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Is Borrowing From Your 401(k) a Smart Move?

Is Borrowing From Your 401(k) a Smart Move?

Several years and two home states ago, I recall one of my co-workers telling me about how she was able to borrow from her 401(k) in order to buy a new car (or at least put a down payment on one). She went on and on about how low the interest rate was and, ultimately, how happy she was with her decision. This seemingly good advice stuck with me to the point that, some time later, I decided to give it shot in order to help fund my dream vacation to Tokyo.

While I didn’t know it at the time, it turns out that this move isn’t always as great as it sounds. In fact, borrowing from yourself can actually get to be quite expensive.

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The good aspects of taking out a 401(k) loan

On the surface, temporarily taking money out of your retirement account makes a lot of sense. After all, many of us won’t be retiring for a good long time, so what’s the harm in taking advantage of some of the funds now? Furthermore, if you pay the money back in a timely manner, there are no tax consequences to 401(k) loans, in sharp contrast to the penalties you will incur if you take out money directly.

Another reason these loans are so attractive is that they come at relatively low interest rates. For that reason, it may make more financial sense to borrow your own money as opposed to utilizing credit cards or personal loans that are transparently costlier. Because of these considerations, 401(k) loans can make financial sense and could even be the best option depending on your specific situation. However, there is more to be aware of.

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The rest of the 401(k) loan story

If you compare just the interest rate, borrowing from your 401(k) can seem like a steal. Unfortunately, what you could be stealing from is your future. What’s most borrowers do not account for is how the rate of return on your retirement account will be affected by the absent money. By removing a large chunk of your 401(k) funds, you’re hurting your growth potential. With some accounts earning between 5% and 8% annually, that could really add up — especially if you take a while to pay back your loan.

One more thing to keep in mind: if you fail to repay your loan on time, you’ll not only have to pay taxes on the amount you took out but will also have to pony up a 10% early withdrawal penalty. Similarly, if you leave the employer that hosts your 401(k), you will need to either pay the loan balance back immediately or suffer the withdrawal consequences. For those reasons, if you’re thinking about switching jobs, you may want to look elsewhere for your loan.

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So, is it a good idea?

Honestly, it depends. If your current job is secure and you only plan on borrowing a small amount for a short period of time, there may not be much harm in a 401(k) loan. However, cases in which you’re borrowing for longer or instances in which you’re mulling a change of career might not lend themselves well to this option.

Of course, another big factor is what you’ll be spending the money on. There are plenty of great ways to invest in yourself that might prove more important to you than the potential financial ramifications. To that point, there are definitely worse ways of gaining cash or capital than borrowing it from yourself.

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If you’re thinking about borrowing from your 401(k), the best thing you can do is research all of your options first. Just be sure to consider the long-term impact even a short-term loan could have and don’t jeopardize your retirement for things you need (or, worse yet, only “need”) today.

Featured photo credit: TaxCredits.net via flickr.com

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Last Updated on January 21, 2020

How to Develop a Millionaire Mindset in 6 Simple Steps

How to Develop a Millionaire Mindset in 6 Simple Steps

We all like to dream about being financially wealthy. For most people though, it remains a dream and nothing more. Why is that?

It’s because most people don’t set their mind to achieving that goal. They might not be happy in their current situation but they’re comfortable – and comfort is one of the biggest enemies of growth.

How do you go about developing that millionaire mindset? By following these simple steps:

1. Focus On What You Want – And Take It!

So many people are too timid to admit they want something and go for it. When there is something that you want to accomplish don’t think “I could never actually do that”, think “I could do that and I WILL do that”.

Millionaires play to win, not to avoid defeat.

This doesn’t mean to have to become a selfish jerk. What it means is becoming more assertive and honest with yourself. You don’t have to grab off other people. There is a big pot of unclaimed gold in the middle of the table — why shouldn’t you be the one to claim it? You deserve it!

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2. Become Goal-Orientated

It’s almost impossible to achieve anything if you don’t set firm goals. Only lottery winners become millionaires overnight. By setting yourself attainable goals, you will get there eventually. Don’t try to get rich quickly — get rich slowly.

Let’s take the idea of making your first million dollars and expand on what kind of goals you might set to get there. Let’s also say you’re starting at a break-even position – you’re making enough to get by with a few luxuries, but nothing more.

Your goal for the first year can be having $10,000 in the bank within a year. It won’t be easy but it is doable. Next, you need to figure out the steps you need to take to achieve that goal.

Always look at ways to make growth before cutbacks. With that in mind, you might want to see if you can negotiate a pay rise with your boss, or if there’s another job out there that will pay better. You might be comfortable in your old job but remember, comfort stunts growth.

You may also have other skills outside of your workplace that you can monetize to boost your bank balance. Maybe you can design websites for people, at a fee of course, or make alterations to clothes.

If this is still not enough to make the money you need to save $10,000 in a year, then it’s time to look at cutbacks. Do you have a bunch of old junk that someone else might love? Sell it! Do you really need to spend $10 on your lunch everyday when you could make your own for a fraction of the cost?

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If you are to become a millionaire, you need to start accumulating money.

Here’re some tips to help you: How to Become Goal Oriented and Achieve More in Life

3. Don’t Spend Your Money – Invest It

The reason you need to accumulate money is for step three. Millionaires tend to be frugal people, and that’s because they know the true value of money is in investing. Being your own boss goes hand-in-hand with becoming a millionaire. You’ll want to quit your regular job at some point.

Stop working for your money and make your money work for you.

Rather than buying yourself a new iPad, that $500 could be used to invest in the stock market. Find the right shares (more on that later), and that money could easily double within a year.

There’s not just the stock market — there’s also property, and your own education.

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4. Never Stop Learning

The best thing you can invest in is yourself.

Once most people leave the education system, they think their learning days are over. Well theirs might be, but yours shouldn’t be. Successful people continually learn and adapt.

Billionaire Warren Buffet estimates that he read at least 100 books on investing before he turned twenty. Most people never read another book after they’ve left school. Who would you rather be?

Learn everything you can about how economics works, how the stocks markets work, how they trend.

Learn new skills. If you have an interest in it, learn everything you can about it. You’d be surprised at how often, seemingly useless skills, can become extremely useful in the right situation.

Start developing the habit of learning continuously: How to Create a Habit of Continuous Learning for a Better You

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5. Think Big

While I advise to start off with small goals, you absolutely should have a big goal in mind. If you have a business idea, then that is your ultimate goal – to start that business and make a success of it. If you want to invest your way to millions of dollars and do little work other than research, then that is your big goal.

There is no shame in not achieving a big goal. If you run a business and aim to make $1 million profit in a year and “only” make $200,000, then you’re still significantly ahead of most people.

Aim for the stars, if you fail you’ll still be over the moon.

6. Enjoy the Attention

To be successful, you have to be willing to promote yourself and enjoy the attention to a certain extent. Now the attention doesn’t need to be on yourself, it could be on your brand, but attention definitely attracts money.

Never be embarrassed to get your name out there. That means finding a spotlight and being brave enough to step right up underneath it.

If you run a business, try contacting the local papers. You’d be surprised at how amenable they often are to running a story about you and your business, and it’s all free publicity.

Above all, remember: You control your own destiny. Push hard enough for anything and you’ll get it.

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Featured photo credit: Austin Distel via unsplash.com

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