Dear Dave: My wife and I make $100,000 a year combined, and we have about $12,000 in credit card debt. We also owe another $80,000 in student loans, and our kids’ private school education costs $1,000 a month. Is it okay for me to take a loan against my 401(k), which is invested in mutual funds, to clean up the credit card bills?
Dear Stephen: I wouldn’t do that. If your 401(k) is invested in good mutual funds, it’s likely you’ll miss out on some pretty good rates of return. But that’s not the biggest reason this is a bad idea.
The biggest reason is that when you leave your company — and you will leave, whether it’s because you get a better job, you get fired, or you die — that loan is considered an early withdrawal. If you don’t repay it within 60 days, you’ll get hammered with a 10 percent penalty plus your tax rate. You could easily lose almost half of what’s in the account.
If you want to start paying off debt, my advice is to start doing things to generate extra income and begin living on a tight budget. Grab an extra, part-time job for a while, too, and have a big garage sale. Sell so much stuff the kids think they’re next! You need to work a serious debt-busting plan.
The good news is it’s only $12,000. Knocking out the credit card debt won’t be so bad, and with your income, the kids’ school isn’t unreasonable. It’s the $80,000 in student loans that’s killing you. Scrape together and save every penny you can find each month, and put that toward paying off the credit card debt. Then, roll that amount over, add anything else you can come up with, and attack those student loans.
You can do it, Stephen!
Dear Dave: I’m 19 years old, and I just got kicked out of the house after wrecking my dad’s truck. I’ve got a job making $12 an hour working about 40 hours a week, and I’m currently living with a friend at his apartment. I have a goal of going to college, and I’d like to get out of my friend’s place as soon as possible. Do you have any advice some someone just starting out?
Dear Brandon: That’s a tough situation, buddy. I’m sorry things worked out that way with your dad. You’re going to need more money than what’s coming in, so let’s prioritize things.
Your first goal is food, and your second goal is to help your friend a little bit with the rent. After that, you need to save up and get a car as quickly as possible. I’m talking about a total beater — a $500 to $1,000, mechanically sound, basic, ugly car. They’re hard to find, but they are out there.
After you’ve done this and gotten some stability in your life, start thinking about saving for a little bit better car. This may mean picking up an extra part-time job for a while. Then comes piling up some cash so you can get your own place. Let’s get all this out of the way before you start thinking about school. Right now you barely have a place to live, and you’ve got nothing to drive.
Listen, I love your motivation and the fact that you have dreams and a goal to better yourself. You’ve been through a lot, but let’s get the basics taken care of first, introduce a little stability into your life, and then we can start coming up with a plan for school and a long-term future. Good luck, Brandon!
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