Break out 401k or keep paying monthly minimum debts?
March 8, 2018 12:30 PM Subscribe
Dear Friends, Brothers & Sisters! Please share your valuable insights, wisdom.
Got 35,000 credit card debt. 18% APR
Another 35,000 in personal loans, signature loans etc
There is 40,000 in my 401(k). My employer no longer matches, so I contribute my 4% (optional)
I have invested 105,000 in overseas stock market, which I am not willing to sell, unless I have to.
I am in late 30s, single, no kids. I live in north america on a work visa, part of the reason I don't want to break the overseas investment.
Living expense (Rent, food, clothes, entertainment) 1500-2000 per month
Debt monthly payments average about 4,000
Should I keep paying my credit card debts monthly, like how I have been doing?
Or break out my 401(k)?
My credit cards are all maxed out, credit score is about 600.
Got 35,000 credit card debt. 18% APR
Another 35,000 in personal loans, signature loans etc
There is 40,000 in my 401(k). My employer no longer matches, so I contribute my 4% (optional)
I have invested 105,000 in overseas stock market, which I am not willing to sell, unless I have to.
I am in late 30s, single, no kids. I live in north america on a work visa, part of the reason I don't want to break the overseas investment.
Living expense (Rent, food, clothes, entertainment) 1500-2000 per month
Debt monthly payments average about 4,000
Should I keep paying my credit card debts monthly, like how I have been doing?
Or break out my 401(k)?
My credit cards are all maxed out, credit score is about 600.
Are you making an 18% return on the international investment? Can you sell enough to pay off at least your credit card debt but leave some of it in there? I'd avoid touching the 401(k) because of the penalties but if it were me, I think I'd sell enough of the overseas stock to pay off the 70,000 in credit card debt and loans and try to avoid getting in that situation in the future. Plus, if you do that, and your debt monthly payments average around 4,000, you can start putting that 4,000 monthly back into the stock market -- that's 48,000 in 12 months! Enough to make up for over half of what you had to borrow, AND you still have your 401(k), AND you're debt-free.
posted by jabes at 12:55 PM on March 8, 2018 [30 favorites]
posted by jabes at 12:55 PM on March 8, 2018 [30 favorites]
I don't understand why you wouldn't sell enough of your stocks to pay off the credit card debt at least. Is it earning more than 18% annually? What are the rates on your other loans?
posted by Kriesa at 12:55 PM on March 8, 2018 [1 favorite]
posted by Kriesa at 12:55 PM on March 8, 2018 [1 favorite]
not the poster, but what I'm reading between their lines is their visa class is classified as "non-immigrant" or temporary, and that a requirement of issue or renewing that visa is demonstrating that you have strong ties to your home country, and owning assets overseas, like stock, could be used as a strong tie.
With that said, you're in a losing position with these debts and any gains that you make in your 401k will be outstripped by your interest payments. You should not go along with what you're doing now. Either break the 401(k) and get yourself some headroom to pay off the remainder of the debt, or consider how much of your overseas investment you can sell to pay it off.
fwiw, I am also a foreign national who went to grad school in the US, racked up some debts while being a fulltime student and raided my old 401(k) to get myself out of that hole. It hurt but it was better in the long run than being caught in a pit of high interest payments.
posted by bl1nk at 1:05 PM on March 8, 2018 [1 favorite]
With that said, you're in a losing position with these debts and any gains that you make in your 401k will be outstripped by your interest payments. You should not go along with what you're doing now. Either break the 401(k) and get yourself some headroom to pay off the remainder of the debt, or consider how much of your overseas investment you can sell to pay it off.
fwiw, I am also a foreign national who went to grad school in the US, racked up some debts while being a fulltime student and raided my old 401(k) to get myself out of that hole. It hurt but it was better in the long run than being caught in a pit of high interest payments.
posted by bl1nk at 1:05 PM on March 8, 2018 [1 favorite]
You can generally borrow from your 401K at extremely low interest rates, since essentially you are borrowing from yourself. Take out the maximum loan you can and use it to pay down the CC stuff. Do NOT simply dissolve the 401K plan as the tax (with the 10% penalty) can cause you to lose 25-45 % of it, depending on your tax bracket. Unfortunately, the maximum you can borrow is, I believe, only half of what's there. But check this out: your plan may be different, and the last time I did this was 25 years ago, so rules may have changed.
I personally would think long and hard about the "untouchable" overseas stocks, though I understand that selling now, plus losing on the exchange, may be problematic. But, after you pay off what you can from your 401K plan, you'll still have about $15K in credit card debt. 18% of that is $2700. That's still a big chunk to be losing each year. Weigh that against the cost of breaking into the overseas stocks.
posted by ubiquity at 1:07 PM on March 8, 2018
I personally would think long and hard about the "untouchable" overseas stocks, though I understand that selling now, plus losing on the exchange, may be problematic. But, after you pay off what you can from your 401K plan, you'll still have about $15K in credit card debt. 18% of that is $2700. That's still a big chunk to be losing each year. Weigh that against the cost of breaking into the overseas stocks.
posted by ubiquity at 1:07 PM on March 8, 2018
1. Stop contributing to the 401(k) for the time being. With a match, it made sense to do so but without one, paying down the debt should be your priority.
2. Depending on the foreign stocks and where/how they're held, you may be able to borrow against them at a more favorable rate than your credit card bills. Have you explored that option?
3. Consider taking a 401(k) loan rather than cashing it out. You can take up to 50% or $50K total, whichever is smaller (I know the latter doesn't apply to you, but I'm including it for anyone else that might be reading this for advice). You will find articles saying that you should not take out loans on 401(k)s because if you separate from the employer, you have to pay it back within a month or two. This is no longer true. It's still non-ideal to do, but the extra breathing room helps.
Also, even in that case, you're still only paying the early withdrawal penalty and taxes on it, which is no worse than if you just take an early distribution. Paying down $20K on your credit cards would save you approximately $2500/year which you could then put towards paying down additional debt.
This is really important - if you do take this option, do not use the increased headroom on the credit cards to spend more. That's the classic issue that gets people into more and more trouble when they take a 401(k) loan. Cancel the credit cards if necessary if you don't have the self control not to splurge when you see the available credit go up by thousands of dollars.
4. Work on reducing expenses if you can. You're in a deep hole. Don't cut things so tight that you're so miserable you can't function well at work but consider what can be shed if necessary.
posted by Candleman at 1:08 PM on March 8, 2018 [1 favorite]
2. Depending on the foreign stocks and where/how they're held, you may be able to borrow against them at a more favorable rate than your credit card bills. Have you explored that option?
3. Consider taking a 401(k) loan rather than cashing it out. You can take up to 50% or $50K total, whichever is smaller (I know the latter doesn't apply to you, but I'm including it for anyone else that might be reading this for advice). You will find articles saying that you should not take out loans on 401(k)s because if you separate from the employer, you have to pay it back within a month or two. This is no longer true. It's still non-ideal to do, but the extra breathing room helps.
Also, even in that case, you're still only paying the early withdrawal penalty and taxes on it, which is no worse than if you just take an early distribution. Paying down $20K on your credit cards would save you approximately $2500/year which you could then put towards paying down additional debt.
This is really important - if you do take this option, do not use the increased headroom on the credit cards to spend more. That's the classic issue that gets people into more and more trouble when they take a 401(k) loan. Cancel the credit cards if necessary if you don't have the self control not to splurge when you see the available credit go up by thousands of dollars.
4. Work on reducing expenses if you can. You're in a deep hole. Don't cut things so tight that you're so miserable you can't function well at work but consider what can be shed if necessary.
posted by Candleman at 1:08 PM on March 8, 2018 [1 favorite]
You don't say your monthly income. Is it in the $6000 range, or are you going deeper in debt? If you are going deeper in debt just paying your bills, then I'd talk to a lawyer about bankruptcy.
posted by The_Vegetables at 1:37 PM on March 8, 2018
posted by The_Vegetables at 1:37 PM on March 8, 2018
Absolutely liquidate (enough of) your foreign investments to pay off the CCs + loans.
You need a budget and a plan before you do anything though, otherwise you'll just end up here again.
posted by so fucking future at 2:29 PM on March 8, 2018 [1 favorite]
You need a budget and a plan before you do anything though, otherwise you'll just end up here again.
posted by so fucking future at 2:29 PM on March 8, 2018 [1 favorite]
Agreed that some soul/budget searching to determine what got you here and how to break out of it is needed.
posted by Candleman at 3:09 PM on March 8, 2018
posted by Candleman at 3:09 PM on March 8, 2018
Can you get that CC debt at a lower interest rate. With 18% interest, a significant portion of your repayment is going to interest. One way is just to call and talk to the credit card company and ask for it--sometimes they will lower it, especially if you have been delinquent, because some money is better than no money. Alternately, are you able to get a card that has promotional 0% interest for a balance transfer, and transfer at least a portion of your credit card debt to that? I have done this successfully in the past and switched $15k in CC debt onto interest-free cards. You will want to read the fine print and make sure that you won't be responsible for all the forgiven interest if you aren't able to pay it off by the end of the promotional period.
Also, if you do that, it goes without saying that you CANNOT USE your cards anymore. You are in a cash-only situation at this point.
Agree with others who say for now, your problem is immediate and I would consider not contributing to the 401k for now if that 4% can help you pay down your debt faster.
posted by assenav at 3:38 PM on March 8, 2018
Also, if you do that, it goes without saying that you CANNOT USE your cards anymore. You are in a cash-only situation at this point.
Agree with others who say for now, your problem is immediate and I would consider not contributing to the 401k for now if that 4% can help you pay down your debt faster.
posted by assenav at 3:38 PM on March 8, 2018
I think you are a candidate for the Michelle Singletary method. She specializes in getting people out of debt. While many people give advice that is theoretically the best from a mathematical standpoint, that advice is often not the best from a human standpoint. The first thing she recommends, even before paying off debt, definitely before retirement savings, is saving for an emergency fund. Maybe $500-2000, that you put in a savings account and don't touch unless it is really an emergency like a job loss. Then build up a "life happens" fund of about the same size. This fund is used for the normal "unexpected" expenses like a car repair, medical bill, etc. Then she recommends the "debt snowball". You take the debt with the smallest total balance, regardless of interest rate, and save like crazy to pay that off. The rest of the debts you just pay the minimum monthly payment. The idea is to get used to saving and give yourself an early victory. Because you can do this. You have a lot more resources than most people with that kind of debt. Once you get the first balace paid off, you use the money that was going to that and attack the next debt. Ignore the people who say the highest interest should be first.
The other thing Michelle would say is do not cash your 401(k). Because the reason the credit cards got so high was that you were spending, so if you pay it off that way, you'll just go back to the old pattern. It's not about the math or interest rates, but your own psychology. Once you have a card paid off, cut it up, close the account, and get yourself down to just one card. Freeze it in a block of ice if you need to keep yourself from using it. Pay cash for stuff instead of putting it on the card. Whatever you can to condition yourself to get the spending in check.
posted by wnissen at 5:26 PM on March 8, 2018 [2 favorites]
The other thing Michelle would say is do not cash your 401(k). Because the reason the credit cards got so high was that you were spending, so if you pay it off that way, you'll just go back to the old pattern. It's not about the math or interest rates, but your own psychology. Once you have a card paid off, cut it up, close the account, and get yourself down to just one card. Freeze it in a block of ice if you need to keep yourself from using it. Pay cash for stuff instead of putting it on the card. Whatever you can to condition yourself to get the spending in check.
posted by wnissen at 5:26 PM on March 8, 2018 [2 favorites]
At 18%, you have in fact reached "have to" on selling the overseas funds.
The good news is that you'll have some left over when you're done and can start over.
It's all about the rates, as jabes said above, and then after that, the tax status. You are, effectively, losing money on those investments. The rate differences make this very, very clear: you must sell. But secondary, liquidating the 401k means you lose the tax-protected space, and there is no time machine for you to get it back once you've given it up. Also, you are paying taxes on the gains of investments outside of tax-protected space, while contributions to 401k are not taxed. But again, tax concerns are secondary to the simple subtraction of rates: market gain minus interest charged.
posted by Dashy at 6:54 PM on March 8, 2018
The good news is that you'll have some left over when you're done and can start over.
It's all about the rates, as jabes said above, and then after that, the tax status. You are, effectively, losing money on those investments. The rate differences make this very, very clear: you must sell. But secondary, liquidating the 401k means you lose the tax-protected space, and there is no time machine for you to get it back once you've given it up. Also, you are paying taxes on the gains of investments outside of tax-protected space, while contributions to 401k are not taxed. But again, tax concerns are secondary to the simple subtraction of rates: market gain minus interest charged.
posted by Dashy at 6:54 PM on March 8, 2018
Sell the stock, pay off your debt. You will free up $4000/month! At that point, if you really want to, you can save $4000/month for 26 months and buy back your $105,000 of stock.
posted by ian1977 at 6:45 AM on March 9, 2018 [2 favorites]
posted by ian1977 at 6:45 AM on March 9, 2018 [2 favorites]
I took a 401k loan to help buy our house. Then my employer folded and the balance became taxable. It continues to fuck with our finances and of course we have less for retirement. Don’t cash out your retirement accounts.
posted by infinitewindow at 12:16 AM on March 10, 2018
posted by infinitewindow at 12:16 AM on March 10, 2018
Any gains you are making in investment are being erased by the interest rates of your credit cards, and possibly your other loans as well.
posted by oceanjesse at 4:11 PM on March 10, 2018
posted by oceanjesse at 4:11 PM on March 10, 2018
This thread is closed to new comments.
posted by theora55 at 12:52 PM on March 8, 2018