Question: I work for a small construction firm and recently sprained my back. I’ve been out of work for a month now, and while my foreman is cool about me taking time to come back, I’m not making any money. I’m living off my credit cards now, because I already wiped out my savings account. I have a 401(k) from another job. Should I cash that out? Any advice you got, I’ll do it.
— Dylan in Texas
Howard Dvorkin CPA answers…
First of all, I’m sorry for your injury, Dylan. In more than two decades as financial counselor, I’ve noticed work-related injuries are one of the Big Three reasons for sudden debt. (The other two are divorce and serious illness.)
Let’s start with your immediate problem and work our way up from there. No, you shouldn’t “cash out” your 401(k). However, you can take out a loan against it.
As my friends at Bankrate say, “Borrowing from your 401(k) is such a risky and costly choice that it shouldn’t even be on the table unless it’s your last resort.” Why? Because your money is no longer earning tax-free interest for your retirement. (Check out Bankrate’s 401(k) calculator to see how much you’re not making when you borrow from yourself.)
Still, it’s the best option for you because when you pay back the loan, you’re essentially paying yourself back. That’s better than paying your credit card company, where the average interest rate is currently hovering around 15 percent.
I’m glad your injury isn’t serious and you’ll be able to return to work soon, Dylan. I hope you’ll use this episode as a warning: Get disability insurance.
Earlier this month, I read a fascinating study from Empire BlueCross BlueShield that said, “90 percent of respondents say they lock their doors and windows, just 40 percent of Americans have disability insurance, which could protect them financially if they were unable to work.”
That’s interesting because, according to the FBI, you have a 1-in 36 chance of getting robbed — but a 1-in-4 chance of being disabled before you retire, either temporarily or permanently.
Even if you have disability insurance, it’s not likely to pay all your bills should you need to use it. That’s why you should read How to Prepare For and Deal With an Income Emergency. Once you’re back on your feet and at work, Dylan, you should pay down those credit cards. Need help figuring out how to do that? Call Debt.com at 1-800-810-0989 for a free debt analysis from one of our trained counselors. They’ll get you “back” on track.
Have a debt question?
Email your question to firstname.lastname@example.org and Howard Dvorkin will review it. Dvorkin is a CPA, chairman of Debt.com, and author of two personal finance books, Credit Hell: How to Dig Yourself Out of Debt and Power Up: Taking Charge of Your Financial Destiny.