I had an interesting conversation with someone the other day who is having some personal cash flow issues. Apparently there have been some vehicle issues as well as some other things that have come up that are putting a stress on things. So he basically wanted to see what I thought about lowering or discontinuing his 401k contributions for a little while in order to free up some more money to take care of some of these short term issues.

My first thoughts were to try and think of anything else that could be done before having to cut back on these contributions, and for a number of reasons:

• These contributions are pre-tax, so you wouldn’t be freeing up as much money as you might think.
• By discontinuing the contributions you’re also missing out on the associated company match, which in this case is an instant 75% return on your money.
• You’ll also be missing out on a time to buy when prices in the market have pulled back and are therefore cheaper.

If you have some credit card debt that is charging you upwards of 16% or so, you may be tempted to cut back on the contributions since it’s a guaranteed high rate of return on your money. Just remember though, that what you’re giving up could be a far higher rate of return such as the 75% in this case.

Something Else To Try

Like I mentioned above, I wanted to think of almost anything else that could be done before having to give up the benefits of these contributions. Of course one could cut way back on some expenses such as eating out and entertainment, or any other unnecessary expenses, but there’s one idea that wouldn’t take much effort at all.

If you consistently get a tax refund at the end of the year, then you have money just waiting to be given you. All you have to do is change (raise) the number of exemptions on your W-4 so less will be withheld from your paycheck. I know it may be nice to get a fat tax refund at the end of the year, but it’s your money to begin with and you may as well use it if you need it. I would at least explore this option before considering lowering your 401k contributions.

What other ideas might you have that could free up some cash in the short term?

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