Ben Todd | Jun 3, 2017 | 2
Should I Use My 401k To Pay Off My Credit Card Debt?
Taking money out of your 401k to pay your credit cards is a truly terrible idea. It is officially the stupidest thing you can do with your retirement money. Your 401k is your best saving tool for when you retire. When you are 65yrs old, there is a good chance you will have absolutely no earning power. At that point you are going to have to rely on the state, and you are going to have to rely on your retirement savings. Draw out a little when you are younger than 60, and you remove a large sum you could have used as security when you are older. You will also be charged taxes and at least a 10% fee.
Using Your 401k To Pay Off Your Credit Card Debt Is Dumb
Of all the frivolous reasons to draw money out of your 401k, drawing it out to pay off your credit card debt is probably the worst. Your credit card debt is there because you are unable to spend “only” what you earn. If it money is not in your current/checking account, then you shouldn’t be spending it.
Drawing out money from your 401k to pay off your credit card debt is helping you get off the hook for a serious financial mismanagement problem you have. You are removing your potential to earn a lot of money over the long term in order to support your poor money handling in the present. It is the ultimate double whammy of poor financial management and planning.
You Have A Problem That Your 401K Cannot Fix
The fact is that your poor handling of your debt is the reason you are still stuck in credit card debt. You need to change the way you approach your debt and the way you manage your wealth. Your quick fix attitude is part of the reason you are in this mess.
Credit Card Debt Is A Hole From Which You May Never Escape
Credit card debt is one of the few types of debt where you may be stuck forever, but even if you are stuck in debt all the way up to retirement, you shouldn’t use any part of your 401k. It will not fix your problem because your mismanagement of your money will trip you up again in the future. Do not use your last pale of water to put out the fires that you keep setting. You need to read our articles on wealth management and debt management and learn how to fix your financial problems.
Your 401k Is Not A Quick-Fix Tool
If you take money out of your 401k for something as frivolous as your credit card debt, it will set a dangerous precedent and you will do it again and again. When you run into a problem, you cannot fix it with your retirement savings. You will be destitute by the time you are retired and you will have no way of pulling yourself out of the mess you have left yourself in.
I Want To Buy A House Soon
You are not in control of your finances enough to buy a house. If you cannot pay off your credit card debt, then you cannot afford a mortgage and you cannot afford to pay for a house. You need to learn how to handle your money before you take on mortgage debt.
Your Problem Is That You Keep Spending
Credit card debt is a bottomless pit of debt because people keep spending the money they pay back onto their credit card. They max out their card, they slowly build $300 or $400 of credit on it, and then they spend it for one reason or another. They find themselves in trouble every now and again, and they keep spending the money they pay off their credit card.
Cancel Your Credit Card As Soon As It Is Paid Off
If you do not do this, then you will always be at the mercy of credit card debt. If you have ever maxed out your credit card and had it maxed out for months, then you are simply not good enough at handling your money to keep your credit cards. When you pay off your cards, you need to cancel them and never use credit cards again. Does doing this justify using your 401k? Not on your life it doesn’t. You need to pay off your debt the hard way if you are ever going to learn how to save, build wealth, and stay out of credit card debt.
If You Can Pay Off Your Credit Card Honestly, Then You Can Become Wealthy
Paying off your credit card debt the honest way is the biggest test that leads to wealth. Paying off your credit card is just like building wealth and becoming rich. The trick is to keep putting money into an account where you know you will probably never spend that money ever again. You keep doing that until a massive amount is accumulated. That is how you become wealthy, and that is coincidentally how you pay off credit card debt. If you can put money into your account every month and let it build up as you repay the balance on your credit card, then you can continue to do the same thing in an investment account after your debt is paid off and you can become wealthy.
Taking Out $1000 Today Will Cost $10,000 Tomorrow
Let’s say that you are paying standard US tax rates and that you earn around $30,000 per year. Let’s say you are 30yrs old and you take $1000 out of your 401k to pay your credit card debt. Between the age of 30 and the age of 65, which is when you will probably retire, your $1000 will have turned into just under $10,000 if it is left in there with the rest of your money. If your 401k remains untouched from the age of 30 to the age of 65, the $1000 that sits in your 401k will turn into $10,000 in 35 years.
Conclusion – Control Your Spending To Get Out Of Debt
If you can control your spending and stop yourself from spending the money on your credit card, then one day you will be able to pay it off and cancel it. If you are able to stop yourself, then even adding a few dollars every few days, along with the minimum monthly payment, will help to pay off your credit card debt. It is not about a lump sum to pay it off; it is about controlling your spending, managing your money, and sticking to your financial plans. Our website is loaded with advice on how to manage your money, manage your wealth, and manage your debt. Learn all you can, change your spending habits, stick to your budget plans, and you will be fine.