Is This A Good Stratagy For Attacking Debt
Here's the scenario. I have a friend that is currently trying to reduce their debt.
He has about $17000 in debt.
$7000 is in CC debt
$7000 in auto Debt
$3000 in Misc. Debt
He also has about $40,000 in an IRA (I think). Obviously he'll get a penalty if he takes it out.
His job doesn’t get paid that well. His first check of the month is usually spent on bills. His second check leaves him with an extra couple hundred extra after paying bills. I told him to take as much as he can and pay down his credit cards. Looking at it, I saw that it will still take him many many years to pay down his debt. Thinking about it longer my advice to him was to take out the money from the IRA and pay down his high interest loans (at least). I told them that their CC debts and their Auto loans are going down faster than the IRA is going up. Might be wiser to take the money out of the IRA and pay off the CCs and Auto loan. His concern is that this is their retirement money. I told him that since his job isn't going to give him any more raises (hit a glass ceiling), that his best scenario (without switching jobs) would be to take the money from the IRA and pay off these debts. This will stop him from paying interest to these companies that he owes debt to. Also since he won’t have to pay these companies any more, that will put more money in his pocket each month. And to obviously be careful not to get yourself into this situation again.
Your thoughts
[ Edited by ddemott on Date 09/26/2003 ]
Taking the money from the IRA is the best idea. Ask him to pull the CC bills, add all the interest he has paid for this year, and the last, and the previous years. Add it all up and see what your friend would have saved, and will save in the future. I would not worry too much about the car, It is 9 times out of 10 not worth the hassles for the finance company to repo it because they never get FMV for it when they try to sell it. They only tend to go after newer or high end vehicles for obvious reasons. What type of "misc" debt are you speaking about?[ Edited by fauche65 on Date 09/26/2003 ]
Personally, I would not use IRA to pay down the credit card debt. Think abut early withdrawral penalty and income taxes that you have to pay. I just don't like to pay any penalty, but this is my personal opinion.
Why not filp a couple of properties and pay off all the debt without touching the retirement fund? Otherwise I would use the extra $200/mo to pay down the debt with highest interest rate. Tthen do the next one and so on.....like the experts recomend.
Yes... It will take a long time but.......the slow painful method will remind you how quickly you can go into debt. And how long it takes to get out! That should keep it from ever happening again!
Good Luck
P. S. What us a BB Code?
Using IRA funds to pay off bills has to be the dumbest idea I have ever heard of. The penalty from early withdrawl and the additional tax hit will be at least a 30%. I was in this situation before and what I did (and what I suggest your friend do) is to get a 2nd job and use the funds from that job exclusively to pay down the debt that is currently assessing the highest interest charges. Usually Consumer Credit negotiates a lower interest rate on the outstanding debt so I would look closely into what type of interest is being paid on the other bills and decide which one is costing more in higher interest charges. I know this is not an easy solution but your friend should feel a lot better after seeing his debt going down rather quickly with the proceeds from the 2nd job. Good luck to your friend.
ddemott,
I know you have people responding that using an IRA to pay down debt is a dumb idea. However let me explain my logic: Every investment professional in the world will tell you that before you invest any money, you should pay down you debts. I do not know the specifics of your friends situation, but if he is having trouble sleeping at night, get rid of the debt and he will sleep better. The return on the IRA is probably no where near the interest on the CC debt. There are people saying get a second job (Depends on the situation), Flip properties (Depends on a number of factors). Debt elimination should be everyones priority, and using the existing funds that your friend has available regardless of penalty will pay off in the long run.
Arguements the other way:
http://www.stretcher.com/stories/99/991227d.cfm
I am trying to show both sides of the coin.
I think fauch might be right. Although I hate the idea of using a nest egg to pay off debt. It doesn't take a genius to figure out that if they are being charge 13% or more on the credit card and only making 3% in the IRA which one needs to be paid off.
It depends on what stage in life you are in as well. If you are young, than you have time to rebuild the nest egg. In the modern working world there are hardly enough hours in the day for work, family, fitness, quiet time, and what ever else life throws at you, never mind getting a second job and never seeing your family. Been there, done that.
It all boils down to ROI...
If he's paying 13% in credit card rates and 5% in his IRA, then you can say that he'll get a 8% ROI by paying down the CC's rather than making the minimum payment and putting money into the IRA. You'll have to calculate the true rate of using the IRA and add the penalty into the equasion. Here are a couple of ideas.
Call up the creditors and ask for a discount if he can pay it all off in one lump sum. I think he'll be surprised how many creditors will accept 75% of what is owed if he can send them a check. In that case, pulling money from the IRA will eliminate some of his debt and immediatly knock of 25% of that debt.
Have him apply for a credit card with 0% interest on balance transfers. Move the money, and pay it down aggressivly until the interest kicks in. Once the interest rate kicks in, apply for another similar card, transfer the balance, and do it again. It's a bit of work, but well worth the time.
Does he have a home with equity??? His best option may be to refi and pull out enough to cover his debt.
Lastly, the most important thing is that he learn how to manage his money and buy things ONLY when he has the money do do so OR when it will put more money into his pocket than it will take out (ie, RE with positive CF).
G' luck