Suze Orman's Action Plan by Suze Orman Read Free Book Online Page B

money to pay off your credit card debt.
    ACTION: Do it. Once you get to the point where you have maxed out your employer’s matching contribution (ask HR to help you figure out the max you need to contribute to collect the full company match), then you absolutely should stop contributingso you have more money in your paycheck to put toward pressing goals. As I explain in “Action Plan: Credit,” reducing your credit card balances is not only smart, it is necessary. But you are to make paying off credit card debt your focus only if you have already taken care of building an eight-month emergency savings fund. An emergency savings fund must be your first priority; tackling credit card debt comes second on your to-do list.
    SITUATION: You plan on retiring in five years and are wondering if it makes more sense to keep contributing to your 401(k) or use the money to pay off your mortgage.
    ACTION: If you intend to live in your home forever, then I recommend you focus on paying off the mortgage. With one big caveat: If you get a company match on your 401(k), you must keep investing enough to qualify for the maximum employer match. That is a great deal you are not to pass up. But I wholeheartedly recommend scaling back your contribution rate just to the point of the match so that you’ll have more money in your paycheck to put toward paying off your mortgage before you retire. Yes, I realize this means you will have less saved in your 401(k), but you will also need a lot less because you will no longer have a mortgage payment to deal with in retirement, and for most retirees that is the biggest income worry.
    SITUATION: You can’t afford your mortgage and want to borrow or withdraw money from your 401(k) to make the payments.
    ACTION: Don’t do it. Too many people these days are making this huge mistake. I understand that you are desperate to hang on to your house and will do anything to avoid foreclosure, but I definitely do not want you to take a withdrawal. You will pay income tax and may also be hit with a 10% penalty for money taken out before you are 59½. And then, six months later, you will find yourself back in the same hole: All the money from your 401(k) will be gone and once again you will fall behind on your mortgage.
    A 401(k) loan carries a ton of risk too. If you are laid off, you typically must pay back the loan within a few months. So if you take out the loan, get laid off, and can’t pay the money back ASAP, you will run into another tax problem: The loan is treated as a withdrawal and you’ll be stuck paying tax—and possibly a 10% early-withdrawal penalty. A loan is also dangerous because the markets may rally during the time you have taken out the loan, which means you will have missed an important period to recoup some of your losses.
    It’s also important to know that money you have in a 401(k) or IRA is protected if you everhave to file for bankruptcy. You get to keep that money no matter what.
    My preference is that you scour every part of your financial life to find other income sources for covering your mortgage. See “Action Plan: Spending” for advice on how to squeeze more savings out of your current income.
    SITUATION: Your credit card account was closed down and your interest rate on the remaining balance was increased to 32%. You want to take a 401(k) loan to wipe out the credit card debt.
    ACTION: As noted above, it is just too risky to take out a loan from your 401(k). I understand the damage a 32% credit card interest rate can do, but I want you to resist the temptation to raid your 401(k). Please review “Action Plan: Spending” for my advice on how to seriously tackle your expenses to find savings you can then put toward important financial goals, such as paying off high-rate credit card debt.
    SITUATION: You’ve been laid off and don’t know what to do with your 401(k).
    ACTION: Whenever you leave a job—voluntarily or not—you have a few options for how to deal with your