Tough spots and a 401K

[Moses Yoder]

I used to make about $20 per hour, and we live simply. Basically we were rich; if we saw something we wanted we could buy it. My job was eliminated and with no certificate or degree, today's market is tough. In a month I found a job that I love but only pays about 60% of my other job. Since we live simply, we are making it. My wife now has a full time position as a bank teller which really is a low paying job for as nice as they have to dress. We have a little credit card debt now, about $1200, and just had to borrow $700 to replace the water pump on my car. To me it is awful tempting to remove some cash from my 401K and pay off the cards and the water pump. My wife says if we just buy what we need we will be okay. What do you think? I do not have a lot of money in the 401K but am now adding to it and it is in good hands, making some money. We are able to buy a premade pizza on Friday nights from Meijer, really pretty good, and we are subscribed to Netflix so we are not really in bad shape but a night at the movies or out on the town is out of the question. We have it pretty good but the tightness of our finances is a burden. The credit card debt is mostly from repairs on our Saturn Vue and my daughters High School correspondence course, we have one more year of her schooling and we got rid of the Vue. So do you remove money from the 401K or do you just keep plugging away?

I also have a nice Powermatic shaper I could probably get about $800 for but would then never be able to replace, what are your thoughts on selling good tools?

[Bruce Pratt]

Moses,

You are going to get a ton of advice from folks here on the board. My strongest recommendation is to meet with a certified financial advisor and have them run the numbers for you.

My personal recommendations would be: 1) get your credit card debt to a card with the lowest interest level and concentrate on paying it off, 2) don't touch the 401k, there will probably be a penalty for withdrawal, and it sounds like you will not easily be able to put the money back in soon (thereby losing the benefit of compound interest in the long term), 3) you didn't say what you are currently doing with the shaper, but unless it is going to help you bring money into the family coffers, consider selling it to reduce you credit card debt, and 4) depending on personal circumstances and the quality of the local school system, seriously consider enrolling your daughter in the local high school to eliminate the cost of the correspondence courses.

[Frederick Skelly]

My personal recommendations would be: 1) get your credit card debt to a card with the lowest interest level and concentrate on paying it off, 2) don't touch the 401k, there will probably be a penalty for withdrawal, and it sounds like you will not easily be able to put the money back in soon (thereby losing the benefit of compound interest in the long term), 3) you didn't say what you are currently doing with the shaper, but unless it is going to help you bring money into the family coffers, consider selling it to reduce you credit card debt, and 4) depending on personal circumstances and the quality of the local school system, seriously consider enrolling your daughter in the local high school to eliminate the cost of the correspondence courses.

Moses,
Personally, I would do the same things that Bruce recommends.
I hope that things get easier in time.
Fred

[Jerry Bruette]

I would leave the money in the 401K. Penalties and taxes will eat about 50% of what you take out. If you need $2000 you'll have to take out about $4000 to get it.

The penalty and taxes are probably going to be more than the interest you'll pay on the $1900 you have borrowed at this time.

Then don't forget to figure the lost interest on the $4000 that's missing from the 401K

Maybe you could pick up a 2nd part time job for awhile or grab all the overtime you can if any is offered.

[George Bokros]

I would not touch the 401k, like said above penalty and taxes will require you to take out at least 50% more than you need to pay off the CC and loan. Get your credit card debt to the lowest interest rate card you can find. I would look for a part time second job and keep your eyes and ears open for a higher paying job. I would consider enrolling your daughter in the public school system if it is of reasonable quality. I would really look at income and expenses and if you can pay of the CC and loan without selling tools I would do so, If you cannot pay off the debt and have some funds available for the unexpected because the unexpected will happen then I would sell some tools. You do not want to drop into a debt spiral.

[Bert Kemp]

Yea don't touch the 401 you will regret it later.

[Ed Jolin]

This sounds stressful for you. My 0.02 - stop contributing to the 401k for now, and use that liquid cash to build a savings for things like the next water pump. It might not be a popular view and sounds counterintuitive, and you may hate debt, but you could pay the minimum on the card until you have a cash cushion to absorb the average unplanned expenses, and then go after paying it off. Otherwise, as pointed out, it can lead to a spiral of reliance on the card to make ends meet because the well never has any water in it.

[Jerome Stanek]

Wouldn't financial planner cost him more of what he doesn't have IE money and they basically just give you a budget that you could do yourself. The best thing is write every penny you spend down and see where the money is actually going When I say everything I mean everything like money for a pack of gum or candy. You will be surprised at how much the little stuff adds up.

[George Bokros]

Wouldn't financial planner cost him more of what he doesn't have IE money and they basically just give you a budget that you could do yourself. The best thing is write every penny you spend down and see where the money is actually going When I say everything I mean everything like money for a pack of gum or candy. You will be surprised at how much the little stuff adds up.

Jerry has an excellent suggestion. I did this when I was on the army and it will show you exactly where the funds go.

[Keith Hankins]

I've been there in your shoes kinda. When I was younger, we had our first house and I'd done the renovations and we wanted to move up to something bigger. I decided I was going to do a modular and be the GC. Well with the money we made from the sale, and a construction loan, I had it all planned. Then disaster hit. The amount I'd budgeted for the septic, and road into the property came up half of what it cost. My only solution was to put it on the credit card. At the end I wound up 25k in dept on my CC and making a monthly payment of 750 bucks, I was making about a 70 actual mark against the loan. I knew it would never get paid off. I'd had several jobs by then with the state, so while not overwhelming, I made the hard choice to liquidate two 401k's to get totally out of dept, and swore I'd never put myself in that position again. That was 1994. I've stuck to it, and luckily reconstitued my efforts to saving and now have a good nest egg.

Now the bad side of taking it out . Imediate hit on taxes. If you are less that 55 (59 & 1/2 if its an ira) you will take an imediate 10 percent hit, + it is taxable income. So the gov't will get a huge benefit from your labor. A loanshark would not get 38%.

Next lost opportunity cost. That money if you are young, will forfeit all the years of earnings and that could be significant. I've calculated what I lost by cashing out and it's in the neighborhood of 100k. It's not peanuts.

So unless you are not in dire need or are up to your eyeballs (as I was), I'd say don't do it and only touch it to save you from going under. In most cases even declaring bankruptcy(depending on your state) 401k's are off limits from creditors. Protect it at all cost.

In my case, I made a comitment to never put myself in that position again, and I can say I've done it. I put away 15% and it hurts and I've got a kid in college now and paying off the other one that went a few years ago so it hurts. I know though at the end, it will be worth it.

Take care and good luck.

[Raymond Fries]

I would not sell the big tools unless there was NO other option. Aside from personal use for your projects, you might need them for side jobs which could generate cash. When we used to have a lot of credit card debt, we rolled it from one card to another with 0% APR offers. I would not pull from the 401k if a penalty was involved. You might have an option to borrow from your 401k which is an interest free loan to yourself. All you would lose is the interest you would have earned. But the interest on two grand would not break the bank. The loss of interest might be less than any credit card interest you are paying.

Good luck Moses. Hope you find a solution that meets your personal situation.

[David Weaver]

One thing you guys are not considering, and I'm not advocating taking from the 401k, is that taxes at some point in the future will be regular income. So if there's a 38% tax hit coming from the 401k, it's not 38% vs nothing, it's 38% vs. whatever the tax rate would be after 59 1/2. Likely, the 59 1/2+ tax rate will be lower due to no other income, and of course no 10% penalty.

Whether it comes out of the 401k or doesn't shouldn't make much difference in the long term. I'd try to get it elsewhere, but wouldn't sell a shaper I'd like, either. Even if you get it over time or take out a CC offer as a one-time deal to get a roll over 0% interest period (and make sure the card has a good rate), whatever you have to do.

I agree with the comment above that a fee for service advisor is probably going to cost more than it's worth, it sounds like you are already doing a good job of cutting back, which is more than most people do.

I'd personally be wary of commissioned advisors, too, but usually commission advisors are driven by the ability to make load/sales fees on an inflow of money and you don't have that going on right now.

[Mike Olson]

call your 401K provider to even see if you can withdrawal. mine won't let me withdrawal, only take loans out against. Only way I can withdrawal is to show that something critical needs to be repaired on my primary residence such as heating. That would let you stop thinking about it.

[Curt Fuller]

Moses, you might find this helpful. http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-Hardship-Distributions

Hopefully things will get better. They usually do.

[Stephen Tashiro]

One thing you guys are not considering, and I'm not advocating taking from the 401k, is that taxes at some point in the future will be regular income.

Is it a 401 K or a Roth 401 K?

[Moses Yoder]

I had not thought about borrowing against the 401K. I will look into that tomorrow. This sounds like a good option; instead of having 3 payments we would only have one, and possibly no interest instead of 9% I think we are paying currently.

Sending my daughter to public school is not an option. She has never been to public school, is an extreme introvert, very gifted in some areas, would simply not function in public school. Plus, this is her last year. She will graduate Keystone National High school. I have never felt the responsibility to finance my children's college education; it seems to me if they have to work for it then it will mean something to them. I am at least encouraging them to get higher education; my dad told me I would burn in hell for eternity if I went to college.

I don't think I will do anything drastic right now, things will probably be better in a year. I could make money out of my shop but this summer I have been working on a very labor intensive mother-in-law project.

Thank you for all the advice.

[Brian Elfert]

There is typically interest on a 401K loan, but the interest goes right back into your 401K so you are paying the interest to yourself.

[David Weaver]

The trouble with loans in 401ks is some have minimum loan sizes, and you're paying interest to yourself with after tax money only to pay regular income tax on the money again at distribution. But on a small amount, it may not matter much.

[Edward Clarke]

Take a look at this article and specifically at "Mint". It's free and seems to have a good reputation. You shouldn't just guess; run the numbers and get a real handle on your situation.

http://lifehacker.com/5828438/five-best-desktop-personal-finance-tools

[Andrew Joiner]

When we used to have a lot of credit card debt, we rolled it from one card to another with 0% APR offers. I would not pull from the 401k if a penalty was involved.

Moses, You are smart to address this now before the $1200 card debt gets bigger. Learn all you can about creative ways to manage this. This is a great learning opportunity for you. How much interest are you paying on the card and the $700?

I agree with Raymond. Using 0% APR offers is a good idea for this. Goggle "0% APR offers" to find how you can benefit from these.
Fatwallet finance and Bogleheads are sites that I follow for creative finance ideas. You could ask your questions there and get some great ideas.

[Bill Orbine]

I'd try to deal with the low funds by staying away from the 401. You don't know what other major emergency dipping in the retirement cookie jar may lurk ahead in the future. So try to deal with it without sacrificing the 401K. Do a little moonlighting for a while. And there a buck spent you could make a little bit of money on..... that little juggy thingy you bought last week or two might be worth something. You wife sounds like a good sales person....but the shaper....oh, Nooooo! Not if you can help it!

[Jim Becker]

It's not a great idea to raid a 401K unless it is the most dire situation and there is absolutely no other option. An actual withdrawal carries tax penalties that one has to pay by April 15th. A loan, while easy, not only has to be repaid, but it also can significantly reduce the future value of the account because of the effects of compounding. That can mean a major income hit at retirement time, "compounding" today's financial angst well into the future.

If at all possible, it's best to find other ways to make up for shortfalls, including careful living, secondary employment, liquidation of assets that are discretionary, etc.

[Moses Yoder]

I looked at "Mint" and find it utterly astounding that people will actually give access to all of their accounts to a third party. Astounding. I would love to have a free program similar to the "Quicken" I used to use, where you simply enter your expenditures and designate a category and it will do all sorts of reports for you.

[Justin Ludwig]

For a $1.50 in late charges at your local library, you can read Dave Ramsey's Total Money Makeover and download all the free spreadsheets from his site/forum. No need to pay someone to tell you what can simply be read and learned in less than a week's time.

It's a good system for low income families. I used the system and made my own adaptations to it. I'm 37 and debt free. I don't make a lot of money; I just "want less."

[Wade Lippman]

You can live without Netflix or premade pizza. Unless you have realistic prospects of earning more money in the near future, you better live within your means.
Giving up the planner would be lousy, but not as bad as falling deeper into debt.
I know it can be a lot easier to say that than to do it, but it is pretty important.

I am not competent to judge, nor do I have enough information, but if it is all that serious you have to get ahead of the spiral.

[John Sanford]

First, don't touch the 401k. Second, think outside the box. You may be able to "hock" the shaper to another Creeker or other upright soul who needs the use for a while, with a guaranteed buy-back for the same amount. There may be other assets that you have that don't really have as much value to you that you can part with.

[Moses Yoder]

The problem with Dave Ramsey is that he is hugely popular and has an immense amount of charisma. Bill Gothard and former president Bill Clinton also are the same type. This type of person is an instant turn off for my wife. She will not listen to a word they say and refuses to have anything to do with them.

[Charles McKinley]

Then get the spread sheets and remove his name and the programs name from them and just work the plan.. Dave says himself it is nothing magical. "It is the advice your grandmother would give you but I keep my teeth in."

There is X amount of income so out go needs to be less than X.

You don't even have to give him anything if you get it from the library or borrow a copy from one of us.;)

[Val Kosmider]

Moses,

It sounds like you have a good handle on your situation.

Skip the financial planner. That is a fee to provide you with the obvious. There are no miracle cures for being broke.

Spend cash. Only. Or use a CC that gives you cash incentives and which you pay off every month. One point (or more with the right card) for every dollar you spend; 100 points equals one dollar in cash back to you. $500 a month in groceries and gas (plus some utility companies will take a CC) is $5.00 in cash! Two months and you have a free pizza. Most today will scoff at $5.00, but not those of us who have been there, or who are serious about saving money.

Using 401K is not the best solution, but the facts are 10% penalty, and 10% Federal Withholding. So, if you need $1200 net, you redeem $1440. With low income, you will get the 10% back when you file your income taxes. Net is therefore 10% penalty. How does that compare with your CC interest? 9% versus 10%. Piece of mind and a fresh start might be worth it.

Keep looking for a new job, a second job, and any other way to raise money. Just like not liquidating the 401K unless you absolutely have to, don't sell assets.

Budget. Conserve. Use social programs like food stamps, utility assistance, and any other public programs. You have paid for them in previous taxes, and you will pay back when you land on your feet and are paying higher taxes once again.

Chin up. You are not alone.

[George Bokros]

Using 401K is not the best solution, but the facts are 10% penalty, and 10% Federal Withholding.

Federal withholding on random payments is not 10% it is 20% plus the 10% penalty. Yes it will all even out when you file your federal return but it is still a 20% hit at time of withdrawal. No one has mentioned any state income taxes that could be withheld. IF the state taxes are not withheld at time of distribution they will need to be paid when you file your state return.

I am a retired accountant and have dealt with withholding taxes and was the administrator of the 401k plan.

[Moses Yoder]

I have gotten the okay from Meg to start keeping track of where our money goes. We pay bills on Thursday nights: my wife works at our credit union and knows what the deposit is going to be on Friday, bills are then mailed on Friday. I am going to do a fairly simple small notepad and pencil to keep track then transfer to an Excel spread sheet once a week. It will be interesting to see if I stick with it.

[Brian Elfert]

If you're really mailing your bills you can probably save some money on stamps and checks by doing online payments where possible. You probably bank at the credit union and they may offer free online billpay.

[Bill ThompsonNM]

I looked at "Mint" and find it utterly astounding that people will actually give access to all of their accounts to a third party. Astounding. I would love to have a free program similar to the "Quicken" I used to use, where you simply enter your expenditures and designate a category and it will do all sorts of reports for you.

Look at GnuCash, runs on almost everything and works great for home accts

[Alan Beech]

No one has mentioned this but I wonder about what you will do after this "event" is sorted out. You mentioned in first post that you lacked any "certificates". That pushes you into less well paid jobs. Should you not consider becoming certified in something, go to night school if necessary, learn and earn.
Al

[Moses Yoder]

If you're really mailing your bills you can probably save some money on stamps and checks by doing online payments where possible. You probably bank at the credit union and they may offer free online billpay.

A couple is made of two people. I would love to do online bill paying. My wife distrusts all things electronic. In other words, there is no way in hell we will ever do online bill paying. A few of our bills are auto withdrawals; I thank my stars she allowed that much.

[Moses Yoder]

No one has mentioned this but I wonder about what you will do after this "event" is sorted out. You mentioned in first post that you lacked any "certificates". That pushes you into less well paid jobs. Should you not consider becoming certified in something, go to night school if necessary, learn and earn.
Al

This is an interesting proposition here, one I have given considerable thought to. I was raised to believe I was too stupid to accomplish anything. Seriously, every night my dad sat at the supper table and told us how worthless we were. I was the personality type that believed him. My brother refused to believe him and is now an electronic engineer. He works about 80 hours a week, his wife threatens to kill herself every week, his son is in jail, but overall they are pretty well off. So far as I know they do not have problems paying their bills now, although at one point they were nearly bankrupt.

I met my wife and gradually accepted the fact that someone could love me, that I was worth something. I stumbled into cabinetmaking and have been there ever since; steady work but does not pay much. Now I have 20 years to go before I retire on Social Security and build stuff to sell out of my shop. We are not going to discuss relying on SS for retirement. With 20 years to go is it worth changing careers? How would I finance an education and then pay it off? Or should I rely on the government to forgive college loans? What occupation would I apply for? I like computers and realize now that I am more than smart enough to go into IT or programming or whatever, I just did not feel that way when I got out of high school which is when it really should have been pursued.

Then there is the fact that I like my job now. I start work at 5:30 am and am usually done at 2 pm. My wife and I both have a credit score over 800. In 24 years of marriage we have never had a bill that we we didn't eventually pay. One thing I noticed this summer as I was selling tools is that as I made money, I spent it. I wonder if it would not be the same if I switched careers.

[Raymond Fries]

Moses,

if you want to return to school, apply for financial aid. You might qualify for Pell Grants which are gifts from the government. If you are not sure what you would like to do, there are assessment tests available at the colleges that can identify what you have an aptitude for.

Good Luck...

[Dave Lehnert]

Moses,

if you want to return to school, apply for financial aid. You might qualify for Pell Grants which are gifts from the government. If you are not sure what you would like to do, there assessment tests available at the colleges that can identify what you have an aptitude for.

Good Luck...
I use to work with a lady who son took an assessment tests at a local collage. Test came back he should train to be a Mime. LOL!!!!

[David Weaver]

I use to work with a lady who son took an assessment tests at a local collage. Test came back he should train to be a Mime. LOL!!!!

Was it an oral exam where he refused to talk? :)

[David Weaver]

This is an interesting proposition here, one I have given considerable thought to. I was raised to believe I was too stupid to accomplish anything. Seriously, every night my dad sat at the supper table and told us how worthless we were. I was the personality type that believed him. My brother refused to believe him and is now an electronic engineer. He works about 80 hours a week, his wife threatens to kill herself every week, his son is in jail, but overall they are pretty well off. So far as I know they do not have problems paying their bills now, although at one point they were nearly bankrupt.

I met my wife and gradually accepted the fact that someone could love me, that I was worth something. I stumbled into cabinetmaking and have been there ever since; steady work but does not pay much. Now I have 20 years to go before I retire on Social Security and build stuff to sell out of my shop. We are not going to discuss relying on SS for retirement. With 20 years to go is it worth changing careers? How would I finance an education and then pay it off? Or should I rely on the government to forgive college loans? What occupation would I apply for? I like computers and realize now that I am more than smart enough to go into IT or programming or whatever, I just did not feel that way when I got out of high school which is when it really should have been pursued.

Then there is the fact that I like my job now. I start work at 5:30 am and am usually done at 2 pm. My wife and I both have a credit score over 800. In 24 years of marriage we have never had a bill that we we didn't eventually pay. One thing I noticed this summer as I was selling tools is that as I made money, I spent it. I wonder if it would not be the same if I switched careers.

Moses, pardon me for getting a chuckle out of this, but when this text is taken by itself it's pretty amusing:

>>He works about 80 hours a week, his wife threatens to kill herself every week, his son is in jail, but overall they are pretty well off<<

I can imagine Ricky from trailer park boys describing someone using all of those same words in that order.

As far as your dad goes and college stuff and going to hell, there was a lot of that where I grew up, some of it separate. There were a few religious sects around us who told their members that, I suspect because they believed it was bad for membership and a reasoning group of individuals would be too much trouble for the leadership. My grandfather told my mother the same thing, though. My mother was college bound, and her father said to her "I don't know why you are opening those books, you're not college material". He wanted her to get outside and work (on the farm). I guess he didn't know she was college bound, but to this day, she still gets irritated by that - it drove her to succeed and outdo her sister (who had gotten great marks in school and was in college).

I see some parallels between what you say and where I grew up (which is an area dominated by germans who fled germany in the 1700s, some amish and some not).

I personally think you should consider what you want to do and do it, you can ultimately do anything you really want to do. If you want to change careers, and you can map out a plan of how it would be feasible, you can do it. But if you don't want to really change careers, then don't - you're ultimately the boss of what you do.

[James Runchey]

Moses, years ago my wife and I were in a very tight situation and really had no choice but to cut spending to the bone. I mean we weighed every penny we spent. We even gave up the daily newspaper to save the 50 cents. We had a woodstove insert in our fireplace, bought in better times, so we heated our 2 story house with wood and turned off the furnace. We never went out to eat, too much money. we were forced to do this for several years til we got out of the hole. in all this time we always made our two thousand contribution to our IRAs. We could not afford this, but it came first, before anything else. We knew we,d need this down the line if we ever hoped to retire. In short the key to success is to control your outgo, cut out every thing possible in your budget and you'll manage and hopefully not have to touch your 401K. I've now been retired 22years and well off. Hope you can do the same. Good luck to you.

[Larry Frank]

Not all people who go to college and work 80 hours end up with that situation. It is all up to the person and family. During my career, there were times when the job required a lot of hours and my family worked out pretty well. Being successful and working a lot of hours does not equate with having a family with all types of issues.

As mentioned, each person ends up making the choices as to what they want to try for or maybe they are happy with the way things are. There are a lot of good career choices out there that do not need a college degree but rather a technical training from a local school. In my area, the community colleges offer all types of 2 year programs that can lead to good jobs. One just needs to determine what is best for themselves.