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. For all the people who think that stopping a 3% matching 401k contribution will somehow magically get them out of a “bind” for a few months consider this: If one follows Ramsey’s plan to a T except keeps contributing 3% that is matched they will be just fine. Keep in mind I said to a T. For example someone making 100k a year would contribute 250 a month. Now if after tightening the belt they can’t live without that 250 then they aren’t doing Ramsey’s plan right. That 250 will make a minimal difference to debt reduction IF they are throwing everything else at it.
    Now to address the other hole in Ramsey’s plan and find a solution.
    Ramsey highly recommends, nay, implores people to tithe (give 10% of gross income to church or other charitable organization).
    Now think about it. For the Ramsey’s zealots, take 3% of your tithe and “give it away” to your 401k. Or better yet take the metaphysical 10% and tithe it all to your 401k. Even Dave himself says you won’t go to hell for not tithing (boy I feel better) so go ahead and tithe to yourself for once.
    Hey and if you feel bad about it, just double your tithing to your church for the same amount of time it took you to do this after you’re in a better financial situation.
    Or just follow this piece of homespun advice “Don’t lose money”.

  2. Ramsey is selective in his advice. If you tell him you are a Christian he says you MUST give the first 10% of your income to the church regardless of your financial situation. So the 3% match which becomes 6% is lost to the 10% loss to the church first. Figure that one out. He also calls tithes “firstfruits” while the Bible does not.

  3. There’s disagreement on this issue even with Dave Ramsey fans; I’m on the My Total Money Makeover discussion boards. A lot of us “koolaid drinkers” disagree with stopping retirement contributions to the match while getting out of debt, although perhaps stopping voluntary additional contributions makes senses until the debts are cleared.

    Dave talks about your “NO MATTER WHAT”s–drawing a line in the sand that you will not cross. One of my NO MATTER WHATs is that I will make my retirement contributions to the employer match (which is 200%–a double match–rare)–NO MATTER WHAT.

    I am in touch with my Inner Bag Lady.

    I started my retirement savings when I was 22 and have consistently done it, never missing a month whenever I have had a professional job (14 months missed when I didn’t have a professional job).

    Another NO MATTER WHAT is that I will not withdraw or borrow against retirement money evah!!! Never have, never will. That 14 months I was seriously unemployed and underemployed and conducting a national job search, and travel expenses were usually not reimbursed. I barely had two Abes to rub together by the time I got my next professional paycheck. But I didn’t crack into my retirement savings.

    My retirement investing is going well and even if I didn’t save another dime I’d be set for retirement. (Of course I am going to continue saving and investing.)

    That being said, I can see the wisdom in pausing contributions temporarily if you can’t stay current with your payments. That would be a last-ditch strategy after selling stuff and working extra jobs. If short-term survival means pausing the long-term prosperity building for a little bit, I’m OK with that. Here’s hoping that all of us never go through a bad patch that is that bad!!!

    A lot of DR fans are Christians who don’t believe in tithing either. Read the wikipedia entry for tithing, and there’s a link to an interesting critical article called Tithing: Low-Realm, Obsolete, and Defunct–it’s from a Bible Christian perspective.

    Some DR fans believe you have to pay your tithes to get God’s blessing, and that is the sin of simony. God blesses his sons and daughters without price.

    Abusing Malachi has been very profitable for some preachers and churches. I am scandalized by it. Flag on the play–Scripture abuse!!!

    Oh, I wish more people paid attention to another bit of Malachi–For I hate divorce, says the Lord! Hmm, lots of mumbling and equivocation goes on with that one.

    To be fair, DR says in the FPU class to contribute at least $25 monthly to charity. He’s not rigid or legalistic about tithing. It irks me when he says, if you’re a Christian, you tithe. Well, Jews and Muslims do too, and not all Christians believe in the 10% of gross mantra, or that it has to go to your church. Tithing can also be done with time and talent. The Holy Spirit moves people to contribute time, talent, and treasure as He wills. The Old Covenant people didn’t have the indwelling Holy Spirit and needed external compulsions to tithing. We don’t need it.

    I’m a daughter of the King and daddy’s love don’t cost a thing!

  4. great discussion. some miss the fact that dave is mainly talking about changing behaviors and not finance. missing the match obviously causes pain which fuels intensity to get out of debt. as he says, if you were doing math in the first place, you would not be in debt.


  5. Back to th 401k issue. I heard DR say something like if takes you more than 24 months (or maybe it was 36 months) to get out of debt, to continue contributing to the 401k. The point to stopping the 401k is to bombard debt with all the ammunition and guns you can grab your hands on! Also, stopping the 401k will get people more dedicated to paying off the debt faster so that they don’t have “loose” free money anymore.

  6. What many people miss on this is that even without a company match, you are still making money on the 401(k) because it is pre-tax savings.

    For example, on 90K per year, if I put in 6% to my 401(k), I got $231 per pay period put into the fund. However, it only affected my net income by $140. Therefore, it only cost me $140 to save $231…which makes a $91 “profit” on my savings. I earned over 60% *before* the company match. Plus, that $231 is deducted from my gross income, so I pay less tax come April. With the company match, I had an additional $115 added to the account, giving me a total of $346 added to the fund for a net cost of $140. Again, this doesn’t include the tax savings.

    While paying down consumer debt should be a priority, show me any credit card debt that delivers that kind of return. Unless you simply need the additional cash flow to survive or pay down some debt, I just don’t see the advantage of not contributing to the 401(k). This would have to be a dire circumstance.

    This is one of many cases where going with the heart over the head simply doesn’t work.

  7. 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.

  8. 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.)

  9. 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.

  10. 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.

  11. 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.

  12. 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?

  13. -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.

  14. 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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