My Journey out of Debt

Featured customers currently enrolled in a CareOne Debt Relief Plan, share journey to become debt-free; hear how they juggle family, finances, and more.

It is Debt Confession Time...

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It is Debt Confession Time...Confession Time: Vonnie and I have more debt than what we enrolled in our CareOne Debt Management Plan (DMP).

That's right; we had MORE than the $109,000 in credit card debt that we claimed. We also have several store credit cards with lower balances that are not enrolled in the plan because we figured we could just pay those off ourselves.

How did that work out for us? Not so good.

For those in a DMP, you know that when accounts are included in the plan, they are closed and can no longer be used. Guess what financially irresponsible people do with credit lines that are still open-even as they struggle to get out from under a mountain of debt?

Yep, we USE them.

Soon, those low balances became not so low anymore. Eventually we got a grip on our finances and did cease using them, but the damage was done. We had accumulated a handful of credit lines with a cumulative sizable balance, at a high interest rate.

When we enrolled, we were also paying on a loan we had taken out from my 401K. We used those funds to consolidate some debt, as well as add a large deck onto our house. 

Over the recent years, we've largely gained control over our finances from the perspective of communicating and budgeting, but money has still been pretty tight. We're constantly looking for ways to cut more costs and increase income to make our monthly budgeting easier. Due to some unexpected expenses late in 2011, we had to really stretch our money, making Christmas especially difficult.

During one of our income and cost review sessions, I kept looking at the large payment being deducted from each of my paychecks for the 401K loan repayment. If only I could somehow get rid of that payment. I smiled as an idea popped into my head. I am able to initiate a maximum of two loans from my 401K, and I currently only had one. What if I took out a second 401K loan, just large enough to pay off what was left of the first one, as well as consolidate the store credit cards?

This strategy appeared to have several benefits:

     a.) The interest rate on the new 401K loan would be less than my current loan.

     b.) The interest rate on the 401K loan would be a tiny fraction of what we were paying on the store credit cards.

     c.) The net effect would put hundreds of dollars a month back into our pockets.

Effectively, what we're doing is re-financing our 401K loan. Since the balance of the original loan has decreased a lot since its initiation, our monthly payment will be much smaller after refinancing-even when we include the balance of the store credit cards.

There are a couple of negatives to this plan:

  1. We're borrowing against our 401K, which many experts say you should never, ever do. It is essentially sacrificing the growth of funds for the future in exchange for immediate relief.
  2. We reset the term of our 401K loan so we'll be paying on it longer.

Weighing the positives against the negatives, we decided to go ahead and do it. 

I understand that borrowing against my 401K will reduce its growth for a few years, but we really needed some increased relief now. We need to ensure that we can pay our monthly bills and stay on track with our DMP. In a little over two short years we will be finished with our plan, and we can sink our teeth into repaying the 401K plan as quickly as possible. 

The question we asked ourselves is, "Why continue to struggle day after day when there's a way to improve our quality of life, and get to that line of finishing our DMP without having to drop out of the plan or take some other drastic action?"

Every debt reduction program I've researched states that two of the most important things to do in order to get your lives back on track financially is to:

     a.) Reduce expenses, and

     b.) Have an emergency fund. 

This action accomplishes both of these.

With just a few clicks of the mouse button, our lives became a whole lot easier. What would you have done? Would you borrow from your 401K to get your day to day finances completely on track?

Related Links:

Getting out of Debt is a Constant State of Mind

Running the DMP Marathon

Halfway Home!

Travis Pizel, My Journey out of Debt Blogger, CareOne Debt Relief Services CustomerTravis Pizel

Travis is a contributing writer for the My Journey out of Debt blog and is a very active member of the CareOne community forums. Travis is currently enrolled in a CareOne Debt Management Plan (DMP). Travis very candidly shares his personal journey to pay off his debt and the tips he's learned along the way. As a father and husband he provides a unique perspective on balancing debt, finances, and family. You can also follow along with Travis on his personal blog, Our Journey to Zero. Compensated Blogger for CareOne Debt Relief Services.

Follow Travis on Twitter @DebtChronicles

 

 

 

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  • Hey Travis,

    I completely understand how hard the decision to shuffle some debts around must have been. We did something similar in 2009.

    After a three year stretch of me staying home with our first child, attending school full-time and real estate taking a dive (my husband sold real estate at the time), we ended up racking up quite a bit credit card debt and nearly maxed out our home equity line of credit. Once I was finished with school and my husband left real estate, we refinanced our home and cashed out a large chunk of our home equity to pay off the credit card and home equity debt.

    It wasn't ideal, but it lowered our monthly payments by hundreds each month, allowing us to comfortably send our oldest child to preschool.

    Fast forward four years, and things worked out fine. Yes, we have a larger mortgage than I would like, but the choice we made allowed us to get on our financial feet pretty quickly. We are now consumer debt free, have a nice emergency fund and are planning to pay down our mortgage completely in the next 7-10 years.

  • Travis I respect your honesty!!  That can be one of the hardest things to do.  It is hard enough to admit we needed help in the first place.  With being open and honest it shows how serious you are about getting out of debt.  

    My honest opinion is if it was getting to the point where you were going to have to take drastic measures anyway, by dropping out of the program or possibly losing something (home, car or whatever) then I believe you made the right decision.  

    Once you have  your program paid off you can always put that money towards your 401K loan and get that paid off as well.  I hate stressing every month on how I am going to pay something.  Then when you have a family involved as well it isn't good for the family dynamics and can cause other issues.  I truly hope this has helped eliminate some of that stress for you and your wife.  I believe you deserve to have some reprieve.  

    I know I for one have complete faith in you and your wives ability to overcome any obstacles and complete the program and become debt free.  Again I have a lot of respect for you and the fact you are being so honest!!  You will make it and I will come back to see the day that that happens!!!

  • Thanks for your comment, Jenny.  Interestingly enough, there seems to be a flood of posts recently in the personal finance community talking about how dangerous it is to take a loan out against your 401K and that it should never be done.  However, my viewpoint is that I need to fix today first. Not so I can have a ton of discretionary funds each month, but just comfortable enough that finances don't continue to cause strain in my marriage and my every day life.   It's nice to hear from someone that took a similar path.

  • I appreciate the respect and support, mdavis1964.  It was a difficult decision, especially since the general consensus by the "experts" is that this is the wrong path to take.  However, put those same experts in the same situation (constantly struggling month to month, causing strain on their personal relationships), and I'd like to see if they still take the same stance.  We will get to that day when we can say we are consumer debt free....by any means necessary...and it will be AWESOME!

  • Funny you mentioned in your Stumbleupon email about the number of posts lately about 401k loans.  I'll be putting one up about that soon on Enemy of Debt (I just became a contributor for EOD, here's my profile www.enemyofdebt.com/team-eod ).  Thanks for being honest about your situation.  I don't think 401k loans are a generally good idea because it costs you a TON of money in the long run.  You have to weigh the long term consequences against the short term need and the numbers usually don't work in your favor.

    However, when you are in a very difficult situation and you need relief now, you have to find a way to make it work, and that's what you did.  Better to make a decision and stick to it than ignore your situation like so many people do.

  • Hi Jason and welcome to TeamEOD!  I'll be looking for your post!   Thanks for your comment...we are certainly making an educated decision.  My goal right now is to make it to the finish line of my DMP.  At that point, I will have more than enough available funds to start pumping back into my 401K.

  • Hi Travis,

    I had also been told that taking a loan out on your 401K is not a good idea.  Ironically, we are not allowed to do that with our 401 K at my job.  I wasn't in as much debt as you were, however.   Hopefully you have found some breathing room and will be able to get ahead sooner. :)

    The ironic thing about going through something like this are the lessons learned.  I've been debt free now for four years now and have a credit card, but pay it off before I even get the bill.  The struggles you go through while on the program really keep you disciplined later on and for me, I knew I never wanted to be there again!   While some steps are drastic, you are doing what is necessary for your situation and I'm sure your honesty will be helpful to others going through the same thing.

  • Great to hear from you Cherl_G!   I'm so happy to hear that the lessons you learned while in the program have continued to stay with you, and are keeping you from heading again in the wrong direction financially.  It makes me ever more hopeful that Vonnie and I can do the same!

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