Debt, 401(K) and Advice

[LRZ]

Hello everyone,

I have been looking for a Christian based forum to get some financial advice. I have asked questions on other forums, but wanted to get the perspective of like minded Christians. Hopefully you will be able to offer some advice.

I'm 34, who unfortunately had very foolish spending habits and fairly recently realized the importance of saving for retirement. So in the last 2 years or so, I've managed to put up about $10,400 in a simple IRA. I went through a divorce a few years back, and unfortunately was left with a lot of debt that my ex incurred. She was supposed to clear them, but she didn't, so have had to take care of them myself. Because of this, my credit is pretty bad, mid 600's. I'm working for a company who, beginning Jan 1, 2014, switched our simple IRA to a 401(K). I've increased my contributions to 9% of my income (less than $50K/yr base salary) to go towards my 401(K), and increase by 1% every year until it hits 12%. My company matches up to 3%, plus another 3% of my income per year as part of a Safe Harbor plan. In addition to all this, I also have a life insurance with Northwestern Mutual. I'm not completely familiar with the lingo, but I have immediate death benefit, and a separate one where I can take money out of after I turn 65 (obviously I pay a lot more for such whole life insurance).

All that being said, here's my debt! I have credit card debt of about $4500 with interest rate at 26%, a store card debt of $2200 with the interest rate at 22%, and a pay-day loan of $1000, whose interest rate I'm scared to even mention. I took the advice of one of the responses from another forum to write down all my expenses. I forgot to mention this in that forum, but I also have a "vacation ownership," aka, timeshare loan, with a balance of about $6200. On the flip side, I don't have a car payment, I paid off my college loans about 2 years ago, take public transportation so as to save on gas money, and have made my living arrangements to where I'm paying about $300/month. While this may not seem like a lot to some, it is hard for me because by the time everything is said and done, I have only about $200/month (and still have to cover food, gas, cell phone bill etc).

So what I need your advice/opinions is on whether I should cash in my 401(K) to pay this debt off, or at least part of it. Yes, I have made horrible mistakes, but I'm trying to do better. God has blessed me BEYOND my needs, and it is my poor habits that has me in the bind that I'm in. My 10% for tithes come out FIRST every paycheck, and I give another $240 in missions giving. These are non-negotiable's to me, and I write these checks out the night before I get paid. I'm very tired of paying and not even making a dent in my debt. I'm also getting married in September of next year. My fiance is very aware of my financial situation, so we've opted for just a simple ceremony (no reception etc), asked friends to help decorate, and use a personal friend as photographer to cut costs. God has ALWAYS provided me with more than I need. I'm fully aware of the penalties of cashing in on my 401(K), but piggy-ing back to my previous statement, I know God will undertake for all my needs, even at retirement age. I work for a great private company, and am quite secure with my job, so I know the "investment" opportunities will always be there. What bothers me so much is that all the debt I've incurred I could be using them to support other missions. I was in such a situation not long ago, and my heart just cringed because  I didn't have money to give. Obviously I want to be debt free, but that incident is really what sparked this thought process.

Your advice and opinion is much appreciated.

Thank you.

[Jaime]

Immediately get online and sign up for Dave Ramsey's Financial Peace classes in your area. That's the best advise I could give you.

[Helen]

Please see an accountant or financial advisor and don't ask for advice from strangers on the internet.  You need a professional to guide you through this.

[LRZ]

Jaime: Thank you. I looked into the classes and I found a few close to me. Just got to find the right day to do it, but definitely looking into it.

Helen: I agree, financial advice like this should be through a professional accountant, and frankly I have yet to come across one that would advice to cash in (unless I'm at the brink of bankruptcy). But my purpose of asking on here was more for the spiritual perspective of things. As I mentioned, the thought of even cashing in on my 401(k) came about due to a situation of not having extra money to give for missions, and the guilt of my poor spending habits just overwhelmed me. I will be talking to my Pastor as well, but wanted to get some input from others as well. Thank you for your input; advice well received. 

[Catholica]

My advice would be to reduce your retirement savings to the minimum that will get you the match, and use the extra money to pay down your loans, starting with the highest interest rate loan first.  Having revolving debt that draining you at a higher rate than the stock market is growing is a net loss to you in overall funds.  Once your high interest loans are paid off, then increase your 401k again. 

You have to consider that every dollar you earn is part of your net worth and will affect your retirement.  If you invest that dollar for a year and earn %10 in a good stock market (which is not going to continue), you will have $1.10 in your 401k, but you will still have (for example) lost 22 cents by not paying down the 22% loan, and have a net earnings of $0.88.  But if you pay off a $1 of loan, you effectively avoid paying the $1.22 of loan + interest but miss out on the 0.10 of gain from investments, making the comparative value $1.12.

This may be fuzzy math and I'm sure I'm not being exactly accurate, but it is prudent with regard to retirement to pay off high interest debt as soon as possible, as it will pay off later.  And once you are out of debt and taking in more than you spend, you will be better able to increase your contribution to your 401k without jeopardizing your financial stability.

Using your 401k might be a good idea in this case, but keep in mind that you can only borrow half of it, and it is really just another loan that you will have to repay.  And you typically only have five years to repay that loan, and if you leave your job you will only have 60 days to repay it.  If you don't repay it in 60 days, then IRS will charge you back taxes plus a 10% penalty for withdrawing before the age of 59 1/2.  AND depending on your employer you may not be allowed to make contributions into your 401k while you have a loan from it.  So you may miss out on the company match.

[LRZ]

Catholica: Had to read your response a few times (and calculate the math), but makes total sense. One of the responses I got elsewhere posed the question of why I would take a loan (i.e., my 401(k)) with an interest/penalty of 35%, to pay off a loan with a lower interest of 26%? But your explanation of net loss due to a revolving high interest debt versus the slower growth of the stock market gives me the insight to look at it from a different perspective. Thank you.
We actually just switched to a different company to handle our investments, going from a simple IRA to a 401(k), and was told that I could actually cash part of the money like I was leaving my job (so not even a loan, just a payout). So if I go this route, I might not even have to repay it, which would be awesome. Thank you again.

[Red Baker]

Immediately get online and sign up for Dave Ramsey's Financial Peace classes in your area. That's the best advise I could give you.

Agree with Jaime~and in the meantime, get two jobs and leave your savings alone, the penalty would not be worth it, plus, you still have to repaid.  You need to get expert advice from more than one person, but Dave Ramsey is a very proven person, and well known, but, I would not only use him~ In a multitude counselors there is safety!  Proverbs in our bibles the very best book, on financial success~Solomon is much better than Ramsey.   Catholica advice is very wise concerning reducing your retirement savings until debt is paid off, then start again increasing 401k.   

RB

[Jaime]

The thing about Dave Ramsey is that he will give you the same advice your grandfather would give you, but he keeps his teeth in. 

Live like no one else now (2 jobs, rice and beans etc), so that later you can live like no one else!

[Red Baker]

The thing about Dave Ramsey is that he will give you the same advice your grandfather would give you, but he keeps his teeth in. 

Live like no one else now (2 jobs, rice and beans etc), so that later you can live like no one else!

LOL!  Jaime, I see that your Aggies came back and beat the Wall Street boys!

[Jaime]

Well, I'm a Texas Tech Red Raider. They snuck up on Arizona State.

[tpm]

Catholica is spot on.  Reduce your 401k contributions to the minimum required to get your whole company match until you are our of debt.

There are two ways to get money out of a 401(k).  You can take a distribution, which is taxable + 10% penalty, or take a loan.  I would get a loan for a much as I could (typically 50%).  For you that's about $5k which would make a good dent in your revolving debt.  Paying back that $5k (to yourself with a very reasonable interest rate) over 4 years should be easy given what you will be saving in interest charges.

[Texas Conservative]

Catholica is spot on.  Reduce your 401k contributions to the minimum required to get your whole company match until you are our of debt.

There are two ways to get money out of a 401(k).  You can take a distribution, which is taxable + 10% penalty, or take a loan.  I would get a loan for a much as I could (typically 50%).  For you that's about $5k which would make a good dent in your revolving debt.  Paying back that $5k (to yourself with a very reasonable interest rate) over 4 years should be easy given what you will be saving in interest charges.

Absolutely right.  I would take out a 401k loan and get rid of the high interest rate loans.  Then slightly lower your contributions (if necessary) and pay back yourself (401k) with a loan around 5%.

[Mere Nick]

Go with what Helen said and talk to a pro where you can lay everything out.  And I mean everything.  I'm a CPA/CFP and believe such specific advice as you are seeking should be sought from someone in person over a desk instead of online.  It is not unusual for someone seeking piecemeal advice to not give 100% of the information needed to make a completely rational decision. 

That said, it is generally a horrible idea to withdraw from your 401k.  If you owe money, make sure you are not paying a high interest rate when a lower rate is available, like others are saying.  I'd expect a pro, who you should see, will tell you the same thing.

There should be a free or low cost credit counseling service in your area.  Here is a leading one in the Asheville area.  There may be one similar to that where you live.  If there is a large congregation where you live you might check some of them out to see if they have a ministry for such a thing since, being a large congregation, there is probably more than a few with a similar need that needs addressed.


   

[Mere Nick]

As for Dave Ramsey, some of his ideas are good.  Some are horrible.

http://whitecoatinvestor.com/how-dave-ramsey-may-be-leading-you-astray/This basically sums up a couple of my gripes.  He's generally good at advice on how to not live beyond your means, but he mistakenly assumes all debt is bad.  Some debt is good.  It depends.  Also, his debt snowball advice says to pay off the smaller debt first.  It makes more sense to pay the higher rate debt, first.



edited to fix link

[Jaime]

Which ones are horrible, so we will know.

[Mere Nick]

I modified my post right above yours.  He's a pretty good debt man.  Not great, but pretty good.  And he does a good public service by talking about it.  But he is not giving good advice, imo, if he is advocating folks strive to pay off, say, the 3.875% fixed rate 30 year mortgage that we have.  Would you invest your money for 30 years at 3.875%?  That is essentially what you are doing if you pay off early.  Cutting up credit cards that can't be paid off every month, he is spot on.  Fixing the underlying problem that got you in that position, spot on.  Not all debt is bad.  Not all is good.

As for investing advice, I think he is over his head, other than getting a tax free 18% or guaranteed return by paying down and/or off credit card debt.

He's like the relative that has three excellent pieces of advice but insists on giving you seven.

[Jaime]

I haven't gotten past the first three.

[Mere Nick]

I haven't gotten past the first three.

Good.  Stop right there, Jaime.  He gives pretty decent debt advice but pretty lousy investment advice.