I currently have a 403b with about $20k in it. I am planning on leaving my job late April and was previously planning on moving the money somewhere else. However, I owe a family member $15k for a car they bought me almost 5 years ago. I did not pay them back yet because we have been working on paying off all of our other debts (which we have paid them all off!), and the family member was not charging me interest or asking for the money back. So this $15k (and our mortgage) is the only thing holding us back from being debt free. Would it be wise to consider pulling the money out of the 403b when I leave my job, paying the taxes, and then giving my family member the money to pay off the debt? Then I was thinking about opening a Roth IRA with any remaining money since I think we can get down to owing the family member $10k by the time I leave my job.

Another factor which I need to look into is how my company has invested in my 403b. I am not fully vested since I will be about 7 months short of becoming fully vested so I am not sure if I will lose money from the 20k when I leave my job.

My Answer:

Regarding the 403b, I would NOT pull the money out of it to pay off the debt you owe the family member. The reason for this is because you will potentially pay a 35% penalty to withdraw the money early. The 403b will charge you a 10% penalty and then you’ll owe the IRS taxes on the withdrawal amount based on your current tax bracket which is probably 25%. So, would you borrow 15k at 35% interest to pay off the personal loan? No, I am sure you wouldn’t, so there’s no reason to use the money from the 403b.

When you leave the company, transfer the 403b money into a Roth IRA with a discount stock broker. I like Vanguard, Charles Schwab, and Etrade.com. You want to do a DIRECT transfer. This is very important, because if they cut a check to you, you cash the check, and put the money into another account, the IRS could hit you for the taxes. You want the money to go straight from the 403b provider to the new brokerage account. Whoever you choose will have instructions on what to do for a direct transfer.

I commend you for wanting to get out of debt quickly, and I think you still can, but the family member obviously isn’t hurting from that loan, so contact him or her and tell them you’ll start sending them money on a monthly basis. Who knows, maybe after 6 months of sending them money, they’ll forgive you for the rest of the loan. But, you definitely owe the money, so you should start putting together a repayment plan as part of your monthly budget to get the loan paid off as quickly as possible.
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Should I Cash Out My 403b Account To Pay Off Debt? is a post from: Money Crashers

It will free up your best wealth building tool: your income

Your income is the best tool you have for building wealth. When all of your money is coming in and going out the next day by dozens of bills to pay, you have nothing left over to save and give.

It takes away financial risk in your life

You may have no problem paying the monthly payments now, but what if something happens that changes your life? If you lose your job, have a death in the family, or a medical emergency, the last thing you want to think about is a student loan or a car payment. The less debt you have, the less financial risk you have.

It allows you to give more generously

Why pay interest to the bank when you could be giving that extra money to your church or favorite charity? It’s tough for broke people to be givers. If you pay off your debts, you’ll have more disposable income to give back to others.

You’re not getting rich off of an interest spread.

One common argument is that people would rather invest their money and make 7 or 8 percent, rather than pay off their student loan at 5 percent. First off, that 3% spread isn’t going to make you rich, and most people that make this argument aren’t factoring in taxes and fees with the money they are investing. Plus, if you pay off debts quickly, you’ll be able to contribute more to investments and build up cash much faster than before. Related Posts:

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Why You Need To Pay Off Debt As Quickly As Possible is a post from: Money Crashers

Sign #1: When your monthly payment is 50% or more of your take-home pay.

If you bring in $4,000 a month and your mortgage payment is $2,000, you’re going to have a really hard time paying all of your bills and necessities, especially if you have a family to support. You might be able to make it work for a short amount of time, but it will catch up with you.

Sign #2: You can’t afford the utility bills and/or home maintenance bills

If you bought a house without an emergency fund, then one emergency like the water heater bursting would force you to pull out a credit card and get into debt. Buying a home means that you have enough money to take care of it. Also, you need to remember that the utility bills go up significantly, because your maintaining a larger area, you have grass to water, and many cities now charge for trash pick-up and stormwater drainage fees.

Sign #3: You cannot get ahead or achieve your financial goals.

If most of your income is going to your house, then you won’t have anything left over to pay down debt, invest for retirement, save for kid’s college, or pile up cash for other large purchases. If you find that it’s hard to achieve these goals and you have nothing left over at the end of the month, then you either have a mortgage payment that’s too high or your spending habits are out of control.

If all three of these signs apply to you, then you need to seriously consider selling your home. It has become a financial burden, and you’ll never get ahead with money if you keep the home. Your home should be the last resort. If the payment is in line with your income and it doesn’t cost too much to maintain, then find every other alternative to achieve your goals. But if you find that nothing is working, then it usually means that the house is the problem and you need to dump it. Related Posts:

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When Should You Sell Your Home To Improve Your Financial Situation? is a post from: Money Crashers

Blake Thompson, the sound engineer for the Dave Ramsey radio show, posted this on Twitter and Facebook today:

64% of college students have credit cards, half do not know the annual percentage (APR) of the credit card they use most, and 42% of freshmen are credit card dependent. – Center of Economics in Washington

64% of college students have credit cards, and 100% of them can’t afford to pay them off! Don’t we see the problem with that? Credit card companies are extending credit to students who generally have no income. They might have jobs, but it’s only enough money to live on, not pay off credit card balances every month.

What About Emergencies?

There is too much temptation for a broke college student to have a credit card sitting in their pocket. No matter how responsible they are, they’ll end up using it once for something that’s not an emergency, and then it’s downhill from there. If you are worried about emergencies and you want to give your kid a real graduation gift, open up a high-yield, online savings account for them with $500 to $1,000 in it. Don’t tell them the username and password. If they have an emergency, you’ll have the money sitting there to help pay for the emergency.

What about building credit?

For what? Buying a new car after college that they can’t afford? Teach your kids to save money instead of relying on credit. What about buying a house? You don’t need to screw around with a credit card to get accepted for a mortgage. If your kid lands a great job out of school, has no debt, and he or she can prove that they paid their rent on time for four years, they’ll have no problem getting a mortgage loan from a company that does manual underwriting. Lenders that mindlessly look at credit scores to approve loans are the ones that go out of business.

What If I Co-Sign For The Credit Card?

Sure, if you feel like paying for another credit card balance and/or ruining your credit. I know your kid is really responsible, but this is a whole different ball game. It’s college. Kids do a bunch of stupid stuff, their mind isn’t focused on paying minimum payments for a credit card, and there are so many opportunities to spend money in college. One night out could easily be a $100 down the drain. Don’t ever co-sign for your kid’s credit card. You’ll end up ruining your own credit.

You may disagree with my stance on this issue, but please think before you encourage your kids to get credit cards while in college. They don’t have the resources to manage a credit card responsibly, and they end up coming out of college with $10,000 in credit card debt. It happened to me, and I will do and say everything I can to stop other college freshman from getting wrapped up with credit cards. Related Posts:

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Kids And Money: Should Your Kid Apply For A Credit Card While In College? is a post from: Money Crashers

Still in debt? Read my debt elimination series.

The Prize

Email your debt story to me at erik(dot)folgate(at)gmail(dot)com, and I will review them. I will pick one winner and send you a $25 itunes gift card! Please send them in by next Friday, August 21st. If you send me your story, then you are agreeing for me to anonymously post your story. I’ll make up an alias for you but i’ll use the current city you live in. So, get writing, I can’t wait!Related Posts:

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We Want To Hear Your Debt Elimination Story! is a post from: Money Crashers

A Mother was shocked when she experimented with her 6 year old boy applying for a credit card. He filled out the entire application himself and filled out the application truthfully. He filled in $0 for his income, “other” for his residential status rather than owner/renter, and signed his name that looked exactly like a 6 year old’s handwriting. Come to find out a few weeks later, he was issued a $600 credit limit from the Bank of America. How did this happen? This happened, because Bank of America only screens about 3 or 4 out of 10 applications. The ones that aren’t looked at are automatically issued a credit card.

Think you spend a lot of money eating out? Think again. A guy from North Texas received his credit card bill and saw that the balance due was $23,148,855,308,184,500.00. No, I didn’t write that wrong. The credit card charged him 23 quadrillion dollars for his meal at Five Sixty, a fine dining restaurant owned by Wolfgang Puck. Now that’s a programming error. The error was properly corrected, of course. But that bill would ruin anyone’s day!

I am sure I could come up with hundreds of more of these stories, but we all know that credit card companies simply don’t care who they extend credit to. Not only do I think credit cards are dumb financial “tools”, this kind of stuff just makes me laugh at them. The very people that beg and plead to the federal government that they are being hit hard by the economy and they need a bailout, are the same ones that extend credit to kids, dogs, and dead people. It’s crazy. When will these credit card companies start taking their lending practices seriously? Credit cards have become a joke.
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1. First, pay your most important bills. Your mortgage/rent, utilities, food, and transportation costs should be your first priority to pay. Don’t pay your credit card bill before you pay for the utilities bill. Take care of you and your family first, then start paying unsecured debt payments.
2. Second, brainstorm ideas for making extra money to stay current on debts. You can take a second job, sell a bunch of stuff, or start a side business (i.e. mowing lawns, consulting, cleaning houses). You must be proactive. The longer you sit and think about how you can’t pay your bills, the more your debts will pile up. Don’t dig the hole any bigger than it needs to be. Do whatever you can to scrounge up enough money each month to get those minimum payments made.
3. Third, answer this question, “What will I do in the long-term to increase my income?” Do you need to take a class, get a promotion, take a job at a different company, or get a certification? You must have a long-term plan to increase your income. The reason you can’t pay your bills is either because you have an income problem, a spending problem, or both.

If you still can’t your minimum payments, then the next few months will be ugly. You’ll have to let go of some of your debts, and be prepared to get harassed by debt collectors. They will do anything and everything to intimidate and belittle you to try to bully you into paying them. Check out my guide to dealing with debt collectors here. Here is a list of debt payments to pay by order of priority:

1. 1st Mortgage
2. 2nd Mortgage/HELOC
3. Car Loans
4. Student Loans
5. Credit Cards/Department Store Cards
6. Other personal, unsecured loans

Remember, you are not alone and you should not feel ashamed. However, if you continue to spend recklessly, don’t get an a budget, and don’t work like crazy to make extra money, you should be ashamed that you didn’t make the effort to stay current on your bills. The most important step is to have a long-term plan to reduce expenses and increase your income. Do this and you’ll be ahead of the game. Then, you’ll be able to start the Money Crashers debt elimination plan.

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What To Do When You Can’t Pay Minimum Debt Payments is a post from: Money Crashers

Since I left home at the age of 18, I have owned a land line for two years of out the ten years that I have been on my own. The first time I paid for it, I had gotten rid of my cell phone a year before, so my roommate and I split a land line so I could make phone calls when needed. The second year that I paid for a land line was my first year of marriage with my wife. I traveled here and there for work, and the apartment we rented required a land line to activate the security alarm. We hardly ever used it to call people, and the only people that called us on the land line were our mothers.

How Much Would You Save?

Every provider has different prices, but I will base my calculations based on the quotes from Bell South, which is now owned by AT&T. For a local land line with all calling features, the cost is $26, and if you want unlimited long distance throughout the United States, its $40 per month. So, even if you only had a local land line with the bells and whistles, you would save $312 a year by getting rid of the line. If you were paying for unlimited long distance, that’s a savings of $480 a year.

Some Misconceptions About Land Lines

• They are good for safety reasons. This isn’t true, because I have sat through many Hurricanes in Florida, and when the cell towers go down, the land lines become way too jammed to make a call out, anyway.
• You need them for security alarms. This isn’t true either. Technology for security alarms has come a long way, and they can be hooked up to your high-speed internet connection to notify monitoring companies.
• They are more reliable. Yes, they don’t rely on having a cell signal, but I remember several times when my land line just stopped working, because the lines were being worked on or something went wrong with the wiring in my house. And by the way, many phone companies will charge you to come out and fix the problem if the problem exists within your walls and not out by the telephone poles.

Saving Money By Eliminating Fixed Costs

This is a movement that many personal finance bloggers like me and Ramit Sethi from I Will Tech You To Be Rich are trying to place in the brains of people who have been subscribing to the “Latte Factor” for saving money. I believe that you should focus more on cutting your fixed costs like utilities, auto insurance, phone bill, cable bill, unsecured debt payments, gym memberships, and cell phone bills. You pay for this stuff on a monthly basis, every single month, so why not focus on reducing these bills? It’s instant YEARLY savinigs.

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Do You Still Pay For A Land Line? is a post from: Money Crashers

Meanwhile, the credit card portion is aimed at addressing consumer concerns.

The new restrictions would protect debt-ridden consumers from many of the surprise charges common in the industry, like over-the-limit fees and a charge to pay the bill by phone.

Some of the changes, including a requirement that cardholders receive 45-days’ notice before their rates are raised, are already on track to take effect in July 2010 under new regulations by the Federal Reserve.

But the legislation would put these changes into law and go further in restricting when and how banks charge people and who could get a card.

For example, the bill would require people under 21 to prove first that they can repay the money or that a parent or guardian is willing to pay off their debt if they default.

As banks scramble to make up for the lost revenue, cardholders who pay off their balance in full each month could also see annual fees become the norm and lucrative rewards programs canceled.

On the plus side for consumers, card holders who see their interest rate skyrocket because they have been late on a payment would get a chance at their older, lower rate if they pay their bill on time each month for six months.

Source: Fox News

I am about to sound like a complete pessimist, but that’s because I hate banks. These new regulations sound nice for the consumer, but banks will find a way to replace the revenue they will lose from the reduced interest rates. Going forward, it will be extremely tough to find a credit card without an annual fee and with perks such as reward points and cash back bonsuses. Basically, the government is going to make a bad financial product into a horrible financial product, because now you won’t even be able to get a gift card to chili’s or an extra $100 a year from paying all of your bills a credit card and pay it off immediately.

What are your thoughts on these new regulations? Will it improve credit cards or make them worse?

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Credit Card Regulations Bill Passed By Congress is a post from: Money Crashers

The process of spending more money than you make on a consistent basis that forces you to borrow money each month to reconcile the deficit.

How To Get Out Of The Debt Cycle

1. Cut up your credit cards. It’s the only way to stop using them. If you eliminate the temptation to use them, you will force yourself to find a way to pay your bills and expenses each month without using them.
2. Start a written budget. All you need to do is write down all of your fixed expenses and make a good guess at your variable expenses. Then, figure out all of your income for the month. If you didn’t overestimate your variable expenses and you see that you still don’t have enough income to support your expenses, then you might have an income problem. Read more about budgeting
3. Break your bad spending habits. Are you constantly eating out for lunch? Do you go overboard at the grocery store? Do you have more clothes than you know what to do with? Do you buy the latest gadgets when they first come out? Then, you could be a spend-a-holic. Print out your last three months of bank statements, and write down all of the purchases you made that you could have done without. This is not just a step to take. It’s a lifestyle and habit you must consciously work to change.
4. Ask For Help.

Seek out a couple, friend, or family member you know that is winning with money. Ask them to keep you accountable about stopping the debt cycle. It helps to know that someone is going to ask how you’re doing every week.

Stopping the debt cycle is the first step to getting out of debt. You need to stop the bleeding before you can think about your plan to get out of debt. Everyone has a turning point when it comes to winning with money, and getting mad about being trapped in the debt cycle is usually the beginning of that turning point.

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How To Reverse The Debt Cycle is a post from: Money Crashers