answers to a few readers' questions regarding debt and debt reduction. The first question outlines a situation that stings a bit. Here's a summary:
- Husband has less construction work coming in; takes lesser-paying jobs to bring in something.
- Couple cuts budget but is still short $250/month, which is depleting their savings.
- She contributes to her 401(k) only enough to get match from employer.
- Question: Give up the free money to shore up the shortfall?
Ms. Singletary's answer is yes, do this until the employment situation improves, even though it hurts to give up the free money.
I have to agree with this. I'd go for one more round of cost-cutting before throwing in the towel, or cut as much as I could but just reduce my contribution so that I'd still get some of the match, but yeah, money more or less locked away in a 401(k) doesn't do much good when the credit card balances start going up.
I think this would especially hurt someone who had been doing the right thing and taking advantage of matching money from their employer. Plenty of people just let this money float right by them down the drain each and every paycheck. (Just to set the record straight: I'm not completely sold on maxing out 401(k) contributions, but getting as much as you can out of your employer in matching money is usually a good idea.)
Keeping your income streams flowing is key, just as doing little money-saving things. Investing should be used with excess funds, and if there are no excess funds, then there should be no investing, for retirement or otherwise. And if there's debt to be reduced, then this is even a stronger reason for not investing.
Giving up an employer match would be extremely hard for me to do. But there is a psychological thing about seeing your credit card balance go up, especially if you've been working your tail off to make it go down.
I think I would do everything in my power to save $250 a month before I cut my contributions below the match rate though.
I read the Post article as well. I found myself asking "where are the budget details?" Too many people write and ask for advice, saying that they have cut everything to the bone and therefore need to do something radical, such as stopping 401k contributions. Upon further examination, we learn of multiple car payments, cable TV and cell plans, $600 food budgets, ballet lessons, etc. So when I see these questions, I remain skeptical until I see the budget details.
Mr. ToughMoneyLove makes a good point. The whole idea that people have really cut things to the bone is laughable…especially when today’s generation has no clue how to live frugally, i.e. as Mr. ToughMoneyLove points out. When times are tough and jobs have been lost, it may be that the only thing you can afford is a roof over your head, a basic grocery budget that consists of staple items from which you can make meals from scratch, a landline phone, and basic utilities (no Internet, no cable TV). That way you just might be able to keep your savings plan in place (which includes emergency, emotional, and retirement savings) and continue to pay off debt. You might even have to sell the cars and take the bus.