Hey guys, just wanted to get some opinions on debt vs. savings. I have a good company match 401k plan but we also have debts. We don't have much in the way of emergency funds to speak of. I know that it sounds like I am irresponsible which is somewhat true, but our income is down about 40% from just a couple years ago, so things are a little rough.
Company does a 50% match on 401k up to 10%, so if I put in 10% they put in 5%. It's a pretty sweet deal, it's free money. But for the last year I have not been maxing it out, and I know I should, but we are pretty much broke. So I put in 8% and they do 4%. My 401k is doing pretty well and it's "on track" at this point for me to retire at 62-65.
However we also have debts, some time share debts (was a bad decision) and some student loans. We also have a little bit of medical bills from this year (0% interest).
The student loans are not good debt, the interest rates are between 6-8% I think.
If we reduced the 401k contributions we could pay down the student loans and medical bills faster. If we increased the 401k we probably couldn't pay all our bills but would grow the 401k faster.  I am 33 years old.
We already redid our tax witholdings so that we will get a really small refund next year. The total amount in the 401k is about 2x the amount of student loans and other debts.

The thing to consider when comparing any two investments is their relative rate of return.

In your case, you are (automatically via matching) making 50% on whatever you contribute to your 401(k)...that beats the 6-8% you are paying on the student loans.

I would put as much as possible into the 401(k) while still making all my other payments/bills.

Max out the 401k. The company match is free money.

Contribute to 401k to get the company match and no more, hammer away at debt with everything else you have

I don't know your exact situation but this would be my vote. Put enough into the 401k to bet the full employer match and no more until you have either reduced your debt or increased your income and have an emergency savings reserve in a low-risk account.

DEFINITELY look into refinancing the student loans. 6-8% is very high. I just finished paying mine off earlier this year and was only paying around 2% interest. That could save you a lot of money and help you get out of debt sooner.

edited to add that I would highly suggest making minimum payments on your debt and building a savings account to get at least 3 months worth of living expenses put away if you don't have that already. 6 months is better but with two incomes and existing debt 3 months might be better until your situation has improved. Your debt could get seriously out of hand if one of you lose a job or something, but that is a decision you will have to make. Like I said, I don't know your exact situation.

Having debt sucks and having a tight budget every month sucks too, but try to think long term and you will save yourself a lot of heartache later on.

We made some bad choices (grad school for the wife, timeshares) but we are slowly getting things back in order. Unfortunately some decisions can't be undone and have to just be dealt with.
I will look into consolidating/refinancing the student loans. Who did you go with?

One situation that will help give us some traction is that we only have 2 more payments left on our car. And the truck is already paid off.

See if you are able to refinance through sallie mae or check the U.S. department of education. There are federal options available if you have private loans. It's difficult to refinance private loans within the private sector, but the government options will be your lowest cost option.

Have you considered selling the timeshares? Usually you aren't going to make a profit (probably a loss but hopefully a small one). Timeshares will turn out to be nothing but an expense long-term so you may be better off selling it at a loss as long as it's not too big of a loss. That will rid you of the payment and I'm assuming it probably has a nice big annual maintenance fee too.

I know the timeshare sales programs are relentless and will not take no for an answer. I sat through 6 hours of sales pitches on them nearby and they make them sound like the best investment ever. They started trying to sell me one at $27k and by the time I had repeatedly said no to the third salesman he was offering me a foreclosure for about $5500 or something. It's always an expense.

I have considered it and it doesn't make any sense whatsoever. If we sold them right now, we would still owe money on them (upside down) and then have a debt with nothing to show for it. I think we owe about $15,000 and could sell for about $7,000. Annual maintenance fee isn't terrible and it's shared with my MIL. Believe me I have considered it. We've also put something like $6,000 into them so far.

Ah, I see.

Go to sofi.com and refinance your student loans asap.  I went with the variable rate but I will also have them paid off in another 5-6 months so that made the most sense for me.  

Also, put enough in the 401k to get the full match and then put everything else towards the debt.  Also, try and find a part time job and start earning extra income.  

Earning extra income to pay down the debts faster? I'd rather not, I have 2 small children right now. If anything, my wife needs to get a job. But if she does, most of the money will be going to day care.

If she really likes kids she could see about doing child care at home. She could easily bring in $100-125 per week per child full time and be home to take care of your kids too. There are part-time work from home type things that she could do for extra income without having to worry about a commute or child care. My wife has done child care, addressed envelopes for a local company, and some other odd job things for extra money over the years while still being able to stay home.

I'd rather not as well but I get my ass up early every day and work late because I have too.  I have 2 young kids as well and it sucks at times but you do what you got to do, man.

I hear you, but I'd rather put my wife's super expensive education to use before I'd take a second job and leave everything for my wife to do.

down boy

That makes some sense.  I've just found making extra money is easier than you might think.  It does suck coming home late though.

Lol, I meant no harm.  

It's okay. If I was desperate for money I would have to take a second job. And actually, that might be a thing pretty soon. Current job pays well but student loan payments are killing us. We are going to refinance very soon.

LIke mentioned, max out 401k atleast up to your works contributions. I have yet seen anyone regret maxing 401ks but plenty have regretted NOT maxing it out, yours truly included. Had I known or someone told me in my early years, Id max'd it all out and be sitting pretty.

Chip away at the debts, learn to save and skimp. I dont know what all you have for cars, living expenses, etc etc. But live below your means.

That's a deal, sell them.  Recognize it was foolish, take your licking on the maybe 8grand you owe, and move on.  Refi the balance another way and get out! If things are that tight, you don't have the luxury of weeklong timeshare stays. Period.  If your mil wants to keep it, sell to her or explain the need to offload them. Shed that albatross and move on, as, and I hate to break it to ya, but having a timeshare isn't "anything to show for it"

After all my bills are paid 50% of left overs go to debt, 50% goes to the market where I buy dividend champion stocks. 2 of my monthly bills are paid for by dividends. `

1. Contribute 10% to 401K to get 5% match.
2. Sell guns/TV/blood/whatever to get emergency fund.
3.  Sell car if you have a note on it.  Buy used car.
4.  Save money.  Don't go out to eat.....ever.  Don't drive all over the place wasting gas.  Cancel cable TV.
5. Work more.  This applies to you, your wife, or both.

Yes, it's supposed to hurt.

I can't sell my guns, that's crazy talk. Especially now with the market the way it is, they aren't worth as much esp. my ARs. But yeah, we could probably buckle down a little more.

We do a lot of buckling down. I have friends that are up to their eyeballs in debt and and have little if any savings and negative net worths. They all have: Nice/newer vehicles, smartphones, eat out a lot, spend a lot on unnecessary items anywhere from expensive purses/watches to small random expenses like cigars/pipes/knick knacks/organic lollipops/etc.

We only have one decent car, mine is a clunker, we don't have smartphones, we rarely eat out, we work very hard to keep our grocery budget to a minimum, and don't spend much on things that aren't necessities. It's really hard but we've got some debt to get rid of as well. It should all be gone by late next year with the exception of our mortgage and a car payment since I will have to get a new car soon. We have approximately 5 times our annual income in net worth and I'm not yet 35 (most is tied up in home equity and retirement accounts).

When my youngest 2 kids start elementary school my wife will be looking for work and we'll be able to relax a little bit, but we take the pain now so we can be better off later on. YMMV.

You are very young.

A lot of this equation comes down to "How much total debt do you have?" and after a life changing mindset - "How much can you put towards your debt each month".  This will help determine how long you might be stuck in this situation.


This plan ASSUMES you buckle WAY the hell down, and get on a written budget.  From reading what you have posted, it doesn't sound like you are really that serious or willing to make a lot of sacrifices.... so this will probably take someone with your current mindset, a long time.


1.  $1000 in cash/checking for immediate emergency fund.  Any other cash you have goes to smallest debt(s).  Now, as a parent, it would scare the HELL out of me to have less than 6 months of living expenses sitting in the bank.... I personally feel it is almost irresponsible when you have others depending on you.... so I cant imagine only doing the $1000 thing with wife and kids.... but that is how you get serious and it helps you run a little "scared" so you get out quicker.

2.  Pay off all debts smallest to largest, taking the payment from each closed debt and applying that to the next debt, in a "debt snowball".   This means stopping (temporarily) any investments, including 401k regardless of match.  If you don't get serious about getting out of debt.... you will live like this for the next 10 to 20 years, or more.  Now - on the smallest to largest thing.... I know that isn't mathematical.  But math did not get you into this problem - your bad behavior did.  Math wont solve it... you need to change your behavior and snowballing helps reinforce and give you wind at your back as you see accomplishments.  That said, if I had zero percent interest, I'd run that as long as I possibly could paying minimums until it was gone, while I focused on other interest deducting accounts.  There are services available to you to get out of those timeshares.

3.  Once you get debt free - then take all the money you were applying to debt every month, and build a real emergency fund, which is 6 months actual living expenses.

4.  Once all the above is met, you are actually ABLE to invest, and go back to maxing out your 401k up to the match (10%).  Then take any additional investment money you have and contribute to your ROTH IRA up to the max.  If you have additional money, finish maxing out your 401K for the tax deferment benefits.

5.  Set aside college funding for your kids, so they aren't as burdened as you are.



To make #2 go along faster, look at things to sell, cars, house, other expensive items or items costing you a monthly or yearly maintenance.  Cut expenses, meals out, cable, stuff you don't need.  Look at ways to increase income... like wife working part time, or you focusing on ways to make more in your job or changing jobs.

If you are really serious, the time you take to handle #2 can go incredibly quick, and the lessons you learn will more than cover any lost matching you temporarily experienced in your 401k.

This is Dave Ramsey methodology correct?

Yes, with my caveats that he would be more dogmatic about.

My main issue with #2 is that I have a relative that likes this methodology, but in their situation it has worked out that as they get close to getting rid of debt, they relax and get right back into it. In other words, if they have run up a really high credit card bill at $10-15,000 they tighten their belts and get it paid down without putting any money away in retirement accounts that keep them from withdrawing it.

When they get their debt paid down to $2 or 3k then they mentally adopt an attitude of "times are better" etc. and either start spending more of their disposable income or something comes up and they have to put themselves further into debt to take care of it. So this leaves them right back where they started all the while with no savings put away to grow while they are sorting out their financial priorities. In terms of their long-term net worth, they are far worse off than they would have been following conventional wisdom. I'm positive that they have either little or negative net worth and they are in their 40s.

Now perhaps this is more of a failure in the individuals properly adopting the methodology, but in my opinion the methodology ought to address the human nature aspects of the topic. I see them as being better off taking advantage of that "edge" that they get from putting enough into a 401k or whatever in order to get the employer match and have it all grow in something they are less likely to tap into. I suppose it gets to a certain point though that you can only suggest the right way to do something so much and it's up to the person listening to the advice to either take it or continue being stupid with money (I'm not suggesting the OP is, just thinking about the relatives I have in mind).

Personally, I've got more debt than I'd like, and I'd love to pay it all off faster, but I see an emergency fund and taking advantage of the employer match as necessary to long-term financial success. When I am making my debt payments as minimums while also putting money into savings/401k I am not only increasing my net worth faster, but also improving my long-term financial security AND forcing myself to tighten my belt on discretionary spending. That way when I get to a point where I am debt free IF I decide I can relax on my spending a little bit it's OK because I have assets in savings and retirement accounts in addition to being debt free. When you keep your finances really tight you need some relief from time to time to enjoy yourself a little if finances allow. Whatever I am paying in interest is more than made up by the employer match, tax advantages, and the mentality of needing to reduce as much discretionary spending as possible for a longer time period.

Anyway, I'm sure there are a lot of situations where his methods work well. I'm just not a fan of certain aspects of it. YMMV.

Op, I'm going to give some counter opinions just for the sake of playing devils advocate.

1. Agree 100%. It's not almost irresponsible. It is absolutely and completely irresponsible, reckless actually.

2. This approach is where you have a "fork in the road" so to speak. Some people cannot change, they cannot learn, they cannot think objectively. This is the approach you take if you cannot do those things. There's nothing wrong with that, some people don't possess those abilities. Much like I can't draw pictures, or woo people with my witty banter, or think quick on my feet; there are some people who can't math.

If you feel like you can do those things then you should take the time to educate yourself and do things that make sense mathematically. You'll come out much farther ahead in life if you can retrain yourself to think objectively rather than "feel" things. Nearly anything in life can have a monetary value assigned to it and the benefit of it, figured with a simple formula.

If you're anything like my wife, this attempt to retrain yourself would be similar to a 60 year old heroin addict quitting cold turkey with no help. It's not going to happen.

3. This is true in most cases. If you are really rural or specialized in vocation then more might be needed. I keep 24 months of income fairly liquid in case I lose my job because I live in the middle of nowhere and work in a small industry (dairy equipment service and construction).

4. If you are able to do number 2, then maybe you should look into investing in some rentals, side business, or the like. It might be more profitable if you can't afford to max your retirement and put some money in something else. Maybe do half and half.

5. If you teach your kids to do number 2 (that sounds bad ) then you shouldn't have to pay for their college. They will never be truly burdened in life because you taught them better than you were taught. I had a bad life growing up but my parents did teach me to think objectively. It served me far better than any lump sum savings account that I didn't earn, would have.

What does a college fund actually teach a kid? In my opinion it teaches them that they are entitled to an education, it's not something special that they should work hard for. Put yourself in a position that if they need help, you can easily cosign on some loans or lend them some money if they fall on their faces. Life is supposed to be a little tough, little uncomfortable. You are supposed to pay for your decisions. You decide to go to college, guess what? You can pay for that decision.

Separating the consumer from the cost is never positive in my opinion. Go ahead, separate your child from the cost of an education and see how well they do. The odds are against them.

You are right - if you ignore the methodology and guidance, it wont work for you.  

I agree with everything you said.  Especially on #2.  I didn't follow D.R. like a lemming.  I course corrected, took what I could learn from his methods, and did my own solution which was based on logic and math.  However, when I recommend it - I am more strict in my guidance.... because I know in the end, many people need an explicit plan to follow to be successful, and those that don't will do their own thing anyway.

On #5.... I agree somewhat.... but I want to be prepared to give them that option in case they turn out to be great and want some opportunities that they otherwise wouldn't be able to afford on their own without being saddled with massive amounts of debt.  College costs a LOT more as a percentage of the median income than it did when I was in school.  If my kids act like I did when I went to college... they wont be seeing a dime from me.  

This thread has strayed far from the question I initially asked. Somehow there was discussion of me selling my guns and a car?

Go back and re-read your thread title, and your OP.

The only thing that even resembled a question.... was this:



That is exactly what you are getting here.  It did not stray one bit.  If you feel it did - perhaps you could be more specific.

yep.  you'd be crazy not to get the free money.  sure you can consider whether its better to make 5-10% rate of return on an investment or pay 5-10% interest on a debt.  There are arguments either way, but the company match money is free money in principle, not just something generating a rate.