I’m 23, transitioning jobs, and I make $32,000 a year. I have $11,000 in a 401(k), and about $15,000 in debt. Should I cash out the 401(k) to pay down my debt?
Cody Dear Cody,
I don’t think so. When you take money out of a 401(k) they charge you a 10 percent penalty, plus your tax rate. Your tax rate is about 20 percent, so that means you’re going to take a 30 percent hit. While I love dumping debt, your idea would be kind of like saying, “I want to borrow $11,000 at 30 percent interest to pay off my debt.” That doesn’t make a lot of sense, does it?
I never tell folks to cash out a 401(k) or IRA to pay off debt, unless it’s the only way to avoid foreclosure or bankruptcy. You’re not facing either one of those situations, Cody. So my answer is no.
Do it with no fees
What do you think about making bi-weekly mortgage payments?
Jeremiah Dear Jeremiah,
I think it’s an awesome idea. By doing that, you can pay off a 30-year mortgage in about 22.8 years, on average, depending on the interest rate.
However, I would never pay someone a fee to set up bi-weekly mortgage payments. All you do on a bi-weekly schedule is make half a payment every two weeks. Since there are 26 two-week periods per year, that equals 13 whole payments. It’s nothing magical, and it’s not difficult.
Go for it, Jeremiah. Get rid of that house payment as fast as you can. Just don’t pay extra fees to make it happen!
Dave Ramsey is a trusted voice on money and business. He’s a best-selling author and his radio show is on more than 500 radio stations. Follow Dave on Twitter at @DaveRamsey and on the web at daveramsey.com.