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Good News Bad News

October 7th, 2009 at 07:33 am

The good news is our monthly billing for our electric and gas is going down by $5/month. They dropped it by $17 a month ago and now another $5! Of course, they are overbilling us...right now we have nearly a $300 credit.

The bad news is about a friend. A friend I've known for over 20 years. She and her husband are taking out a 401k loan. No! Say it isn't so. But it is.

She asked me very briefly on Monday what I thought about it. I don't know any numbers...except they have a lot of credit card debts and they are getting hard to manage. I guess I have one number: they are pulling from their line of credit every month to the tune of $500-$700 per month. I guess they pay this back each month.

About 3-4 years ago they took out a home equity loan to pay off all their bills. She was thrilled at the time since they would all be paid off in 5 years. She feels the same way about the 401K loan. It will all be paid off in 5 years. True, but at what cost. At what risk? And what lesson is learned when you move debt around?

I did a little reading after talking to her. Loans from a 401K loan are paid back with after tax dollars...and then when you pull the money out in retirement you are taxed again! Yep, double taxation. Ugh.

I was honest in my conversation that it would be important to get spending under control...so they don't end up at this same spot 3 years from now. She completely agreed and mentioned a credit card cutting party. She might even put them in a jar as a reminder. I hope so. I so very hope so!

7 Responses to “Good News Bad News”

  1. Broken Arrow Says:

    This reminds me of a friend of mine's wife taking out a 401(k) loan as well. Being a professional financial analyst, she knew exactly how serious that meant, and I can still see the shamed, sullen look on her face when she said that.

    I guess that's a different story though, because my friend's wife knew how bad it is to resort to something like this. It's also the only example I know of where, after hearing their numbers, I also thought it was justified to take out a 401(k) loan. They have it paid off now by the way.

    I agree, 401(k) is pretty much never a good idea. But... I think that's because people who take it out may not grasp the gravity of the situation when they do so. They may see this as another cheap way to borrow money, and that attitude is what I think makes it so dangerous.

    Hopefully, your friend will have this paid off soon.

  2. merch Says:

    You might suggest she read Dave Ramsey's Total Money Makeover. I found this to be a pretty solid book on getting out of debt, especially if you don't know where to begin. The biggest issues will be controlling herself and her and her husband being on the same page.

  3. ceejay74 Says:

    Back when I was a financial wreck and clueless to boot, I thought about a 401(k) loan a few times. I'm not sure how I talked myself out of it; I guess in the end, drawing from the only form of savings I had to my or AS's name just seemed like a psychological hurdle that even I in my financial recklessness couldn't jump. Especially since your friend, like me, doesn't have a proven track record of paying off debts yet, I would just caution against it if she asks you again.

  4. creditcardfree Says:

    Ceejay...she's already confirmed they are doing it.

    Merch...great suggestion. I know I've mentioned it in the past, but I guess I need to bring it up again. I think she trusts my judgement, but never seems to take my advice. Hmmm...maybe she doesn't trust me.

    BA...I think on some level they know the gravity of the situation. I hope it does work out. In five years, we'll know!

  5. LuxLiving Says:

    Oh my, hate to hear that someone is doing this as it'll only be one of those bandaid solutions until they turn their thinking around on debt.

  6. homebody Says:

    Can't they change their mind? Has it already been funded. Isn't there something else they can do?? Double taxation, heck they will be lucky to have 25% leftover in the end. Sorry to hear that.

  7. creditcardfree Says:

    Homebody...that's the problem, they have made up their mind that this is what they are going to do...despite my warnings against it. They don't "think" they can refinance. Which makes me think they haven't even tried. Crazy.

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