Using 401k funds to pay off debt?

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glocke12
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Using 401k funds to pay off debt?

Post by glocke12 » Tue Jan 07, 2020 4:50 am

I know..not recommended but I don't think I have many options.

52 years old, roughly 400k in in my 401k plan, 30k in consumer debt. I'm in the process of selling off a lot of things I've purchased over the years to help tackle this but that's going to take some time. I've already stopped 401k contributions so I can devote almost all my resources to this.

I'm looking into the possibility of a home equity loan to help with this but that may not happen.

This shouldn't have happened. I make 125k a year and Im not even sure how I racked up that much debt.

macheta
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Re: Using 401k funds to pay off debt?

Post by macheta » Tue Jan 07, 2020 4:57 am

You should not use the 401k. Why can’t you cut your expenses and use some of your $125k pay? You should be able to knock it down soon with your pay.

hachiko
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Re: Using 401k funds to pay off debt?

Post by hachiko » Tue Jan 07, 2020 5:08 am

As long as you will pay off the 401k loan faster than you would pay off the debt, I don't think there's anything wrong with a 401k loan. I'm assuming the interest rate on the debt is at or above about 15%.

Olemiss540
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Re: Using 401k funds to pay off debt?

Post by Olemiss540 » Tue Jan 07, 2020 7:49 am

Dave Ramsey can help.

Don't take the easy way out because that path will do nothing to improve the root cause and thus you will certainly find yourself in 30k credit card debt AND 30k 401k debt.

Work through your debts smallest to largest. Seen this happen to many relatives and the ones that change their life always take the path towards cutting expenses and slogging through debt with every available dollar until they are free. You can do it in a year easy with your salary. Have a nicish car you could sell? Could you pickup a part time job to erase this quickly?
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.

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glocke12
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Re: Using 401k funds to pay off debt?

Post by glocke12 » Tue Jan 07, 2020 8:00 am

It wouldn’t be a loan. It would be an withdrawal.

I already have one one loan out on my 401k I took out last year to deal with some house expenses. That’s at 9k right now. If I can hold out to mid March I’ll get my annual bonus and can pay that loan off with that and use a new loan to pay this crap off.

Like I said I’m already going though the process of selling off a lot of things I have to help tackle this but that’s going to take awhile.

It sucks. I’m terrible with money and I know I screwed up but even with my salary being what it is I’m not sure it’s fixable within a year.

I drive a ten year old 4runner in Decent shape but can’t sell that. I need reliable transportation like that.

Are there any legitimate professionals that can help me wade through this.

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JoeRetire
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Re: Using 401k funds to pay off debt?

Post by JoeRetire » Tue Jan 07, 2020 8:05 am

glocke12 wrote:
Tue Jan 07, 2020 4:50 am
I know..not recommended but I don't think I have many options.
Have you tried Rice and Beans? How about Beans and Rice?

If you make $125k per year, what are your necessary expenses and how much does that leave to pay down debt?
It's the end of the world as we know it. | It's the end of the world as we know it. | It's the end of the world as we know it. | And I feel fine.

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JoeRetire
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Re: Using 401k funds to pay off debt?

Post by JoeRetire » Tue Jan 07, 2020 8:07 am

glocke12 wrote:
Tue Jan 07, 2020 8:00 am
It wouldn’t be a loan. It would be an withdrawal.
With a 10% penalty.

Not good.

Have you considered getting a second job?
It's the end of the world as we know it. | It's the end of the world as we know it. | It's the end of the world as we know it. | And I feel fine.

Topic Author
glocke12
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Re: Using 401k funds to pay off debt?

Post by glocke12 » Tue Jan 07, 2020 8:15 am

JoeRetire wrote:
Tue Jan 07, 2020 8:07 am
glocke12 wrote:
Tue Jan 07, 2020 8:00 am
It wouldn’t be a loan. It would be an withdrawal.
With a 10% penalty.

Not good.

Have you considered getting a second job?
10% penalty sucks but I’m sure I’m paying that yearly in interest.

Raiding the 401k is really a last resort as it’s been doing well and I hate to abuse it like that.

I’m a salaried employee and typically work 10-12 hour days and often have to log in from home on top of that. It doesn’t leave time for a second job.

I do some gigs in a band a few times a month that brings in a couple of hundred bucks which is basically gas money fir the month.

Not even sure how this happened. I think I just get bored lonely and end up buying crap I don’t need

Doug E. Dee
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Re: Using 401k funds to pay off debt?

Post by Doug E. Dee » Tue Jan 07, 2020 8:53 am

I would absolutely not cash in the 401k.

With your income, paying down the debt should be completely doable. You need a monthly budget and need to stick to it.

Perhaps you can post your monthly income and expenses here for review?

kjvmartin
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Re: Using 401k funds to pay off debt?

Post by kjvmartin » Tue Jan 07, 2020 8:58 am

Never ever ever touch a retirement account early.

It may seem smart, it’s not.

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MrBobcat
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Re: Using 401k funds to pay off debt?

Post by MrBobcat » Tue Jan 07, 2020 9:09 am

No as others have said do not touch the 401(k) to deal with this.

There must also be something missing in your overall picture because you shouldn't have that much difficulty handling $30k on a $125k salary. Too much house?

aerosurfer
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Re: Using 401k funds to pay off debt?

Post by aerosurfer » Tue Jan 07, 2020 9:15 am

Doug E. Dee wrote:
Tue Jan 07, 2020 8:53 am
I would absolutely not cash in the 401k.

With your income, paying down the debt should be completely doable. You need a monthly budget and need to stick to it.

Perhaps you can post your monthly income and expenses here for review?
Seriously,

Put the expenses in writing, even without our help I bet you will find some things you can trim or eliminate that can have instant impact. At least it can help you pinpoint why you are meeting the stereotype of the average American, not Bogleheads, and how you can begin to change your approach.

Get everything listed out and get a sobering and easy to follow plan together to both get out of debt and save into the black. That way you have a defined goal and end result.

At your age and salary, why do you only have 400k saved? That’s even more indicative of how deep your problems are rooted and the priorities you have set this far. Based on your spending, you are likely way behind where you want to be in retirement.

rkhusky
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Re: Using 401k funds to pay off debt?

Post by rkhusky » Tue Jan 07, 2020 9:21 am

If you get an employer match on 401k contributions, I would contribute at least enough to get that. I doubt the interest on your debt is enough to warrant missing out on a 1:1 or even a 2:1 match.

sjt
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Re: Using 401k funds to pay off debt?

Post by sjt » Tue Jan 07, 2020 9:21 am

10% penalty sucks but I’m sure I’m paying that yearly in interest.
I think you would also be taxed on that, so if you're in the 22% bracket, you would pay taxes, penalty, and any state taxes. I think you would end up draining a lot from your retirement account - as others have said, not a good idea.

You have a great income. I see no reason why you can't knock this out in 1-2 years. You might need to cut back a bit - live frugally for a while
"The one who covets is the poorer man, | For he would have that which he never can; | But he who doesn't have and doesn't crave | Is rich, though you may hold him but a knave." - Wife of Bath tale

mamboking
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Re: Using 401k funds to pay off debt?

Post by mamboking » Tue Jan 07, 2020 9:24 am

I've been there. I took a withdrawal, with penalty, to pay off some loans. It didn't help as much as I thought it would and somedays I kick myself for doing it. The problem was that I hadn't fixed what got me there in the first place.

I then found YNAB, www.youneedabudget.com, and it changed everything. I ended up doing another withdrawal, this time using SEPP, which allowed me to avoid the penalty. And now that I have a good handle on my budget, I'm not creeping back up in debt.

Good luck. I know it sucks but remember, it's not as bad as it feels.
Kevin

FreemanB
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Re: Using 401k funds to pay off debt?

Post by FreemanB » Tue Jan 07, 2020 9:29 am

First, have you really gotten your spending under control? You've said repeatedly you don't really know how this happened, so I think your first step should be to really examine how you got here. Otherwise, you may end up just treating symptoms instead of the real problem. As for fixing the debt problem, how is the debt structured? You've mentioned $30K in debt, and I think an additional $9k loan from your 401k. How is that $30k debt structured. Is it one credit card, multiple cards, loans, and if so, what are the interest rates? That may determine the best approach to tackling the debt. I agree that tackling $30k in a year would probably not be likely, even on a $125k salary.(After taxes, that's a huge chunk of your take-home pay) But you should be able to handle it within 2 years, particularly if the March bonus is enough to pay off the $9k loan. It depends on the debt structure, but I suspect that the bonus could be put to better use against the other debt first, instead of the 401k loan.

Oh, and you mentioned stopping your 401k contributions entirely. If you have an employer match on contributions, always contribute enough to maximize that, even if it takes longer to pay off your debt.

chevca
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Re: Using 401k funds to pay off debt?

Post by chevca » Tue Jan 07, 2020 10:14 am

Agree with the above. Step one.... figure out why you have $30k or more in debt and don't know how that happened. Step two... stop doing those things. Step three... pay down the debt you have now. If it takes more than a year, well, it takes more than a year.

HawkeyePierce
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Re: Using 401k funds to pay off debt?

Post by HawkeyePierce » Tue Jan 07, 2020 10:25 am

Step 1: List out every debt, its balance, interest rate and monthly payment.

Step 2: List out every expense. I mean every expense. Go back through credit card and bank statements if necessary. Figure out where all your money is going. Separate those out into expenses that were necessary and those which were discretionary. Once you know where your money is going, you can start figuring out where you can make changes.

I second the recommendation for YNAB—I use it religiously—but even doing this in a spreadsheet or with pen and paper will get the ball rolling. You need to understand where your money is going—that's the first step to sending it somewhere more productive.

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goingup
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Re: Using 401k funds to pay off debt?

Post by goingup » Tue Jan 07, 2020 10:26 am

glocke12 wrote:
Tue Jan 07, 2020 8:15 am
Raiding the 401k is really a last resort as it’s been doing well and I hate to abuse it like that.
I wouldn't do it. It's a slippery slope. You're going to need that money for retirement. Keep it untouchable. Find another way to kill the debt.

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Brianmcg321
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Re: Using 401k funds to pay off debt?

Post by Brianmcg321 » Tue Jan 07, 2020 10:30 am

Absolutely terrible idea.

Get on a budget and pay off the debt with your current income.

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jibantik
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Re: Using 401k funds to pay off debt?

Post by jibantik » Tue Jan 07, 2020 10:36 am

Can someone explain to me why a 401k loan is a bad option here or in general. I understand a permanent 401k withdrawal is a bad idea, but why is a loan a bad idea? You don't lose space in your 401k, as your loan payments get put back in, you are only out of the market for a short time... why is it so bad? Is it a behavioral thing or what?

cshell2
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Re: Using 401k funds to pay off debt?

Post by cshell2 » Tue Jan 07, 2020 10:40 am

Does your job even allow a non-hardship withdrawal? My company does not. A loan is the only option.

I also second (or third or fourth), posting a budget. With 125K in income, it's hard to imagine not being able to handle 30K of debt unless you're in a HCOL area. I am also a YNAB user (12 years now) and it has helped me do amazing things with a low income.

chevca
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Re: Using 401k funds to pay off debt?

Post by chevca » Tue Jan 07, 2020 10:50 am

jibantik wrote:
Tue Jan 07, 2020 10:36 am
Can someone explain to me why a 401k loan is a bad option here or in general. I understand a permanent 401k withdrawal is a bad idea, but why is a loan a bad idea? You don't lose space in your 401k, as your loan payments get put back in, you are only out of the market for a short time... why is it so bad? Is it a behavioral thing or what?
Here... the OP already has a 401k loan out, so.... obviously the behavioral thing is the concern for the OP.

In general... it's all situational. It can make sense in some circumstances. But, often folks might be doing it to buy a toy and then the worry is it becomes a habit and they keep dipping into it. It's best to avoid it, IMO.

sailaway
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Re: Using 401k funds to pay off debt?

Post by sailaway » Tue Jan 07, 2020 10:51 am

Figure out where your money is going and start to make some changes.

Get a roommate or two, depending on the size of your house.

Leave your 401k alone. With only 10-15 years to go to retirement, you should get back to contributing, even.

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Brianmcg321
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Re: Using 401k funds to pay off debt?

Post by Brianmcg321 » Tue Jan 07, 2020 11:06 am

jibantik wrote:
Tue Jan 07, 2020 10:36 am
Can someone explain to me why a 401k loan is a bad option here or in general. I understand a permanent 401k withdrawal is a bad idea, but why is a loan a bad idea? You don't lose space in your 401k, as your loan payments get put back in, you are only out of the market for a short time... why is it so bad? Is it a behavioral thing or what?
401k loans are terrible for the following:
1. Your money is now out of the market getting a lower return.
2. Guess what happens if you get laid off or leave. The loan is due and you have a very short amount of time to pay it back or you owe the taxes and penalty on it.
3. It doesn't solve the behavioral problem the OP has of making over 100k and living paycheck to paycheck.
Rules to investing: | 1. Don't lose money. | 2. Don't forget rule number 1.

Olemiss540
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Re: Using 401k funds to pay off debt?

Post by Olemiss540 » Tue Jan 07, 2020 11:09 am

jibantik wrote:
Tue Jan 07, 2020 10:36 am
Can someone explain to me why a 401k loan is a bad option here or in general. I understand a permanent 401k withdrawal is a bad idea, but why is a loan a bad idea? You don't lose space in your 401k, as your loan payments get put back in, you are only out of the market for a short time... why is it so bad? Is it a behavioral thing or what?
Because consumer debt is a behavioral issue, NOT a mathematical issue. You can not solve a behavioral failure through a mathematical solution as it doesnt address the root cause of the issue thus you will end up much worse off after stealing from your future self to gratify your current self.

Repairing a behavioral issue takes behavior modification and many times professional counseling or support. This is why Dave Ramsey is so successful by putting a program together that (while maybe not a mathematically perfect solution) deals with the behavioral issues while providing hope for and continual successes during the journey towards self improvement.
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.

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glocke12
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Re: Using 401k funds to pay off debt?

Post by glocke12 » Wed Jan 08, 2020 3:57 am

Olemiss540 wrote:
Tue Jan 07, 2020 11:09 am

Because consumer debt is a behavioral issue, NOT a mathematical issue. You can not solve a behavioral failure through a mathematical solution as it doesnt address the root cause of the issue thus you will end up much worse off after stealing from your future self to gratify your current self.

Repairing a behavioral issue takes behavior modification and many times professional counseling or support. This is why Dave Ramsey is so successful by putting a program together that (while maybe not a mathematically perfect solution) deals with the behavioral issues while providing hope for and continual successes during the journey towards self improvement.

I completely recognize I have behavioral issues related to my spending. I thought I had it under control but obviously I don't. I'll have to look more into D.R. I guess.

I'll work over the weekend to post some kind of budget here..

To answer the question why I only have 400k in my 401k plan now, I started late in the Professional workforce, really didn't get my career started until the age of 30, and even than was working as a contractor in this industry for awhile.

hachiko
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Re: Using 401k funds to pay off debt?

Post by hachiko » Wed Jan 08, 2020 2:18 pm

glocke12 wrote:
Tue Jan 07, 2020 8:00 am
It wouldn’t be a loan. It would be an withdrawal.

I already have one one loan out on my 401k I took out last year to deal with some house expenses. That’s at 9k right now. If I can hold out to mid March I’ll get my annual bonus and can pay that loan off with that and use a new loan to pay this crap off.

Like I said I’m already going though the process of selling off a lot of things I have to help tackle this but that’s going to take awhile.

It sucks. I’m terrible with money and I know I screwed up but even with my salary being what it is I’m not sure it’s fixable within a year.

I drive a ten year old 4runner in Decent shape but can’t sell that. I need reliable transportation like that.

Are there any legitimate professionals that can help me wade through this.
Based on this I rescind my advice, and do not recommend a withdrawal. Loans can be a good tool (you just have to understand the consequences). Withdrawals subject to penalty (if they're even allowed) are almost never the right move.

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Ketawa
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Re: Using 401k funds to pay off debt?

Post by Ketawa » Wed Jan 08, 2020 3:25 pm

Brianmcg321 wrote:
Tue Jan 07, 2020 11:06 am
jibantik wrote:
Tue Jan 07, 2020 10:36 am
Can someone explain to me why a 401k loan is a bad option here or in general. I understand a permanent 401k withdrawal is a bad idea, but why is a loan a bad idea? You don't lose space in your 401k, as your loan payments get put back in, you are only out of the market for a short time... why is it so bad? Is it a behavioral thing or what?
401k loans are terrible for the following:
1. Your money is now out of the market getting a lower return.
2. Guess what happens if you get laid off or leave. The loan is due and you have a very short amount of time to pay it back or you owe the taxes and penalty on it.
3. It doesn't solve the behavioral problem the OP has of making over 100k and living paycheck to paycheck.
Too broad of a generalization.

1. Selling fixed income holdings in a 401k and paying off higher interest debt is simple arbitrage. Similar scenario, my girlfriend is buying a condo, and can lower her mortgage interest rate by 0.25% if she puts down 25% instead of 20%. The extra 5% down payment is effectively making a guaranteed 7.6% on the margin (interest saved on the down payment itself, plus 0.25% interest saved on the mortgage balance). She can only afford the extra 5% down payment if she takes a 401k loan. She maxes her 401k contributions every year and will probably be able pay back the 401k loan within 1 or 2 years. I once took a 401k loan because I wanted to use 5% FDIC guaranteed interest from prepaid cards for my fixed income allocation.

2. Not necessarily the case with recent changes to the law. Things are a lot more flexible now. Besides, the OP's consumer debt is an even bigger problem in the event of long-term unemployment.

3. This is probably true for the OP.

gotlucky
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Re: Using 401k funds to pay off debt?

Post by gotlucky » Wed Jan 08, 2020 5:35 pm

Take a deep breath.

If it's $30k of consumer debt, you are paying around $20/day in interest at 25%. That's a lot but it's not going to make or break you financially.

What will financially "kill" you is you don't figure what happened and address it. Because if you pay off this $30k with a 401k withdrawal, you will likely be in a worse spot a year from now. Meaning if you don't figure out your issues, you will continue to buy crap (your words) and your 401k will be $60k smaller than it should have been.

You should embrace this $30k debt as a challenge that you need to tackle and learn about yourself along the way. You don't need a professional to help you. You need to figure out if it's worth it to you. You have to earn an extra $10-15K a year pretax just to pay the interest on that debt? I hated working, so just thinking that I would work an hour a day just to pay the interest on that debt would have me eating beans and rice until I had it paid off.

Don't beat yourself up. For many people, the pleasure they get from spending exceeds the anxiety they get from the cost. However, based on what you've written, it sounds like you want to change. It's up to you and only you. Good luck.

hachiko
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Re: Using 401k funds to pay off debt?

Post by hachiko » Wed Jan 08, 2020 6:12 pm

jibantik wrote:
Tue Jan 07, 2020 10:36 am
Can someone explain to me why a 401k loan is a bad option here or in general. I understand a permanent 401k withdrawal is a bad idea, but why is a loan a bad idea? You don't lose space in your 401k, as your loan payments get put back in, you are only out of the market for a short time... why is it so bad? Is it a behavioral thing or what?
Aside from the behaviorial, there is a cost. It's not always bad because sometimes the cost of the loan is less than the cost of not taking the loan.

There are several costs, but some of the big ones:
The interest you pay on the loan (back into the 401k) is with after tax funds. Generally, when you withdraw that interest to you paid in, it's included in income (taxable) which means you're paying tax on it twice. But on a loan with a 5% interest rate, even at a 50% tax rate, that's only a cost of 2.5% (approximately). If you're paying off a credit card at 22%, there's a good amount of spread.
As someone else said, if you lose your job, you may be required to pay the amount back within a short period of time, or it's treated as an early withdrawal.
Most administrators charge a fee for the loan.

I don't really buy the argument about losing the gains in the 401k from taking out the loan. It is a true statement, but you could also benefit if the market goes down. If this argument holds, you would never pull funds out of the market to pay for other expenses. But I would imagine most people here would suggest pulling funds out of a taxable account to pay off a credit card at 22%. The same argument should hold for taking a loan from a 401k. Also, if the goal is to get as much money into your 401k as possible, there is a point at which a 401k loan would make sense. It's basically a fixed gain for the account.

rustymutt
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Re: Using 401k funds to pay off debt?

Post by rustymutt » Wed Jan 08, 2020 6:16 pm

Ok, it's not recommended. Now, that said, I did it back in the 70s, and again in the 2000s to pay off loans, and paid myself back with interest, as I recall. Better to pay myself, than a bankers Heck it was my money, why not put it to use, as long as you understand the importance of paying the loan from the 401k off. Worked great for me. Not having house payment was huge. We had a huge party, with wine and cheese, smoked ribs. I'm hungry. Discipline is critical in any plan, if it's to work. It work will for me. Good luck yourself
Even educators need education. And some can be hard headed to the point of needing time out.

olliema
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Re: Using 401k funds to pay off debt?

Post by olliema » Wed Jan 08, 2020 7:04 pm

I am mostly a lurker but want weigh in because this resonates with me deeply.

The consumer debt shell game is one that many of us know too well.

I humbly suggest showing you can live 120 days cash flow positive against a monthly budget to prove you have shifted your behaviors if you haven't yet done so. Make sure you + your SO can emotionally support you. Once you have proven this, think about how to use leverage.

Without making this about me, I learned is you absolutely need to change the behavior and at your core, your way of life and way you think about things. If you pull levers like 401k cash outs and selling stuff on craigslist - but do not change literally who you are and your values, you'll be back in the hole worse than before. I've done it for 20 years. Time is not your friend - a 50K haircut on a 400K portfolio at 52 is bad. Real bad.

17 months ago I started using monopoly money in little envelopes to track my weekly budget and logging every transaction in GnuCash each morning, and tracked my cash flow to $0 against an iron-clad monthly budget. I did grocery shopping with a paper list and my cell phone calculator. I stopped frivolous spending even on things we cherish like vacations. I pocketed my cash bonus to build a proper emergency reserve. I pay my credit card bill two times a week and take the 2% cash back. I choose to live in a little flat until I have my debt paid down.

17 months later:
Consumer debt (including house) down 25% from $130K to $104K
Cash reserve (incl emergency fund) up 31% from from $19K to $30K
Retirement contributions made $40.5K (max 401k plus empl match)
I got off the envelopes after a few months and use a spreadsheet

The levers I pulled were HELOC and 401k loan - my only two sources of debt - they were the right choice for me only because I had the discipline to close the loop and a steady job.

Good luck and PM if you want to talk more 1x1

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Bernard
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Re: Using 401k funds to pay off debt?

Post by Bernard » Wed Jan 08, 2020 9:49 pm

Many people, and many of us, myself included, once walked in your shoes. I too had no idea at the end of the month were all my money went. Sure, I bought clothes, had my daily Starbucks, DirecTV, went out for lunch and occasionally for dinner. The good food I bought at Whole Foods. Don't we all do that?

You do not have a financial problem. You have a behavioral one. You wanting to change that is the most important step in the right direction. But you can't make informed decisions if you are a slave of debt and if you don't know where your money is going. You need to keep track of every penny you spend. Every. Single. Penny. I've been doing that since 2009. I have a self-made Excel list and if you contact me, I''ll gladly give it to you. I write down every single expense. It sounds crazy, but it's rather easy. Write down every penny and at the end of the day, enter it into the spreadsheet. You'll be flabbergasted to see how much you spend on what, and you'll get a kick out of reducing that month by month. You can knock out your debt in less time you may think. Shop at 99 cent stores. Don't buy new clothing. Pack your lunch. Brew your coffee at work. No Starbucks, no eating out. Is it easy? Yes! And you can do it. And a few years from now, you not only will have no debt, but a lot more money in your war chest.

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