Do you find yourself paying for the sins of holidays past? Although most people have good intentions for staying out of debt, life often gets in the way with unexpected expenses or events that seem to occur when cash flow is at its lowest.
What if you don’t have the money and can’t get the money from any other source to make the “debt monster” go away? Is there a reasonable solution to get you out of this mess?
Maybe, but first a warning – what I am going to talk about will have your dyed-in-the-wool traditional financial planners and accountants up in arms shouting accusations of betrayal and robbery.
So what is this controversial solution? Borrowing money from your 401(k).
Your employer’s 401(k) may allow you to take out a personal loan and if so, at an interest rate far lower than your credit cards. Plus, the loan payments will be deducted each pay period with the loan being completely paid off within a maximum period of five years.
The loan is not disclosed to any credit bureau so, there is no impact on your credit score or income to debt ratio. In fact, paying off your credit card debt and leaving your credit cards open with zero balance can result in a major increase in your credit score.
Also, keep in mind that although you will be charged interest on the loan, which currently averages around 6 percent, you are actually paying yourself since the payment plus interest goes right back into your 401(k) account – how cool is that?!
Lets take a look at an example of how Ted and Karen used a 401(k) loan to get themselves back on their feet:
First, Ted and Karen verified that a personal loan was available from Ted’s 401(k) plan. Then, they reviewed the terms and gathered the paperwork to fill out.
After, they contacted each creditor and explained they were having trouble making their payments and asked if a reduced payoff was available. Three of the five creditors agreed to a discount for payment in full within two weeks.
The good news – just a small amount of effort saved them $3,722.00.
Ted then requested his 401(k) loan and they immediately paid off all five creditors. Karen said, “That night we had the most peaceful sleep in the last three years.”
The moral of the story?
Don’t allow traditional financial experts to scare you away from taking a loan from your 401(k) plan. When you have a plan, tapping into your 401(k) and investing in your own peace of mind just makes sense.
With this caveat – when all is said and done you must recognize the difference between what is good debt (a mortgage) and bad debt (impulse shopping), and exercise self-discipline so that you don’t repeat the sins of the past and resurrect the debt monster again.
TELLS US WHAT YOU THINK
How do you plan to stay on budget and out of debt this holiday season?
*The information provided by Personal Success Planning in this blog is general advice only, and has been prepared without taking into account individual objectives, financial situations or other personal needs.