Hi Money Minder,
Alright, so I know grabbing cash from a 401k is usually a big no-no, but just roll with me for a bit. My workplace is totally employee-owned and we’ve got an ESOP going on. I got scooped up by this company, so I’ve had a 401k for 5 years and the ESOP for 2.5 years. And man, the ESOP is incredible. Right now, my ESOP’s sitting at $46k, and guess what? My 401k is trailing behind at just $41k after twice the time.
Our company’s amazing; they toss in 12-18% of our salary into the ESOP yearly based on profit – and the profits are super solid. Plus, the stock’s been growing by an average of 10% over the last decade, with this year hitting a sweet 19%. The 401k though? They only match 1.5%. I did some conservative number crunching (5% salary increase, 12% ESOP, 10% stock growth), and it looks like the ESOP will easily hit the millions by the time I clock out for good, while the 401k feels kinda wimpy in comparison.
Here’s my dilemma: I’ve got a messy mix of debts – car loan, credit cards, and a couple of personal loans from past failed attempts to clear my debt (thanks to some life curveballs like healthcare bills and my old car kicking the bucket). The real killer here is juggling all these payments; it’s like drowning and the interest rates are brutal. Altogether, it’s about $22k in debt, but it’s been creeping up. I considered getting one big loan to wipe everything out, but all the interest rates they’re offering are over 13%, it’s a joke. I know I’d lose a bunch on fees and potential growth by tapping into my 401k, but being debt-free sounds incredible – a massive weight off my back. Am I totally off the mark here, or is there some sense in what I’m considering?
— Financially Flustered
Response from THE MONEY MINDER:
"Hello There,"
First and foremost, congratulations on being part of a successful, employee-owned company with an ESOP that appears to be performing well. It’s important to acknowledge the strides you’ve made and the benefits of your ESOP, especially considering its robust growth and substantial company contributions.
However, it sounds like the weight of your current debt is making it difficult for you to enjoy these long-term benefits. The idea of withdrawing from your 401k to pay off your debt is understandably tempting, but it’s crucial to consider all angles before making such a pivotal decision.
Withdrawing from your 401k comes with substantial drawbacks, including penalties, taxes, and the loss of future compounding growth. These penalties and taxes can take a significant chunk out of your funds, potentially more than the interest you are currently paying on your debts. Additionally, removing funds from your 401k reduces the amount that can grow over time, which can significantly impact your retirement savings.
Instead, consider alternative strategies to manage your debts and improve your financial situation without jeopardizing your retirement savings:
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Debt Consolidation: Explore debt consolidation through a credit union or a reputable non-profit credit counseling agency. Often, these organizations can help you secure lower interest rates and simplify your payments into one manageable monthly installment, potentially at a rate lower than 13%.
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Budget Adjustment: Evaluate your current budget to identify areas where you can cut expenses and redirect those funds towards paying off your highest-interest debts first. Consider any subscriptions, memberships, or discretionary spending that can be reduced or eliminated.
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Side Income: Look into opportunities to increase your income temporarily, such as freelancing, part-time work, or monetizing a hobby. Directing any additional income towards your debt can expedite repayment and reduce your overall financial stress.
- Employer Assistance Programs: Investigate if your company offers any financial wellness programs or assistance that might help you manage your debt more effectively. Some companies provide employee loans at favorable terms or partner with financial planners who can provide personalized advice.
Using these strategies, you can tackle your current financial challenges while still allowing your 401k to grow, preserving your long-term financial health. By methodically addressing your debts, you’ll be in a position to leverage both your ESOP and your 401k to secure a comfortable retirement future.
Wishing you the best of luck in your financial journey.
THE MONEY MINDER
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