Q.  I have some high-interest-rate credit card balances that will take some time to pay off. Should I take a 401k loan to pay them off sooner and at a lower interest rate that is paid to myself?

 

Other than to prevent a foreclosure or bankruptcy filing, I’m not a fan of 401k loans. An unpaid 401k loan has to be repaid upon leaving your job or you will face a tax bill with penalties (in most cases)!  You may not be planning on leaving your job anytime soon, but history has shown us that no job is really secure, especially in today’s environment.  The last thing you need to deal with if you’re facing a work layoff is a tax bill.

I am not opposed to reducing or eliminating (temporarily) any additional 401k contributions to allow more dollars to go toward debt elimination.  If paying off the debt will take more than 18 to 24 months, you may want to lower any new 401k contributions just to the level needed to fully capture the employer match.  Yes, you will lose some time contributing to your retirement.  Just remember that you can raise your contributions to an even higher level once the debts have been paid in full!

Another option is to shop for other credit card offers that offer 0% (or very low rate) promotional periods.  A few things to remember, though:

  • You can’t borrow your way out of debt!  This step is great for potentially reducing interest rates, but don’t fool yourself into thinking you’ve improved your financial situation.  This option will allow more of your payment dollars to go to principal instead of interest.
  • Be aware that many 0% promotional rates do assess a one-time fee based on the amount transferred.  It still may be worth doing, just be sure to take the fee into consideration.
  • If you’re worried that you may spend more because you have more available credit, DO NOT OPEN A NEW ACCOUNT!  Here’s where you need to be very honest with yourself.  It’s not a sign of weakness to admit you have a habit of overspending!  Acknowledging it is the key to keeping it under control!

The “secret” to paying off debt is to stay focused and intense.  This may mean cutting back on spending, getting a second job or part-time gig, or becoming an eBay power seller of stuff sitting in your house and attic!  Remember: this isn’t a permanent way of life – it’s a time of temporary pain for long-term gain!

 

John is a CPA and personal finance coach.  Email your questions to john@60minutefinance.com.

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 If you need confidential financial coaching for your particular situation, please contact John for a no-cost, no-obligation discussion of your needs.

 

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