Debt sucks, but screwing over my future just to pay for my past decisions doesn’t seem all that wise either.
I have come a long way in my journey to being financially educated. While I still have a long way to go, one thing I’ve learned is that borrowing money is to be avoided at all costs.
Currently, the money I’ve borrowed would if I stuck to the plan keep me in debt into my 50’s. However, I’m going to do my best to pay off me debt early and to set my future self up for success by taking advantage of my 401(k).
The reason paying off my debt will take so long is because I’m not just paying back the money I borrowed I’m paying it back with lots and lots of interest. If you looked at my Debt Journey, you would have noticed that my student loan balance is over $230k. When I finished school, it was $193k.
1. My 401(k) Belongs to Future Me
Even with my debt, I do have a 401k, I contribute enough for my company match and no more. Given my economic realities, I’m in no position to turn down free money.
The amount has built up, enough that by the end of the summer if I were to use it I’d be able to start turning the tide on my student loan balance this year. However, I won’t be doing it, because the money isn’t really mine. It belongs to future Liz.
Future Liz is going to be needing that money. If I were to borrow that money, I’d not only have to pay it back but with interest too.
See I’m hoping that the interest on my 401k will work in my favor (that is generally how it works). Borrowing against it will hurt more than help me. Plus it will really piss future Liz off (trust me).
I don’t like being mad at myself. I’m already plenty mad at myself for the damage I’ve already done and robbing future Liz to pay past Liz isn’t going to solve any problems. So I’ll keep contributing to future Liz, while I work my ass off to pay for past Liz’s mistakes. I will also now stop talking about myself in the third person. You’re welcome.
2. There Are Penalties for Withdrawing From Your 401(k) Early
Since my contribution to my 401(k) is pre-tax, withdrawing before I’m 59.5 means I will have to pay both state and federal income taxes. Additionally, I’ll have to pay a 10% early withdrawal penalty.
For example, if I were to take out $10k from my 401(k) after taxes and the penalty I end up with about $7,000 (approximate, taxes may vary). Alternatively, if I keep that $10k in my 401(k) It will earn interest on average of 4-7% each year. So in 5 years, assuming it earns at an interest rate of 4% it would total $12,166.
3. My 401(k) Is Regularly Increasing My Net Worth
Since I have so much debt, I actually have a negative Net Worth. However, by regularly contributing to my 401(k) I’m helping to increase my Net Worth. As a bonus, my 401(k) is earning interest that also adds to my total Net Worth.
I have the contributions pulled directly from my paycheck, so I can consistently grow my net worth without ever having to think about it.
Now I wouldn’t suggest you go on complete autopilot. Make sure you understand the vesting schedule of your 401(k) as well as any employer match increases. After three years my employer increases their match, however in order to take advantage I had to increase my contribution.
Wrapping it Up with a Bow on Top
Your 401(k) is money that you have wisely set aside for your future. If you are in debt then you know how much it sucks when you don’t have enough money for all the things you want. Do you really want to screw over your future self by borrowing or withdrawing from your 401(k) early? No.
In case you need more convincing, here are three reasons why you should never borrow from your 401(k):
- It belongs to future you
- There are penalties for withdrawing from your 401(k) early
- Your 401(k) helps to increase your net worth
What are your reasons for keeping your retirement money where it is at?