I recently received an e-mail from a reader named Chris, who is in his early forties. He and his wife are working on paying off a car loan and a mortgage, and
We owe about $10, 000 on a car loan and $105, 000 on our mortgage, and we have two newer vehicles. I recently calculated that if my wife and I stopped our 401(k) contributions (mine 6% with a 50% match; my wife’s 8% with a 50% match) that we could pay off our car and our mortgage in eight years (maybe a little faster if we’re REALLY disciplined).
Eight years is a bit magical in that we’ll be just shy of 50 years old, and our oldest will be graduating from high school. My thought is that we’ll then start to save for replacing our vehicles and start to make contributions to our retirement funds again. We’d save about $64, 000 in interest, so I thought it might be the way to go.
Being debt free has a great draw to us — probably more than giving up the wonderful company match on the 401(k) plans. What are your thoughts?
Without knowing all of the details (e.g., income level, mortgage terms, auto loan details), it’s hard to say for certain. However, I would personally think long and hard before stopping those 401(k) contributions. Not only will they be giving up a ton of free money (the 50% match), but they’ll also be giving up the opportunity to stash that money in a tax-advantaged account, as well as years of tax-deferred compounding on the principal plus the match. Moreover, once those debts are paid off, they’ll have kids in college — this may wind up being yet another impediment to investing.
If it were me, I would most likely maintain the 401(k) contributions, tighten my belt a bit, and focus on getting rid of that auto loan. The mortgage (assuming that the terms are reasonable) is much less of a concern. Not only does it likely have a much lower interest rate, but the interest payments are also tax deductible.
Bottom line: While being debt free is an admirable goal, my view is that you really need to look at the big picture when making decision like this.
What about you? Any advice for Chris and his bride?