Paying Off Debt without Using Your 401(k)

Paying Off Debt without Using Your 401(k)

Having unsecured debt can be a drain on your finances, but before you use your retirement savings to pay it off, you have to look at how you accumulated the debt in the first place.  Paying off your debt will solve the problem in the short run, but if you don’t address the cause of your debt, you will be doomed to repeat it.

Create a Budget

A large amount of unsecured debt is usually a result of living beyond your means.  Look at your budget and see where you can make cuts in order to keep your expenses down.  If you don’t have a budget, then it is time to get busy and create one.  

Budget to pay your bills, including your unsecured debt, and then set aside money to go into savings as well.  Your budget should account for about 90% of your income and another 5% to 10% will be for incidentals that you might buy everyday, such as a cup of coffee.  Sticking to a budget is the best way to get a handle on your spending habits.

Trimming the Fat

The next step in taking back control of your money is to trim unnecessary expenditures.  Instead of paying someone to mow your lawn, do it yourself to save money.  If you have more than one car, determine if two cars are necessary and, if you find that they’re not, sell one of them.  Downsize where you can to cut expenses and, if need be, take on another job to help pay for those items you deem as necessities.

Set Goals for Paying Off Debt

When you set your budget, set a time limit for paying off your unsecured debt.  By setting a goal, you will be able to budget how much you will need to set aside each month to pay off the credit cards or personal loans that are outstanding.  Try not to touch your retirement savings because you could end up losing more than you will save.

Penalties for Using 401(k)

If you have a 401(k) and you want to use it to pay off unsecured debt, try to ignore the temptation to do so.  People who are under the age of 59 1/2 who withdraw money from their account will pay a penalty of 10%, plus taxes on the money they take out.  This could easily cost you more than slowly paying off your debt.

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