Comment From a Reader Regarding My Dave Ramsey Post

Remember the Dave Ramsey: Give up the 401(k) Match in Order to Pay Off Debt post from a couple of weeks ago?

That post received some excellent comments, one of which was this one from a reader named John:

What I saw my dad do was keep funding his 401k and still using credit cards, without paying off the debt. As his minimum payments went up and up he wasn’t willing to stop the contributions to quit using the cards, and he wasn’t willing to cut his lifestyle either. He ended up with about $65,000 dollars in credit card debt and he had to file for bankruptcy because all his payments were MORE than his paycheck. At this point he was STILL making the employer match. He just retired, and he only has $250,000 to live on. If he had just cut his lifestyle, cut his 401(k) funding for a few months, paid off those cards, he could have started putting in EVEN MORE, and STILL enjoying his luxurious lifestyle without those credit card payments. If you are DEEP in 20-30% interest debt you understand how much damage it does, it’s UNIMAGINABLE.

Personally, I think the cutting of the lifestyle is the key. However, it is one of those things people simply don’t like to do. It sounds to me like John’s dad just didn’t want to pay off the credit cards. In order to get out of debt you first have to WANT to do it.

I guess if you want to look at the good side of things, we should be happy that his dad was able to save up $250,000. Lots of retirees have nowhere near that much money at retirement.

What do you guys think?

20 thoughts on “Comment From a Reader Regarding My Dave Ramsey Post”

  1. Giving up free money is nuts, so continuing with the match still makes sense to me. The ongoing lifestyle financed by credit cards has nothing to do with the match. Do you really think if Dad gave up the match he would have used the extra cash to pay down the credit cards? If he had the self control to reduce life-style and stop charging on the credit cards, he could have done it while still matching.

  2. You hit the nail on the head–you have to WANT to pay down your debt. BUT, you also have to be willing to take action. As we’ve gone back-and-forth on this before, you have to overcome the emotions that got you into the problem in the first place. Otherwise, debt reduction will always remain an unfulfilled wish.

  3. Let’s do the math here.

    Scenario 1: stop 401K funding and pay off credit cards.
    401K: 185K
    CC: 0

    Scenario 2: fund 401K, declare bankruptcy
    401K: 250K
    CC: 0

    Uh, Dad pulled a fast one on the CC issuers. The key of course is to cut down the expenses after bankruptcy so you don’t eat up the 401K.

  4. I don’t even understand how a person can do this. It’s like you want to go to both the golf course and to the movies. Obviously you can only go to one at a time. If you try to go to both then eventually there will be a time when you have to go both left and right . . . and then you will crash. But that’s obvious so I don’t know how people can think they should both save and go into debt through consumption.

  5. The dad did pull a fast one on CC companies. And John should realize that his dad didn’t feel like cutting his spending. Let’s say that 6% into 401k be honest John would he have paid off the CC? NO!

  6. Well — one thing that jumped out at me is unless the dad had gone on a serious “sell everything til the kids are afraid they’re next” binge, with $65K in credit card debt he wouldn’t have been looking at just a few months of no 401(k) contributions while he paid the cards off. He’d be looking at a few years assuming he had a lot of money he could throw at them.

    I’m of the mindset that dad was probably right to keep contributing to the 401(k) to get the match. That really wasn’t the problem. The problem was that he wanted to live without any discipline in his spending habits. Stopping a 401(k) contribution wouldn’t have done anything to fix that.

    The sad thing is now he has $250K to live on — and yet how much debt is he paying on? I wager dad’s money won’t last as long as dad does.

    If you aren’t willing to live beneath your income, there’s no helping you out of debt.

  7. I think folks are missing the point here (I’ll sound like a broken record here, as I commented on the last post).

    This isn’t a math issue. Belive me, I understand the math.

    This is a behavior issue and has nothing to do with funding a 401(k) versus debt. It has to do with learning to live within your means. Whether or not he decided to pay down credit cards or fund the 401(k), this guy was spending more than he earned and therefore had a cashflow issue.

    I agree with “Customers Revenge” – you can’t have it both ways. If you are taking a healthy approach to your finances, then you will take care of bad/consumer debt first while fixing lifestyle behavior.

  8. I don’t want to sound too mercenary but what’s the value of money? The value of money is to buy goods and services. Who’s to say someone who saves for the future is better off than somebody who uses their money now and has nothing for the future? The end result is the same — you use roughly the same amount of goods/services (inflation prorated) either now, later or spread out over time. My only issue would be someone who goes out in a blaze of debt now and then complains about how hard their life is in the future.

  9. Mossy-
    I would add one more issue to it: Someone who brings someone else down with him. The dad’s fiscal irresponsibility is now also the burden of the mom (assuming she’s in the picture). Hopefully the reader and any siblings are sufficiently insulated from their father that they won’t suffer as well.

  10. I think the words “if he had just cut his lifestyle” are key here.

    If he had cut his lifestyle then either option would have been ok. Yeah sure, one is probably better than the other but as it is he spent more than he made. And, to paraphrase Dickens, that is the sure path to misery.

  11. I agree with the folks who think Dad was crazy like a fox and pulled a fast one on the CC co’s.

    The CC debt could be extinguished thru bankruptcy, but the oppty to get the “free” 401K match would have been gone forever if he missed it. And key point – pension assets are insulted from creditors in bankruptcy (I wonder if Dad knew that all along).

    Having $250K to retire on might not be a enough for Dad, given his over-spending tendencies, but it is far more than most people will have.

    And guess what – Dad can probably repeat the same technique all over again cause it ain’t difficult to get new CC’s even with his record.

  12. Typo – should read: “…pension assets are insulated from creditors in bankruptcy…”

    Also, should note that recent changes in the bnkrpcy law make it harder to fully eliminate CC debts.

  13. It seems that everyone is willing to agree that if the father is willing to change his behavior that would help address the root of the problem. Knowing how important 401k contributions are, I would think a short term stoppage is an excellent measure of how committed someone is to getting out of debt. The greater the commitment, the quicker debt will be gone. With no debt, you can make LARGER 401k contributions. Makes senses to me.

  14. Without the dedication to change one’s habits, debt will linger. So yes, lifestyle changes are key — whether or not it involves having to reshuffle money around and give up the 401K to ease the brunt of paying down debt. I think it depends on each person. If someone feels they are sacrificing too much, they may feel resentful and not stick to the program, so for some people, the sacrifice may end up being that 401K for some period of time just so debt can be paid down.

  15. I am currently in a situation where I have thousands in debt with credit card, car loan and student loans. I personally do not see the issue with the debate. I will not give up contributing to my 401K. I contribute the minimum to get the employer match because I like FREE and because I will never be able to get that back. Plus, for the small amount that am contributing to my retirement pre-tax giving that up would increase my tax bill and the difference in take home pay would probably not put a huge dent in my debt to make it worthwhile.

    I am also saving for an emergency fund while paying down debt. Why? In September I had a car accident and realized the wisdom of having a mini-efund so that the credit card cycle does not continue.

  16. I agree with Dave Ramsey on most things, but…

    For some people, the 401k contribution is the only good habit they have. Don’t quit the good things–quit the bad things. Stop using credit cards and change your lifestyle. Reward yourself for good behavior by giving yourself a 401k raise at certain milestones.

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