Use 401k to Jump-Start Debt Snowball?

Chad asks Dave if he should jump-start the debt snowball by using money in his 401k.

QUESTION: Chad and his wife have $35,000 in debt between credit cards, student loans and car loans.  They bring home $150,000 a year.  They also have $25,000 in their 401-K savings.  He wants to jump-start their debt snowball.  Should they use that money to eliminate their debt?

ANSWER: You should not take the money from your 401-K to eliminate your debt because $14,000 will go to penalties and taxes – that’s 40% of your savings.  It’s like taking out a loan with 40% interest to pay off your debt.  That’s a bad plan. 

Live on less for one year, get on a written budget, and you can have it all paid off in less than a year.

I would never cash out retirement savings to pay off debt unless it is to avoid foreclosure.

Jump-Start Your Goals!

Jump-Start Your Goals!

Get our 8-Day JUMP START series and weekly newsletter that are packed with articles and tools to help you win with money.

Reach Your Money Goals

Reach Your Money Goals

Start with a budget. Join the millions already budgeting with EveryDollar!

Create My (FREE) Budget

Thank You!

Your 8-Day Jump Start is on its way to !