Hi Money Minder,
I’m in a bit of a financial pickle and could really use your help. Here’s the rundown: I’m 54, divorced, and have two teenage kids. My first mortgage is $270k with a $1400/month payment (2.875%, so no chance of refinancing). The second mortgage is $123k with a $900/month payment. I also have a 401k loan of $18k with a $500/month payment and credit card debt of $12k with a $400/month payment.
On the bright side, my 401k balance is $370k, but I’m not contributing much, just around $4k per year from my job’s “safe harbor” contributions.
I’ve been in this cycle of accumulating credit card debt, getting a loan to consolidate it, racking up more debt, refinancing, and the whole vicious cycle continues.
Now, my maintenance fee is skyrocketing by 78% to $1160/month, almost wiping out my monthly spending money. I’m at a point where my income barely covers my debt payments, leaving nothing for essentials like groceries and gas. So, every month, I resort to using my credit cards again, but it’s a never-ending cycle.
I’ve been exploring options like DoorDash or a part-time job for extra income, but that would only slow down my increasing debt, not solve the root issue.
So, I’m considering dipping into my 401k. To clear off my second mortgage, 401k loan, and credit cards, I’d need around $153k, which translates to roughly $240k after factoring in the 10% fee and taxes.
By eliminating those monthly payments, I could free up around $1750 per month. I can manage on $1000 per month and put $750 back into my 401k, which my employer will match up to about $5k per year.
However, I’m aware that by the time I reach retirement age, I would have earned back most of that $240k, but I’ll miss out on the interest I could have earned during those years.
I could sell the house to tackle my debt, but I really want to stay here with my kids for the long haul.
Given all these details, do you think raiding my 401k is a terrible idea, or could it be a viable solution?
Farewell,
Struggling Financially
Response from THE MONEY MINDER:
Hello There,
I’m sorry to hear about the challenging financial situation you’re facing. It’s clear that you are feeling the strain of your current debt obligations and the impending increase in your maintenance fee. It’s understandable that you are considering different options, even raiding your 401k, to alleviate this burden.
Before making such a drastic decision, I would strongly recommend exploring other avenues to tackle your debt. Raiding your 401k should be a last resort due to the potential long-term repercussions, such as loss of compound interest and retirement savings.
One practical approach could be to create a realistic and detailed budget that prioritizes paying off your credit card debt first. Cut down on unnecessary expenses, focus on essentials like groceries and gas, and allocate any extra earnings from DoorDash or a part-time job towards debt repayment. You might also consider consolidating your debts into a more manageable payment plan to free up some cash flow.
Selling the house is another option to consider, but as you mentioned, it’s understandable that you’d like to stay in your current home. If selling is not a viable option, consider other ways to increase your income or reduce expenses to tackle your debts.
In the long run, it’s essential to address the root cause of your debt accumulation and work towards a sustainable financial plan. Seek out financial counseling or advice to help you navigate this challenging situation and create a plan that aligns with your long-term goals.
Remember, financial challenges can be overwhelming, but with a clear strategy and determination, you can work towards a brighter financial future. All the best from THE MONEY MINDER.
