I recently read that some people who are in the middle of paying off debt have decided to stop contributing to their 401k in order to pay off the debt faster. The more money that they get as take home, the more they can pay off, right? Let’s take a look at the math in that, and why sometimes, even if you are following a debt payoff plan, it’s better to forget the plan and seize the opportunity.
It’s Not Just About Retirement Money
If I told you I had just come from the future (put aside the sketchiness of that statement) and knew Bitcoin would make you a millionaire ten years ago, would you invest, or tell me you cant because you owe on a credit card?
Similarly, 3 years ago my brother told me they were selling a house around him for $250,000 when the other houses in the neighborhood were going for about $300,000. I had no plans to buy a house. I was 27 at the time and I wanted to wait until I was 30. I already had my condo and I was living by myself. I was happy there. I told him all this and he said it could be fun to just check it out.
The house was beautiful. Bigger than I needed, but I had plans to move in with my wife (girlfriend at the time), and we wanted kids eventually. The backyard was huge, the neighborhood was good, and less than a mile from y brother’s and my parent’s house.
A few years later, a large portion of my Net Worth comes from this same house. Although I only included it at a little over $300,000 because I like to be conservative, the truth is, the houses in this area are very close to reaching $400,000.
Math Is Always Math
My employer matches 100% of my contributions up to 5%, but let’s go a little bit more conservative. My wife’s job matches 50% up to 6%. What that means is that your dollar gets a 50% return each time you invest it. The only time you should forego the contribution is when you have a loan charging more than that 50%. If you have a loan that charges more than 50% interest though, you messed up somewhere in life and get that fixed ASAP.
Can’t I Catch Up Later?
If you go to the contact me page, I would love an email about where you are 5 years from. Not where you think you’ll be. I’m talking about where you are going to be. You’ll need that time traveling man to tell you what family emergencies you’ve had, what job losses or promotions, etc.
The truth is nobody knows what’ll happen, but there is a saying that I love about investments. Don’t try to time the market, but give the market time. When it comes to investing, time is your best friend.
Let’s say you earn $40,000 a year and your employer matches 50% up to 6% of your contributions. You’re still 25 so you got another 40 years to retire (If you’re one of the few reading this that don’t want to retire early).
If you start investing right away with the match and earn 8% annually, you’ll have $966,000 by the time you retire.
If you wait:
1 Year: $891,000
2 Years: $821,000
3 Years: $757,000
4 Years: $697,000
5 Years: $642,000
And the numbers just go on and on and on, hurting you more and more.
So When Do I Pay Off My Debt
Stick to the plan somewhat! Keep paying debt down, especially high-interest debt. If you like the snowball method of paying the smallest ones first, then go for it. But don’t miss opportunities. Don’t miss free money because someone said you should be investing until you pay off your house or whatever the situation might be. Take advantage of great deals along the way, and set yourself up to be ready for the next deal. These opportunities aren’t created by luck.
I’ve mentioned MyCalculators.com before. Plug in your numbers and see what a difference certain scenarios will make for you. And remember, you are the biggest expert on your own finances, don’t let anyone decide what’s best for you. (Including me!)