Posts Tagged ‘nest egg’

To Borrow or Not to Borrow against a 401K

Friday, July 10th, 2009

Question –

Because of the credit crunch, is this a good time to consider borrowing against a 401(k) savings as a means of paying off other loans? My current 401(k) planning investment return is 5 percent, and the interest I will be paying on it is 9 percent.

To borrow or not borrow against a 401K.

Answer –

If you only really consider the numbers in the situation, taking out a loan against your 401(k) in order to pay off a high interest credit card or some other higher interest debt may seem like a no brainer decision. This is because you would be paying yourself back the interest by paying back a 401(k) loan, but with credit card debt or a high interest loan you would be paying as much as 15 percent or more straight to the bank. Plus in today’s market, the 9 percent that you speak of is more than you would make if you were just keeping the money to sit in your account.

With that said, however, most 401k planning experts would shudder at the mere idea of raiding tomorrow’s intended nest egg to fund the financial indiscretions of today. This kind of thing may work out in terms of pure numbers, experts will gladly agree, but that does not make this a good idea, or even one worth putting consideration into. Financial planners generally agree that there are a number of concerns to touch on before you ever make a decision as large as this one, for example:

What if you leave your company?

If you leave your company for any reason at all, you generally only have 30 days to pay back the entire loan in full; otherwise you will have to pay ordinary income taxes on the withdrawal along with a 10-percent IRS penalty, assuming you are under the age of 59 and a half.

The bottom line here is that this is a pretty foolish move in most if not all situations, even if you are desperate to pay off a high interest credit card or some other high interest debt that has been accrued. If you are likely to rack up more debt in the process, have concerns relating to job security, or are paying off loans that are tax deductible or low interest, then this is definitely a foolish way to go. On the other hand, there are scenarios where this could allow you to come out financially ahead, but they tend to be few and far between. If you’re not sure, then it would be wise to sit down with an investment advisor or financial advisor who can help you weigh your options.

Before you take out any loan you should sit down with an expert that can help you review your choices. You just may discover that there is a better, less risky and less costly option that you have not yet explored for this particular situation.

Photo Credits: 1

Originally posted 2020-11-10 20:58:13. Republished by Old Post Promoter

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Teens Saving Money

Wednesday, July 1st, 2009

Help your teen build strong money management skills.

One of the best ways to build a strong financial foundation in teens is by starting a savings plan early on. Over the past few years, there have been more teens saving money and the results are clear. When you take the time to teach good financial practices to your children, these skills will carry them through life, helping them to build up a nest egg that they can rely on in the future. If you want to start your kids down this financial path, here are a few tips on how to get your teens saving money now.

1. Set up a reward system.

At first, before the benefits start to kick in, your child may need some extra incentive to start saving money. Try setting up either a reward once they reach a certain dollar amount, or you may even want to offer to match their savings, dollar by dollar. This is a great way to get your teens saving money and offers them some real incentive, as well as hard evidence, that saving is very beneficial. Even if you only add a few dollars to their account at a time, this extra money will help them get motivated and stay focused.

2. Start discussing sound financial principles with your child.

Once you’ve got your teens saving money, it’s a great time to start talking about setting financial goals, and working on the follow through. For example, you can ask your child to set a goal as to what they would like to be able to buy, that they cannot afford right now. This helps them see the value of the hard work they are putting in towards saving for that item and once again, will keep them motivated. However, it is important that they understand that spending all that they have saved up isn’t the best solution and that they should have long term goals, as well as short term goals.

3. Take them to the next level.

Once you have your teens saving money and they are learning more about goal setting, you can take their lessons to the next level by incorporating information about setting up more than one stream of income. Help them to set up a portfolio, use a p2p lending service like Loanio to lend money, or open a high yield savings account for them so that they can start to watch their money grow. This is also a good time to start talking about investments with your teen, even if they can’t quite make their own just yet.

4. Get them interested in continuing education.

One of the best ways to get your teens saving money is by teaching them how the stock market works and how they can add to their savings account easily. There are numerous online sites that will provide users with free example “money” that can be used to invest in theoretical stocks. This is a great training method that has no risk, but can be incredibly useful in teaching lessons about stocks. You may even want to take part in these yourself and set up a competition to see who can make the best theoretical picks.

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Originally posted 2020-10-31 04:55:15. Republished by Old Post Promoter

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