401k: Cash out to pay credit card debt?

[jmjj215]

We've all heard this before but it bears repeating again. All of this BT stuff just reenforces the fact that the initial problems that caused the hardship in the first place need to be addressed.

OP: are you actively budgeting?

[neatdesign]

Originally Posted by jmjj215

All of this BT stuff just reenforces the fact that the initial problems that caused the hardship in the first place need to be addressed.

What caused the hardship in the first place was the fact that I had to go on short-term disability leave at a time when I was the sole income earner. This normally wouldn't have been a problem except that Aetna bungled my disability claim not once but TWICE. As a result, we went for 2 months with no income at all, and 2 more months earning less than half of what I'd been earning, before Aetna finally got its head out of its arse and retroactively paid my disability coverage. By then we were in deep. At the same time we already had some credit card debt that we were trying to pay off, which didn't help.

We had savings, but not enough. We did the best we could with the resources we had available to us.

Yes, we are working on a budget. I wouldn't say it's set in stone -- it's a work-in-progress. Right now we're focusing on keeping as much of our debt at 0% as we can (which is where the BTs come in) and earning more money to help pay it off more quickly. I've just applied for a new job and have an interview next week. (Fingers crossed!) We have several things we're going to sell on eBay which should bring in several hundred dollars. Every bit of found money goes directly into savings. We're doing the best we can.

~ Jenney

[Ima saver]

Good for you!! You need to build that savings up to about 6 months worth of living expenses. We are keeping our fingers crossed for your new job!!

[Tree0164]

Jenney
In case you didn't see Oprah did the Debt Diet last week which had some good advice. I would check it out. http://www.oprah.com Very motivational.

You are on the right steps by coming here and taking active steps to get out of credit card debt.

[neatdesign]

I'm starting to feel like a broken record, but I have to say it: THANK YOU to everyone for your encouragement. I cannot express how much it means to me, it genuinely gives me hope.

Teresa, thanks for mentioning Oprah's Debt Diet. I work the afternoon/evening shift now so I don't get to watch Oprah anymore, nor do I have a way to record TV shows. Although I've never see the Debt Diet series, I have seen other individual Oprah episodes about conquering debt and have found those very motivating and informational. I remember the first time I heard of the "latte factor" was when I saw David Bach on Oprah. It was an eye-opener! I'm definitely going to look into this...

~ Jenney

[neatdesign]

Ok -- I have a follow-up question re our situation, now that it's been decided that the 401k will not be cashed out.

I know this issue has been discussed numerous times on this site, but I'm hoping I could get more feedback specific to our situation, now that you all know the basics of where we stand right now and how it got that way. My question?

How much of our savings should be used to help pay down our debt?

We currently have about $3600 in our ING savings account (4.25% APY). Of that amount, $1520 is already earmarked to pay down balances on three of our credit cards. $1020 of the $1520 will completely pay off two cards before their 0% APRs expire in October; the other $500 will cut the last card's balance by one-third.

That means we'll have $2000 left over. I am VERY torn about what to do -- or not do -- with this $2000.

Part of the reason we got in as deep as we did was because we didn't have enough savings built up to deal with a long gap of little-to-no income. Not only was my disability itself unexpected, but more importantly the 7-month delay in getting my disability coverage payments was completely unexpected. We went through what savings we did have fairly quickly. Had it only been delayed by a month or two, we'd be much, much better off right now than we are. But that's not what happened.

Naturally I am worried that if something else comes up like this again, if we use our savings to pay down our credit card debt then we run the risk of getting in even deeper. But at the same time, I don't like having all this debt hovering over us. I just want it GONE!

So... What do you think? I should say that I think totally liquidating our savings would be a bad idea, but am wondering if we should use some of the remaining $2000 to pay towards debt. If so, how much? Another $500? $1000? How much should we keep as a safety buffer?

Any feedback would, as usual, be greatly appreciated.

~ Jenney

[MairGrif]

Originally Posted by neatdesign

Ok -- I have a follow-up question re our situation, now that it's been decided that the 401k will not be cashed out.


We currently have about $3600 in our ING savings account (4.25% APY). Of that amount, $1520 is already earmarked to pay down balances on three of our credit cards. $1020 of the $1520 will completely pay off two cards before their 0% APRs expire in October; the other $500 will cut the last card's balance by one-third.

That means we'll have $2000 left over. I am VERY torn about what to do -- or not do -- with this $2000.

Part of the reason we got in as deep as we did was because we didn't have enough savings built up to deal with a long gap of little-to-no income. Not only was my disability itself unexpected, but more importantly the 7-month delay in getting my disability coverage payments was completely unexpected. We went through what savings we did have fairly quickly. Had it only been delayed by a month or two, we'd be much, much better off right now than we are. But that's not what happened.

Naturally I am worried that if something else comes up like this again, if we use our savings to pay down our credit card debt then we run the risk of getting in even deeper. But at the same time, I don't like having all this debt hovering over us. I just want it GONE!

So... What do you think? I should say that I think totally liquidating our savings would be a bad idea, but am wondering if we should use some of the remaining $2000 to pay towards debt. If so, how much? Another $500? $1000? How much should we keep as a safety buffer?

Any feedback would, as usual, be greatly appreciated.

~ Jenney

Jenny,

I'd suggest leaving it there as an emergency fund. Leave it there, and forget about it. Don't use it to buy something unless it is an absolute need - to keep the roof over your heads, or food in your mouths. You experienced what can happen when you don't have an emergency fund, or a sufficient one. The debt will go away little by little. With that, you will learn good habits to keep out of debt in the future. I'd say make adding to the emergency fund as important as wiping out the debt. Just my $.02.

[Ima saver]

I agree with marianne. I would put the whole $2000 in your emergency fund. You can pay extra on the one credit card you have left.

[wyett3]

Let me point you to the Crown Financial Ministries site @ http://www.crown.org/. One of the things they should tell you is to save up a $1000 mini- rainy day fund and then go attacking your smallest debt first, and when that one's paid off go after the next, etc. When you hit the mortgage save up to a 2 month's rainy day fund. You'll snowball your way to being debt free!

[Tree0164]

Jennie
I would leave it there. $2000 should hopefully cover any emergencies that you should have.

[vsjhoc]

Originally Posted by neatdesign

Although I know Roth IRA contributions are taxable upfront ...

You've got plenty of good advice here so I won't repeat it.

Just wanted to make sure you're clear regarding "taxable". Your Roth IRA contributions are paid with "after tax" dollars, meaning you deposit money from your take home pay after you have paid Federal, state, etc. taxes on it. This is in contrast with a 401(k) which you pay for with "before tax" dollars, which lowers the amount of your income that you have to pay income tax on.

So if you get $100 in income, and put nothing in a 401(k), you pay taxes on $100. If you get $100 in income, and put $10 in a 401(lk), you pay taxes on $90. In either situation, you can choose to spend some of your net income (take home pay) on a Roth IRA.

Sorry to repeat this if you already understood it, and I won't go into the fascinating details of what is taxable when you withdraw funds ...

Good luck!