Location: USA
My last job was barely paying me enough to get by and when I had a health issue last year I fell several months behind on my mortgage and other bills. That medical issue has since been resolved so I am no longer falling further behind but I am also not catching up.
Things are starting to look better though because I have recently gotten a new job which should pay slightly more (starting hourly rate is barely higher but overtime is more likely) and it should vastly reduce my expenses (cheaper and better insurance along with a company provided vehicle and gas). In addition it is going to be a far more secure job in the comming economic crisis. Honestly, it’s also looking like my dream job. However this new job requires me to purchase many of my own tools. There is a tool stipend but it accumulates hourly and only pays out quarterly so I will need to front my own tool costs to start with. The problem here is that even the cheap tools are going to cost me about $1000 and if I want a set of tools just good enough that they aren’t an active hinderance I’m looking at closer to $2000. I currently have no money which isn’t allocated to bills that I am already behind on.
It seems like a simple solution would be to take out a loan from my 401k. Right now I could take out a maximum loan of a bit over $6,000. $5,000 would be just about the perfect amount to catch up on all of my bills and buy the tools needed to do my new job. If I set it at a 5 year repayment term then the monthly repayment is under $100 which I should definitely be able to afford with my new job. I could go with a shorter repayment plan but my thinking is that without knowing exactly what my finances are going look like, I want to have the smallest required payments and just plan to pay it off early if my finances are where I expect they will be even if that means I pay a bit more in interest.
At the same time I don’t like the idea of taking out a loan to pay off debts that aren’t charging me any interest. My bank isn’t forclosing on me yet and, considering I am still paying them every month, I doubt that they will. My medical bills may go to collections if I let them sit much longer but there aren’t any late fees and I can always pay off the collections company as I get money. Just looking at the money it almost seems like the more financially sound long term plan would just be to choose to fall a bit farther behind on my bills now to buy my tools and then catch up on those bills later. My credit is already trash and will be for a while. But I also already own my home, have no plans of moving, and tend to buy dirt cheap used vehicles with cash, so I don’t really need a good credit score right now or anytime soon. So my late bills really aren’t doing anything but causing me stress right now. Does it really make financial sense to start paying interest on a loan just to get rid of that stress?
At this point I am heavily leaning towards taking out the loan. But I can’t help but feel that I’m going to be paying a whole bunch of money in interest just to feel more secure. I’ve also never taken out a 401k loan before. So should I take out the 401k loan or just temporarily fall even more behind on my bills? Also if I should take out the loan is there anything I need to know about 401k loans or any pitfalls to watch out for?
I strongly recommend you don’t do this. A 401k isn’t an emergency fund, and using it like a piggy bank even once will likely encourage you to do it again.
There are a ton of great reasons not to do this, and very few good reasons to do it.
I recommend negotiating the bills down and just cash flow paying them off. Use that discomfort to light a fire under your butt to take care of it ASAP, and then keep the spending low until you get a full emergency fund so it never happens again.
You pay interest to yourself, FWIW. My issue is with the psychological justification you’re doing here, not the interest.
If you need a loan, get it from your bank, not your 401k, and only if it’ll save you money. Losing that interest to a bank will piss you off and get you to pay it back faster. If you can’t get a loan due to crappy credit, then what harm would another default do?
Keep your 401k safe, don’t touch it.
Taking a loan from my 401k is not something I would be considering if I had any other credit options available.
You can’t default on a loan you can’t take out in the first place.
The bills I’m refering to can’t be negotiated lower. I’m talking, mortgage, utilities, liability only car insurance, and medical debt which has already been negotiated as low as possible. Any dischargable debt was discharged a bit over year ago via bankruptcy (which is why I have no credit options), unfortunately a medical issue cropped up after that. My optional spending is already as low as I can get it and even necessary expenses have been delayed far longer than they should be. Mainly, I have some fairly critical issues with the house which I can’t afford to fix but only get worse and more expensive to fix every day. I can’t even rent out part of the house for extra money due to those issues and the rental restrictions in my city.
Trust me, I absolutely know I should leave my 401k alone, if I had any other options to get money I would be pursuing them. Right now though I need a fair chunk of money basically immediately and my only options are:
Fall further behind on bills so I can buy the tools I need and plan to catch up later. My creditors won’t be happy and the bank may threaten forclosure again. But I can do that and it shouldn’t be an issue outside of the short term and delaying the recovery of my credit score a bit and delaying when I can start getting an emergency fund together.
Borrow money from my 401k. This has the various pitfalls you brought up but it would get me caught up and able to start building an emergency fund more quickly than option 1 which would save me money in the long term which would allow me to make higher contributions to my new 401k sooner.
This one is an even worse idea but it is an option I just recently found out about so I’m listing it. Roll my current roth 401k (I probably should have mentioned all my contributions are roth) into a roth IRA and then withdraw enough off the principal to cover immediate expenses. The literal only reason I’m even entertaining this idea is because not having to make loan repayments would enable me to start building an emergency fund immediately and having an emergency fund would save me money in the long run which would allow me to contribute more to my new roth 401k even sooner.
Remain behind on my bills by the current amount and just use option 2 or 3 to cover the cost of the tools. Then plan to catch up later.
Right now I’m mainly just torn on which way to go because option 1 costs me the least on paper. But at the same time being broke is costing me more money right now. The question is if I could use that money from my 401k (in one way or another) to start getting ahead of things now would it save me enough to eventually counteract my losses on my 401k. Considering I’m not really anticipating any gains (I’m pretty sure we’re all expecting a crash any day now) on my 401k in the near short term anyways I may be able to make better use of that money to increase my earning and saving potential now so I can make larger contributions while the market is recovering.