Q&A with Ric: Should I Cash In My 401(k) To Get Out Of Debt?

Ric Endelman
Ric Endelman

By Ric Edelman

Question:Your show Tuesday night gave me the first hope I've had in awhile. My question is do I try to refinance my home, sell it, get a different job, or cash in my modest 401k to turn this around? I have survived a very difficult 2 1/2 year custody battle that cost $30,000+. I would do it again for my son's sake and well being. At separation, I was a stay-at-home mother. I went back to school to earn my masters degree in teaching to be an effective single parent in my child's life. My graduation and my divorce finalized both in 2007. Here are my statistics:

  • Own home ($268K value-$120K loan; current payment $853/month)
  • Credit card debt ($56K-includes attorney fees, unexpected car maintenance $5K, etc; best guess is still hangin on to fairly good credit)
  • School loan ($40K-currently deferred and earning interest)
  • 401K from previous employer before marriage and child ($36K)
  • Current salary ($2,985K/month)
  • Alimony of $1,000/month through Dec 2008

Any advice you could give would mean more to me that I could express.

-C. from Washington

Answer: Congratulations on turning your life around. Do not make any draconian changes at this time - you've had enough of that lately!

  1. Do not withdraw the money from your 401(k) plan. Instead, roll that money over to an IRA (if you need help with this, just call my office).
  2. Contribute to your school's 403(b) plan. Your goal is to contribute 10% of your pay. If you feel you can't manage that much right now, start smaller, and increase your contributions over time. Best way: with each salary raise, increase your contribution amount by 1% or 2%. Soon, you'll be at the 10% rate. For help in deciding which funds to select in your 403(b), just call my office. We're happy to help.
  3. Call your lender to see if you can refinance to a lower rate, or to a fixed rate loan. You did not tell me the details of your current loan so I can't provide further information.
  4. Make your normal car and school loan payments - do not pay more than the required amount each month. It's ok if it takes years to pay these off.
  5. Pay as much to your credit cards as possible to get rid of them as quickly as possible. Chapter 51 of The Truth About Money shows you exactly how to do this. Please read that.
  6. You should get a new job only if it offers better career, salary, benefits and lifestyle opportunities than your current job. A better choice might be to get a 2nd, part-time job.

All the best,