It's a recession; should I stop contributing to my 401(k)

A question from a reader:

My company recently suspended its 401(k) match. They used to match up to 6 percent of employee contributions -- now they match none. I'd taken advantage of it (and built up a nice start to my retirement savings) in recent years, but after they announced the match suspension (a few weeks ago) I lowered my contribution back down to 3 percent.

So here's the thing: it's a recession. And my money is getting increasingly tight (we're not even going to TALK about the pay cut they want us to take here). I know I should be saving, but is it okay if I just eliminate my contributions all together and have that extra 3 percent stay in my paycheck? What should I be thinking about (beyond setting myself up for the future)? What do you suggest I do? I'm 25: I would like to buy a new pair of shoes or something, not just work so I can pay my bills.

I understand your concern. Most of the questions I get are about 401(k) plans and with the economy being what it is being worried makes a ton of sense.
But I can never advocate making a short-term decision when looking at a long-term problem. I'll use myself as an example: I started my first 401(k) maxing out but quickly figured out I had a cash flow problem. What I should have done is what you did: rolling back my contribution just enough to still get the company match, but no less. What I did was pull completely out for about a year or so. that was a mistake.

Why? Because when you're young, what matters is not how much money you're putting in, it's how many shares you accumulate. The principle of compound interest is at work, meaning you accumulate enough shares on a regular basis, and over the long term those shares increase in value and give you a better return on your investment.

Right now (and I've said this before), the market is on sale. Everything is cheap. And while that doesn't make every stock or mutual fund a good investment, it does mean that accumulating shares of good stocks or funds is easier to do. So even though you're worried about the economy, to an extent the turmoil in the markets works in your favor. But that's only if you keep accumulating shares by contributing to your 401(k).

There are a few questions you should ask yourself. How much money would really go back into your paycheck after taxes if you stop making your 3 percent contribution? I don't know how much you make, but it's entirely possible that the tax benefit you lose by not contributing would negate any after-tax cash you'd get back. Would it really be worth it if you'd have to pay an extra, say $75 in taxes if all you were getting back after tax was $125 each pay? Find a 401(k) calculator and do the math before you act.

Also, I know you want to live and enjoy your youth but are you sure the ONLY place you could cut back is your 401(k)? If you really want a few new pairs of shoes, why not try and shift some other discretionary spending. Cut back on cable, maybe? Fewer meals out? Not as much long-distance driving on weekends? Whatever it is, there's usually some discretionary money that you can shift around to make a difference.

Last, do you have any credit card debt? If you do, think of the money that's going to pay off whatever you bought as your discretionary spending right now. If you're still paying off some shoes you bought last year (with interest), does it really make sense to take money from your nascent nest egg to have fun with. Think of your credit card balance as the bill coming due for fun you've already had but didn't pay for.