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Why are people so bad at 401ks. I just overheard someone tell another person they should pay down principal on a car loan instead of putting the extra into 401k. WHY.

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One aspect not considered here - cash flow. I often plan my spending to maximize my cash flow later on... depending on plans: if I choose to move, travel, have a kid, get am MBA.... paying off current debt makes more sense... since I know that once that car is paid off I have the extra money in my pocket.
Not everyone can afford to think compound interest.

I am more conservative as well: pay off debt, emergency fund, invest. My ways got me in a sweet spot. I'm not rich, but I have no debt (besides the house), maxing 401s, and putting some extra in investments separately.

To each their own, but we can't always jump and assume ignorance.

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OP, you seem to get it.
My point was that one never knows the circumstances and people's thoughts.
When I got married, hubby and I spent a year paying off everything we could (cars and student loans). Then we had a baby and now the extra cash flow is directed into a down payment for a bigger house.
We never spent above our means, we just like to plan things in advance and maybe act more conservative at times: eliminate the small debt before increasing the mortgage, save for a significant down payment to get a good rate and so on...

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TA 1 is definitely a Dave Ramsey disciple. Solid advice.

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I'm paying down student loans rather than investing in retirement accounts. Savings in interest alone are worth it.

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It's not just 401ks. There are people who carry credit card debt! and they're in PA.

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OP, you get credit for all the math and yes, you are right on paper. Life is not so black or white.

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I only have a mortgage payment. No car debt, no student debt, no credit card debt. I have $20k in the bank and now I'm maxing my retirement account. Do you know how good it feels to know I could be fired tomorrow and be fine for 6 months without a job. I only need to cover a mortgage and food and I can take care of my family. I know OP feels smart keeping payments around, but there is another level of enjoyment when you aren't in debt and you aren't a slave to your employer.

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How do you know their loan interest rate? Maybe it was 7%+... average market return has been skewed over last few years. Unless you have all details you can't know why

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Don't drink too much 401k koolaid!

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Getting wealthy steps. Step 0. have a zero base budget every month. 1. Save $1,000 2. Payoff all debt as fast as possible. Except for house. House should of be on 15 year mortgage 3. Save 3-6 months living expenses 4. Invest 15% of income 5. Save for kids college 6. Payoff house

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OP, point taken and agreed, the math will always make sense when you have compound interest/earnings on your side. But like TA1 said, it's more about behavior for most people. That's why many CPAs and other wizards of smart have money problems, they couldn't control their spending. So, people who can keep low or no debt typically come out ahead in the end because the other things (401k, etc.) will be taken care of through smart money habits rather than understanding the nuances of an amortization schedule.

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If you ever aren't maxing out you employer contribution to your 401k, you are leaving money on the table - an EBP specialist

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Dave Ramsey is very conservative when it comes to debt. It's not a bad thing, but it's also borderline unrealistic. Atleast his thoughts on mortgages

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Okiedokie, some math for those that think it's so smart to pay extra on principal. The person in particular drives a Honda, but for fun let's pretend the car was bought for 40k, at a 12% interest rate, for 10 years. Higher than any interest rate on a car that most anyone would get. 10 years to allow for lots of time for interest to accumulate. This loan will cost about 28,700 in interest. Let's also pretend this person contributes $200 a month to their 401k, for an entire 30 years, that's all they ever put in and they're returned 2.5% every year. And we won't take any firm contributions into account. So their total pretax contributions are 72,000 and their account sits at 108,000. Earned 36,000 dollars. Now let's assume this person has an extra 200 a month to do whatever they want with. Let's say they double the 401k contribution, awesome now their contributions are 144,000 pretax dollars and their account is at 216,000. Earned 72,000 dollars, and a gain of 36,000 over contributing just $200. But what about the loan? How did they do if we applied the $200 a month to principal? Paid off in 7 years, and even assuming this person starts contributing the 200 to the 401k after payoff. 16,500 paid in interest, and we saved $12,000. And our 401k had 127,000 put in and we got 51,000 back out. Loss of 21,000 on 401k, and we only saved 12,000.

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Lol @Assurance Associate 1 i thought the same thing

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Yep, this is the extra cash flow she got from paying off another debt, which she wants to keep accessible in case of one of those scenarios and she needs to take on new debt. You shouldn't really carry enough monthly debt that you couldn't do those things, so technically you could do both, but people like to borrow out of their means. So I understand if a payment is hindering leading a life, definitely pay more to increase cash flow faster.

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I've been caught. I love me some Dave Ramsey.

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Umm... that math doesn't work OP. Would you take a $40k loan at 12% interest and turnaround and invest it for 2.5%??? If so, I will lend you $40k tomorrow. Don't forget that the loan is also compounding interest against you. If we use an average market return of 8%, factor in tax savings and employee match, let's call it 10% total return. If you have debt compounding against you at 10%+ it would benefit you to pay the debt rather than invest more. That's just simple math. Most credit cards are over 10% so pay them first, most student loans are 6-10, so when you factor in risk, you have a guaranteed savings of that interest rate vs. risking a lower return from the market, so probably better to pay student loans if you're risk averse, then if you have home loan debt at less than 5% it wouldn't make sense to pay that down instead of 401k unless you are really risk averse or nearing retirement and need to get out of debt.

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In your scenario you'll have $400/mo to put away from years 1 to 10. If I pay down the 12% loan I'll invest 200/mo from years 1-7, but then I'll have like 800/mo from years 8-10 which will put me in front of you by year 10. From years 11-30 we would both put away 800/mo so no difference besides that I'll have more money than you at year 10, which means I'll have more money than you at year 30 if our contributions and returns are equal. Run some time value tables tomorrow if you don't believe me. The only way you'll come out ahead of me is if your investment return outpaces the loan interest. It makes sense for most people to pay down debt even if it is less than their investment return because they won't take the extra 200 and invest it, they'll just spend it on stupid stuff.

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I'm with you, PwC1. Borrowing to invest is insane. That said, 401k's come and go. Subaru memories last a lifetime.

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