Location: USA

My last job was barely paying me enough to get by and when I had a health issue last year I fell several months behind on my mortgage and other bills. That medical issue has since been resolved so I am no longer falling further behind but I am also not catching up.

Things are starting to look better though because I have recently gotten a new job which should pay slightly more (starting hourly rate is barely higher but overtime is more likely) and it should vastly reduce my expenses (cheaper and better insurance along with a company provided vehicle and gas). In addition it is going to be a far more secure job in the comming economic crisis. Honestly, it’s also looking like my dream job. However this new job requires me to purchase many of my own tools. There is a tool stipend but it accumulates hourly and only pays out quarterly so I will need to front my own tool costs to start with. The problem here is that even the cheap tools are going to cost me about $1000 and if I want a set of tools just good enough that they aren’t an active hinderance I’m looking at closer to $2000. I currently have no money which isn’t allocated to bills that I am already behind on.

It seems like a simple solution would be to take out a loan from my 401k. Right now I could take out a maximum loan of a bit over $6,000. $5,000 would be just about the perfect amount to catch up on all of my bills and buy the tools needed to do my new job. If I set it at a 5 year repayment term then the monthly repayment is under $100 which I should definitely be able to afford with my new job. I could go with a shorter repayment plan but my thinking is that without knowing exactly what my finances are going look like, I want to have the smallest required payments and just plan to pay it off early if my finances are where I expect they will be even if that means I pay a bit more in interest.

At the same time I don’t like the idea of taking out a loan to pay off debts that aren’t charging me any interest. My bank isn’t forclosing on me yet and, considering I am still paying them every month, I doubt that they will. My medical bills may go to collections if I let them sit much longer but there aren’t any late fees and I can always pay off the collections company as I get money. Just looking at the money it almost seems like the more financially sound long term plan would just be to choose to fall a bit farther behind on my bills now to buy my tools and then catch up on those bills later. My credit is already trash and will be for a while. But I also already own my home, have no plans of moving, and tend to buy dirt cheap used vehicles with cash, so I don’t really need a good credit score right now or anytime soon. So my late bills really aren’t doing anything but causing me stress right now. Does it really make financial sense to start paying interest on a loan just to get rid of that stress?

At this point I am heavily leaning towards taking out the loan. But I can’t help but feel that I’m going to be paying a whole bunch of money in interest just to feel more secure. I’ve also never taken out a 401k loan before. So should I take out the 401k loan or just temporarily fall even more behind on my bills? Also if I should take out the loan is there anything I need to know about 401k loans or any pitfalls to watch out for?

  • sugar_in_your_teaEnglish
    1·
    2 days ago

    You can’t default on a loan you can’t take out in the first place.

    I’m saying you could default on your bills, especially the medical bills. What are they going to do, sue you? They can’t undo the surgery or whatever it was.

    I’m talking, mortgage, utilities, liability only car insurance, and medical debt

    I’d ignore the medical debt for now and contact the other three to see if you can get some lenience. Tell them when you’ll have the money, and keep your commitments. Mortgage and utilities will probably work with you, at least for 2-3 months.

    I have some fairly critical issues with the house which I can’t afford to fix but only get worse and more expensive to fix every day

    Can you describe them? I’m not an expert, but I do most of my own maintenance, and perhaps I can help prioritize. Most things can wait, even if it totally sucks to wait.

    That said, if you will struggle to pay the mortgage even with your higher paying job, it probably means you can’t afford the house. Owning a house can be expensive.

    I need a fair chunk of money basically immediately

    And what are the consequences if you don’t get it? I’m guessing you’re stressed and seeing scary bills, which absolutely sucks, but spelling everything out could help.

    would it save me enough to eventually counteract my losses on my 401k

    We can’t know that, because that depends on the market.

    But that’s the wrong question. This isn’t a math equation, it’s psychology. The decision you make now could impact decisions you make down the road. If you get a loan from your 401k, you’ll rationalize it again in the future when this happens again, and you’ll end up with no retirement savings at all. Draw a firm line in the sand here, DON’T TOUCH RETIREMENT!

    Here’s what I would do:

    1. cut all unnecessary spending - cut until it hurts, and then cut some more; the target is the bare minimum to get to work and back (rice and beans, no subscriptions, no eating out)
    2. get a part-time job, whether that’s gig-work or scheduled (e.g. restocking shelves, throwing boxes for Amazon, etc)
    3. prioritize the most important bills - again, focus is getting to your job and cooking food
    4. build up cash reserves - target is your highest deductible (health insurance, car, etc)
    5. tackle critical issues at home - anything related to immediate safety (smoke/CO2 alarms esp if you have a gas furnace, structural damage, etc)
    6. 401k match at work
    7. high interest debt (back payments that are accruing penalties may count)
    8. build up to 3 months expenses in cash
    9. tackle the important issues at home (anything that could end up costing more long-term)
    10. increase optional spending for comfort - better food, raise thermostat, etc
    11. build up to 6 months expenses in cash

    You may need to make some hard decisions, such as:

    • downside your car - esp. if you’re making payments
    • go to a food bank
    • learn to cut your own hair

    The point here is a little less about money and more about forcing yourself to be uncomfortable to force you to get yourself back on your feet. The harder you go on the cuts, the faster you’ll get back on top.