Key Points from 24/7 Wall St.:

• Not contributing to a 401(k) usually means passing up an employer match.
• You should usually prioritize earning matching contributions first, then switch to debt payoff.
• If you’re working on paying down debt, make sure you have a plan to stay on track. 
• The best high-yield savings accounts are paying way more than most Americans realize, with some are offering cash bonuses for new accounts. Click here to see our top pick today. ^(Sponsored)

While an $82,000 salary is usually considered pretty good money and is above the national average, it’s still possible to struggle with such a high income — especially if you’re deep in debt because of past mistakes. That’s the situation one Reddit user found themselves in. 

The Redditor posted that they have $25,000 in credit card debt to deal with. Since their goal is to get rid of this debt, they’re considering discontinuing 401(k) contributions temporarily until they do. The question is, should they make this move or would it be a poor financial choice in the long run?

Does halting 401(k) contributions to pay down debt make good sense?

Figuring out how to balance competing financial priorities is always a challenge, but the good general rule of thumb is to:

• First contribute enough to a 401(k) to earn an employer match. A 401(k) match can often provide a 50% to 100% ROI depending on what the company’s matching rules are. Unless you have extremely expensive debt, such as payday loans charging upwards of 400%, investing to earn your match is the best way to maximize your money. It should usually be your first move after covering must-pay bills. 
• Next, save up a small emergency fund. You should have at least some money saved for emergencies before you start aggressively sending extra payments toward your debt. This may seem counterintuitive, but you don’t want to start making progress on debt payoff only for an unexpected expense to set you back and kill your morale. So, save up around $500 to $1,000, which can cover most minor emergencies. This way, you won’t have to go back to the cards after starting to pay them off. 
• Now, focus on paying off high-interest debt. After earning your full 401(k) match, the next place to put your money is toward certain kinds of debt. If you can make extra payments on your credit cards or other high-interest consumer loans, you can pay them off faster — thus reducing the total interest paid and freeing up money to invest or do other things. This is just high-interest debt, though. You typically shouldn’t make it a top priority to pay extra on your mortgage, student loans, or other low-interest loans — especially if interest is tax deductible.

Once you’ve tackled the debt, you can then shift more money to retirement savings or other goals like small or medium-term purchases. The key, though, is to keep your priorities in order and make sure you’re getting the highest ROI possible with each dollar.

What should the Reddit poster do?

In the case of the Reddit user who asked the question, the poster said their employer puts 3% into their 401(k) by default even if they don’t invest.

If they don’t have to contribute to get the match, there’s an argument to be made they should just hit the ground running on debt payoff, become free of their burden ASAP, and then resume retirement contributions.

The risk is that it will take longer than they expect, though, and starting to contribute late to a 401(k) makes it harder to build a big nest egg. Still, if they have a clear, committed plan to become debt-free, it may be worth trying to tackle their cards first since their employer is investing for their retirement anyway.

Ultimately, checking with a financial advisor may be the best move because an advisor can evaluate your specific situation and provide advice tailored to you, given factors like your age, interest rate, and future goals. 

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