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How “Old” 401(k) Funds Can Get You Out of Debt Quicker…

Are you one of those people who has changed employment and still has money sitting in an “old” 401(k)?  I want to give you options to think about in terms of how to use this money rather than just leaving it sitting there doing very little to benefit you. 

Take a look at the following illustration. It shows an employee putting money into a 401(k) “vault” of sorts:

The reason I call the 401(k) a vault is because money in this type of account is sort of locked up. It’s not liquid and can’t be used very easily. Basically you have very little control over this money. As you examine this illustration further, you’ll see that there are cracks in the vault, which represent the expenses of keeping your money in the 401(k) vault.  The vault does not offer protection from losing the money, as it is most likely invested in the market or mutual funds, which have volatility.  And notice when you retire and start drawing down on this 401(k) Uncle Sam is there, positioned to take a share of everything that you’ve put into the fund, plus any amount it has grown.

Now take a look at a couple I’ll call Mark and Joyce and their “Get Out of Debt” report, which is based onPower Down principles of quick debt elimination:

If Mark and Joyce will control spending so as not to keep getting into debt, they can have all debts paid off in less than 10 years.   It demonstrates how Powering Down your debt will get you debt-free in about 9 years, including your mortgage.

Now combine these two concepts of how the 401(k) locks up your money with the Power Down principle of getting out of ALL debt in less than 10 years. If Mark and Joyce were to consider taking all the money in an old 401(k) to pay off debts with higher interest rates, this could jump start their debt elimination considerably. Now of course, if they are younger than age 59.5 then they will have to pay a 10 percent penalty on top of the income tax due, but I don’t think you should be afraid of the 10 percent penalty because it’s less than those  high-interest rate debts you would use the 401(k) money to pay off.

Here’s how it could work:  

  1. Roll your 401(k) money into an IRA, so you have control.  Consider a credit union’s IRA savings account and remember earning interest is not the point. 
  2. Early in the year, like January or February, consider taking out a large chunk (in this example, I’ll use $10,000) and pay off credit card debt.  Taxes and penalty on this collapse of the 401(k) money are not due until April of the NEXT year. 
  3. Using this example, you would pay off $10,000 worth of high-interest debt (I’ll use a 22 percent credit card) and save that 22 percent for one year, which would equal $2,200.

Viola! You have just paid off a high-priced debt AND you are saving a ton of interest you would have had to pay to the credit card company. This suggestion would save you from paying interest of $6,500 on the credit card if you were to pay it off over a 5-year period, or much, much more if you never paid off the card at all!

So if you have an OLD 401(k) consider “using” it.  It does not have to stay in the “vault.” As it sits in the “vault” fees are being assessed, the market can decline, and in the meantime you owe $10,000 with a 22 percent interest expense on credit card debt — you’re basically going around and around in circles instead of getting on the road to total debt elimination.

While this is a great idea, I want to CAUTION you.  If you do not control your spending and therefore cannot save the monthly credit card payment of $275, in this example, you had better not touch the 401(k).  It makes no sense to pay off debt in this way where you will pay a bit of a price to do so if you are just going to get into more debt.  

Contact me with your debt information and I will prepare a Power Down report for you at no cost that will show you when you will be completely out of debt: peter@moneymastery.com.

How Many Times Have You Paid $47 for a Hamburger? You Might Be Surprised

Can I sell you a $27 happy meal from McDonalds?  Not interested?  How about a Big Mac for $47?  Sounds crazy right?  You would call anyone who did that insane…  Hold your judgment for a minute because this might hit close to home.  If you buy things on a credit card and only make the minimum payment then you are doing the EXACT same thing.   It’s almost commonplace for Americans to be in this situation.

Let’s walk through the math, assuming the following:

Situation:

  • Amount owed on a credit card is $3,100.
  • The card company charges an interest rate of 19.9%.
  • Cardholder only pays the minimum monthly payment of $51.43.

Question 1:  How long will it take to pay off the card?

Answer:  39.4 years!

Question 2:  How much principal will be paid on this debt in the first year?

Answer:  29 cents!

Question 3:  How much interest will be required to pay the card off?

Answer:  $21,216.10

 

The $21,216 is just the interest alone!  When you add the principal of $3,100 to that interest expense, you end up paying  7.84 times the original amount borrowed.  So if you put a $5.99 Big Mac meal on your credit card and just pay the minimum you are paying almost 8 times what the Big Mac actually cost.

Keep reading because we have a simple strategy that will not only help you avoid overpaying for things on credit but we can show you how to easily get completely out of debt in less than 10 years. Ready to go? Get our real life example of a couple that did exactly this.

This might sound extreme.  It definitely is! You might be saying to yourself, “well I make a little more than the minimum payment.”  In that case, congratulations — you might be doing a little better than those only paying the minimum. But you still are getting raked over the coals. Remember…

Those who understand interest earn it, those who don’t pay it. 

Tip: If you do have to put something on a credit card, especially something as insignificant as a hamburger, pay off the credit card as quickly as you can. Don’t let big balances pile up on items such as food. Is food really something you should be borrowing money to purchase anyway? And what about bigger-ticket items such as a TV? You may feel justified in borrowing for something more expensive like electronics, for instance. But ask yourself the question, “would I rather take a little time and save $400 for that new TV or is having it right now worth $4,800 to me?”

Getting out of debt sometimes sounds hard.  It definitely can be if you don’t have a plan or have someone who can help you along the way

We would love to help you by first sharing a simple example of some of our clients (Mark & Joyce) that were not only able to stop buying things on credit BUT got completely out of debt in less than 10 years. They’ve given us permission to share the details of their financial life with you because it changed their life and they wanted others to feel the sense of relief that they now feel.  If you are ready to do the same then, as a gift from them, please download their story. We guarantee that if you read it, you will quickly see how our strategy can do the same for you.  It’s free and worth the read… we promise.  If you then have more questions, we will be here for you!

 

Free Report

 

 

You Need to Consider Becoming a Banker

We all know when you deposit your money into a bank, all the bank does is loan it out to someone else at a much higher interest rate than they are paying you for the use of it.  Of course the bank is taking a risk of repayment, but that risk is with your money, not the bank’s.  Yes, the banks petitioned the federal government years ago to offer FDIC Insurance to help make it less risky for each of us to deposit money into a bank, but nevertheless, your money is still at risk.

The next time you’re at your bank, look for the vault. You will notice it is usually right in the middle of the foyer.  It is in plain view and the big steel door is usually open.  It may have a plastic fence around it with another door that is opened with a lock, but the safe/vault is in plain view.  The building is almost always made of bricks.  The whole idea is to impress you that your money is safe.  But most banks keep little more than 10 percent of all deposits on site. The bank doesn’t want your money just sitting there in its vault — it wants to put that money in motion to make more money, and keep that money moving, loaned out and making interest income. If the money is sitting in the bank, it 1207isn’t earning one dime. We give money to bank, the bank loans it out and then gets paid interest.  We don’t get paid, the bank does.  How is that working for us?  

What if, instead, you could act like a banker by having a cash surplus that you could learn to put to work to make more money for you? Wouldn’t you like to earn money upon your money?  To do so it like taking your money and putting work clothes on it, a bib and overalls, so to speak, and adding work gloves and a hat as you send it out the door to go to work for you 24 hours a day, seven days a week with no breaks, sick leave, or vacations. You just say, “Goodbye my sweetheart money, keep bringing home the bacon.”  This is what banks do.  I contend, however, that there is no way for you to get your money to do this if you don’t get your spending under control so you can create a surplus. And if you have credit card debt and are paying 20 percent interest annually on $5,000 for example, you will pay $1,000 each year back to the bank.  Where did the bank get the $5,000 to lend to you on this credit card?  Right, someone else’s money.

But have no fear…You too, can learn to be a banker and put your money in motion to create more!  Here is a brief video link that will introduce you to this wonderful time-proven principle:  https://www.youtube.com/watch?v=M0mjqO8HohI. After watching this short discussion about money in motion, learn more about this principle and the other nine Money Mastery Principles at www.moneymastery.com.

Are Credit Card Companies Allowed to Garnish My Wages?

If you owe a large amount of money to a credit card company and stop making payments, these companies may try to recover the debt you owe through wage garnishment. Wage garnishment allows creditors to legally take a portion of each of your paychecks until the debt is paid.

Severe debt is a grim leftover from the recession. In the past, wage garnishment typically covered tax payments or child support; today, more garnishment occurs for consumer debt like student loans, medical bills and credit card debt.

According to a study from National Public Radio and ProPublica, one in 10Americans between the ages of 35 and 44 are having their wages garnished by creditors, half of them for consumer debt. About 3 percent of the overall American population had their wages garnished in 2013.

Before seizing any money, the credit card must file a lawsuit against you. Typically this is done in a local court. They are able to do this because when you signed up for the credit card, you signed a contract promising to make monthly payments. This is an expensive process, even for large companies, so they only pursue a relatively small number of these cases.

Once the company receives a judgment in court, they work with your employer to garnish wages. Employers are required by law to comply. The employer needs to understand the garnishment documents and state law, or any errors could make them responsible for all or part of shutterstock_283185716the debt. Generally, employers are not allowed to fire employees having wages garnished under federal law.

If you are in debt, there are a few steps you can take to prevent wage garnishment:

  • Settle the debt. Credit card companies would likely rather settle than spend money on legal fees. If they sent your debt to a collector it would be for a reduced rate anyway.
  • Familiarize yourself with state laws. Wage garnishment is legal for credit card debt in over half of U.S. states, but not all. States have different laws about how much of your wages can be taken; the maximum rate under federal law is 25 percent.
  • Consider filing for bankruptcy as a last resort. Bankruptcy can help you settle credit card debt, thus ending wage garnishment, but it will seriously impact your financial status and should only be considered as a last resort.

Worried about wage garnishment and credit card debt? Work with the Money Mastery team for debt relief solutions. Contact us today for more information.

What is Debt Consolidation?

When you find yourself facing seemingly insurmountable debt, one of the relief options you have is debt consolidation. Simply put, this is a way to condense your debts into a single, outstanding loan to pay with different terms than your existing debts, making it easier to track and pay off.

This can be a particularly helpful solution for people facing any of the following financial problems:

  • High interest rates. Some types of debt can have extremely high interest rates of more than 20 or 25 percent. Consolidation can help get a lower interest rate to save money as you work to pay off your debts.
  • High monthly payments. If you have a lot of debt, chances are your minimum payments are high as well. Consolidation can lower your monthly payments to give you the breathing room you need to get back on track with your repayment.
  • Too many bills. Again, if you have a lot of debt, it probably comes from a lot of different sources. Consolidation is a convenient option for people who have a hard time keeping track of all their debts, as it puts them all into one payment plan.

Of course, whether debt consolidation is the right option for you depends on your own financial situation. Most of the time, people who opt for debt consolidation will have a lot of consumer debt. Credit cards have very high interest rates, especially compared to mortgages or auto loans, which generally have very low interest rates (but are spread out over longer periods of time).

So if most of your debt is tied up in mortgages, car loans or student loans, all of which you pay over the course of multiple years, debt consolidation is not likely to be the best option for you. However, if you’ve racked up a significant amount of debt from several credit cards and are buried under high interest rates, this is where you’ll really want to think long and hard about debt consolidation as a legitimate option.

If you need more information about debt consolidation or require assistance in getting yourself out of debt, contact our team at Money Mastery today.