[Money-woes]

I've been a long standing member, but due to the sensitivity of this question, I've opted to go underground.

I am struggling with some financial issues, like many people are these days. The problem is that some poor choices the last couple of years has caused my debt to balloon.

I am at a point because of some circumstances out of my control, that I am not making enough to pay down the debt. I'm barely treading water . I am able to make the minimum but that is A small mistake on my part could send me spiraling down. I am still able to pay rent and I can afford to buy the basic staples of life but this problem could upset the whole delicate balance.

I have 30k in credit card debt, and I'm thinking of taking 15k out of my 401k to pay off one of the credit cards. That will free up 300 dollars a month and give me the breathing room I need. Also I will be able to dedicate a larger amount to the other credit card. I will also adjust my W4 withholding to help mitigate the withdrawal penalty. Of course this presupposes that I rip one credit card up and not add on debt.

My significant other thinks thats a huge mistake. We have about 30 more years before we retire and the way the market is going, I'm losing money anyways. I see no other alternatives. I am not bankrupt, and I don't want to go down that path. So my options are increase my income or pay down my debt.

Advice, is there other alternatives?

Yes, I'll be seeking financial help from a professional but until then I wanted to see if this idea was idiotic or not

[blackstar]

If your in debt it is much smarter to pay off that debt first before worrying about retirement. After paying off that debt you can use those $300 that your using as payments for your cc debt and pay that into your 401k. If you're only doing minimum payments for your debt you'll end up paying those monthly $300 for the rest of your life.

[Paco500]

I'm no expert, but I can't imagine why you should not cash in the 401k. If you have more than 15k I'd get it out as well. I can't imagine you are earning more in interest than you are paying on you CC. I can understand emotionally not wanting to wipe out your savings, but it makes no logical sense not to.

[Lateralus]

Agreed.

Getting out of debt should be your main priority. If you have to do it at the expense of your 401k, then so be it. Especially when you're 30 years from your planned retirement; you've got quite a bit of 401k breathing room.

The best path to retirement is the one that involves the least amount of financial responsibility. The end goal for everybody should be to have as little of their income earmarked for bills/debt as possible.

[Tiresias]

Originally Posted by Money-woes 

I have 30k in credit card debt, and I'm thinking of taking 15k out of my 401k to pay off one of the credit cards.

Huh? Money woes? Am I missing something? You have $401,000! Minus $30,000 leaves you $380,000 to build upon using the money you are no longer amortizing on your credit card debt.

[SpaceMonkey]

Originally Posted by Tiresias 

Huh? Money woes? Am I missing something? You have $401,000! Minus $30,000 leaves you $380,000 to build upon using the money you are no longer amortizing on your credit card debt.

I can't tell if you are being serious, but: 401(k) - Wikipedia, the free encyclopedia

[Tiresias]

Oh. Where I hail from they call that superannuation.

[Chuckit]

It's probably a good idea. The interest on every dollar of your debt is most likely costing you more than the interest on every dollar your savings is gaining you, so you'd ultimately be able to gain more money by eliminating the debt than by increasing your savings. That's just a mathematical fact. But don't forget to take into account the taxes for withdrawing from your 401(k) — I'm not a financial pro, but that could wind up changing the math a bit.

[Cold Warrior]

Seconded. Dump the debt first, but most importantly take aggressive action to eliminate and reduce expenses and new debt.

[turtle777]

Get same financial advice from Dave Ramsey.

He has some excellent resources for people who want to become debt free.

-t

[Andy8]

Cut up your credit cards once the debit is cleared from them.

[turtle777]

Originally Posted by Andy8 

Cut up your credit cards once the debit is cleared from them.

Yes and no.

Learn to control you spendings behavior and your consumerist urges.

Then keep the CC for important things, like traveling, getting extra warranty or internet purchases.

-t

[Railroader]

All good advice here. Even turtle777's advice of wise credit use. The only thing I would add is don't use a credit card unless there is money in your savings to pay it off. Use credit cards only for extra warranties or in places where it would benefit you or protect you.

It's amazing what debt burdens can do to people. You are losing a ton of money, and more importantly security, by paying for debt. And also putting your future at risk by damaging your credit rating. Let me tell you, the relief of living debt free is hard to explain.

[James L]

I agree with the above advice... I would keep ONE credit card for emergencies, benefits, and for your credit rating. I would CANCEL the paid off one.

Throw $300 per month at your other card and you will get it paid off within 4 or 5 years.

Putting money into savings when you are buried by cc debt and may be struggling to buy groceries makes no sense to me. Get back to even footing first, then worry about getting ahead.

[Railroader]

Originally Posted by James L 

Putting money into savings when you are buried by cc debt and may be struggling to buy groceries makes no sense to me. Get back to even footing first, then worry about getting ahead.

It's amazing how many people do not understand this.

[Money-woes]

Originally Posted by James L 

Throw $300 per month at your other card and you will get it paid off within 4 or 5 years.

Try 10+ plus years and that is if nothing else ever gets charged. I can see not buying anything of material worth for a couple of years, but its difficult to fathom living like a monk for the next 10 years

Thank you all for the advice, it has echoed my sentiment that I need to dip into the future funds to put myself on a better situation.

[Eug]

Perhaps you can find a non-profit debt management advice location around you. I agree that cashing in a portion of your 401k is probably advisable, but you may also be able to consolidate some of your credit card into lower interest loans from a different lender.

It would also pay to start keeping VERY close track of how much money you are spending, and on what. I'm not saying this is you, but I know of people who can barely make ends meet, yet they have no problem going out and sticking a PS3s or whatever on their credit cards. Other people may eat out 3 times a week, and spend $15 per person each time. For two people, that adds up to $350-400 per month. In contrast, you can make yourselves a nice meal for two for $5-10. That's a savings of $250/month right there.

[Dork.]

Make sure you fully understand the tax ramifications of taking money out of your 401k. You will owe income taxes on that money, plus a 10% penalty. The addition to your taxable income may push you into a higher tax bracket. I'm also pretty sure that whenever you withdraw the money from any retirement planning account, they will withhold 20% for taxes, no matter what your actual tax liability is. (A rollover, when you have money sent money from one account to a new account without ever touching it, is not subject to this.)

This doesn't necessarily mean that taking money out of the 401k is a bad idea, especially if you are using it to pay off high-interest credit card debt, but it's a bit more complex than just increasing your withholding to compensate for the taxes. You may want to plan out what your taxes will be for this year, and make sure withdrawing that amount doesn't push you into a new bracket.

[turtle777]

Well, seems like Dave Ramsey disagrees with cashing out the 401k.

Cash Out 401k to Pay Debt?

It's hard to give advice w/o knowing your details (budget, spendings, etc...)

-t

[Mrjinglesusa]

With that much CC debt and you struggling to make ends meet, I would suggest consulting with one of those debt consultants (you know, the ones who help you get out debt). The good ones will negotiate with the CC companies to lower your interest rate as well as your monthly payments.

The most important thing for you right now is to pay off that debt. If that means liquidating your savings and 401K to pay them off, so be it. It will be impossible for you to pay off your debt in your lifetime if you are only making the minimum monthly payments because you are only paying interest, if that.

With regard to what David Ramsey says in the above article, he also says, and I quote, "Live on less for one year, get on a written budget, and you can have it all paid off in less than a year." I don't know what alternate universe he is living in, but I don't see any way someone can "live on less" and pay off $35,000 in debt in "less than a year". That's almost $3,000/month in debt that needs to be paid. Even assuming someone brings in $5,000/month after taxes, that would only leave $2,000/month for mortgage/rent, bills (phone, electric, etc.), food, gas, etc. No way that's going to happen.

[turtle777]

Originally Posted by Mrjinglesusa 

With regard to what David Ramsey says in the above article, he also says, and I quote, "Live on less for one year, get on a written budget, and you can have it all paid off in less than a year." I don't know what alternate universe he is living in, but I don't see any way someone can "live on less" and pay off $35,000 in debt in "less than a year".

The person in that article made $ 150k / year.
I would think that saving $ 35,000 should be possible in that situation. For that person, that might feel like living completely on the edge, but that's all relative.

However, since we don't know a lot of details about the OP's financial situation, it's hard to say how feasible or impossible paying off that debt would be within a year.

-t

[Eug]

$150000 per year is $12500 per month.

Assuming a single person, 28% federal tax rate, and 10% state tax rate, that's 38% tax, or $7750 remaining after tax. With that, I could see some people saving $24000-36000 in a year, as that would leave $4750 - $5750 remaining per month for various expenses. I'll admit though it's unlikely for most (since people often tend to "grow" too easily into their paycheck).

However, I highly suspect the original poster isn't anywhere close to that situation. So, I'll reiterate: If he's asking for advice here, he may as well ask one of those debt counsellors.

[PB2K]

What will happen after you talked to debt counsellors in the US ? will you absolutely live on the minimum for 3 years (no property more than 5000€ ) and they will take care of the rest, or will you pay for the rest of your life? Because that's how it can ultimately work out here.

[turtle777]

Originally Posted by PB2K 

What will happen after you talked to debt counsellors in the US ? will you absolutely live on the minimum for 3 years (no property more than 5000€ ) and they will take care of the rest, or will you pay for the rest of your life? Because that's how it can ultimately work out here.

No, it doesn't work like that.

A debt counsellor is just giving you advice and support, they are not taking over charge of your finances. YOU still decide how much you want to cut back your spending, and how much you want to pay off.

Money will only be taken from you if some creditor sues you and wins in court, Then they can garnish your wages and possibly seize control of your assets.

-t