Tuesday, October 14, 2008

Should you stop your 401(k) contributions?

Well yesterday was a good day on Wall Street, but no one is quite sure if this is the start of the upswing. Meanwhile, our family's personal investments have been tanking at a meager existence, probably like most people. So my husband was wondering if he should suspend his 401(k) contributions and instead use that money to pay down debt.

I am no expert on this, so I went straight to the Coors Credit Union Investment and Retirement Team and asked financial planner, Nelisha Wilson. Here's what she said...

Without knowing your specific situation, generally it is not a good idea to suspend contributions when the market is down. You've heard the old saying "buy low, sell high"... the market is "on sale" right now for long term investors. You may feel like the money you are putting into the 401k is disappearing, but it is not. Every dollar you are putting into it is buying more shares of your funds. Therefore, when the market rebounds you have more shares to accumulate wealth.

Why would you wait for the market to rebound and pay more for the same security? Is that how you shop for other things? If you see a shirt for sale for $100 do you buy it or wait for it to go onsale at $75? You purchase at the sales price-- same concept works in the market.

Also, unless you are extremely disciplined I doubt if you suspended your contributions any of that money would be used to pay off debt. You would find something else to spend the money on.

Ouch that last remark-the money probably wouldn't be used to pay debt-really stung, but was right on. If my husband and I were extremely disciplined we probably wouldn't be carrying debt anyway. And there's always something that comes up right? A car needs tires, the dog gets injured...

Each of Nelisha's points makes perfect sense. But when you see you dollars going down, down, down it's hard not to feel like you are drowning and panic. Thanks Nelisha for showing us the sensible side of the craziness that is our economy right now.

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