After my last post about what an emergency fund is and how to build one up, I’m hoping that everyone who read it is on their way to get that started!

Having something as basic as an emergency fund is a must, especially in times of economic stress.  I’m not going to get into a dissertation about the next few years, but let’s just say that for a number of systemic reasons, we are not going to get away from economic stress for quite some time.  As a result, you need to start that emergency fund … yesterday!

Once that emergency fund is working it’s way up to a reasonable funding level, it is time to start killing any and all debts that you have.  There are a million reasons why, I’m only going to talk about a few of them here, then I’ll give you two simple plans to kick the debt habit.

The rich rule the poor, and the borrower is servant to the lender – Proverbs 22:7

Think for a moment about the debt that you have and what it really means for financial health on a monthly basis.  Let’s take as an example a common expense for many Americans, the monthly car payment.  The loan that you took out to buy your car provides you with a car today, and obligates you to pay a lender a few hundred dollars every month until the debt is serviced in full.  You don’t own the car, you are simply borrowing the car and are indebted (a servant to) the lender.  Your work is their profit, every month until you can pay off the car.  If you cannot make your payments, the lender will take the vehicle away and you will be without a car, and without anything (except a jacked up credit score) to show for your months of payments.  Then course there is the issue of how much cash you end up spending to purchase the vehicle vs. the actual cost of the car, but that doesn’t matter all that much – what matters is that you are financially enslaved to another person/entity.  In times of stress like this, maximum financial flexibility is critical.

An example…

Let’s assume that you take home $3,000 per month after taxes.  If your mortgage is $1,200 and your car payment is $300 then fully 1/2 of your take home pay is spoken for each and every month.  In order to simply cover your debts you need to take home $1,500 after taxes each month.  If you could simply remove the $300 burden, that would reduce your minimum fixed costs by 20%.  That would also provide you with an effective increase of 20% in spending/savings capability each month.

Is that car really worth $3,600 a year in lost spending/savings capability to you?  Do you really need the latest and greatest whatever it is?  Do you really want to be enslaved to the tune of $3,600 each year to a lender?

All of these questions are working to get at the heart of debt and what it means to you. Debt is like a financial noose around your neck.  There is of course some debt that is good and can help to make you and others better off; however, that is another topic of discussion.  When you borrow to consume you are effectively lighting a match to your cash, and your financial health.  This of course gets worse and worse as we get further and further into debt…

Levering up, with more debt – the credit card!

Let’s take that quick example from above and make it a touch more dramatic (and sadly, realistic).  Assume that you have the average household credit card debt of $8,000… We’ll use some basic figures like a 3% minimum payment, interest rate doesn’t matter for this discussion.  The reality is that you are going to be spending and additional $240 a month just to service that debt!  So now, you have another $2,880 in debt service obligations each year – a total of $6,480 or 18% of your take home pay in my simple little example. Imagine simply ridding yourself of the credit card and car payments and getting an effective raise of 42% in spending/savings power every year!

For the math geeks out there, that is ($36,000 – $14,400) / ($36,000 – $14,400 – $3,000 – $2,880) – 1 = 42% change in discretionary income.

This of course becomes much more dramatic if you include things like food and utilities as non-discretionary expenses.  But lets just keep it simple for now.  We don’t need to over complicate things

I’m sold, let’s get this paid off!

The rubber is about to meet the road here.  First things first – make sure you have an emergency fund setup.  I’m dead serious about this, get that emergency fund setup first.  The last thing you need is to pay off $1,000 of debt only to have some random expense come up and totally destroy the emotional wins that you’ve just made.  This will cost you a few extra dollars in the long run, but the emotional and momentum gains it will give you are critical.  So get that fund setup!

What makes you tick…

Before we work through the two methods to pay off the debt, ask yourself a question… Are you predominantly guided by logic and rational decision making, or emotional decision making.  Be honest, this choice may mean success or failure in paying off your debt.  Using the simple rules below, pick a target debt and then follow the 7 step process…

Emotionally driven folks should target the debt with the smallest balance first, when that is paid off, move onto the next smallest balance – always.

Rationally/logically driven folks should pick the debt with the highest interest rate, when that is paid off, move to the next highest interest rate debt, always.

The difference in the two approaches is simple.  For the emotional folks, you will build momentum by paying off a small debt first.  That gives you the high you typically feed off of to continue the quest to kill your debt!  For the rational folks, I don’t want to see you get hung up on paying off a small interest rate card first and then give up because you rationally (and correctly) think that you are paying down the wrong debt based upon the overall cost.  The reality is that in the end, the differences between these two approaches is so small that it doesn’t really help or hurt either side to pick what works for their brain.  Just pick what feels right.

7 Steps to get out of debt

1. Carve out some cash to extinguish debt.
   • This could be the money you were saving to build your emergency fund, or better yet – this could be the cash you save from scaling back your cell phone plan, cable plan, eating out habits or any other part of your life. You don’t have to be a hermit, but you need to spend within your means, so identify the fat and kill it.
2. Pay all minimum payments on your accounts – all of them.
   
3. On the account identified as your target account, add your savings identified in step one to the payment on that account.
4. Repeat 2 and 3 until that first debt is paid off.
5. Take all of the money that was being used to pay off your first target debt (minimum payment and extra payment cash) and apply that amount as the extra payment to the next debt you’ve identified as a target.
6. Repeat steps 2 and 3 until that is one is gone
7. Repeat steps 5 and 6 until they are all gone!

Using this simple little plan against the debts we discussed in the example above will pay these off in a relatively short order of time and save you $6,480 a year in payments!  That is a huge increase in saving/spending capability going forward.  I’d suggest that you save at least 1/2 of that money, preferably more, but that is up to you!

Enjoy your new debt free life – it’s fun to have a lot more money without getting a raise from your employer.  You’ll feel better about your financial health, your stress will go down and heck, you can now take a vacation and pay cash as a reward if you want to.  Just remember, debt enslaves you, so save up first, then enjoy the fruits of your labor!

It’s been a while since I’ve written any posts regarding personal finance, and I happen to think this is a very important topic.

Yesterday, my wife and I were discussing how and when to pay off my car. That is one of the few debts we still have and one that we decided made sense financially when we bought the car.  We’ve made steady progress in knocking down the principal very quickly and are now at a point where we can pay it off if we want to.

You might be asking yourself, what on earth does paying off a car have to do with an emergency fund?  Nothing directly, but the process of building an emergency fund and savings has allowed us to have the money in savings to pay off the car.

Let’s start with what an emergency fund is not.  In my mind, it is not your living expenses fund for 3-6 months, it is not your vacation savings fund, it is definitely not your 401(k) or retirement savings accounts.  An emergency fund is simply a savings fund that has a reasonable amount of money in it to pay for “emergency” events that occur. (Your own personal circumstances will have to define reasonable)

You know the ones I’m talking about, new tires on the car, broken window in the house, unexpected this that or the other thing.  Those expenses that are unexpected, unplanned and typically not in your budget!  Those are the kinds of expenses that typically result in credit card debt that piles up and takes forever to pay off.

To combat those expenses, you can simply build up and emergency fund.  This is a lot easier than it sounds.  By simply putting away $100 dollars a month you can quickly build up to a $1,200 fund that can cover most of those quick and unexpected expenses.  The side benefit is that once you get in the habit of saving $100 a month, you can begin to roll those savings over to other accounts when your emergency fund is fully funded!

So start stashing away a few dollars here and there.  Just ditching the morning starbucks can fund the emergency fund with no problem!  You’ll be happy you have one the first time you have to replace your tires and can pay cash – trust me

I cannot begin to explain how angry this makes me, I’m not kidding when I say that I can feel the anger building up after reading this.  The FDIC, on a Friday afternoon with no vote, no say, no representation, from the people is socializing mortgages and making you and me pay for it.  I still live in America right?  It’s really beginning to feel like another country around here.

From the FDIC via Zerohedge:

As part of its loss-share agreement with acquirers of failed FDIC-insured institutions, the FDIC is encouraging its loss-share partner institutions to consider temporarily reducing mortgage payments for borrowers who are unemployed or underemployed. This program will provide additional foreclosure prevention alternatives to these borrowers through forbearance agreements that will give them an opportunity to regain full employment and avoid an unnecessary foreclosure.

“With more Americans suffering through unemployment or cuts in their paychecks, we believe it is crucial to offer a helping hand to avoid unnecessary and costly foreclosures. This is simply good business since foreclosure rarely benefits lenders and would cost the FDIC more money, not less,” said FDIC Chairman Sheila C. Bair. “This is a win-win for the borrower, who can remain in his or her home while looking for a new job, and the acquiring institution, which continues to receive payments on the loan. Ultimately, by reducing losses under our loss-share agreements, this approach helps reduce losses to the FDIC as well.”

The recommendation to loss-share partners applies where unemployment, or underemployment, is the primary cause for default on a home mortgage. In such cases, the FDIC is urging its loss-share partners to consider the borrower for a temporary forbearance plan, reducing the loan payment to an affordable level for at least six months. The monthly payment during this period should be established based on an affordable payment – given the borrower’s circumstances – and it should allow for reasonable living expenses after payment of mortgage-related expenses. The reductions in mortgage payments during a temporary forbearance period are not covered losses under the loss-share agreement with the FDIC, though losses incurred from subsequent permanent loan modifications are covered. If the home preservation efforts are ultimately unsuccessful, losses incurred in subsequent foreclosures or short sales also are covered losses.

Acquirers of failed insured institutions who agree to a loss-share arrangement with the FDIC must abide by the FDIC Mortgage Loan Modification program for assets purchased from the failed institution. The program’s objective is to modify the terms of certain residential mortgage loans to improve affordability, increase the probability of performance, allow borrowers to remain in their homes and increase the value of the loans to the FDIC and assignees. The program provides for the modification of “qualifying loans” – those that meet certain criteria – by reducing the borrower’s monthly housing debt to income ratio (DTI ratio) to no more than 31 percent at the time of the modification and eliminating adjustable interest rate and negative amortization features.

Zerohedge says it best:

o there you have it – yet another wealth redistribution program courtesy of a late Friday release by the administration. Money flowing from taxpayers, stupid enough to be responsible with their money (and, heaven forbid, to have dollar denominated savings that Chairman Ben wants to see dead not alive) end up funneling their money to the FDIC on three occasions: i) first to eat the bulk of the cost associated with any bank failure, while the good assets are covertly shifted over to “loss-share partners”, ii) to have these same loss-share partners not charge full mortgages of those individuals who, following the American dream, and the American max the credit card plan, are unable to afford living in a house, yet who find themselves in that 16.8% of unemployed or underemployed category, and iii) to foot the final bill when inevitably, after 6 months, these same individuals redefault once again.

[snip]

In a nutshell – socialism – FDIC style.

Exactly, socialism FDIC style.  Unbelievable.

A few days ago I wrote about my internal struggles in determining what is the best allocation of funds for my 401(k).  Well, I’ve gone back and forth, again and again trying to figure out the best move. The biggest constraint is simply the funds available in my 401(k).  I’m not horribly comfortable throwing 100% of my money in a single fund – I just don’t have a lot of options!

So, here is what I’ve decided to do.  Your comments are always welcomed!

• 75% of my 401(k) is now locked up in the Pimco Total Return Admin – PTRAX Fund.  The fund has performed well over its life, and should provide stable returns to the 401(k) during this upcoming period of what I believe will be market non-performance.
• 25% of my 401(k) is allocated across a series of different funds that have exposure to domestic and international stocks.

As with all projections mine are bound to be wrong.  Timing, size of the move, all of these things will be wrong in some respect.  I could be totally wrong and the market could take off like crazy!  Who knows.

Here is the brass tacks of my logic.  PTRAX has performed consistently since its inception.  It continually provides returns year over year.  If I am right and the market absolutely falls apart, it is possible that PTRAX will suffer some losses, but they should be very small compared to the overall stock market.  If I am totally wrong and the market rips up from here, well… I’ll still make money.  Sure, it will be a bit less than a fully setup stock portfolio, but it will still provide very nice returns overall.

That is pretty much it, should be interesting to see what happens.

If things begin to slide as I expect – you can be sure that I’ll be looking to throw even more money at PTRAX.  The other options I have are pretty much useless, so who knows.  If you are a seller of PTRAX, I have a large block buy coming in

If you haven’t already done so.  It is well past time to get your financial house in order.

So lets start with the basics

1. Do you know where your spend your money?  Chances are, if your finances are out of control, you have no idea how much, or where you are spending.  How do you fix it?  Well, its pretty simple really.  For a month, write down what you spend, when you spend it.  You can keep receipts, use a credit card for everything, use online software like mint.com or something like Quicken or Money.  Any of these options work, the goal is to simply track where, and how much, you are spending.
2. Do you know how much you make?  Funny that I ask that… The reality is that if you are not on a straight salary, a lot of folks don’t really know the answer to this question.  So, just like what you spend, track it.
3. Are you spending more than you are earning?  If yes – you need to cut back – now.  Depending on how big the hole is, your cuts might be small (eat out less), medium (drop the cell phone, downgrade to dial-up) or big (move to a living situation, share an apartment, sell a car).  The key is that you must cut spending.  You can always try to go and get a second job, but lets be serious – in today’s difficult times your best bet is to cut spending.  Heck, if you can get a second job, do it, and save the money you earn to build a safety net.
4. Are you saving money?  You better be.  You should be paying yourself first.  If you can, setup automatic savings via direct deposit, or via your online banking tools.  In order to save, you may need to cut more spending out of your budget (you’ll need one of these as well).  Do it.

That is a pretty good place to start.  Once  you know how much you make, and how much you spend, you can start the process of putting together a budget.  I’ll go into that in detail in a future post.

Get one, and stick to it!

We are about to enter one of the most difficult economic cycles that our country has ever seen.  There are a myriad of reasons for this; and most of them boil down to a lack of personal responsibility.

It’s time to take responsibility for one of the most basic things that you have, your cash flow.  Get control of it today.

If you’ve never lived in a budget, I’ll offer a few tips:

1. Use Cash – It’s harder, but it will keep you honest
2. Don’t pull the strings too tight right away – keep a “fun” fund if you have the money to pull it off
3. Pay yourself first – savings, off the top and automatic

Here are a few quick pointers on how to setup a budget:

• Start with your “gross” pre-tax pay.
• Make a line item for your taxes and any “automatic” pay-check deductions
• Next your “fixed” expenses – rent/mortgage, car payment, insurance, etc…
• Variable expenses – credit card payments, electricity, gasoline, food
• Finally, discretionary – internet, telephone, cable tv etc…

You’ll probably be surprised at how much you spend after the first month.  My guess, you blow your budget in month one.  Good, now regroup and get it tightened up.  If you don’t have enough money to pay yourself via savings, then cut off the cable tv and get to living within your means!

I’m obviously not a liberal, and a lot of the time I don’t fully subscribe the things that Paul Krugman talks about… However, the guy is flat out brilliant and you know, in this post I think he has a pretty darn good point.  I’m going to copy in a few of the things that he talks about here, if you’d like to read the whole article (you should), go to http://www.nytimes.com/2008/11/14/opinion/14krugman.html and check it out.

We are already, however, well into the realm of what I call depression economics. By that I mean a state of affairs like that of the 1930s in which the usual tools of economic policy — above all, the Federal Reserve’s ability to pump up the economy by cutting interest rates — have lost all traction. When depression economics prevails, the usual rules of economic policy no longer apply: virtue becomes vice, caution is risky and prudence is folly.

My thoughts: Well yes, you have a point there. We are in a really difficult spot. With a 1% fed funds rate, you really can’t do anything else on that front, and with money that cheap and things still going down the tubes, it’s a fairly backwards place to be. Furthermore, we are going to experience a very ugly negative feedback loop as we lose more jobs, and those job losses lead to more defaults, and more job losses, and less spending, and more job losses… well you get the point.

Krugman goes on to talk about normal economic policy responses and how they are ineffective because of the state of affairs in the world and makes a very compelling argument:

Finally, in normal times modesty and prudence in policy goals are good things. Under current conditions, however, it’s much better to err on the side of doing too much than on the side of doing too little. The risk, if the stimulus plan turns out to be more than needed, is that the economy might overheat, leading to inflation — but the Federal Reserve can always head off that threat by raising interest rates. On the other hand, if the stimulus plan is too small there’s nothing the Fed can do to make up for the shortfall. So when depression economics prevails, prudence is folly.

You know, that actually makes sense. If we do something really, really drastic (Krugman suggests a $600B stimulus package) and it is too much, then we simply tighten things back up and get into a normal mode again.

Don’t get me wrong here, there a systemic issues that need to be mopped up in regards to credit and savings, but taking drastic action seems to actually make a bit of sense.

Today I received an interesting note from The Vanguard Group. The article is titled: “Do you spend more when you use credit cards?” And of course, the answer is YES!

Here are just a few things that are cited in the article that I found very interesting:

Visa says that it reviewed 100,000 restaurant transactions to see if diners who paid with credit cards spent more than those who paid in cash.The result? People who used credit cards spent an average of 30% more than cash-payers at restaurants.

When we pay with a credit card, the amount we spend feels less to us than when we use cash, according to Greg Davies, a researcher at Warwick University in Coventry, UK.
When we pay with cash, Davies writes, we feel the loss from our wallet and link it directly to the purchase. But when we pay with plastic, we feel the immediate benefit of the purchase without
experiencing the regret of handing over cash

I’ve been preaching the value of Cash to my family and friends for a while.  Megan and I have seen HUGE benefits from going to cash, and now there are major institutions validating this statement.  I cannot stress enough the value of using Cash to control your spending.

Cash is king.  It is emotional, it is real, tangible, and difficult to part with.  The best part about cash is that when you get your spending under control, your whole life begins to move into control as well.  Debt minimization and all of the benefits that come with it!

So, if you’ve read any of my other posts on personal finance you’ve likely figured out that I think debt (that doesn’t make you any money) is bad.  If debt is bad, and you have it, then you’re goal should be to get out of it!

How to get out of bad debt…

There are two mainstream thoughts on how to get out of debt.  The first, and mathematically most advantageous method is to tackle your highest interest debts first, then then second highest interest debt, etc… etc…

The second thought is championed by a gentleman named Dave Ramsey and tackles the psychology of  debt by tackling the lowest balance item first, then the next lowest item etc… he calls this the “snowball” method.

Paying it down

It doesn’t matter which method you pick, the overall model is the same.  After building your basic budget, you’ll have an understanding of what money is “extra” and available to pay down your balances.  Of course your basic budget will have to include the minimum payment on all of your debts, and I’d recommend a little bit of flex in the budget if you’re new to this.

Once you’ve identified the amount of extra money that you can apply to your debts you focus in on your first target debt.  If you have $700 to cover you minimum payments and another $300 to go against principal (extra payments) you will continue to pay the total amount of $1,000 in debt repayment every month until all of your debts are gone.   The trick is that you focus in on a single debt at a time to try to remove them as fast as possible.

If you had two credit cards and one car loan, you might pick the first credit card to pay off.  In order to do that, you’ll pay the minimum payment on the other credit card and the car loan.  On your target credit card, you’ll pay not only the minimum payment, but you’ll also add your $300 extra payment each month until the card is paid off.  Once that first card is paid off, you’ll take all of the money you had been using on credit card one, and apply it your to next target debt – likely the next credit card.  Do this over and over until you pay them all off.

Which method to choose?

That’s a really good question, and a lot of it has to do with you.  If you’re already completely committed to paying down your debts and you understand the principals, you might want to go with the mathematically advantageous method of paying higher interest debts first. However, if you’re new to this whole thing, you might do well with Mr. Ramsey’s “snowball” method.

The real benefit to paying down your lowest balance item first is completely psychological. There really is a fantastic feeling that comes with seeing a balance hit $0, then watching the next one come down really quickly – because you now have more money to pay it down!  In the end you’ll end up paying a little more interest but you will get them paid off.  If the choice is between never paying them down, and getting out of debt – I’d suggest anything that works for you to get out of debt.  This may cost you a little more in interest, but a lot less than never getting out of debt at all!

My experience

I’m not totally out of debt – yet. However, I don’t carry any credit card debt, and all of my debt is at a very low interest rate.  In a previous post, I wrote about owing money on a car and a student loan.  Right now, Megan and I are focusing in on the car loan and will have it paid down in just a few short months.  This debt also happens to have the higher interest rate so I’ve picked the mathematical model for myself.

However… Before I really got serious about paying down debt I carried a few rotating credit cards all the time.  I’d move money from card A to B and not think twice about it.  Eventually, we had more than $500 a month in minimum payments due.  What the heck was that all about?

After looking at our options, we focused down and started to tackle a single credit card debt.  These debts where all “low rate” balance transfer things, so at least we weren’t getting hammered by 18% plus rates.  Our debts where sitting at about 4.9% or less… Anyhow, after focusing in on the debt repayment, we were able to knock off the first card and it was a fantastic feeling!

All of the sudden we weren’t required to pay $500 a month to the credit card companies and we had more money to spend/save/invest/tithe etc… This feeling was fantastic and we dialed into a second debt.  After paying that off, we started to spread our cash around build up a nice savings buffer while still tackling some other debts, with a little less focus.

Now, we are back to the focused debt repayment and have allocated a specific amount to hammer down on our debts each month.  We also add additional money to a savings account, 401k and tithes so we could pay our debts off earlier, but there are things that are more important to us than paying down a few months earlier. The greatest thing that I’ve experienced in this journey is the freedom to do what I want with my money.

After paying down just a few debts, we’ve been able to invest a lot more, save a lot more, tithe a lot more and do much more with the income we’ve been blessed with.  I hope you’ll take a few minutes to review your situation and get out of the stranglehold of debt!  Good luck!

Borrow from your 401k.

A few days ago I was at a dinner party with some friends. We were talking about a ton of different issues from politics to economics and during the course of the conversation privatization of retirement plans came up. One of the folks in the conversation said that he supported privatization because it allowed him to borrow from his own money rather than having it be hidden away. He relayed a story about how he borrowed from his 401k to purchase a car, then was laid off and used his severance package to pay back the 401k loan.

Please don’t do this.

There are a bunch of reasons why this is a really bad idea. I’ll try to debunk the most popular argument that I hear: If I borrow the money, I’ll have to pay interest anyway, so paying myself is the best way to do it!

Wrong. Paying yourself the interest after borrowing from your 401k money is a horribly expensive way to do borrow money. It isn’t the interest payment that gets you, it is the tax payments that get you! When you put your money into the 401k it goes in pre-tax, when you pay it back, you pay post-tax.

Example: If you were to borrow $40,000 from your 401k plan to buy a shiny new luxury car, and you happened to be in a 28% tax bracket paying 5% state taxes as well you’d need to earn $59,701.49 just to pay back your $40,000 principal. Then, when you take that $40,000 back out again, it gets taxed – again!

Let’s run down the example a little further to show why this gets you in the long run. Assuming you can pay back your $40,000 loan in 5 years here is the scenario (assuming the 28% and 5% tax brackets).

Borrow from the 401k

• Loan of $40,000 from 401k, interest rate of 8%, term 60 months
• Interest paid back to 401k – $8,663.35
• Interest earned on money paid back to 401k (Assume 10%) – $10,774.12
• Income required to pay back 401k loan – $72,631.86
• Cost of 401k loan in taxes to repay it ($24,968.51)
• Taxes paid on withdrawal of $59,437.47 from 401k – ($19,614.36)
• Total taxes paid on 401k dollars – ($43,582.88)

Don’t borrow from the 401k

• 401k Balance – $40,000
• 401k Interest Earned (Assume 10% Annual Growth) – $24,240.40
  • Ah… the magic of compounding interest. You don’t get that full benefit when you pay interest to yourself.
• 401k Balance at end of 5 years – $64,420.40
• Taxes on withdrawal of $64,420.40 – ($21,258.73)
• Total taxes paid on 401k dollars – ($21,258.73)

Well, look at that… Not only do you earn more money on the 401k if you don’t borrow from it, but you pay a LOT less is taxes when you get your money back out. These costs, and losses, get a lot larger the younger you are.  Again, compounding interest is there to help, or hurt you. There are two major things working against you when you borrow money from the 401k.

1. Double taxation – this is a killer. You’re 401k money goes into the account pre-tax from your paycheck. When you pay back a 401k loan, this is post-tax dollars.
2. Lower principal balance for compounding gains. If you pull your money out of the 401k, you don’t earn compounding interest on the principal. You pay interest each year on it, but the amount gets lower and lower as you go along.

I’ve assumed a 10% annual gain in your 401k account for this exercise*. You can run it a lot of different ways an get different results. Net/net, borrowing money from your 401k is not a great idea.

Beyond the fact that you are strapping yourself with money payments, you are also killing your tax benefits. If you truly have $811.06 each month to pay for the loan, why not throw that cash into a savings account and save up to buy the luxury car in just a few years. In fact, if you can earn 3% on that money (not to difficult to do), you can pay your taxes on the interest gain and have your $40,000 in cash in only 48 months.

If you were to simply wait 4 years to buy the care and pay yourself first, you’d be able to save a truck load of money on your purchase, and pay cash. On top of that, if you continue to pay yourself the $811.06 a month the 401k loan would have required for the last 12 months, you would end up with a $40,000 luxury car and $10,650.72 cash in your pocket – after taxes – and $64,420.40 in your 401k (assuming no additional contributions). Not to shabby.

There is another nasty side effect of borrowing from your 401k. If you happen to lose your job, you have to pay back the principal amount right away (typically within 60 days) or it is considered a distribution from the 401k. If you’re not at retirement age yet, that distribution comes with a 10% fee.

*The average return in the S&P 500 over the period from 1987 to 2007 was 10.1% – without dividends.