Ask The Money Coach

Posts Tagged ‘401(K)’

Even though $200 a month in savings might not sound like a lot to some people, you’re actually doing quite well on the savings front, given your salary. Saving $200 a month translates into $2,400 a year, which means you’re tucking away about 9% of your $28,000 annual income. That’s pretty good, so be encouraged about that. I know it’s hard to stretch a modest income, especially as a single income. So if you want to save a bit more, start by knocking out some of the credit card debt you mentioned, namely that $3,800 Discover Card or that $380 balance you’re carrying on your Gap store card.

On your credit cards, pay two to three times the minimum payment required to more quickly eliminate those bills. When the credit card debt is paid off, you can start putting into savings the money you had been putting toward those credit card debts. Also, if your employer has a 401(k) plan or another retirement savings plan, make sure you contribute to it. You may be able to get a matching contribution from your job, which would add to your savings in a pain-free way. Lastly, look at every area of your budget to see if there are areas where you may be inadvertently overspending, perhaps on food, goodies for the kids (i.e. clothes, toys, etc.) or even certain “luxuries” for yourself, like hair and nail appointments. Don’t totally change your lifestyle just to save a few more bucks. But where possible, cut back on a few categories of your existing spending in order to keep more of your hard-earned dollars.

I don’t think it would be a good idea to tap your 401(k) to pay off that high rate credit card debt because it would be very costly to do so. For starters, since you are under 59 ½ years of age, that 401(k) distribution would be considered “premature” by the IRS. This means your $10,000 would be subject to ordinary income taxes – along with a 10% penalty by the IRS. I don’t know what tax bracket you are in currently. But let’s assume you are in the 25% tax bracket. You would have to pay the federal government $2,500 in ordinary income taxes, plus a $1,000 penalty. So all in all, your $10,000 is effectively reduced to $6,500 – because you’ll have to fork over $3,500 to Uncle Sam. That’s the equivalent of paying 35% interest (in the form of taxes) in order to access that $10,000. That’s too high a price to pay. I know you want to get rid of that high-rate credit card debt. But I’d recommend using some savings (not retirement savings), or finding an alternative source of cash to pay the credit card debt. If that’s not possible, try two other strategies: Call your credit card company and ask for a lower rate. Depending on your payment history, they may say yes. Also, start tripling the payments you’ve been paying on your credit card. If you can be even more aggressive, using some of the pension income you receive from your former employer, that will knock out your credit card debt even faster.