Debt can be a trap. It can lead to desperate measures as a solution to the problem. If you find yourself in financial difficulties even though you are working and have a regular income you may resort to a number of different courses of action to relieve yourself of debt. Identifying the problem is a start but there are certainly solutions that you should not seek to rectify your situation. There are some good courses of action but first of all here is a list of ones that you should reject.
Touching your IRA
If you have a decent balance in your retirement account you can take that to solve your problem perhaps? You certainly should not to that. The fact that you have a balance suggests you have at least a little financial sense because you have started to provide for your future. Unless you literally have nowhere else to turn and perhaps you are in danger of losing your home you to look to other alternatives first.
You will face a tax bill if you touch your IRA but you may also face penalties. However just as serious you will be losing the growth that your balance will achieve in the remaining years before your retirement. There are other solutions if you have an income from regular employment.
Borrowing from your 401(k)
Your 401 is a mixture of your contributions and those of your employer. You can get a fairly cheap loan from your 401 if you are in financial difficulty so it may be tempting to do that. The problem is that most people are so short of good retirement provisions and should therefore look to maximize them, rather than lose growth by borrowing from what they have at present. If something happens and you lose your job you will only have 2 months to pay back any loan in full so borrowing might actually increase your immediate problems.
“Living with debt can lead to making poor decisions. The way to get rid of debt is with a budget, a determination to be self-disciplined and a consolidation loan”
You may have hears stories of people who spent their last few dollars and make a fortune. Those stories are heartwarming but how many stories are there that do not hit the headlines because the last few dollars were lost? The odds are always against a gambler and you should not think that you can solve your problems on a gamble. It might be tempting to go online and try but you should resist the temptation.
Friends and Family
No one wants to see a friend or family member in trouble and will therefore help out if they can. It may be that money is available interest free so nothing comes cheaper than that. However if that is a route you decide to take you may damage the relationships you have if you are unable to repay the $5000 loan.
A Balance Transfer
Before the recession came it was common practice for people to have several credit cards. The companies used aggressive marketing techniques to increase their database of users and 0% balance transfers were a popular way for card holders to rid themselves of the high rate of interest that credit card companies charged on month end outstanding balances. It worked for some people while there was a fairly relaxed financial environment.
These balance transfers were an introductory offer and after a short period interest became applicable once more. It takes an extremely good financial juggler to stay ahead of the game and not face the day when their debts are even greater.
So what is the answer?
It is as much about self-discipline as anything else. You need to prepare a budget and look at your monthly expenditure and the total debt you are carrying although for the point of this exercise it is perfectly alright to regard a mortgage as something that is positive in your financial life because it should be contributing to your growing an asset.
You need to look at clear expensive debt and in the vast majority of cases that is credit card debt that is incurring a high rate of interest. It is all too easy to subsidize your life by using your credit card then not paying off the balance each month. You must do that but perhaps you are no longer able and you are thinking about one of the five ways above to pay off those card debts? If you have regular income it is likely that you can get a personal loan to achieve the same end because interest rates in the financial sector, other than on credit and store cards, are currently low.
You will be judged on your ability to repay the installments for the full term of the loan more than on your existing credit score. The loan should only be part of your strategy because you need to create a manageable budget that you intend to live by in the future. That includes not using your credit card or cards in the future other than for things that you pay off in full at the end of the month. If you write down your current expenditure and analyze where there are possible savings you will hopefully see that you do not have to take any desperate measures to get yourself out of trouble. You can do that without touching your retirement savings and if you are successful you will perhaps be able to put more aside in the future as well.
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