Using retirement funds to pay off consumer debt
| This post over at The Simple Dollar left my head spinning.... and not just because I don't agree with the author's advice, but I was amazed at how close it was to my own situation. The woman in question is 28 (like me!), and has $25k in credit card debt (compared to my $33k). She also has a nice chunk of money in her 401(k), amounting to about $30k. I've also got a considerable sum in my own 401(k). I was shocked at Trent's advice to cash out the 401(k) to pay off the credit card debt. That hardly seems like a win-win solution to me. After all, how do you learn to live below your means if you continue to propagate the cycle of spending. Trent used the woman's age as a reason it would be okay to use retirement funds, but I say that the woman's age is the primary reason NOT to. She's young, she doesn't mention any reason why she can't increase her income or cut her expenses. Using retirement funds now would just continue to set her back and she'll be in a pattern that will be difficult to break. She mentions in her question that she still gets hit with finance charges, which makes me think that she has not yet learned how to manage credit. Mr. Savvy and I are not only not going to use any of our retirement funds to bail us out of the credit card hole we've dug, but we are going to continue our full contributions ($13,000/year pre-tax and $8,000/year post-tax), while we do it. If anyone ever needs an inspiring story of someone who overcame a LOT of credit card debt in a short amount of time, the story of IBJanky of FatWallet fame is a classic. Labels: $37k debt payoff |
posted by savvy at 6/20/2007 06:51:00 PM
Comments on "Using retirement funds to pay off consumer debt"
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Hazzard said ... (10:38 PM) :
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Anonymous said ... (5:59 AM) :
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savvy said ... (6:01 AM) :
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mapgirl said ... (9:36 AM) :
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Rogers Place said ... (12:10 PM) :
post a commentI completely agree with you. I think she should keep the 401K money where it is and make some sacrifices to pay back the CC debt. If she just cashes out the 401K I think she'll just repeat the cycle over and over. She needs to take care of her "future" self as well as get her "current" self out of the credit card mess she's in today. By going through the long process of committing to her goal and succeeding like NCN did, she'll transform her view of money in the progress AND still have her investments for the future. Sure, she'll pay a little more interest on the debt, but it's probably the best financial lesson she'll ever experience.
I think you and her are completely different. You own investment real estate, have clear financial goals and only have the credit card debt because of the appraisal issue. The debt is also vastly different because you used the money to invest in an appreciating asset. I'd guess she used hers for consumer junk.
Isn't the pretax limit $15,000?
Anonymous- yes, but my employer imposes their own limit for reasons they've never told me.
I think Trent pulled the post. I wanted to read more details.
Yes, it's nuts to pull out money from a 401k plan to pay debt, but at the same time was she considering filing for bankruptcy, etc? Sometimes rational decisions aren't always the best ones. For instance, I pulled out all the money in a 401k plan when I was about 25 so that I could leave high priced San Francisco and move to Baltimore and make a career change. Yes it sucked to do it, but I had no money at all and was floundering in a really expensive city. Ultimately, it was a good decision, but I had few choices back then. I would have been better off saving an emergency fund and using that first, but que sera sera. Hindsight is 20-20.
Some losses you may take in the 401 most likely will offset the Interest your going to pay on $30,000 dollars Credit card debt. With average interest anywhere from 15 to 23 percent, taking some 401 money (probably much lower returns around 5%)to reduce the credit card principal, will both save you tons of money while paying off debt.