Intense Focus

Chaz asks what Dave would recommend for 401(k) contributions while getting out of debt. Dave advises stopping any investing while in Baby Step 2.

QUESTION: Chaz in Nevada asks what Dave would recommend for 401(k) contributions while getting out of debt. Dave advises stopping any investing while in Baby Step 2.

ANSWER: I stop all savings while I’m doing the debt snowball regardless. “What? Don’t you believe in compound interest?” Yes. “I’m going to miss out on my match!” I know. I temporarily stop saving money at all in any form when in Baby Step 2.

Baby Step 1 in The Total Money Makeover program that millions of people have followed is save $1,000 as a starter, beginner emergency fund. Baby Step 2 is list your debts smallest to largest in the debt snowball—everything but the house—and pay minimum payments on everything but the smallest one. Attack the little one with complete focus. All of the math is pointing at that smallest debt, and you pull the trigger until the gun is empty.

“I’m missing out on the match!” Not for long. The average person working this is out of debt in 18 to 24 months—everything but their home. Some are a little longer, some are shorter. That’s why we call it an average. The average person is debt-free—when you go all in and you go intense and you go focused—then you can move the needle.

See, the problem with a lot of areas in our life is we try to do too many things at once, and none of them get done . . . or none of them get done well. And when you pay a little extra on all your debts and you put a little bit in your 401(k) and you pay $50 extra on your credit card, $100 extra on your mortgage, and you just nickel-dime, nickel-dime, nickel-dime, nickel-dime, nothing moves the needle. You need to see the needle move to stay with a program because personal finance is 80% behavior. It’s only 20% head knowledge. This is not a math problem. If we were doing math, we wouldn’t have credit card debt. It’s not a math issue.

So temporarily, for a short period of time, we’re going to focus all of our emotional, spiritual, mathematical and financial energy on that smallest debt until it’s gone, and on the next debt until it’s gone, and on the next debt until it’s gone. And you knock it out. When each one of those debts is gone, you have more money to pay the next one down and more money to pay the next one down. You keep working that debt snowball. I know that feels weird to some of you, but what you’ve been doing hasn’t been working, so it’s time to change. It’s time to change and time to focus.