Thursday, November 02, 2006

401k Loans and 9 Other Costly Mistakes

Are you thinking about borrowing from your 401k plan to help you ride through a rough patch? I've done it and it was not a good idea.

Sure, you pay yourself back, plus interest, but the loan interest rarely matches the investment performance of the 401k plan. And there are other arguments: administrative loan fees and the double-dipping repayment schedule: OUCH!

Borrowing from a 401K plan is just one of the 10 mistakes listed by Bankrate.com from this feature on MSN.

The list of don'ts includes: home equity loans, saving money in your kid's name and falling for store-branded credit card gimmicks, such as shopping discounts for opening new accounts.

3 comments:

Wealthy Geek said...

This makes so much sense. It’s foolish to borrow money off ANY kind of retirement plan. That’s why it’s so deliberately complicated and costly: if it wasn’t, people would do it willy-nilly and end up having so much less on which to retire – which in turn would be a tremendous expense to society as a whole. (This is particularly with a huge demographic like the Boomers retiring all at once.) Me, I’m lucky that my bank offers me a $10,000 line of credit which only charges me $100 a month regardless of how much money I borrow off it. (And if I owe nothing on it, it charges me nothing.) I would much rather use this in times of emergency than borrow money from my retirement plan or (gasp!) my credit card.

Frugal Duchess: Sharon Harvey Rosenberg said...

That's a great source of emergency funds.
Thanks for your comments.

Michelle Jun said...

Here's something else that could cost you a bundle. Did you know that credit card companies can change the terms of your contract at any time? That’s just one of the credit card traps that can trip up consumers and lead to spiraling debt. Consumers Union, the nonprofit publisher of Consumer Reports, has put together a lighthearted animated holiday-themed satire about abusive credit card fees and practices. Check out “It’s Always Christmas Time (for VISA)” at www.creditcardreform.org. Be sure to take action after viewing the animation!

Michelle Jun
Consumers Union