Tag Archives: debt

It’s time for a Q & A!

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Q: I have $10,000 sitting in a 401(K) that is not earning much and I owe $20,000 on a credit card with 9.5% interest. Should I take some out of the 401(k) to pay off this debt? I am under 59.5 years old.

A: Generally, this is not a good idea. Firs,t whatever you withdraw from the 401(k) will be added to your income and taxed. This could put you into a higher tax bracket. Next, you will have to pay an additional 10% early withdrawal penalty due to you age. These two taxes could reduce your withdrawal amount by 25% turning your $10,000 into a spendable amount of only $7,500.
This would leave you with the remaining credit card balance and no retirement fund. If we look at the loss of compounding tax deferred dollars, for every $1000 withdrawn, you will be losing $7,686 in future spending dollars.

Here is what I recommend: reduce the amount that you are contributing to your 401(k) and apply the difference to the credit card debt. Contact the credit card company to see if you can get the interest rate lowered. You do not know if this is possible if you do not ask. Put together a budget and track where your income goes. Look for areas where you can spend less to reduce the debt, and you will have more money for short and long term savings.

Very few things in a marriage are 50-50

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We just attended the first of the summer weddings we have been invited to. She is a new Doctor, he is a new Attorney. They should be on the road to financial security – after paying back the student loans. Here are a few more tips for newlyweds.

Keep credit cards separate:
If one spouse has good credit and the other not so good, one could drag the other down in the credit score game if you make your credit cards joint. It is not necessary to make your spouse joint on your cards.

Don’t split your costs 50-50:
Money is often power. This is very true in marriages. Splitting household expenses can breed resentment when one spouse makes a lot more money than the other. It may also create a sense that the person who pays more has more say in how money is spent.

Talk about spending:
Even after you have reviewed your finances, you need to find out how your spending habits match up. Beyond how much someone spends, there is a potential conflict as what you see as a must-have. You need to work on managing your differences that will lead to a long and happy union.

I have some credit card debt that I would like to pay off. Should I suspend my 401k contributions to do this?

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I admire your desire to pay off your indebtedness; however, you should continue to make your 401k contributions. Typically, company matching boosts your yield on the contributions up as much as 50%. Even though you are paying interest on the credit card, you can’t afford to pass up that match.
You may want to reduce what you are contributing to your 401k until the debt is paid off then do not charge more than you can pay when you receive the bill.
After the debt is paid, please increase your 401k contribution to what is was before.

It’s time for resolutions

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Peace of mind comes with understanding and being in control of your own financial situation. Whether this need arises during a major life transition such as divorce, or with your everyday finances, we help empower you to make sound financial decisions by providing advice, analysis, and education.

Resolutions need not be big or grand. Baby steps make being financially secure much easier. First take a look at where you stand financially. How much debt do you have? How much are you saving on a regular basis? What big expenses are down the road? Second, you need to put together a plan of action. Here are a couple of steps for you to take:

Pay yourself first. This is a very old idea, but an important one. Pay yourself as you would any other monthly bill. As you see your account balance increase, you will know that you are giving yourself the power of choice. Having cash gives you the power to choose how you spend it. There is no better feeling.

Reduce your consumer debt. If you are only paying the minimum toward this debt – increase the payment. Once your consumer debt is gone, do not charge any more than you can pay off the next month. This takes you back to the previous point- you will now have financial choice.

Start a slush fund for the large expenses that are down the road. If you know that you will need to replace your car in a couple of years, start saving now for the down payment, or maybe even half the value of what you might spend.

Resolutions can be hard to keep, but for 2012, give yourself the peace of mind that comes with financial freedom