At 27, I was in debt up to my eyeballs and broke to the point that paying the bills was a struggle. Making the decision to cash out my 401k, which had grown to just over $8,000, was difficult but it was the best financial decision I’ve made in a long time. Having this extra money in my bank account came with a whole host of benefits, some that I wasn’t even expecting.
I avoided hundreds of dollars in late fees.
A late fee here and there doesn’t seem like a big deal but believe me, they add up fast. That extra money in my checking account meant that I didn’t have to incur months of fees on payments I made weeks or months after the due date. If I hadn’t taken the 401k disbursement, I could have quickly racked up $250-$400 a month in late fees between my student loans and credit cards. Can you imagine trying to get out of a hole of debt that gets worse due to late fees?
I was able to keep my student loan out of collections.
Two days after I decided to cash out my 401k, I received a letter stating that one of my student loans was about to be sent to collections. Since my mom co-signed my loans for school, it was going to affect her credit score and mine. Not only did I feel like a bum, my mom was along for the ride. Luckily, my disbursement gave me the cash to be able to pay back the roughly $900 I owed, which kept my loan out of the hands of a collections agency.
My interest didn’t get out of control.
The less I paid towards my debt each month, the more interest accumulated. Soon enough, my minimum payment wasn’t even paying off any principal, just chipping away at the interest. Learn from my mistake and avoid credit cards that charge interest rates of 20-25%. They’re a real bitch!
I could pay more than minimum payments.
For the first time in a long time, I could pay more than the minimum payments due on my credit cards. In the few months after I took the disbursement, instead of just paying the $25 minimum, I could afford to pay $100 which took care of all the interest for that month and chipped away at the principal debt.
It saved my credit score from destruction.
I realized quite quickly that if I didn’t do something drastic, the late payments and non-payments for my loans and credit cards would deteriorate my credit score. My credit score had already started to decrease due to my continued requests for increased credit lines and the percentage of usage on the cards I already had. Being able to play some quick catch-up really helped me avoid the pitfalls of a low credit score.
I was ready to start a little nest-egg.
I took $1,000 out of the lump sum I received after taxes/penalty and put it into a separate savings account. This was the start of a nest-egg I had been wanting for years. Since I was no longer behind on bills, I now had some financial breathing room to put $75 of each paycheck (bi-weekly) into that nest egg, slowly but surely growing that amount. Today, I have a little over $2,000 in a savings account, only to be used for an emergency. My goal is to have three months worth of expenses in this account and I’m about 25% there.
Dream vacations became a reality.
In the fall, my husband and I are going to Ireland. My 401k disbursement gave us the extra little bit of money we needed for the down payment on this trip. While most of the money that I received was used towards managing my debt and paying bills along with starting a savings account, I thought it was also appropriate to use some of it for fun. I mean, I did work for that money and I could spend it however I wanted. Plus, life is short—I wanted to turn my dream into a reality.
I finally got ahead a little bit.
As soon as that money was deposited into my checking account, I felt instant relief. This lump sum allowed me to get ahead in so many ways, most of which have already been described. Getting ahead of my bills and having money put away for a rainy day was a feeling I had never experienced. I felt like such an adult and it was a feeling I didn’t want to lose.
I choose money now instead of more money someday.
Don’t get me wrong, I know it’s crucial to save for retirement. I contribute to my new 401k account each paycheck now and have no plans of touching that money until I’m actually retired. However, if I wouldn’t have cashed in my 401k at 27, I would be in a much worse place financially. If I couldn’t have made it through that, what would the future have even mattered? I went against the advice of a lot of people, but I used my 401k at the age of 27 to springboard myself into long-term financial success.
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