Dave Ramsey: Give Up a 401(k) Match in Order to Pay Off Debt

February 15, 2007

I’m listening to the Dave Ramsey Show from yesterday. At about 1:06:38 (that’s hr:mm:s) into the program, Dave takes a call from a guy who wants to settle a disagreement with his wife. His wife wants to take their 401(k) contribution down to zero while they pay off their debts. Apparantly Dave suggests that people forgo putting money into their 401(k) while they are getting out of debt even if they receive a company match. WOW! The guy on the phone told Dave that he would be leaving $6,000 – $10,000 on the table if he took Dave’s advice.

I’m surprised that Dave would suggest this over the phone without getting a firm grasp of this couple’s situation. I mean shouldn’t he (Dave) find out this couple’s cash flow situation before he tells them to stop contributing to their 401(k)?

When the caller asked Dave about this, Dave said something to the effect that, “personal finance is 80% behavior and 20% head knowledge.” This sounds like one of those sayings that people say without really having any proof to back it up.

Now, I realize that I’m not a “GURU” like Dave Ramsey is, but here are my thoughts on this:

1. Prioritize your finances. Take a look at your cash flow and see what areas are most important. Contributing to a 401(k) should be one of the top prioritieS

2. If you have to cut costs, cut them by getting rid of unnecessary monthly expenses.

3. ONLY touch the 401(k) IF you have no other resources to pay off your debts.

I have to totally disagree with Dave on this one. What are your thoughts on this?

65 responses to Dave Ramsey: Give Up a 401(k) Match in Order to Pay Off Debt

  1. Wow, this was freeing for me (especially thanks kentuckyliz).

    I currently run a nonprofit for the homeless. I started it over four years ago and worked for FREE for 4 years to ensure that we were able to provide food, clothing, etc.

    Recently I had to start drawing a salary due to the dirty D word…divorce.

    Though I am grateful to have a salary, unfortunately, it doesn’t cover all of my expenses. If I DON’T tithe, I come close…about $300 shy a month – which I think I can make up through other means. (FYI, I have NO consumer debt besides a car that has a balance of 4K…just mortgage and real cost of living stuff…no frills).

    I have been so torn over the tithing issue…how can I tithe when it literally leaves me unable to live?????

    I definitely give of my time and talents (and money if I can) without a second thought.

    It is comforting to know that this is viewed as “tithing” also.

  2. In a world filled with killing over money, broken families due to disagreements over money (divorces, arguments over wills), media glorifying wealth, and people orienting their lives around the pursuit of excess money, you are either lying or stupid if you state that handling money is only about “doing the math”. No one manages money purely based upon head knowledge. In fact, some of the people with the most head knowledge concerning money have ended up broke as a joke / suicidal over lack of money.

    Also, it’s true that giving up the match for some people does not make sense mathematically. Although, every case is unique, so contributing to a 401k does not always make sense when you actually “do the math” (especially if you are contributing to it without a match or above the match.)

  3. Although is sounds a little off the wall to not put away for retirement, the more I think about it, the better sense is seems to make to not contribute to the 401k retirement until one’s debt is paid off. What good is a retirement account if you are so deep in debt that your retirement fund gets eaten up when you retire. When you have no debt, you get to keep 100% of what you net to use how you want.

  4. What Dave says is fore go the small contribution most people make while in debt, get out of debt as fast as possible, usually around 2 years or less, then put 15% away in retirement, first in matching 401k’s up to the match, then in roth ira’s, then any remaining in 401k’s or traditional roth ira’s. So following his plan the math will still win and behavior will be changed.

  5. Wakenia Leonard August 25, 2009 at 10:31 am

    I really appreciate the advise that Dave Ramsey gives. I do agree with him in reference to the 401k situation. I see it as this. The overall goal is to be totally debt free and so what if you lose out on the company match for a time. Once you have paid off debts you have freed up so much extra that you can then invest as you like.

  6. That’s nothing. I just heard Dave tell a woman NOT to take money out of her 401k for a down payment on a home, because she would pay penalties and taxes.
    Which is totally, factually, WRONG. Why the hell is this guy a guru?

  7. -If you have say $10k in credit car debt at 17%, (sometimes people have up to 22%) amortized over three years your payment is over 50% interest anyhow +fees. That means that its actually better financially to pay off the credit card debt than take the match.

    -Dave says that primarily because most people have been taking out credit card debt and contributing to the 401k all along, and he wants them to break that cycle. Its about psychology, not math.

    -Any decent financial adviser will tell you not to have a portfolio of 100% small cap stocks even though they are over the long term by far the best performing sector. Reason? Hardly anybody can handle seeing there portfolio make 50% swings year to year with calling their broker and making panic sells.

  8. OK, I am a big “Head over heart” guy who always does the Math. Ramsey’s “stop the 401(k)” advice never made sense to me. Due to some bad choices coupled with some life events (Murphy’s Law), I find myself teetering near a zero cash flow. So I can’t handle any other major impacts to my cash flow and I no longer have a significant, fully liquid, non-tax-penalized cushion. So I finally did the numbers and have decided to stop the 401(k) matching for a couple of years based on:
    ~$40k car loans (<5% APY)
    ~$55k student loans (4.625%)
    ~$8k consumer debt (0% temporarily)
    6% contribution with 70% employer match (4.2%)
    I'm also contributing ~2% makeup contribution (being match at 7%) that I will continue (or I lose the ability to continue it. I'm bearish on the market anyway, so I don't expect to do well with the contributions made over the next 2 years and would rather contribute more then when I expect a recovery to me in progress or at least closer. Even if the recovery comes, I expect it to be $10k savings (30k interest savings vs 20k matching funds), while losing the opportunity costs of my contributions, but retiring known debts.

    If the market takes another nose-dive, I’m in even better shape.

    We will reavaluate once both car are paid off (~15 months), potentially shifting back to get all the matching and using the old car payments to retire student loans.

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