Location: USA
My last job was barely paying me enough to get by and when I had a health issue last year I fell several months behind on my mortgage and other bills. That medical issue has since been resolved so I am no longer falling further behind but I am also not catching up.
Things are starting to look better though because I have recently gotten a new job which should pay slightly more (starting hourly rate is barely higher but overtime is more likely) and it should vastly reduce my expenses (cheaper and better insurance along with a company provided vehicle and gas). In addition it is going to be a far more secure job in the comming economic crisis. Honestly, it’s also looking like my dream job. However this new job requires me to purchase many of my own tools. There is a tool stipend but it accumulates hourly and only pays out quarterly so I will need to front my own tool costs to start with. The problem here is that even the cheap tools are going to cost me about $1000 and if I want a set of tools just good enough that they aren’t an active hinderance I’m looking at closer to $2000. I currently have no money which isn’t allocated to bills that I am already behind on.
It seems like a simple solution would be to take out a loan from my 401k. Right now I could take out a maximum loan of a bit over $6,000. $5,000 would be just about the perfect amount to catch up on all of my bills and buy the tools needed to do my new job. If I set it at a 5 year repayment term then the monthly repayment is under $100 which I should definitely be able to afford with my new job. I could go with a shorter repayment plan but my thinking is that without knowing exactly what my finances are going look like, I want to have the smallest required payments and just plan to pay it off early if my finances are where I expect they will be even if that means I pay a bit more in interest.
At the same time I don’t like the idea of taking out a loan to pay off debts that aren’t charging me any interest. My bank isn’t forclosing on me yet and, considering I am still paying them every month, I doubt that they will. My medical bills may go to collections if I let them sit much longer but there aren’t any late fees and I can always pay off the collections company as I get money. Just looking at the money it almost seems like the more financially sound long term plan would just be to choose to fall a bit farther behind on my bills now to buy my tools and then catch up on those bills later. My credit is already trash and will be for a while. But I also already own my home, have no plans of moving, and tend to buy dirt cheap used vehicles with cash, so I don’t really need a good credit score right now or anytime soon. So my late bills really aren’t doing anything but causing me stress right now. Does it really make financial sense to start paying interest on a loan just to get rid of that stress?
At this point I am heavily leaning towards taking out the loan. But I can’t help but feel that I’m going to be paying a whole bunch of money in interest just to feel more secure. I’ve also never taken out a 401k loan before. So should I take out the 401k loan or just temporarily fall even more behind on my bills? Also if I should take out the loan is there anything I need to know about 401k loans or any pitfalls to watch out for?
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I strongly recommend you don’t do this. A 401k isn’t an emergency fund, and using it like a piggy bank even once will likely encourage you to do it again.
There are a ton of great reasons not to do this, and very few good reasons to do it.
I recommend negotiating the bills down and just cash flow paying them off. Use that discomfort to light a fire under your butt to take care of it ASAP, and then keep the spending low until you get a full emergency fund so it never happens again.
But I can’t help but feel that I’m going to be paying a whole bunch of money in interest just to feel more secure.
You pay interest to yourself, FWIW. My issue is with the psychological justification you’re doing here, not the interest.
If you need a loan, get it from your bank, not your 401k, and only if it’ll save you money. Losing that interest to a bank will piss you off and get you to pay it back faster. If you can’t get a loan due to crappy credit, then what harm would another default do?
Keep your 401k safe, don’t touch it.
Taking a loan from my 401k is not something I would be considering if I had any other credit options available.
If you can’t get a loan due to crappy credit, then what harm would another default do?
You can’t default on a loan you can’t take out in the first place.
I recommend negotiating the bills down and just cash flow paying them off. Use that discomfort to light a fire under your butt to take care of it ASAP, and then keep the spending low until you get a full emergency fund so it never happens again.
The bills I’m refering to can’t be negotiated lower. I’m talking, mortgage, utilities, liability only car insurance, and medical debt which has already been negotiated as low as possible. Any dischargable debt was discharged a bit over year ago via bankruptcy (which is why I have no credit options), unfortunately a medical issue cropped up after that. My optional spending is already as low as I can get it and even necessary expenses have been delayed far longer than they should be. Mainly, I have some fairly critical issues with the house which I can’t afford to fix but only get worse and more expensive to fix every day. I can’t even rent out part of the house for extra money due to those issues and the rental restrictions in my city.
Trust me, I absolutely know I should leave my 401k alone, if I had any other options to get money I would be pursuing them. Right now though I need a fair chunk of money basically immediately and my only options are:
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Fall further behind on bills so I can buy the tools I need and plan to catch up later. My creditors won’t be happy and the bank may threaten forclosure again. But I can do that and it shouldn’t be an issue outside of the short term and delaying the recovery of my credit score a bit and delaying when I can start getting an emergency fund together.
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Borrow money from my 401k. This has the various pitfalls you brought up but it would get me caught up and able to start building an emergency fund more quickly than option 1 which would save me money in the long term which would allow me to make higher contributions to my new 401k sooner.
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This one is an even worse idea but it is an option I just recently found out about so I’m listing it. Roll my current roth 401k (I probably should have mentioned all my contributions are roth) into a roth IRA and then withdraw enough off the principal to cover immediate expenses. The literal only reason I’m even entertaining this idea is because not having to make loan repayments would enable me to start building an emergency fund immediately and having an emergency fund would save me money in the long run which would allow me to contribute more to my new roth 401k even sooner.
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Remain behind on my bills by the current amount and just use option 2 or 3 to cover the cost of the tools. Then plan to catch up later.
Right now I’m mainly just torn on which way to go because option 1 costs me the least on paper. But at the same time being broke is costing me more money right now. The question is if I could use that money from my 401k (in one way or another) to start getting ahead of things now would it save me enough to eventually counteract my losses on my 401k. Considering I’m not really anticipating any gains (I’m pretty sure we’re all expecting a crash any day now) on my 401k in the near short term anyways I may be able to make better use of that money to increase my earning and saving potential now so I can make larger contributions while the market is recovering.
You can’t default on a loan you can’t take out in the first place.
I’m saying you could default on your bills, especially the medical bills. What are they going to do, sue you?
I’m talking, mortgage, utilities, liability only car insurance, and medical debt
I’d ignore the medical debt for now and contact the other three to see if you can get some lenience. Tell them when you’ll have the money, and keep your commitments. Mortgage and utilities will probably work with you, at least for 2-3 months.
I have some fairly critical issues with the house which I can’t afford to fix but only get worse and more expensive to fix every day
Can you describe them? I’m not an expert, but I do most of my own maintenance, and perhaps I can help prioritize. Most things can wait, even if it totally sucks to wait.
That said, if you will struggle to pay the mortgage even with your higher paying job, it probably means you can’t afford the house. Owning a house can be expensive.
I need a fair chunk of money basically immediately
And what are the consequences if you don’t get it? I’m guessing you’re stressed and seeing scary bills, which absolutely sucks, but spelling everything out could help.
would it save me enough to eventually counteract my losses on my 401k
We can’t know that, because that depends on the market.
But that’s the wrong question. This isn’t a math equation, it’s psychology. The decision you make now could impact decisions you make down the road. If you get a loan from your 401k, you’ll rationalize it again in the future when this happens again, and you’ll end up with no retirement savings at all. Draw a firm line in the sand here, DON’T TOUCH RETIREMENT!
Here’s what I would do:
- cut all unnecessary spending - cut until it hurts, and then cut some more; the target is the bare minimum to get to work and back (rice and beans, no subscriptions, no eating out)
- get a part-time job, whether that’s gig-work or scheduled (e.g. restocking shelves, throwing boxes for Amazon, etc)
- prioritize the most important bills - again, focus is getting to your job and cooking food
- build up cash reserves - target is your highest deductible (health insurance, car, etc)
- tackle critical issues at home - anything related to immediate safety (smoke/CO2 alarms esp if you have a gas furnace, structural damage, etc)
- 401k match at work
- high interest debt (back payments that are accruing penalties may count)
- build up to 3 months expenses in cash
- tackle the important issues at home (anything that could end up costing more long-term)
- increase optional spending for comfort - better food, raise thermostat, etc
- build up to 6 months expenses in cash
You may need to make some hard decisions, such as:
- downside your car - esp. if you’re making payments
- go to a food bank
- learn to cut your own hair
The point here is a little less about money and more about forcing yourself to be uncomfortable to force you to get yourself back on your feet. The harder you go on the cuts, the faster you’ll get back on top.
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I don’t have anything to add about the loan but if you haven’t already talked to the hospital/doctor about financial assistance, I would do that. I know the network where I am has programs that even include debt forgiveness.
Is the 401k plan from your previous employer? I’d first check if your plan admin will let non-active employees take loans out. Otherwise, if it helps your decision, the interest accrued from a 401k loan goes back into your own account, so it’s like you’re paying yourself interest. The main pitfall would be making sure you can pay it back on the agreed upon schedule, otherwise you get penalized. Also, while your money is removed from the market, you’re technically losing out on potential growth, but sounds like you’d benefit more from having access to the money now.
Honestly, if it were me and it would set me up for a career and I probably would do it and just make sure to contribute as much as I can to my retirement once I’m able to. Some alternatives would be a credit card or retailer with a fixed fee pay-over-time feature or a 0% interest intro offer. Failing that, you may just to get creative (sell things, pick up some side gigs, etc.)
Thank you for your advice. That helped a ton. Assuming that they let me I will be going through with the loan.
Is the 401k plan from your previous employer? I’d first check if your plan admin will let non-active employees take loans out.
It is from my previous employer, however the allowed loan amount is already based only off my vested balance. So I’m not sure why they wouldn’t. But I will ask.
Otherwise, if it helps your decision, the interest accrued from a 401k loan goes back into your own account, so it’s like you’re paying yourself interest.
That is excelent to know! Thank you. So it sounds like I’d effectively just be contributing a bit extra to my 401k for a few years. That does make all the difference in my decision.
The main pitfall would be making sure you can pay it back on the agreed upon schedule, otherwise you get penalized.
At less that $100 per month I shouldn’t have any issue making the payments. I could probably even make those payments on my old income after things got sorted out.
Also, while your money is removed from the market, you’re technically losing out on potential growth, but sounds like you’d benefit more from having access to the money now.
Honestly I’m not picturing the market being in the best shape for a bit anyways considering the current US political situation. But even so that’s a good point and with that in mind I’m going to try and pay it off as early as I can. I would definitely benifit from having the money now though.
Honestly, if it were me and it would set me up for a career and I probably would do it and just make sure to contribute as much as I can to my retirement once I’m able to.
That’s going to be my plan going forwards. It’ll be a few months before I get access to my new 401k plan but I always try to put as much in as I can. I figure I can always cut back on my contributions later if it starts looking like I will have plenty in there.
Some alternatives would be a credit card or retailer with a fixed fee pay-over-time feature or a 0% interest intro offer. Failing that, you may just to get creative (sell things, pick up some side gigs, etc.)
Unfortunately a fairly recent bankrupcy and my current credit score means I have basically no credit options other than my 401k right now. I also don’t really have anything I could sell. But I have been looking at side gigs. My old work schedule made those tricky but I can probably do some side gigs with the new job if I don’t wind up working too much overtime.