If you are thinking about using your 401k to repay your debts, please think again. With people living longer in retirement it is amazing how many are living out their twilight years in poverty. They are afraid to turn the heating on or to buy too much food. You don’t want to end up this way too and that is what you are risking if you encash any retirement savings vehicle early. Plus it isn’t the easy solution it is often made out to be. The IRS doesn’t like people cashing in savings plans that have benefited from tax relief so they are likely to hit your withdrawal with a sizeable penalty. Don’t fool yourself you can make up the amount you take out, as you can’t. If you withdraw $10,000 now but pay back in $10,000 in three years time it isn’t the same thing. You will have missed out on three years worth of compound interest. The compound interest you earn on your long term savings is what makes their returns look so good.
Instead of cashing in your 401k to repay credit card debt you need to find out more about your financial situation. The only way to do this is to draw up a financial budget. If you don’t like using spreadsheets just get a piece of paper and list all your income on one side and the outgoings on the other. Don’t forget things like hair cuts or school trips for the kids. You probably won’t know what you spend your money on a daily basis, so it is a good idea to carry around a notebook for a month and note down everything you spend. So many people complain about having no cash as they move the take away pizza boxes out of the way so they can start their budget.
Once you have a budget you will be able to see if there are any expense you can cut back on. If you cook your meals from scratch you will save money and your family will be a lot healthier. They won’t be taking in as much salt and running the risk of obesity and diabetes when they are older. Cooking from scratch isn’t difficult so why not give it a go. You also need to think about taking packed lunches to school and work.