Here’s a question that I frequently get asked by my coaching clients: “Should I stop investing in my 401k while working to pay off my debt?” In most cases, the answer is no. If someone’s budget is really tight, even after trimming non-essentials, then it may be wise to temporarily suspend 401k contributions. Here’s why I want you to keep those 401k contributions rolling into your account.
Most people have sufficient cash flow to afford to put in the minimum amount to take full advantage of their employer’s 401k match. As an example, let’s say that your employer matches 50% on up to 7%. If at all possible, you should put in the 7% so you don’t miss out on that “free money” from your employer (3.5%).
I’ve found that sometimes people will stop or decrease their 401k contributions while paying off debt and then “forget” to bump them back up once their consumer debt is paid off. Either way, you should max out your retirement account contribution when all of your debt (with the exception of the mortgage) is paid in full.