Debt Reduction - Debt Snowball & Retirement Plans

Should One Make Retirement Contributions During the Debt Reduction Process?

In my previous post Debt Reduction – The # 1 Way of Eliminating Debt!? I reviewed the debt snowball technique for debt reduction as one of the most popular way to eliminate debt.

The reason it’s named ‘debt snowball’ is because you start with the smallest debt and work your way up to the biggest one, like rolling a snowball. When the first loan is paid in full you allocate the payment from this first loan to the next highest one. As each loan gets paid, the pay down amount getting applied to the next largest one gets larger each time – hence the term ‘debt snowball’.

With debt snowball technique for debt reduction arises the dilemma whether to make retirement contributions during the debt reduction process or not since the idea is to use all free capital for the debt reduction plan.

Some financial advisors argue that all contributions are to be put on hold during the debt snowball, thus freeing up more money to make payments. However, if this is the case, it is recommended that retirement contributions should not be put on hold for more than 2 years. Others dispute this practice, citing the cost of compounding interest to be greater than the gains made from paying off debt. It’s really your call to make based on your financial priorities.

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To the Readers:

Would you make retirement plan payments while trying to reduce your debt through debt snowball?