Don't touch your 401K yet.




Stephen asks if it would be a good idea to take out a loan against a 401(k) to pay off credit card debt. Dave advises against this, and during the conversation he learns that credit card debt isn't the real problem.
QUESTION: Stephen and his wife have about $12,000 in credit card debt, and they owe another $80,000 in student loans. Their kids’ education also runs about $1,000 a month, all on a combined yearly income of $100,000. He calls in to ask Dave if it’s acceptable to take a loan against your 401(k) to clean up the credit card mess. Dave doesn’t like the idea, and he explains why it’s a bad plan.
ANSWER: I don’t recommend that you do that, and here’s why. Your 401(k) should be invested in good mutual funds. When you take the money out in a loan, they pull it out of the mutual funds and you’re paying yourself a five percent interest rate instead of receiving what the mutual funds are paying, which should be 10, 12, 15 percent — whatever the market is doing. So you’re missing out on good rates of return.
But that’s not the biggest reason. The biggest reason is when you leave your company, and you will leave — whether it’s when you get a better job, get fired, or you die — that loan is considered an early withdrawal. If you don’t repay it within 60 days, you get hammered with a 10 percent penalty plus your tax rate. It can end up being half of the account.
No, I wouldn’t do that. The good news is that it’s only $12,000. I would tighten up the budget, and do something to increase your income — have a big garage sale, and sell so much stuff the kids think they’re next. The $80,000 in student loans is what’s killing you, not the credit card debt. You need to work a serious plan to get out of debt, and that always includes living on a tight budget.

Source: https://www.daveramsey.com/askdave/debt/dont-touch-the-401k?

Comments

Post a Comment

Popular posts from this blog

How Smart People Plan Accordingly For Their Retirement.

Do you know anyone who is considering retirement and do they have a healthy nest egg? How did they achieve their nest egg? They are not financially smart like Warren Buffett or hold the secret solution to retiring comfortably. They did not play the Russian roulette with the stock market or watch it every single day. People who are ready for retirement constantly make contribution towards their investment and saving plans for every month. They are very responsible with their spending and intentional savers in their daily lives. They use the help of professional financial advisor to achieve their goals. The Secret of Saving for Retirement Successfully are listed below: 1). Use your biggest wealth building tool to your financial advantage. 2). They keep their expenses low. 3). They invest 15% of their income. 4).  They do not fund any expenses without referring to their budget. 5).  They meet routinely with their investing professional. 6).  Have a plan and update their plan mon
Read more

The Mistakes We Make everyday About Money.

Here are some of the mistakes we make everyday: It can be cars that we cannot afford, personal loans or house mortgage causing people to file bankruptcy. Here are some money myths that will keep you broke and not compete in today's society. So, why are people still making money mistakes and not changing their ways. Most people are still mismanaging their money and still blaming the society for not setting a law. Please, do not buy into the society popular money myths. Here are some myths that are bad for your money. 1). Debt is a tool. 2). Car payments are a way of life. 3). Loaning money to your family show you care. 4). You cannot go to college without student loans. 5). You can make enough money to catch-up on your retirement. 6). You already understand spending your money, so you do not need a budget. 
Read more

Money and Relationship.

Do you think that most couples argument is about money? The recent survey shows that 63% of couples think that their significant other overspends in many ways, according to TD bank. Money is the leading cause of fight and divorce in North America. Those little fights can cause serious marital problems as time goes on based on the National Council on Family Relations. It is extremely important to figure out how to argue with your significant other in a productive way. In addition, to cultivate a solid marriage and relationship, it is essential for couples to take time to work on their relationship and money. Marriage brings people from different backgrounds and different life experiences together, if they can succeed they need to work on their money and relationship daily. Whether couples realize it or not, money issues can cause havoc in relationship and lead to a fail marriage. The Seven Area of Conflict in Marriages: 1). Separate but equal. 2). Lifestyles. 3). Personality Diff
Read more