In This Special Case, Divert Retirement Savings to Pay High-Interest Debt
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.