“Every time you borrow money, you’re robbing your future self.” -Nathan W. Morris
Reality Set In
A few months later, and after making those payments to the credit cards, I realized I didn’t really pay off my debt, I only transferred it. So rather than getting my paycheck and making $200 worth of payments to the credit cards, my paycheck was just $200 less than what I was used to. And now, since I am locked in to the loan re-payment term, I can’t even make additional payments if I wanted to! I’m stuck!
Ok, ok, so yes, with the 401k loans I am no longer paying interest to a creditor. In the long run, is it really worth it? My answer is no…and here is why. 1) Since the debt was only transferred, I didn’t really learn my lesson about using credit cards. This will certainly not help me in the future. 2) Now I get to see those repayment deductions on my paystub until the darn thing is paid off. (Oh and I cannot make any extra payments when I have money I can throw at it). 3) The growth rate of my 401k is now lower since my balance is lower. This may not seem like a big deal, but it certainly is.
Here is an example of what a 401k loan may cost you on a 5-year loan (these are made up numbers). Let’s say you take out a $10,000 loan from your 401k. There is a one-time fee of $50, which is paid to the investment company. Additionally, you will have interest on the loan; let’s just say 4.5%. You may be thinking, “Well, on a 401k loan, the interest you pay goes back to yourself”. This is certainly true, but it can still have negative results. The reason for this is because that $10,000 you took out is not growing at the rate of the mutual fund. So if before the loan you are the essentially losing $450 or more per year. (This is using simple math, but the actual amount lost would be higher due to compound interest and growth).
My lesson here is please do not take on debt to pay off debt. With investments like a 401k, you are not borrowing from yourself, you are robbing from your future. Don’t make the mistake I made. I know it’s rough and may seem like an easy way out, but in the long run, you will see greater growth in your 401k and you will have developed a greater respect for your own money.
Have you ever taken a 401K loan? What are your thoughts on it? Did you have any regrets? Let me know in the comments below.