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Credit Card Debt Calculator”

What would you tell the 30-year old divorcee with 30k of debt?

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Jason writes:

I’m 30.

Just divorced. Not fun.

$30k in debt. Freaking me out.

I have an old 401k that I rolled over from a previous company into Sharebuilder. Value $8,500.

I’m very inclined to withdraw the cash with penalty and pay off a higher interest credit card (13%). I know that mentally and emotionally it will make me feel better to give a big “peace out” to a credit card that I cut up a while ago.

I’m torn and looking for advice. There’s no way I’m making 13% on the money within Sharebuilder.

My financial goals: pay off all debt as soon as possible, and live a simple, cash lifestyle with lots of savings / investment. Looking at all options: cutting back on $tupid crap, selling stuff, and maybe even freelancing to make more money (even though I make $80k+ at my full-time job). If you’re wondering, I have a Simple IRA that I contribute to every month with my current employer.

Any help is appreciated…

Before you answer…

What would you tell Jason? (And watch the comments to see how they differ from your own opinion…that’s the most interesting part.)

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  1. Three things:

    1. It’s good that the debt bothers you, but “freaking out” may not be the best thing. Stay concerned and on top of it, but don’t let it run your life.

    2. Keep the money in Sharebuilder and FORGET ABOUT IT while you pay off the debt. In a few years (very few, if investing intelligently) you’ll come back to that account and be amazed at this “windfall” you have. 13% is high, but it’s not crazy. It’s managable.

    3. You are young and obviously smart. Use that age and brain to pay off the debt as quickly as you can. Sorry that you are divorced, but, being single, you should have less expenses. Use that negative as a positive and reap the rewards when you have no debt.

    Good luck!

  2. If you take the 8,500 out of the 401k, it’s not just going to be penalized. It’s going to be subject to regular income taxes as well. Depending upon your tax bracket, it could be easy to see a third of it disappear before you even got to use it to pay off the debt.

    I’d say leave the 401k alone, and work on throwing every other dollar you have toward that debt.

  3. Don’t touch the 401k.

    Try to roll the debt onto a lower interest card or one with a no interest period. Pay the absolute biggest amount possible every month, even if you have to scale back on other contributions. Kill every bit of unnecessary spending. Sell stuff. Do the side gigs.

    If you have some kind of emergency with absolutely no reserves (your 401k), you will really be in a heap of trouble then.

  4. Don’t touch your rollover IRA unless you are transferring it to another firm to get better asset allocation.

    Call you credit card companies and negotiate a better interest rate. Cut other expenses and throw every thing you can at your debt.


  5. Hey Ramit, off-topic, but you wouldn’t happen to accept late submissions to the scholarship? I just found the link. If you could email me back I’d appreciate it.

  6. I felt bad for you at first, until I read that you make $80K a year. Yourself. My husband I and together bring home half of that income and we are fine for a family of 3. Unless you live in NYC or San Francisco I can’t see how one person would need that much. What are you doing with that extra 40K? Couldn’t you just use the it to pay off your debt? Please don’t think I am being insulting, I’m just flabbergasted.
    Okay, now I will read what others have written

  7. 1. DO NOT TOUCH YOUR RETIREMENT ACCOUNT! Penalties and taxes will apply and you will ONLY see about 60% of that money if you do.
    2. Get on a written budget and find a friend who can be your accountability partner on this. Being single you have no one to hold you responsible…they do not have to know all the details, but they need to be asking you if you are doing what it!
    3. Since you are single, explore those other areas where you can make money on the side!
    4. If you are REALLY serious, stop you current retirement contributions and put EVERY EXTRA dollar you have toward your debt! This is very temporary and you have to stick to the plan if you are going to do this!

    My wife and I did this last year (got lucky on the stock market timing) and stop IRAs and we are debt free except the house. But it takes getting really mad at having debt!

    Best of luck!

  8. As long as you are able to keep up with the monthly payments on your debts, you should not touch your retirement funds.

    Establish an emergency fund, scale down your lifestyle if needed, and keep working hard and making the payments. Any extra money should go toward your highest-interest debt. But you should not tap into your retirement funds unless you have exhausted every other option.

    Also, unless you’re getting some kind of employer match, you may want to consider redirecting your Simple IRA contributions toward your debts.

  9. I am amazed how many zombies say “don’t touch the 401k”. That is illogical its just advice that has been drilled into everyone’s brain’s for so long they just spew it out like they are the god of finance.

    Of course take out the 401k and pay off the debt. Of course do this. There is no point having money in a 401k (especially in this economy), when you have large amounts of high interest debt. Even taking the penalties on the 401k you will stake be far ahead in a few years.

    What happens if you lose money in the 401k? Then all you did was avoid paying penalties on 401k money that lost value while you still paid the 13% interest.

  10. I’m not in the US, so I’m not familiar with the 401(k), (I know what it is, but I don’t know the rules), but here’s my two bits:

    Since you make $80k/yr, and are single, you should be able to pay off that debt pretty quickly. Your options are:
    1) Get a consolidation loan from a bank. Interest rates are pretty much nothing right now, and if you have a decent job, (it seems you do), that seems stable I would expect that the bank would lend you $30k at a much lower interest rate than any of your cards, then pay off the bank loan however you set it up with the bank.

    2) Get some new credit cards with a 6-8 month “introductory rate” of 0-3%. You have to be disciplined and not use them for anything except paying the other cards. Then pay these cards off as fast as possible.

    3) Don’t bother with any of the above and just pay off the debt. If you make $80k/yr, (before tax? after tax? – let’s assume we have $80k to work with here), and you can cut your costs to, say, $3k a month, then you’ll have $3600/month you can use to pay the debt. You’ll pay off your debts in the 9th month from when you start, (I didn’t take interest into account, but you’ll have a bunch left over in the 9th month, and I’m guessing it can cover the difference).

    Basically, if you only have yourself to look after, you should be able to devote most of your $80k to your debt and pay it off quite quickly.