After Monday’s post about not borrowing from the 401k, I had a thoughtful comment from someone who’s done just that and offered to share her experience. In my opinion, if you had to borrow from your 401k as a last resort, here’s how you should go about it. Here’s the comment from Cheapskate who blogs @ Yes I Am Cheap:
“Let me speak from the experience of someone who HAS borrowed from my 401K.
1. I borrowed from my 401K at 28 so I knew that I had quite a lot of time to repay the money. The loss in potential interest did not bother me too much. I also made sure that the repayment period was as short as I could afford it to be. I did not want to extend it.
2. I made the interest rate as high as the return that I had been getting on my money. Thankfully I borrowed the money right before the recent crash so I actually ended up preserving some of my money since my portfolio lost 35% last year.
3. I was in dire need on the money and had no other place to come up with the large amount of cash that I needed in such a short amount of time with an affordable interest rate. I would not recommend borrowing money to purchase a car or finance education or something like that but if it comes down to borrowing against the 401K and being out on the street then I am all for tapping that cash.
Everyone has different situations but you should be fully aware of what you are getting into. Know that you have to repay immediately if you separate from your job. Know that you have to pay both penalties and interest if you do not repay. Things like that could make you pause. Know that the loan is paid back with AFTER tax money.
I did what was right for me at the time and in 8 months or 16 payments from now I will be free of the 401K loan, freeing up a full $400 per month to smash my other debt. It also taught me how to live on $400 LESS per month while still contributing 6% of my pretax income to my 401K so I will nor return to my old ways.”
Thanks for sharing Cheapskate, and good luck getting rid of the debt and blogging your efforts at YesIAmCheap.com.