#1. Lack of liquid savings. They'll kill themselves to fund their 401k (my financial advisor said MAX IT OUT!) while paying 25% interest and late fees on credit cards because they're cash poor. Then the car breaks down.
Greg, I couldn't agree more. I sometimes hear folks say, "Well, the only reason I have $25,000 in available credit is just in case of an emergency." I heartily disagree with this way of thinking. (And it makes me feel even worse for someone when they're in their 50s or 60s with little to no savings.) Thinking of credit as an "emergency fund" is not quite as bad as thinking of credit as another paycheck ("WOW -- a Target card with a $1,500 LOC -- what should I buy!!!!????"), but it's still pretty dangerous. Needless to say, it's a smart idea to steal an idea from Grandma's playbook and save over time a "rainy-day fund" (Grandma's term for "emergency savings") of at least 3 months worth of pay. Doc
Doc, By the way, my response was not disagreeing with Greg. I heartily agree with him. I was just pointing out that I think my 401k (minus all the losses lately) is one of my better retirement funds. I also have a few low risk short term investments that I think of as my "rainy-day fund". I just wanted to point out that someone with a 401k fund and a bunch of credit debt could consider a loan against their 401k to pay off that debt and then would be paying themselves interest. Of course, if they rip you off to get the loan, like Quxote, then you would definately have to think about it. But if you can't pay your bills it's ludicrous to fully fund the 401k. And I also agree with you that thinking of your total credit limit as an emergency fund is a recipe for disaster. Yikes!
#2. Consumer credit with a failed (or no) exit strategy. They become consumer debt users for two decades; a way of life. Laziness creeps into the best laid plans to pay off, over the following three months, a $1000 vacation financed by a credit card-- but somehow, it didn't work out like on paper. Neither did the next $1000.
Pat, I was right with you and didn't consider it as disagreement (which is allowed in any case, LOL). Good points regarding 401k. Greg, when people use credit cards to "finance" dinner at nice restaurants and then carry large balances for long periods of time, they don't realize that $60 dinner may easily cost double or triple that in the intervening years. Talk about investing in disposable assets! It's not very palatable to consider where that asset inevitably ended up. Doc
#3 Consolodating debt in to a loan (or 2nd mortgage ) and then running up all the consumer debt again. All too easy to do if you fall into the trap of using credit cards to spend more than you earn. Heck, perhaps spending more than you earn or living beyond your means should be #4, 5, and 6. While I'm commenting on this, I just want to stray off topic for a moment to thank Love, Doc, and a few others in chat last week who tried to help me figure out what advice to give to a relative of mine who is in trouble. I had promised to post the details here but things heated up and I got busy . Basically, the story is this... they aren't ready yet. Some folks can't be helped until they're ready to bite the bullet and change some of the basic issues which caused the problem in the first place - which maybe isn't so off topic in this thread. Even though I don't currently have any issues I need to resolve, and I am certainly no guru! I have enjoyed this board and plan to hang around (if ya'll don't mind). Maybe one of these days - when they're ready, I'll introduce my relatives to this board Myschae
so, are you saying that I should stop contributing to my 403b(401K) until I pay off this debt I have in credit cards. I was contributing to off set some of the taxes they were killing me with. I put in $9000 annually now and i thought I should be putting in more.
roni, Not trying to answer for Greg. But here I go anyway You could always figure it out financially. $x in taxes (lower because of 401k contributions) + $x in finance charges vs. $x in taxes (higher, less 401k) + $x or $0 in finance charges. Can you take a loan on your 401k to pay off the cc debt. Then at the very least your paying the interest to yourself. That is if they don't charge for the loan.
I just recently obtained this credit card debt when buying things for my new townhome. My 403b is basically nothing b/c I just started it. I has worked out a budget to pay off this debt in 12 months. I just hope I stick to it.
Roni, If you can pay the cc off in 12 months, do that and still contribute to the retirement accounts. The danger is when you run balances year after year at double digit interest rates that makes contributing to a 401K not such a good idea.
You hit it right on the button..You would not believe how may people I come across that make $40000 a year and drive or would like to $40000 car. Just because we can does not mean that we should. Same thing with credit cards. We always expect the future to be more financially rewarding than where we are today so we spend now and figure in the future we will be making more so things should be fine..Then the next thing you know we go through a recession and you lose your job and you are in financial hell.
Roni given your knowledge of credit I would go for the tax savings, in the long run you will do fine. You will not miss the money saved, long term tax exempt. : ) It is the guy who puts all of his spare change into the 401k while getting $34 over the limit fees and $34 late fees that is really hurting. I wish they would give good solid financial teaching to high school and college kids. Student loans with an occasional forbearance can take 15+ years to pay off. A well kept secret.
My problem is I don't make a whole lot of money and I have NO CHOICE but to live within my means. My question how do you save without a 401K plan, my employer offers it but at the salary I have it would not make any sense to contribute to it. I plan to leave to find a better paying job. Are IRAs any good and do you have to contribute alot of money? I do have some money saved but the bank pays 2% interest which is a joke.
Currently, you can contribute up to $2k a year in a tradional IRA and get the tax deduction. Any number of on line brokerages offer no fee IRA's. Regarless of how much you make, you should contribute to a 401K if available. {Assuming you are knee deep in double digit consumer debt} Even $10 a pay period will be something and it all adds up over time. Good luck in your job serach. You might want to visit the motley fool for some ideas on budgeting, living below your means, retirement savings, etc. As others have said, it's not a good site for credit repair but, it offers solid advice in many other areas.
