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    Tulsa's situation

    Hey all, really great forum you have here. A lot of smart people freely sharing their knowledge, I like it a lot after lurking for a bit.

    I'm interested to get everyones take on my situation. I'm recently divorced and still trying to get my bearings I think. I have no CC or car or school debt. I took out a 38k 401k loan a month before splitting with my ex and owe about 35k on it still (5 yr loan). I used most of that money to buy my current place, a decent doublewide on 2+ acres. I'd like to build here a few years down the road. After selling the house we had and letting the dust settle a bit I have 18k in cash. Even with the 35k loan on my 401k I have about 80k in that 401k and another small IRA.

    My salary is just over 64k. For the last 6yrs I've been maxing out my 401k, 15.5k this year. That means each check I'm putting about 680 to 401k, 330 to 401k loan and just under 1000 take home. I'm leaving pretty cheap I think.
    under 100 electric (so far, elec heat and water & everything else)
    82 phone + internet
    50 car ins
    30 prop taxes
    25 water
    15 trash
    10 prepaid cell

    gas and food are the wildcards. With gas prices all over it's tough to pin down, but 100-200/mo i figure. I get to work from home 2 or 3 days a week. Food is a weakness I'v always eaten out a lot and can't cook my way out of a paper bag. It's odd because I put myself thru college working in the cafeteria. I have been trying to eat healthier. Lots of fresh fruit & veggies, beans, rice etc. My vehicles are an 85 4runner and 86 toyota pickup. I've learned how to do pretty much any repair either would need off the net.

    I guess I feel like I've put myself in a spot where it's possible for me to start piling some money up. But what direction should I take? I'm not quite sure if I should hate my 401k loan and go after it with a vengance or just ignore it and let it disappear over the next 4.5yrs. I should be able to save at least 1000 of the 2k i bring home each month although i have made a couple expensive promises for 2009 like 1500 for step sons final semester of tuition and a trip to alaska to fish with my dad & sister. I'm going to need a riding lawmower and other stuff like that.

    So what would you do in my shoes? It would be nice to not have the 401k loan, but at least I'm paying myself, and worst case I'd pay the 10% penalty easily from savings then figure out the taxes when the time came. I've toyed with the idea of lowering/stopping reg 401k contributions to pay the whole thing off in 14 months, but bottom line is the money all ends up in there either way. Oh, and I figure by taking the loan when I did, and moving the rest of my 401k funds to MM soon after I avoided at least 5k in losses due to the meltdown, probably 10k. Anyway, I've really said a lot. I know there are some really smart folks here so I'm hoping for some ideas I haven't considered.
    Last edited by tulsa_sr5; 12-28-2008, 07:10 PM. Reason: typo

    #2
    I would reduce your investing to only the employers match and payoff debt will all other funds. After debts are paid you need to build your EF to 3 to 6 months expenses, then resume investing.

    Comment


      #3
      maat- the only debt is the 401k loan, so the blanket dave ramsey approach may not apply.

      My take is if you can pay off the 401k loan quickly- do it. Quick is 6-12 months. Otherwise keep it for duration and concentrate on most other financial issues.

      If you make 64k, you are into the 28 or 25 percent tax brackets. I THINK you can be in 15 percent bracket.

      I do not have my fairmark link on this PC, but I think 36k is the income you want to get down to.

      64k
      -6k std deduction (single)
      -3700 exemption
      -16k 401k contribution

      You need to find another 4-6k in adjustments to lower your tax bracket.
      38300 is what I came up with- which lowers your taxes now (meaning only pay off 401k loan if you can do so in a short amount of time, because you can save on taxes significantly). This is close to 26 percent of income going to 401k.

      Set aside any free cash to buy the things you need.

      Comment


        #4
        Originally posted by jIM_Ohio View Post
        maat- the only debt is the 401k loan, so the blanket dave ramsey approach may not apply.

        My take is if you can pay off the 401k loan quickly- do it. Quick is 6-12 months. Otherwise keep it for duration and concentrate on most other financial issues.

        If you make 64k, you are into the 28 or 25 percent tax brackets. I THINK you can be in 15 percent bracket.

        I do not have my fairmark link on this PC, but I think 36k is the income you want to get down to.

        64k
        -6k std deduction (single)
        -3700 exemption
        -16k 401k contribution

        You need to find another 4-6k in adjustments to lower your tax bracket.
        38300 is what I came up with- which lowers your taxes now (meaning only pay off 401k loan if you can do so in a short amount of time, because you can save on taxes significantly). This is close to 26 percent of income going to 401k.

        Set aside any free cash to buy the things you need.
        I'm having trouble seeing the difference between your plan and Daves. I consider a 401k loan undesirable debt, btw.

        We should know how secure OP's job situation also. An EF may be more important now.

        Comment


          #5
          Thanks a bunch for taking the time to read and reply guys! Maat, you are right, job security is very key right now. My company is doing ok, treading water or slightly better. My job is pretty secure as the programming I do helps keep head count down. If it gets really bad they'd need me more than ever.

          I figure I have at least 10mos ef at the moment, even if i lost my job and had to pay 10% penalty and taxes on making the 401k loan a permanent withdrawal. That's not counting unemployment which i'd be eligble for.

          Assuming I keep my job I could pay off the 401k loan in 1.5 - 2yrs but only by stopping my reg 401k contribution. If I were to do that i'd lose the tax break and as I understand it would have to wait till I had the full payoff to send it in.

          Comment


            #6
            I personally would pay it off as quickly as possible and be done with it. Loss of earned interest and risk, IMO, are not worth it. However you do it, I wish you the best outcome.

            Comment


              #7
              Originally posted by maat55 View Post
              I'm having trouble seeing the difference between your plan and Daves. I consider a 401k loan undesirable debt, btw.

              We should know how secure OP's job situation also. An EF may be more important now.
              401k loan might be just below carrying a mortgage to me- not bad but could be better and could be MUCH worse.

              Not as bad as CC debt or car debt for sure.

              Not as bad as CC debt because the loan cannot get bigger (by more charges, late fees, or higher interest rates)

              Not as bad as a car because the asset does not depreciate to zero, and if asset does lose value, the loan is a hedge against the market moving down (because loan will be repaid when share values are lowest).

              I actually took a 401k loan in Feb of 2000. In March of 2000 my 401k dropped 30-50% (tech crash). In effect my 401k loan preserved half my value and actually helped me buy more at lower prices. The current 401k loan is allowing more purchases at the bottom right now.

              If OP can pay it all off quickly (12 months or less), I say pay if off- even if tapping into EF to make the goal happen is the solution. This would then assume the $300/mo 401k loan payment replenishes EF over a 3 year period (EF is 10k, right?). But if the loan cannot be paid off quickly, I suggest leaving things as is and making sure all other financial issues get attention (there is enough liquid income to cover the other issues without 401k loan affecting things one way or other).

              Comment


                #8
                Originally posted by tulsa_sr5 View Post

                Assuming I keep my job I could pay off the 401k loan in 1.5 - 2yrs but only by stopping my reg 401k contribution. If I were to do that i'd lose the tax break and as I understand it would have to wait till I had the full payoff to send it in.
                Do not stop regular 401k contribution.

                You want the match
                You want the tax break

                The 401k loan is not the best solution for a problem, but once you take it, don't look back.

                Can your liquid income ($1000/month?) fund the needs you have (new riding lawn mower, other new house expenses)? It's not like you need to mow the lawn in January is it?

                You have 62k gross income and can save $15,500 to 401k. KEEP DOING THIS.
                And then solve other financial problems with the money you have left. I think 2009 401k max is $16,500. Maybe wait 6 months before you bump up to the new max.
                Once you have the money saved for the expenses you know will be incurred, I would put together a long range financial plan.
                1) Pick a retirement date and calculate what it takes for that date (you are saving ~25% now, retirement for you can some sooner than you might think).
                2) Make sure the risks you are taking with investments is inline with the retirement date you picked (if date is 10-15 years away, the risk is different if date is 20-25 years away).
                3) Stay out of debt if you can help it.
                4) Look to open a Roth IRA to further your investment profile
                5) learn your new tax situation to try and push yourself into 15% tax bracket.

                Comment


                  #9
                  Maybe I don't entirely understand a 401k loan, but a quick clarification question if I may.... Isn't paying off the 401k loan essentially the same as contributing to his 401k? Might a good solution be to contribute only enough to get any employer match, then direct all other funds to paying off the 401k loan? It would accomplish both paying off the debt, and saving for retirement. Yes, this way wouldn't maximize the tax benefits of higher contributions, but overall this seems to make the most sense (to me). Am I wildly off-base with this?
                  "Praestantia per minutus" ... "Acta non verba"

                  Comment


                    #10
                    Originally posted by kork13 View Post
                    Maybe I don't entirely understand a 401k loan, but a quick clarification question if I may.... Isn't paying off the 401k loan essentially the same as contributing to his 401k? Might a good solution be to contribute only enough to get any employer match, then direct all other funds to paying off the 401k loan? It would accomplish both paying off the debt, and saving for retirement. Yes, this way wouldn't maximize the tax benefits of higher contributions, but overall this seems to make the most sense (to me). Am I wildly off-base with this?
                    401k loan is paid back with money which has already been taxed
                    401k contributions are put in pre-tax

                    both monies are taxed the same on withdraw

                    So in effect the loan money is taxed twice. Once on loan repayment, second time on withdraw.

                    Comment


                      #11
                      Jim, thanks a ton for the advice, you and Maat55 have me looking at this in a different way now.
                      The 1000 takehome is per paycheck. I'm going to live on 1000 and save the other 1000, some projects are just going to have to wait another year. There will be 3 months where planned stuff is going to have to come from savings, so hopefully 9k saved in 2009 without stopping regular contributions. The loan balance in 12 months will be around 28k. I figure I can pay the whole thing off around april 2010 and still have 3-6mo EF.

                      And you're dead on about it being a hedge. By taking this money out in early August, and moving the rest of my funds from stocks to a guaranteed fund at 4% I figure I dodged a 15-20% drop in 4th qtr. That will soften the blow some should I miss a big recovery before getting that money back in there.

                      Comment


                        #12
                        Stop maxing out you 401k plan until your 401k loan is paid off. Take the money you was using to max out your 401k and contribute it to your 401k loan.

                        Comment


                          #13
                          Originally posted by tulsa_sr5 View Post

                          And you're dead on about it being a hedge. By taking this money out in early August, and moving the rest of my funds from stocks to a guaranteed fund at 4% I figure I dodged a 15-20% drop in 4th qtr. That will soften the blow some should I miss a big recovery before getting that money back in there.
                          If stocks are low, buy them NOW. If you wait for market to go up, you will miss the steep gains associated with early parts of bull markets.

                          If 401k is invested conservatively, I'd opt for paying it off quickly- you will need to save more than 26 percent of your income for retirement if you do not plan to use equities.

                          401k loan is only a hedge if you stay invested in equities. Otherwise you have a loan costing you X percent while your 401k is invested earning only 4 percent. That makes little sense to me.

                          Comment


                            #14
                            Aren't the laws so that if you would happen to lose your job, you would be required to pay back the 401k loan right away?

                            I think your best bet would be to pay off the loan as quickly as you possibly can.

                            Comment

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