Expert: Paul Henneman - 2/12/2009

Question
Hello, I have about $10,000 in my 401 and I just started my new job where I had to take $4.00 pay cut and now I am living paycheck to paycheck. I am struggling though every month short on money. Should I cash out my 401 and have my money in my bank account so that I can pay my bills on time? Please help.

Answer
Tony,
   Thank you for your question!
Cashing out a 401k should be your absolute last resort. You will lose all of the tax advantages, plus pay additional penalties if you withdraw those funds.
   Instead, I would suggest a few other things first. You should be able to adjust how much you contribute to your 401K plan each paycheck. Change that to zero, simply stop contributing for now until your finances are in better shape. The current $10,000 can continue to sit in the account, and hopefully grow when the market comes back.
   Do your best to cut expenses. For example, if you have a car payment, I would suggest selling the car or trading it in for something cheaper. Whatever you can do to cut your expenses each month, car payments are usually the easiest place to start that can really make a difference. Don't eat out, much cheaper to eat at home.
   This economy won't remain in such bad shape forever, but it may be liked this for a year or two. Do whatever you have to do so as to not build up debt, or you will be paying that off for many years into the future. Even a move to a cheaper home if you rent should be considered, or taking on roommates if this is a possiblity.
   There are often small expenses that can add up over the course of the month that you do not even realize. I always urge people to track every penny the spend for a few months, to really see where they are spending money. By cutting your expenses a little bit in several different areas, it can really add up. Cancel cable, internet connections (free at coffee shops and the library), cancel home phone and just use a cell if you have one, got to a smaller cell phone plan and try to make more calls in evening or weekend where most plans do not charge you for, and any magazine or subscription services that you have. These can all be viewed free at the library anyway.
   If everything else does not work, then of course the 401k can be tapped. But only as the very last resort!

I hope this helps, please do not hesitate to follow up with me if I can be of any additional service,

Sincerely,
Paul Henneman
President
ValuEngine Inc
www.ValuEngine.com