How to manage debt with a finite amount and some qualifiers.
October 29, 2013 3:51 PM   Subscribe

Say you are an idiot, me, for example. How would you manage this debt and a loan?

You have just borrowed $12,000 against your 401k with the original intention of paying off a previous 401k loan with a $5,000 balance, and using the remaining $7,000 to get current with a mortgage and some onerous medical bills (which is where all this started). The 401k interest rate is 3%.

The plan was/is to end up with just the one loan, which would cost $200 a month out of paycheck.

HOWEVER. You have approximately $400 a month in high-interest credit card payments. If you take care of the mortgage/medical bills and pay off the cards, and let the two loans stand (for a scary total of $400 a month out of your paycheck ... see where I'm going ...) You can be spending the same $400, but avoid the terrible interest, not to mention never-ending balances, on the cards. Which is really terrible.

Intellectually I understand that paying off the cards is the way to go. But there's a nagging part that hates that fixed bite coming out of the paycheck instead of JUGGLING the card debt, as I currently do.

Can somebody boss me around on this? I will add that I struggle to get to the end of every month and vow I will not use those cards if I pay them off.
posted by anonymous to Work & Money (6 answers total) 2 users marked this as a favorite
 
Put your money wherever the highest interest rate is.
posted by Jairus at 4:02 PM on October 29, 2013 [2 favorites]


You can be spending the same $400, but avoid the terrible interest

... until you get laid off or leave your job, in which case the loan could possibly become due in it's entirety immediately (depending on your 401(k) provider's rules). At that point, you will either have to get hold of $12,000 immediately or be required to pay taxes (plus a 10% early withdrawal penalty) on the loan amount.

It's generally a good idea to put your money to the highest interest rate because it reduces the total amount of interest you pay. This would entail using the 401(k) loans to pay off your credit card payments definitely (interest rate much more than 3%), your mortgage probably (so you don't get foreclosed on). I'd put medical bills last, as medical providers can be negotiated with quite effectively for extending the terms of payment or reducing the payment amount. However, if you go down that path, you need to be prepared for what happens if your job ends.

I'm not saying this is a good or a bad idea, just know what you're getting into.

I will add that I [...] vow I will not use those cards if I pay them off.

Why do you need to add the caveat "if I pay them off"? Regardless of how you pay your credit card debt, you can stop adding to it immediately.
posted by saeculorum at 4:09 PM on October 29, 2013 [4 favorites]


As saeculorum mentions, you should check with your 401(k) provider but in general in my experience a loan against a 401(k) is automatically deducted from any rollover at termination (whether or nor voluntary) along with tax and penalty, so there's no out-of-pocket requirement.

As someone who has been an idiot with money in the past, I would recommend paying off the credit card debt and keeping only one card, with a limit that would cover you in an emergency, and closing the others. I know that $400 out of each paycheck sounds awful, but if you never get it, you won't be tempted to spend it on things other than your debt. Sometimes idiots like us have to handcuff ourselves into creating good habits and getting out of debt.
posted by janey47 at 5:01 PM on October 29, 2013


a scary total of $400 a month out of your paycheck

Pay now, or pay a lot more later. Those are your choices.

You can only juggle for so long. Eventually you'll drop the ball.
posted by ook at 5:32 PM on October 29, 2013 [1 favorite]


by juggling, i think you mean kicking the can down the road. you take the $200 that you don't have to spend to pay off your debt in a more efficient way on whatever else you want to buy.

you should make a budget assuming you would have to pay whatever the monthly payment in your 401k loan would be, assuming it could fully cover your credit card debt. if that's something you think you could realistically do, then pull the trigger, and have faith that in the future you will stick to your budget when you have an outside influence forcing you to make the hard decisions.

if you can't make the budget work out, then either take the high interest yet liquid on the scale of a few months credit card debt, or start talking to a bankruptcy lawyer about if it would be beneficial to you to declare bankruptcy.
posted by cupcake1337 at 11:01 PM on October 29, 2013


Intellectually I understand that paying off the cards is the way to go. But there's a nagging part that hates that fixed bite coming out of the paycheck instead of JUGGLING the card debt, as I currently do.

If you juggle, you might drop the ball, even if you are the most diligent, careful and organized person in the world, because credit card companies often move the goalposts on you. If you juggle, you will never be able to stop juggling, because you have balances that are not being paid off. If you juggle, therefore, you are no longer suffering because you had medical bills that are outside your control: you are now (and in an endless future) suffering because you're making the poor choice to juggle.

Plus: the $400 burden may feel high, but that's only $200 more than you're stuck with anyway, so it's really only a $200 extra burden...and it's one that, if you can keep the now-paid-off credit cards stashed away, leaves you with better credit (so you can borrow money cheaper in the future if another medical emergency arises.)

So stop being cheap. Sign up for the $400 a month, pay it off, and be better off from day one because of what it will mean for your credit rating and your ability to stop juggling and focus on more important things.
posted by davejay at 1:11 PM on October 30, 2013


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