Contribute to your 401(k) while you pay down your debts. Developing the ‘rituals of wealth’ will pay off for you in a short time-frame.

Give to Charity with a Percentage of your income.
Build your 6 month contingency fund with a percentage of your income
Pay your debts with a percentage of your income.
Fund your 401(k) or IRA as well.

here is a little flowchart I have devised:
http://worthwild.net/blog/?p=165
ymmv

Starting a legitimate business is one of the ‘optional’ keys to financial independence. You can do it without it but I encourage you to look into entrepreneurship as an option.

-WR

In my case, in order to get my company’s full 6% match, I have to invest 24% of my gross pay in my 401(k), which I do; this gives me a full 30% of my gross pay in my retirement account, of which I only contributed 24% (the 6% match is FREE money). I cannot simply lower my contributions to 6% and keep my 6% match, as that would result in only a 1.5% company match (25% of 6%=1.5%), yielding a 7.5% 401(k) contribution.

@ Blogger Lastly, you note 8% over 30 year on the stock market. That is the AVERAGE return per year if invested over 30 years. You’re leaving out that a 401(k) reinvests your interest earned, compounding the interest. $100/yr invested over 30 years compounded ONLY once/yr @ 8% (usually it will be per month in a 401(k)) yields $12,234 ($100 x 30yrs=$3,000 invested; the difference is your investment profit). This results in a lifetime interest yield of over 400%. (This is why every financial advisor will tell you the earlier you invest, the more money you will earn due to compounding.)

Your car payments do not carry compounded interest, as you are amortizing the principal and interest. Your total interest over 3 years is $4,000; over 6 years is $8,000. So, by reducing your 401(k) contribution to pay off your car (or any loan for that matter) is not financially responsible. You need to “pay yourself first”, i.e. 401(k), and then pay off debts to creditors. If you do otherwise, you’ll still have a retirements nest egg, but it will likely look like a robin’s instead of an ostrich’s.

The advantage to deductions is they keep us from paying taxes on money we don’t receive as spendable income(mortgage and student loan interest, health care premiums etc.). For example, this past year I was able to deduct moving expenses, I spent and then deducted $3,000 from my taxable income. I didn’t have to pay taxes on that $3,000, which was good because I was moving either way. But had I not moved, I would have had to pay taxes on $3,000, but that would have left me with more than $2,000 in my pocket. The deduction saved me money because I moved, but moving didn’t make me any money. Better the money not spent with taxes paid, than spent and deducted.

Suppose you have $100 and you are deciding whether to invest it in your 401K or use it to reduce your car debt. By applying it to your car loan, you are increasing your net worth by $6.90 in one year. But by applying it to your 401K, you gain not only the 401K stock market advances (or declines) … say an average of $6 to $10 a year, but you also gain ~ $30 to $35 (depending on your federal tax bracket and state tax situation) by avoiding $100 of reportable income, not to mention the “free” dollars offered by your employer in terms of 401K matching. I am afraid it makes more sense to keep charging hard on the 401K from a math perspective, although emotionally it may feel better to knock out the car loan quicker.

Expenses you incur for your business ( Business lunches, Computer equipment (yes, even that Ipad you’ve been looking at), research into the viability of an enterprise, travel related to your business) are deductible. These are things most of us buy and/or do whether we are in business or not. The trick is to think like an entrepreneur and start a business that is in line with your passion and purpose.

Your home office deduction comes out of the property you already own. Mileage deductions come from the car you already drive. Office equipment deduction comes from…you get the point.

Businesses are taxed only on profits, employees are taxed on wages. Once you understand the difference, the light-bulb will go on and a whole new world will open up to you.

-WR

While contributions to a 401k are pre-tax contributions, and you won’t get to take home all of your former contributions, unless you are in the (non-existent) 100% tax bracket, there is no way that reducing your contributions would not increase your take-home pay. It is possible that most of the difference might be WITHHELD from your bi-weekly check, but most of it will come back to you when you file your tax return at the end of the year (all of which should be applied towards debt).

Before you drop your 401(k) contributions, take a look at your taxes. There are many scenarios where pre-tax 401(k) contributions will result in fractional differences in your take home pay and even some cases where contributing will raise your take home pay. This depends on your tax rate.
plug your own numbers in to Bankrate’s 401(k) calculator and see what you come up with:
http://www.bankrate.com/calculators/retirement/401-k-contribution-calculator.aspx

Remember to only count your money after it has passed through the filter of taxes.

Perhaps instead of reducing your 401(k), you could investigate other ways to reduce your tax burden.

Have you considered starting a home based business? Start up costs, equipment, Home office, Mileage used for business purposes, etc are all deductions. In fact, first year business expenses can significantly reduce your taxes making it even easier to pay off your debts.

-WR

Regarding the car, that’s a hefty debt. Have you considered what you could get for it if you sold it yourself (maybe that’s the amt. you mentioned)? Maybe you could sell it yourself and get closer to the pay off amount? It would be nice if you could somehow reduce that large debt and still have a good used car that meets your needs. You might have to come up with some extra money to make up the difference (perhaps your reduction in the 401(K). I’d rather see you tackle a much smaller car debt and then get after the student loans.

1. 3 month emergency fund
2. Minimum to get maximum company match in 401k.
3. High interest debt (greater than 10%)
4. At least one Roth IRA if you and your wife are eligible
5. Lower interest debt (car loans, mortgages, student debt, etc.)
6. Raise the emergency fund to 6 months or a year and max out second Roth IRA.

We are currently at step 5…we’re paying off our remaining car loan ($9500 for my husband’s used Prius at 4.6%) before tackling our mortgage even more than we have since the beginning (we have about $70,000 left at 5.375% on a 15 year loan that is on schedule to be paid off in 10 years or less total).

It’s all about priorities. Our biggest financial goal is retirement by age 52, so obviously we placed Roth IRA’s higher than some people would.

What would you like more, to retire earlier but waste more money on debt or to pay off your debt and catch up in a couple of years on retirement? Valid question that only you can answer…

I would only contribute what your employer will match to your 401(k) plan as well.