credit cards or 401k? (payment, work, money, state)
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I am at the point of exhausting both my unemployment benefits and my savings, as I hit my 40th week unemployed today. I am getting a teaching certification and am pretty close to getting a job, and expect to have one by August (I'm bilingual certified, I shouldn't have too much trouble). I am set to exhaust my cash savings in July or so. At that point, until I get paid at the end of August (Lord willing), I have to decide whether to use credit cards or pull the money out of my 401k. I will have to cover my living expenses plus supplies for my new job. What would you do? Which is going to hurt me more in the long run, considering the period of time?
Edit: I am turning 30 this year.
Last edited by sweethearttx; 05-10-2010 at 01:16 PM..
I am at the point of exhausting both my unemployment benefits and my savings, as I hit my 40th week unemployed today. I am getting a teaching certification and am pretty close to getting a job, and expect to have one by August (I'm bilingual certified, I shouldn't have too much trouble). I am set to exhaust my cash savings in July or so. At that point, until I get paid at the end of August (Lord willing), I have to decide whether to use credit cards or pull the money out of my 401k. I will have to cover my living expenses plus supplies for my new job. What would you do? Which is going to hurt me more in the long run, considering the period of time?
If you can take a loan from the 401K, that would be the best option. Otherwise, I'd look at which credit card might have a low teaser rate for a cash adance and go that route, making paying it back before the teaser rate expired a priority. Good luck!
I can't take a loan out on my 401k because I'm unemployed. I might look at the credit card route. I sure hate this...so far I haven't had to take on any debt but at 40 weeks I can't make it much longer. A big part of me just wants to take the money out of the 401k and be done with it. I'm turning 30 this year, I have time to make it up right?
I think because you have time to make it up, you might want to go with the 401K. The 10% penalty plus the 20% tax is comparable to the 30% most credit card interests are now, but you won't have to pay it back. Good luck!
Do the math and call your credit cards to see who is willing to give you a cash advance or convenience check at the lowest rate.
Even if the interest rate for a $5000 cash advance is 30%, as long as you pay it back in six months, that's $750 in interest. My guess is that if you shop around you'll be able to get one of them to give you a convenience check that you can make out to yourself for 9.9% or less and a $75 one time fee. That would work out to $322.50 total cost for a $5000 "loan" as long as it's paid back in six months. Not all that bad in the big picture.
On the other hand if you take $5000 from your 401K, that's $1500, period.
Do the math and call your credit cards to see who is willing to give you a cash advance or convenience check at the lowest rate.
Even if the interest rate for a $5000 cash advance is 30%, as long as you pay it back in six months, that's $750 in interest. My guess is that if you shop around you'll be able to get one of them to give you a convenience check that you can make out to yourself for 9.9% or less and a $75 one time fee. That would work out to $322.50 total cost for a $5000 "loan" as long as it's paid back in six months. Not all that bad in the big picture.
On the other hand if you take $5000 from your 401K, that's $1500, period.
I don't think I could pay any loan of that amount back in 6 months on a teacher salary. I have nothing, I've drained everything. I won't have an extra $800+/month to repay a loan! I wouldn't have even had that on my old, and pretty high, corporate salary without really squeezing and pinching. Probably it would be best for me to tap into my 401k and then just start rebuilding from there instead of dealing with debt.
The thing with the credit cards is, you can do the math based on your current CC terms--but those can change.
If you start living off your credit cards, charging a lot and presumably not paying more than the minimum balance each month--they will slash your credit limit and raise your interest rates. The new credit card laws are limiting what punishment the CC companies can dole out via interest rates, so they are doing so with spending limits. You may have a 10k limit today, but if you suddenly spend $1k and only make the minimum payment--expect to see they've cut your limit to $5k or less in your next statement. And then all your other credit cards will lower their limits because another did, even though your activity with them doesn't warrant it. Doesn't make your CC plan look too rosy.
And remember if you go the CC route, future employers will see that. Your credit score will be affected permanently. It won't change the minute you get a job either.
I'd go with the 401k option. You take a hit to your retirement, but it doesn't keep coming back to bite you the way the CCs will.
The thing with the credit cards is, you can do the math based on your current CC terms--but those can change.
If you start living off your credit cards, charging a lot and presumably not paying more than the minimum balance each month--they will slash your credit limit and raise your interest rates. The new credit card laws are limiting what punishment the CC companies can dole out via interest rates, so they are doing so with spending limits. You may have a 10k limit today, but if you suddenly spend $1k and only make the minimum payment--expect to see they've cut your limit to $5k or less in your next statement. And then all your other credit cards will lower their limits because another did, even though your activity with them doesn't warrant it. Doesn't make your CC plan look too rosy.
And remember if you go the CC route, future employers will see that. Your credit score will be affected permanently. It won't change the minute you get a job either.
I'd go with the 401k option. You take a hit to your retirement, but it doesn't keep coming back to bite you the way the CCs will.
Look into doing an indirect rollover on your 401k. You'll have 60 days to get the full amount into an IRA to avoid any penalties and get your "taxes" back. It sounds like you should be able to do this if you can work out the proper timing.
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