Dave Ramsey says to give up employer 401K match to pay down debt

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deltaneutral83
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Re: Dave Ramsey says to give up employer 401K match to pay down debt

Post by deltaneutral83 »

MichCPA wrote: Wed Jun 26, 2019 11:12 am +1, Also important to note many payday lenders affiliate themselves with native american tribes to avoid state interest caps, so usury laws will not apply in many cases. Multiple hundred % loan are a real thing.
Netflix Docu on this practice, owners made a fortune but made other illegal moves that caught up with them.
Whereas we routinely have people humblebragging about being worried over their $5M portfolio.
True enough but $5M in Bay area/NYC is about 1.5-$2M in many not so rural places down south and even lower in extreme rural areas. However as you alluded to, neither is in trouble in the big scheme.
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DragonJoey3
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Re: Dave Ramsey says to give up employer 401K match to pay down debt

Post by DragonJoey3 »

So an answer to your question: Forgoing the 401k match would be crucial if a person were in a massive cash-flow bind. If you are negative in cash-flow ever month due to your loan obligations then reducing the amount being withheld for the 401k to get back to positive so you can remove some of those obligations would be one reason.

A further discussion of DR and his plan:


DR touts, a plan wherein he strives to get everyone out of debt as quickly as possible. For most of his listeners that is <2 years, and for many <1 year. Missing 1 year of the average 4% match, of the average 60K salary in America and a bit of growth on it is setting them back MAYBE $2,500 in lost money. Additionally there is savings from interest not paid, so maybe not even that. When you are dealing with behavior sometimes optimal mathematics doesn't matter. I can explain all day long how the 401k is the optimal choice due to the match, but that doesn't make a difference if the person is going to declare bankruptcy in 5 years because they don't see their steadily accruing debt as a problem.

The ability to quickly move the needle on debt by using all available resources is DR's MO. It adds incentive to the behavior and gives motivation which can be all the difference in a world where most people don't know what the interest rate is on any of the debt.
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Elric
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Re: Dave Ramsey now says to give up employer 401K match to pay down debt

Post by Elric »

willthrill81 wrote: Wed Jun 26, 2019 9:16 am Is such an interest rate legal anywhere in the U.S.?
These rates are all too common throughout much of the U.S., as shown here: https://www.cnbc.com/2018/08/03/states- ... rates.html. Some rates annualize to almost 700%!
"No man is free who works for a living." | Illya Kuryakin
deltaneutral83
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Re: Dave Ramsey now says to give up employer 401K match to pay down debt

Post by deltaneutral83 »

Elric wrote: Wed Jun 26, 2019 11:27 am
willthrill81 wrote: Wed Jun 26, 2019 9:16 am Is such an interest rate legal anywhere in the U.S.?
These rates are all too common throughout much of the U.S., as shown here: https://www.cnbc.com/2018/08/03/states- ... rates.html. Some rates annualize to almost 700%!
Yea I mean, borrow $500 to pay $650 in two weeks on payday annualized out is really nasty. And that's if you pay all $650 on time in two weeks, when they don't, then it gets even wilder.
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DragonJoey3
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Re: Dave Ramsey says to give up employer 401K match to pay down debt

Post by DragonJoey3 »

deltaneutral83 wrote: Wed Jun 26, 2019 11:21 am
Whereas we routinely have people humblebragging about being worried over their $5M portfolio.
True enough but $5M in Bay area/NYC is about 1.5-$2M in many not so rural places down south and even lower in extreme rural areas. However as you alluded to, neither is in trouble in the big scheme.
Counterpoint: someone with 5M in assets in a HCOL area can move to a LCOL area in 3-6 months tops and still have 5M. Someone in a LCOL with 1M can move to the bay area, and still not have 5M.

$5,000,000.00 is a tremendous amount of wealth, and equivalent to twice the amount the average american will earn in their working lifetime. That's right, an "Ordinary American" (who is already in the global 1% of income earners) can work an entire 40-45 year career, with 0 expenses and save every penny they earn and probably never see $5,000,000.00 on their balance sheet. Thoughts to consider when someone posts on here "I only have $5,000,000.00 is this enough to retire on?!"
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Quirkz
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Re: Dave Ramsey now says to give up employer 401K match to pay down debt

Post by Quirkz »

jrbdmb wrote: Wed Jun 26, 2019 10:22 am
I am saddened to hear this, but not that surprised, since a recent survey of *working* Americans show that 21% are saving nothing for retirement, and only 26% are saving what experts recommend is needed.
I'm not surprised. But those statistics may hide some transitory situations - from year to year who's saving and how much can change. I've had 22 working years as an adult, and in that time I'd say I had 5 years where I saved nothing, 2-3 years where I saved something but not enough, and 14 years where I saved diligently. All together I'm on pace to come out okay. I'd still love to see 50% or more of Americans saving adequately on a regular basis, but one snapshot doesn't necessarily mean 20-74% of us are automatically doomed.

Regarding Dave Ramsey, you've got to keep in mind a lot of his audience, especially among new recruits, are often in dire straits. You're talking people who are often on the brink of default or foreclosure, or who woke up one day and realized their $4000 income doesn't fit with their $6000 in expenses. For a lot of these folks, at least in the short term, they need every penny just for cashflow to try to break even. You can't set aside $500 in a savings account for a $250 match that you can't touch for decades, when you're sinking by $2000 every month. The idea is to focus on triage, and then once things have settled down, get back into healthy, long-term thinking.
rascott
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Re: Dave Ramsey now says to give up employer 401K match to pay down debt

Post by rascott »

willthrill81 wrote: Wed Jun 26, 2019 9:16 am Unless you're foregoing the match to prevent an immediate bankruptcy, no, it doesn't make sense to do so.
vineviz wrote: Wed Jun 26, 2019 9:16 am
jrbdmb wrote: Wed Jun 26, 2019 9:11 am Rather than just start another Dave Ramsey flame-fest, are there really any circumstances where one should skip the 50% or 100% match on their 401K contribution to get their debt paid down a bit earlier?
Yes. If your debt carries an interest rate over 50%, skipping an employer match would probably make sense.
Is such an interest rate legal anywhere in the U.S.?
My state allows up to nearly 400% annual rates on payday loans...which can be rolled over forever....so for sure.
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Re: Dave Ramsey says to give up employer 401K match to pay down debt

Post by DesertDiva »

I agree with his "debt is dumb" mantra. If you have debt, you should be aggressive about getting yourself from under that burden. Sell some stuff on craigslist or eBay. Cut your expenses. Get a roommate. Don't go any deeper into debt, etc.

But giving up the opportunity to get an employer match? No way. It is too valuable of a perk, especially since you will lose out on the "time value of money" -- the match you are given will grow over time. It's a missed opportunity you will never get back.

So instead of focusing solely on the psychological effects of paying off debt, think of the psychological boost of growing your 401(k).
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Re: Dave Ramsey says to give up employer 401K match to pay down debt

Post by Independent George »

DesertDiva wrote: Wed Jun 26, 2019 11:48 am So instead of focusing solely on the psychological effects of paying off debt, think of the psychological boost of growing your 401(k).
If it were that easy for them, would they be that deep in debt to begin with? Prescribing the mathematically correct solution while ignoring the messy realities of human behavior will likely make things worse for people who cannot afford to get worse.
MichCPA
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Re: Dave Ramsey says to give up employer 401K match to pay down debt

Post by MichCPA »

DesertDiva wrote: Wed Jun 26, 2019 11:48 am I agree with his "debt is dumb" mantra. If you have debt, you should be aggressive about getting yourself from under that burden. Sell some stuff on craigslist or eBay. Cut your expenses. Get a roommate. Don't go any deeper into debt, etc.

But giving up the opportunity to get an employer match? No way. It is too valuable of a perk, especially since you will lose out on the "time value of money" -- the match you are given will grow over time. It's a missed opportunity you will never get back.

So instead of focusing solely on the psychological effects of paying off debt, think of the psychological boost of growing your 401(k).
It should depend on the match. 100% immediate vesting shouldn't be turned down unless there is a payday loan. If you aren't fully vested, or the match is less, the math can change.

The time value of money (compound interest) affects both debt and investment returns so that isn't as much of a factor as people initially think.
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Wiggums
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Re: Dave Ramsey now says to give up employer 401K match to pay down debt

Post by Wiggums »

Taylor Larimore wrote: Wed Jun 26, 2019 10:16 am
GlennK wrote: Wed Jun 26, 2019 9:15 am
Seriously, I cannot think of any reason where paying off the loan from a bank or credit card could beat the 50%/100% match you mentioned.
Bogleheads:

I agree with GlennK. Foregoing a 401K company match is like refusing free money. With very few exceptions, this is terrible advice.

Best wishes.
Taylor
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Gufomel
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Re: Dave Ramsey says to give up employer 401K match to pay down debt

Post by Gufomel »

DesertDiva wrote: Wed Jun 26, 2019 11:48 am I agree with his "debt is dumb" mantra. If you have debt, you should be aggressive about getting yourself from under that burden. Sell some stuff on craigslist or eBay. Cut your expenses. Get a roommate. Don't go any deeper into debt, etc.

But giving up the opportunity to get an employer match? No way. It is too valuable of a perk, especially since you will lose out on the "time value of money" -- the match you are given will grow over time. It's a missed opportunity you will never get back.

So instead of focusing solely on the psychological effects of paying off debt, think of the psychological boost of growing your 401(k).
The debt will also grow over time too if not paid off.

Someone who’s caught up in consumerism and up to their eyeballs in debt does not get a psychological boost from watching compound growth in their 401k over decades. That’s why they’re in heaps of debt.

You have your boglehead lenses on.
MichCPA
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Re: Dave Ramsey says to give up employer 401K match to pay down debt

Post by MichCPA »

Independent George wrote: Wed Jun 26, 2019 11:53 am
DesertDiva wrote: Wed Jun 26, 2019 11:48 am So instead of focusing solely on the psychological effects of paying off debt, think of the psychological boost of growing your 401(k).
If it were that easy for them, would they be that deep in debt to begin with? Prescribing the mathematically correct solution while ignoring the messy realities of human behavior will likely make things worse for people who cannot afford to get worse.
The 'psychological effect' is having more of your income/assets available for your goals vs for creditors. (For DR this is the 'Financial Peace' feeling) Sticking money into an account that cannot be touched until one turns 60 isn't going to give that effect for someone until maybe their mid 50s. I agree that ignoring the 401k is a bad thing, but having insane levels of credit card debt, student loans, etc. and pointing to a 401k as your far off savior isn't going to help your peace of mind.
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Re: Dave Ramsey says to give up employer 401K match to pay down debt

Post by DesertDiva »

MichCPA wrote: Wed Jun 26, 2019 12:01 pm
Independent George wrote: Wed Jun 26, 2019 11:53 am
DesertDiva wrote: Wed Jun 26, 2019 11:48 am So instead of focusing solely on the psychological effects of paying off debt, think of the psychological boost of growing your 401(k).
If it were that easy for them, would they be that deep in debt to begin with? Prescribing the mathematically correct solution while ignoring the messy realities of human behavior will likely make things worse for people who cannot afford to get worse.
The 'psychological effect' is having more of your income/assets available for your goals vs for creditors. (For DR this is the 'Financial Peace' feeling) Sticking money into an account that cannot be touched until one turns 60 isn't going to give that effect for someone until maybe their mid 50s. I agree that ignoring the 401k is a bad thing, but having insane levels of credit card debt, student loans, etc. and pointing to a 401k as your far off savior isn't going to help your peace of mind.
Points taken. My outlook/viewpoint may be different than many of the Dave Ramsey listeners. I've enjoyed watching my balance grow over time. When I have a debt, I know that it will be short-term and will have an end date. A long-term perspective is often missing from many decisions.
EnjoyIt
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Re: Dave Ramsey says to give up employer 401K match to pay down debt

Post by EnjoyIt »

I would recommend not going for the 401k match if that person is so debt ridden that they are struggling with cashflow. Paying off a few small loans can add a little breathing room to said person and then thereafter can initiate 401k matching which we all agree is very very valuable.

Said person needs to be in a situation where they get the 401k match and still be able to meet debt obligations.
A time to EVALUATE your jitters: | https://www.bogleheads.org/forum/viewtopic.php?f=10&t=79939&start=400#p5275418
decapod10
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Re: Dave Ramsey says to give up employer 401K match to pay down debt

Post by decapod10 »

DesertDiva wrote: Wed Jun 26, 2019 11:48 am I agree with his "debt is dumb" mantra. If you have debt, you should be aggressive about getting yourself from under that burden. Sell some stuff on craigslist or eBay. Cut your expenses. Get a roommate. Don't go any deeper into debt, etc.

But giving up the opportunity to get an employer match? No way. It is too valuable of a perk, especially since you will lose out on the "time value of money" -- the match you are given will grow over time. It's a missed opportunity you will never get back.

So instead of focusing solely on the psychological effects of paying off debt, think of the psychological boost of growing your 401(k).
I think it is possible that there are situations where it may be a good idea as others have mentioned. We give away "free" money all the time buy paying in order to prevent catastrophic failure in the form of insurance. Insurance is usually technically speaking a money loser. Life insurance is a waste of money on average, yet we do it anyway. It just depends on how likely the risk is, how bad the outcome could be, and how much we are paying to prevent that risk.

Forgoing your 401k match could be evaluated in the same lens. People who are not responsible with money and who are in dire straits financially, they have a risk of financial catastrophe due to debt, something that you or I probably do not have. If the risk is high enough, it may be worth "paying" in the form of losing your match. In other words:

1. What is the likelihood the debt will cause me financial collapse?
2. What is the outcome if I cannot control my debt?
3. What is the cost of preventing this problem in the form of 401k matching?

Consider all these factors, a majority of people should probably just take the 401k match. However, I think the number of people that would benefit from paying off the debt in lieu of a 401k match is non-zero. Just my opinion anyway.
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Re: Dave Ramsey says to give up employer 401K match to pay down debt

Post by EnjoyIt »

DesertDiva wrote: Wed Jun 26, 2019 12:05 pm
MichCPA wrote: Wed Jun 26, 2019 12:01 pm
Independent George wrote: Wed Jun 26, 2019 11:53 am
DesertDiva wrote: Wed Jun 26, 2019 11:48 am So instead of focusing solely on the psychological effects of paying off debt, think of the psychological boost of growing your 401(k).
If it were that easy for them, would they be that deep in debt to begin with? Prescribing the mathematically correct solution while ignoring the messy realities of human behavior will likely make things worse for people who cannot afford to get worse.
The 'psychological effect' is having more of your income/assets available for your goals vs for creditors. (For DR this is the 'Financial Peace' feeling) Sticking money into an account that cannot be touched until one turns 60 isn't going to give that effect for someone until maybe their mid 50s. I agree that ignoring the 401k is a bad thing, but having insane levels of credit card debt, student loans, etc. and pointing to a 401k as your far off savior isn't going to help your peace of mind.
Points taken. My outlook/viewpoint may be different than many of the Dave Ramsey listeners. I've enjoyed watching my balance grow over time. When I have a debt, I know that it will be short-term and will have an end date. A long-term perspective is often missing from many decisions.
We see the same phenomena here where people choose to pay down low interest rate mortgages vs investing at their asset allocation. Historically and Mathematically and it is a mistake, but people choose to make that mistake for peace of mind. This mistake can be worth $100k+ depending on interest, size of debt, and returns.
A time to EVALUATE your jitters: | https://www.bogleheads.org/forum/viewtopic.php?f=10&t=79939&start=400#p5275418
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Re: Dave Ramsey says to give up employer 401K match to pay down debt

Post by Katietsu »

MichCPA wrote: Wed Jun 26, 2019 11:12 am
deltaneutral83 wrote: Wed Jun 26, 2019 11:09 am Some of you all need to look at payday lenders and what they charge in interest. Hint, it's above 50%, well above. A
+1, Also important to note many payday lenders affiliate themselves with native american tribes to avoid state interest caps, so usury laws will not apply in many cases. Multiple hundred % loan are a real thing.
I have seen them get around usury laws by using "fees" instead of interest. So if I give you a $100 loan with a 2 week term and charge you a $25 fee plus 6% interest, what is your actual cost to borrow. Then, you still need the $100 dollars after two weeks, so I now give you a "new" $100 loan which, of course, has a new $25 fee. Now, I keep doing this for even couple of months and I am paying back more than loan shark rates.
Last edited by Katietsu on Wed Jun 26, 2019 5:02 pm, edited 1 time in total.
PVW
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Re: Dave Ramsey says to give up employer 401K match to pay down debt

Post by PVW »

From the source below, 15 states have rate caps on interest rates for short term loans. States that don't are charging up to 675% annualized.

If my choice was to either take out a loan that charged 50% interest by the time I could pay it back or stop my 401k contribution, I'd probably stop the 401k contribution.

https://www.responsiblelending.org/rese ... rest-rates
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Re: Dave Ramsey says to give up employer 401K match to pay down debt

Post by Independent George »

MichCPA wrote: Wed Jun 26, 2019 12:01 pm The 'psychological effect' is having more of your income/assets available for your goals vs for creditors. (For DR this is the 'Financial Peace' feeling) Sticking money into an account that cannot be touched until one turns 60 isn't going to give that effect for someone until maybe their mid 50s. I agree that ignoring the 401k is a bad thing, but having insane levels of credit card debt, student loans, etc. and pointing to a 401k as your far off savior isn't going to help your peace of mind.
Please-read my post - that was precisely my point.
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Re: Dave Ramsey says to give up employer 401K match to pay down debt

Post by MichCPA »

Independent George wrote: Wed Jun 26, 2019 12:19 pm
MichCPA wrote: Wed Jun 26, 2019 12:01 pm The 'psychological effect' is having more of your income/assets available for your goals vs for creditors. (For DR this is the 'Financial Peace' feeling) Sticking money into an account that cannot be touched until one turns 60 isn't going to give that effect for someone until maybe their mid 50s. I agree that ignoring the 401k is a bad thing, but having insane levels of credit card debt, student loans, etc. and pointing to a 401k as your far off savior isn't going to help your peace of mind.
Please-read my post - that was precisely my point.
I was responding to the thread and agreeing with you. No need to be rude.
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Re: Dave Ramsey says to give up employer 401K match to pay down debt

Post by Gufomel »

I highly doubt that anyone taking out payday loans at 25% interest for 2 weeks is even remotely considering 401k contributions, so it really doesn’t matter for this discussion.

Pay down 50k credit card debt at 25% APR or contribute to 401k to get company match? That’s the more likely scenario.

Mathematics and spreadsheets say to get the company match. But the reality is that someone who has spent their way to 50k credit card debt is very unlikely to ever pay it off unless they throw everything they have (willpower and money) at it as quick as possible. That credit card debt will cost more in the long run if not paid off compared to the “free money” from a company match. The argument is even more in favor of pay off debt if the company match is not dollar for dollar and it’s not immediately vested.
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jrbdmb
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Re: Dave Ramsey says to give up employer 401K match to pay down debt

Post by jrbdmb »

Nate79 wrote: Wed Jun 26, 2019 10:44 am He has always said this. Probably for 30 years. People focus way too much on the details and miss the forest. Focusing on paying off the debt as fast as possible, increasing income and selling stuff will far outweigh the small amount of match money. It's really not a big deal as we are talking max 2 years for a majority of the people in debt to get out of debt.
If you are able to pay off your debt in two years, then IMHO you are better off saving that 5% of income (and the 50% or 100% match) and taking a bit longer to pay off that debt but then having up to 20% of more of your yearly salary already in the 401K for retirement.
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Re: Dave Ramsey says to give up employer 401K match to pay down debt

Post by spoco79 »

He admits that the math is not in his favor - but his argument is that it is more important to get out of debt as quick as possible. He never advocates to take from an existing 401k to pay down debt, just put it on pause.
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Re: Dave Ramsey says to give up employer 401K match to pay down debt

Post by WingsFan4Life »

Turn down free money? Hmmm
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Re: Dave Ramsey says to give up employer 401K match to pay down debt

Post by Hoosier CPA »

I read one of his books and I seem to remember him saying he only recommends this if it's going to take 2 years or less to get to the point where one is investing. His whole plan is one size fits all and it's focused on doing one thing at a time. So he's starting with someone in debt, no savings, no investing and giving them a game plan. He states that he knows the math doesn't work but like others said he's trying to change behavior. So I see that side of it.

I was more turned off by the bad math and hyperbole in the book. He shows what a new car payment would be worth in 40 years at 12% but then his used car approach involves buying a $4K car and upgrading another $4K every year, ignoring all transaction costs, repairs and depreciation, or the fact that this will cost money too. The concept makes sense - used cars are normally a better deal than new but he overstates the cost of new and the market returns of the investment, and he dramatically understates the cost of used. College funding is nuts too - assumes 12% a year through the date your child starts school. Investing is in asset classes with classes that aren't defined the same as virtually anyone else. I sort of see his point for not using bonds as that ties in with not having a mortgage (if a mortgage is a negative bond allocation, and you don't have that, that can sort of offset not holding bonds in your retirement portfolio, in some sense at least). The worst is probably the retirement return and withdrawal rate assumptions (12% and 8%). I'm 40, and when I checked the retirement calculator at one of his personality's websites, it states I already have enough saved to cover my retirement at 65, again assuming 12% returns from here till the end and 8% withdrawal rates.

In my view the baby steps is a good framework but it's hard to recommend it to anyone since the math examples are absurdly wrong in the book. The show would be better too if it wasn't half an infomercial for his endorsed providers and anyone else he endorses.
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Re: Dave Ramsey now says to give up employer 401K match to pay down debt

Post by quantAndHold »

mptfan wrote: Wed Jun 26, 2019 10:58 am
quantAndHold wrote: Wed Jun 26, 2019 10:39 am
mptfan wrote: Wed Jun 26, 2019 10:18 am
Taylor Larimore wrote: Wed Jun 26, 2019 10:16 am I agree with GlennK. Foregoing a 401K company match is like refusing free money. With very few exceptions, this is terrible advice.
Taylor, I am curious, what are the few exceptions?
Someone with a significant amount of 20+% credit card debt would be an exception. They will come out ahead spending that money paying off that debt as quickly as possible.
I don't agree. An employer match is literally free money, so it's a 100% immediate return as compared to a loss of 20% interest, so I don't see that as an exception.
I don’t know where these people are that have 100% matching. In 30 years and 8 jobs, I never had more than 75% match. Most common was 50%, but it’s been as low as 25% a couple of times.

At 50% match, the math looks more like this that someone posted upthread.
Considering Dave Ramsey's target audience, compare
$1000 401k contribution + $500 match compounded over 5 years @8% ==> $2204
$1000 CC debt compounded over 5 years @24% ==> $2931
Yes, I’m really that pedantic.
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Re: Dave Ramsey says to give up employer 401K match to pay down debt

Post by WhiteMaxima »

That's nonsense. take the employment 401k match to the maximum and borrow against your 401k (5% interest) to pay down your high interest (15% CC loan). It have three benefits: 1) lower your income tax 2) maximize your 401k 3) lower your out going high interest payment. But you have to control your spending and not to accumulate anymore consumer loan.
Last edited by WhiteMaxima on Wed Jun 26, 2019 1:55 pm, edited 1 time in total.
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Re: Dave Ramsey now says to give up employer 401K match to pay down debt

Post by barnaclebob »

willthrill81 wrote: Wed Jun 26, 2019 9:16 am Unless you're foregoing the match to prevent an immediate bankruptcy, no, it doesn't make sense to do so.
vineviz wrote: Wed Jun 26, 2019 9:16 am
jrbdmb wrote: Wed Jun 26, 2019 9:11 am Rather than just start another Dave Ramsey flame-fest, are there really any circumstances where one should skip the 50% or 100% match on their 401K contribution to get their debt paid down a bit earlier?
Yes. If your debt carries an interest rate over 50%, skipping an employer match would probably make sense.
Is such an interest rate legal anywhere in the U.S.?
Pay day loans?
mptfan
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Re: Dave Ramsey now says to give up employer 401K match to pay down debt

Post by mptfan »

quantAndHold wrote: Wed Jun 26, 2019 12:48 pm I don’t know where these people are that have 100% matching. In 30 years and 8 jobs, I never had more than 75% match. Most common was 50%, but it’s been as low as 25% a couple of times.
I don't know how common it is, but I know people, including myself, that get a 100% match. Also, for those employers that offer a SIMPLE IRA plan and choose to match employee contributions, they are required to match employee contributions, dollar for dollar (100%), up to 3%.

https://www.irs.gov/retirement-plans/si ... tributions
MichCPA
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Re: Dave Ramsey says to give up employer 401K match to pay down debt

Post by MichCPA »

WhiteMaxima wrote: Wed Jun 26, 2019 12:57 pm That's nonsense. take the employment 401k match to the maximum and borrow against your 401k (5% interest) to pay down your high interest (15% CC loan). It have two benefits: 1) lower your income tax 2) maximize your 401k 3) lower your out going high interest payment. But you have to control your spending and not to accumulate anymore consumer loan.
TLDR- This is a better option than it used to be, but depending on your plan rules, it could be a bad move.

While this is a more viable course of action than in the past due to the TCJA provision allowing loans to be paid back by the end of the tax year when employment separation occurs, this isn't always an option. Plans can bar you from contributing while a loan is outstanding (and this kills the match). Also, loan rates are set by the plan and can be much higher than 5% (mine is at 9.25%) and there are fees involved. While you are paying yourself, the interest isn't tax advantaged and it is still a cash basis cost.

If you were under a loan restriction, I would advocate a personal loan over a 401k loan. The interest rates are not that different right now, you preserve a match if you plan has a loan restriction, and you have a set term rather than the possibility of a 10 month countdown timer in the case of a job status change. The last thing you would want is to not be able to take a higher paying job because you can't pay off a 401k loan in short order.
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DanMahowny
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Re: Dave Ramsey says to give up employer 401K match to pay down debt

Post by DanMahowny »

Just more dreadful advice by Dave Ramsey.

But if you consider his target audience, the advice is appropriate.
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Re: Dave Ramsey says to give up employer 401K match to pay down debt

Post by Gufomel »

DanMahowny wrote: Wed Jun 26, 2019 1:28 pm Just more dreadful advice by Dave Ramsey.

But if you consider his target audience, the advice is appropriate.
So he should give advice that is not appropriate for his target audience?
MichCPA
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Re: Dave Ramsey now says to give up employer 401K match to pay down debt

Post by MichCPA »

mptfan wrote: Wed Jun 26, 2019 1:18 pm
quantAndHold wrote: Wed Jun 26, 2019 12:48 pm I don’t know where these people are that have 100% matching. In 30 years and 8 jobs, I never had more than 75% match. Most common was 50%, but it’s been as low as 25% a couple of times.
I don't know how common it is, but I know people, including myself, that get a 100% match. Also, for those employers that offer a SIMPLE IRA plan and choose to match employee contributions, they are required to match employee contributions, dollar for dollar (100%), up to 3%.

https://www.irs.gov/retirement-plans/si ... tributions
Per BLS, only 22% of plans have immediate vesting, and per Investopedia 40% of employers that match do a 50% match, which is slightly more common than the 38% that do 100% matching, the remainder (12%) is some amount other than 50% or 100%.

I have seen different survey based on plans vs participants, but the general conclusion is that 100% and 50% matches are close to equally common, and there are a much smaller group of plans that have other (normally under 50%) matches.

FYI, only about half of plans have a match at all.
chisey
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Re: Dave Ramsey says to give up employer 401K match to pay down debt

Post by chisey »

Gufomel wrote: Wed Jun 26, 2019 1:34 pm So he should give advice that is not appropriate for his target audience?
The problem with audience-targeted advice from people like Dave in the 21st century is that far, far more people than his target audience will see it. This advice was published on Yahoo! Finance and will reach many people for whom this is terrible advice.
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Re: Dave Ramsey says to give up employer 401K match to pay down debt

Post by indexfund56 »

You wrote this as "now" as if it is a recent development. He's said this for years. It is not new.
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Re: Dave Ramsey now says to give up employer 401K match to pay down debt

Post by mptfan »

MichCPA wrote: Wed Jun 26, 2019 1:36 pm FYI, only about half of plans have a match at all.
Do you have a cite for that?
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Re: Dave Ramsey says to give up employer 401K match to pay down debt

Post by rustymutt »

The truth around this can vary from client to client and he shouldn't make blanket statements, trying for square peg in round hole. This is the whole issue I have with Mr Ramsey's approach to investments. We sure know where is stands on debt, and I don't disagree with him there. :oops:
Even educators need education. And some can be hard headed to the point of needing time out.
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Re: Dave Ramsey now says to give up employer 401K match to pay down debt

Post by MichCPA »

mptfan wrote: Wed Jun 26, 2019 1:42 pm
MichCPA wrote: Wed Jun 26, 2019 1:36 pm FYI, only about half of plans have a match at all.
Do you have a cite for that?
https://20somethingfinance.com/401k-match/

Keep in mind that 49% of plans means that a small business plan without one and Google having one is 50% by that metric.
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Re: Dave Ramsey says to give up employer 401K match to pay down debt

Post by bbrooks »

A couple of years ago, I got contracted on to do some data analytics work for a "Short Term Consumer Lender" (installment loans that are set at Payday rates). The company wasn't profitable when I started and they were charging between 600-625%. They legitimately needed to charge over 50% interest on their loans to offset the defaults. However, there is a high cost of buying leads. The company I am referencing paid over $200 to buy a lead, then converted leads to loans at 70% (industry standard is closer to 25%), then loans out only $500, and then only 65-75% will pay back in full. If there were restrictions on what could be spent on leads, then the interest rates would drop significantly. Honestly if you could eliminate the lead costs, Lending Club doesn't seem too different to me. Slightly better borrowers. Slightly lower rates than you could get even with things being more efficient. But really not too different.

As far as the indian tribe goes, the owner wanted to go that route, but was too worried about going to jail. It is clearly an illegal move. There are only about 5-10 states that online lenders can make payday loans in. This limits how big you can get, but keeps you on the right side of the law. All of this puts you on the wrong side of ethics and makes you just want to take a shower because you feel so filthy.
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Re: Dave Ramsey now says to give up employer 401K match to pay down debt

Post by mptfan »

MichCPA wrote: Wed Jun 26, 2019 1:50 pm
mptfan wrote: Wed Jun 26, 2019 1:42 pm
MichCPA wrote: Wed Jun 26, 2019 1:36 pm FYI, only about half of plans have a match at all.
Do you have a cite for that?
https://20somethingfinance.com/401k-match/

Keep in mind that 49% of plans means that a small business plan without one and Google having one is 50% by that metric.
That article refers to a survey of 401k plans only, that's not the same thing as saying "only about half of plans have a match at all." There are a number of different employer sponsored retirement plans, not just 401ks, including SIMPLE IRAs, 403(b)s, 457(b)s and others.

As I pointed out above, employers that offer a SIMPLE IRA plan are essentially required to offer a match to those employees who contribute, unless they agree to provide a match to everyone regardless of whether they contribute.
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Re: Dave Ramsey says to give up employer 401K match to pay down debt

Post by czr »

Dave also recommends you continue your tithe while you are in debt so I don't think you take all his instructions at face value although he would be very upset if you didn't follow his baby steps verbatim.
MichCPA
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Re: Dave Ramsey now says to give up employer 401K match to pay down debt

Post by MichCPA »

mptfan wrote: Wed Jun 26, 2019 2:22 pm
MichCPA wrote: Wed Jun 26, 2019 1:50 pm
mptfan wrote: Wed Jun 26, 2019 1:42 pm
MichCPA wrote: Wed Jun 26, 2019 1:36 pm FYI, only about half of plans have a match at all.
Do you have a cite for that?
https://20somethingfinance.com/401k-match/

Keep in mind that 49% of plans means that a small business plan without one and Google having one is 50% by that metric.
That article refers to a survey of 401k plans only, that's not the same thing as saying "only about half of plans have a match at all." There are a number of different employer sponsored retirement plans, not just 401ks, including SIMPLE IRAs, 403(b)s, 457(b)s and others.

As I pointed out above, employers that offer a SIMPLE IRA plan are essentially required to offer a match to those employees who contribute, unless they agree to provide a match to everyone regardless of whether they contribute.
This whole thread is about 401k matches...

Within that context and with the caveats originally given, this is a fair statement. My original comment was in response to a remark about how frequently 401k are matched at 100% vs 50% I don't think it is fair for you to accuse me of being incomplete when you remove so much context. But to address the point you make.

If anything, I would say anecdotally, from my time auditing governments and non-profits that 403b's and 457's bring the number of contributors down more than the tiny amount of SIMPLE IRAs would bring it up.
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Re: Dave Ramsey says to give up employer 401K match to pay down debt

Post by Hoosier CPA »

czr wrote: Wed Jun 26, 2019 2:34 pm Dave also recommends you continue your tithe while you are in debt so I don't think you take all his instructions at face value although he would be very upset if you didn't follow his baby steps verbatim.
What does tithing have to do with any of this?
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Re: Dave Ramsey says to give up employer 401K match to pay down debt

Post by DesertDiva »

EnjoyIt wrote: Wed Jun 26, 2019 12:13 pm We see the same phenomena here where people choose to pay down low interest rate mortgages vs investing at their asset allocation. Historically and Mathematically and it is a mistake, but people choose to make that mistake for peace of mind. This mistake can be worth $100k+ depending on interest, size of debt, and returns.
Except your employer probably isn't chipping in to subsidize a monthly mortgage payment.
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Re: Dave Ramsey says to give up employer 401K match to pay down debt

Post by EnjoyIt »

DesertDiva wrote: Wed Jun 26, 2019 3:16 pm
EnjoyIt wrote: Wed Jun 26, 2019 12:13 pm We see the same phenomena here where people choose to pay down low interest rate mortgages vs investing at their asset allocation. Historically and Mathematically and it is a mistake, but people choose to make that mistake for peace of mind. This mistake can be worth $100k+ depending on interest, size of debt, and returns.
Except your employer probably isn't chipping in to subsidize a monthly mortgage payment.
The match is part of your compensation just like health insurance. You may not see it, but it is indirectly coming out of your take home pay. By not taking the match one is giving up some of their compensation which the employer is happy to keep. With that in mind, the employer is chipping away at your mortgage by providing wages that you can then choose to chip away at your mortgage, invest, put toward debt, or splurge away on golf balls and fountain drinks.
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Re: Dave Ramsey says to give up employer 401K match to pay down debt

Post by Cody6136 »

Stinky wrote: Wed Jun 26, 2019 10:46 am By directing funds temporarily to paying down debt rather than 401(k), Ramsey tries to get folks excited about their financial future.

Hopefully, many of the Dave Ramsey crowd will grow up to be Bogleheads some day.

I did. I needed to hear Dave's message about 20 years ago and it worked. Many of the people on this board enjoy looking down on the less sophisticated Lumpen Proletariat but the truth is, Bogleheads are made not born.
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Re: Dave Ramsey says to give up employer 401K match to pay down debt

Post by Nate79 »

Dave Ramsey got to be the most successful financial "celebrity" because his advice is so simple. 7 baby steps. Very little alternative routes. Very little need for the average person to have to go thru a difficult decision tree to decide what to do. That is why his books are also best sellers. The thing is that his process works. It's not that you can't be successful doing a different process but sometimes simple is the best.
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Re: Dave Ramsey now says to give up employer 401K match to pay down debt

Post by LilyFleur »

LongRoad wrote: Wed Jun 26, 2019 10:01 am I'll offer a (slightly) contrarian point. While I don't think this is good advice in general, and certainly not for the Boglehead agonizing over their 3.49% mortgage, it actually could be a consideration for people with very high interest debt that will be paid off over years.

Considering Dave Ramsey's target audience, compare
$1000 401k contribution + $500 match compounded over 5 years @8% ==> $2204
$1000 CC debt compounded over 5 years @24% ==> $2931

The match percentage isn't directly comparable to the interest rate because it is a one-time contribution.

Again, this would be laughable for most on this board, but there really are people out there in this situation.
Not to state the obvious, but, really, you need to compound the $500 match over all of your wage-earning years, especially if you are young. Because that match, at that time in your life, will not ever be available again. I am not a wealthy Boglehead, but the company match in my 401k (at a moderate, not high income, in just ten years early in life) made it possible for me to retire early.
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Re: Dave Ramsey says to give up employer 401K match to pay down debt

Post by LadyGeek »

This thread is now in the Investing - Theory, News & General forum (general discussion).

Please stay focused on the OP's question.
jrbdmb wrote: Wed Jun 26, 2019 9:11 am Dave Ramsey now says to give up the employer 401K match to pay down debt:

https://finance.yahoo.com/news/employer ... 14543.html

Rather than just start another Dave Ramsey flame-fest, are there really any circumstances where one should skip the 50% or 100% match on their 401K contribution to get their debt paid down a bit earlier?
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