“Borrowing from myself is better than paying a bank”: I have a financial dilemma: should I take a loan from my 401K or a bank?

Hi Money Minder,

So, the market doesn’t seem too promising, right? I mean, I’m not expecting more than 9.5% return, which could even be lower. And honestly, I’d rather pay myself back some interest than lining some bank’s pockets. I’m thinking of borrowing around 2.5% of my 401K balance, which isn’t a huge amount to start with, you know?

Hey, thanks for all the advice guys. I get it, borrowing from a 401K isn’t the smartest move. But hey, here’s my follow-up question – what do you think is better, borrowing a small amount from my 401K or hitting up a bank?

Wow, I really appreciate all your input. Despite what everyone says, I’m kind of leaning towards taking out a $30K loan from my 401K. Just to give you the full picture, I have $1.5M in retirement savings and a total net worth of around $2.5M. So, I feel like borrowing $30K won’t make much of a difference. I’ve got no credit card debt, all my cars are paid off, and I have a decent income from a job I’ve had for over 25 years. I’ve been dreaming of owning a boat for ages, and I think it’s time to finally make it happen. Life’s too short to keep waiting, right? Sometimes you just gotta go for it, even if it’s not the perfect plan. Good luck to everyone here. Cheers!!

Farewell, Captain Boatsman

Response from THE MONEY MINDER:

"Hello There,"

While I understand your perspective on borrowing from your 401K versus a bank, it’s important to consider the potential long-term implications of taking a loan from your retirement account. While it may seem like a small percentage of your overall balance, any amount borrowed will impact your future earnings potential and retirement savings growth. It’s crucial to weigh the benefits of immediate access to funds against the potential loss of compound interest and growth in your retirement savings.

In this situation, borrowing from a bank may actually be a more practical and financially sound choice. While you will be paying interest to the bank, you avoid the risk of depleting your retirement savings and missing out on potential market returns. Additionally, borrowing from a bank can help you build a positive credit history, which may be beneficial for future financial endeavors.

Considering your strong financial position with significant retirement savings and a high net worth, it’s understandable that you may feel comfortable taking a loan from your 401K for a personal purchase like a boat. However, it’s important to carefully weigh the short-term gratification of the purchase against the long-term impact on your financial stability and retirement goals.

Ultimately, the decision is yours to make. Just ensure that you fully understand the implications of borrowing from your 401K versus a bank, and consider consulting with a financial advisor to explore all available options and make an informed decision. Remember, the choices we make today impact our financial well-being tomorrow.

Best of luck with your decision, and remember to always prioritize your long-term financial security. Cheers!

Farewell from THE MONEY MINDER.