What would you do???

iVillage Member
Registered: 01-25-2005
What would you do???
4
Thu, 06-02-2005 - 10:45am

HI,

I have about $10,000 in credit card debt, it has been the same since we moved to our house 4.5 years ago, really hasn't budged much, once i get something paid off something happens and we need to charge something else. My dh who was an alcoholic (whole other story) quit drinking about 7 months ago and FINALLY if we were debt free i know we wouldn't charge anything else b/c he isn't spending 500 dollars on beer anymore a month and acting irresponsible about money. I WANT TO BE DEBT FREE SO BAD!!!! We have a budget now and i quit my part time job last week to be home with our children this summer b/c they are little. My question is this, i have $8200 in 401k, which i should just rollover since i quit, but if i take the lump cash sum it would be enough to pay off TWO of our credit cards and boy would that feel good and take a huge weight off my mind. My thinking is that it is not enough to retire on, when my dd is a little bigger i plan to finish my teaching degree so i will get retirement through that, but they will be taking approximately $2400 of that money from me in taxes and penalties. I was told they would take 20% off the top, and then i would get a lump sum, then i would have to pay another 10% at tax time, and then depending on my tax bracket i might owe additional taxes (which won't be a very high tax bracket since i quit working) So i thought i would get the money and put $1000 in savings to pay the tax man the 10% later and then use the rest to pay off two cards. What would you do?????????? TIA.

iVillage Member
Registered: 03-27-2003
Thu, 06-02-2005 - 10:59am

Good for you, writing a budget and deciding to become debt-free! That's the biggest step, and I'm proud of you.

As for cashing out your 401k, it's definitely not what I would do. There are a number of reasons I think it's not the best choice. For one thing, by the time you pay penalties and taxes, you've probably paid more than you would in interest on the balance you'll pay off with the remainder. Hardly seems worth it from that standpoint.

I know it feels good to see a chunk of debt go away quickly, and I sympathize with that. But there's another really good reason not to do it that way: a huge percentage of people who pay off debt with a lump sum (whether from the sale of a house, a consolidation loan, an inheritance, or some of the "windfall") end up right back in debt again very quickly. Why? I believe it's because by paying it off suddenly, they don't have a chance to learn the skills and habits that are necessary for long-term financial security.

Instead, give yourself a chance to get used to your new budget (go, you!), find out what works and what doesn't, and get in the habit of continuing to save money as well. Although $8,000 isn't enough to retire on now, it's a great start, and you'll be glad of it in a few years when you're debt free AND have a significant savings. And you'll also have an arsenal of habits and skills for continuing to save lots of money for your goals (believe me, the teacher retirement system is great, but you don't want to rely on it for all your long-term goals).

Paying off debt is often a slow, painful process at first, but it builds up and by the time you've been doing it for a while, it picks up pace and you'll be amazed at how wealthy you feel when you've taken the time and effort to do it a bit at a time as you're able.

Stick around these boards for great advice and terrific support. We're glad you're here. :)

Blessings,

Heather

iVillage Member
Registered: 03-30-2003
Thu, 06-02-2005 - 11:43am

I agree with Heather,

You should NOT cash out your 401K. Taxes and penalties will reduce your net to maybe half of your total amount and that will NOT pay all of your debt. In addition, leave your 401K to work for you with stil earning money for your retirement. Cashing out now will result in you losing all your previous years contributions, something you can never rebuild.

I think its wonderful your husband is taking responsibilites for his actions and changing his ways. The money he spent on alcohol, put that toward your card debets. Ask him to help you trim the "fat" from your budget. eating out, cable tv, cell phones, etc. Becareful not to deprive yourself , though, because you'll end up racking up the debt again.

10K may seem a lot to you at this time but it really isn't. Chip at the debt and you'll be very proud of yourself later for doing so. By doing all this, you're also teaching your children the value of money and not fall into consumer debt when they get older.

Good luck in your tasks.

iVillage Member
Registered: 02-14-2004
Sat, 06-04-2005 - 12:20pm
I would not cash out the retirement fund. You would lose a lot of that money saved. Of course its not enough to retire on, but over the years it will build considerably. You can check that out on bankrate.com's retirement calculator. I would try to pay it off independently, and you will be successfull.
iVillage Member
Registered: 05-09-2005
Sat, 06-04-2005 - 1:10pm
Hi,
Don't take the money out. Here's a couple of thoughts from a teacher. I went through the same thought process -- desperate to get away from the 40,000.00 we owe. Here's what I found out. #1 the interest and penalties will kill you #2 if you are really desperate because you have super high interest rates on your cards and can't make a dent in them, consider a loan against the 401 K. The interest rate is usually not more than 5% and YOU ARE PAYING THE INTEREST TO YOURSELF, so it's not such a terrrible waste of interest $$$. #3 later on, when you are planning to retire from teaching, you may want to buy extra years of service which will greatly increase your definite retirement monthly pay. THEN you can roll over your 401K to buy the extra years WITH NO PENALTIES!!!!!!
Megan