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Dear CrankyBear:

I feel your pain! But listen – I’m going to give you some tough love because I think you can handle it.

I want you to consider and act on every single option you have outside of liquidating your wife’s 401(k). Realize that if you decide to go down that lane you will face paying taxes on the income earned in the account plus early withdrawal penalties– altogether anywhere from 10% to 40% of that $30,000.

My questions to you ….

1. Do you have a 401(k) or separate retirement savings yourself? If not, then absolutely don’t touch your wife’s 401(k). Instead, roll it over to an IRA and continue to make contributions towards that. You need to save for your retirement. Saving for retirement should be a fixed expense, just like your housing and car payments. Especially with two kids, you can’t afford to only have $500 in savings. If you do have a 401(k) that you contribute to on a regular basis, consider these next steps before touching your wife’s retirement account.

2. Can your wife start a part-time job with the sole intent of helping to pay down your credit card debt? The incentive here for her is that this can be just a temporary gig. Listen, you can’t rack up $30,000 in credit card debt and not expect to work for it. But if she hates working outside the house, she can call this her “debt diet mission.” Make a timeline of goals. In two months I want to earn $2000, in six months, $5000. Brining in an extra $500 to $1000 a month can help you wipe out nearly a third of your credit card debt in six months. Can’t afford to leave your kids with a sitter while mom works? Call up relatives! Or a friendly neighbor that you can barter with. In this economy, you need to spread your wings and roll up your sleeves. Don’t be shy to ask for help – no one’s going to act surprised since they’re probably in your shoes, too.

3. Can you reduce your credit card rate? Call the 800 number on the back of your credit card and ask a service rep. That works about 50% of the time. Explain you have offers from various other credit card companies. Can you at least get 6 months of no APR and then return to your old rate to help you pay down your debt? Be firm. If the first rep can’t help, ask for a higher-up. If the card company thinks you’re ready to jump ship to another credit card company, they’re more likely to accommodate you. Just a little FYI: Assuming the average interest rate on your cards is around 12% (which I think is pretty conservative) paying off your debt is like paying yourself that 12% interest. How about them savings!

4. What can you get rid of that won't cramp your lifestyle? $400 for a new car…Can you trade it in for a car with a smaller payment? Also, call up your insurance company and ask for a lower rate. Use that same haggling method when asking for a lower credit card rate. What about your cable bill? And you cell phone bill? Can you reduce your plans on both? Any excesses that you can temporarily shut down? You have more important goals – to erase nasty credit card debt and save for your family’s future.

5. Okay, you’ve rolled your eyes through tips 1-4. You’re still desperate to withdraw your wife’s lingering 401(k). Call up the 401(k)’s planner, be it Prudential, Fidelity or the like, and ask about the associated fees. You may find that after it’s withdrawn, you pocket only $20,000 at best. OK, absolutely use that to pay down your credit card debt. But don’t neglect all that I’ve suggested above. You may find yourself in the same predicament in the next year if you don’t watch your spending.

Finally, some parting advice for you, CrankyBear, since I want to help you and see you and your family get back on track bigger and stronger:

*Remember that Cash is King. Limit how often you whip out your Visa V TICKER, or American Express AXP TICKER to just big purchases. I’m talking more than $100. Items that require delivery like furniture, a TV, items that should have insurance or have warranties, like appliances, gadgets, items that you order from the internet that are pending delivery. Why? Because too many of us (myself included) use credit cards to pay for everyday, small items, from food to coffee, newspapers, a pack of gum, what have you. It’s not only a red flag to banks that you need to literally take out a loan for a stick of gum (which results in a slashed credit line for you), it also causes you to overspend. I just helped a woman who thought she was spending $300 a week, but actually was spending $700 a week. And guess what? Nearly all her purchases were made using a credit card. That’s not a coincidence. You’ll be able to have a better handle on your spending when you use cold hard cash. It’s basic, I know. But, few of us practice this and to our own financial detriment.

*Stay Disciplined and Rebuild Your Savings. If you do end up liquidating your wife’s 401(k), pay off your credit card debt with it, but now without that debt hangover, you have more money to contribute to savings – and you should save more. Maybe it means increasing your 401k contributions over the next year to make up for your wife’s emptied account. Figure making up $30,000 is like contributing an extra $500 a month for the next five years to your 401(k), assuming you have flat growth in the account. If the market picks up, you can recover that loss in less time.


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