In This Special Case, Divert Retirement Savings to Pay High-Interest Debt
Age: 35 Background: A single professional who works as an associate editor for a news Web site, earning about $44,000. The Pennsylvania native lives in the District and has no children. She owns a condominium.
New Year’s resolutions: Pay off $4,500 on her only credit card, build up a savings cushion of at least three months of living expenses, and pay down her student loans.
Progress so far: She’s faithfully kept track of her spending and saved nearly $500.
She’s been paying $200 a month toward her credit card debt. But because of interest on the card, she hasn’t made much of a dent during the three months.
I recommended that she stop her retirement contributions for the short term so she can put that money toward her debt. She’s done that. She had been putting 5 percent of her biweekly pay into her company-sponsored retirement plan. Before tax, that came to $88.91 each payday. After taxes, she will have $59.15 each pay period to put toward her credit card debt.
Normally, I wouldn’t suggest stopping all retirement contributions, but Schleicher’s company contributes the equivalent of 10 percent of her salary to a retirement plan even if she does not contribute. If she left the company now, she could take 80 percent of those company contributions with her. In a few more years, she could take 100 percent. Thus she can afford to divert those funds for a short period to get rid of her debt.
Her challenge: She’s still struggling to control her entertainment spending. “It’s depressing,” she said. “I see the cold, hard numbers, and they tell me that I basically have to be a hermit and stay in all the time if I’m going to end the month in the black.”
But as I told Schleicher, this isn’t forever. Budget now, get out of debt now, and you can have more freedom and fun later.
The next step: Create a budget and stick to it. She especially needs to budget for variable expenses, such as car insurance. But Schleicher has cut her expenses quite a bit. The only way for her to find more money to pay down her debts, including her student loans, is to get a part-time job. She’s applied for three since our last meeting.
The interest on her credit card makes it difficult for Annie Schleicher to pay off the balance. Because her employer pays into her retirement plan, she can afford to stop her contributions to it — temporarily — to pay off the card.