Becareful when pulling money out of a 529 fund

DEAR DAVE: My wife and I have $25,000 in credit card debt, $2,500 in medical bills and $89,000 each in student loan debt from when we each got our master’s degrees. We make about $100,000 combined. Our son is 6 years old, and we have $18,000 in a 529 plan for him. Should we use that money to pay off debt instead?

—Sean



DEAR SEAN: I wouldn’t do that, if I were you. You’ll get destroyed with penalties, because if you take money out of a 529 for anything other than college, you’ll be taxed at your current tax rate and hit with a 20 percent penalty. The other thing is, you’ll have this weird feeling that you took money away from your kid.

Technically, it’s your money. You put it there. But when you did, it was in your child’s name. Plus, that doesn’t really solve your problem. You’ve got a ridiculous amount of debt, and that little bit won’t move the needle very much. Having more money in your hands isn’t the big answer here. What you both need is a behavior change when it comes to money.

My advice is to leave the 529 alone. Stop adding to it for the time being. Put any retirement saving you’re currently doing on hold, too. You guys need to start living on a budget, working a debt snowball plan and looking for extra income. Even tutoring would bring in some additional cash. I’ve got a feeling, too, that those master’s degrees can provide you with more money than you’re currently making.

It can be done, Sean, but it’s going to take a lot of hard work and discipline. It may even take four or five years to get this mess cleaned up, but you can’t keep living without a plan.

—Dave

Dave Ramsey: Stop investing when debt piles up

Dear Dave: What would you recommend for 401(k) contributions while getting out of debt? — Chaz

Dear Chaz: I recommend putting a temporary stop to investing while you’re getting out of debt. Lots of people are shocked by this advice, because they’re afraid of missing out on the wonders of compound interest or their employer’s match. But the key word here is “temporary.”

Millions of people have followed and been successful with the program found in The Total Money Makeover. The first step, Baby step one, is to save $1,000 as a starter emergency fund. Baby step two is pay off all of your debts, except for your house, from smallest to largest with the debt snowball plan. During this time you’re attacking your debt with incredible intensity and putting every penny you can scrape together toward knocking out debt.

The average person working my plan can pay off all their debt, excluding their home, in 18 to 24 months. Some folks can do it faster, and for some it takes a little bit longer. But during this time I want your financial focus to be squarely on getting out of debt. Once that’s done, you’ll find that you have a lot more control over your biggest wealth-building tool — your income.

Many times in life we try to accomplish too many things at once. One problem with this is often it diminishes our ability to focus. When you spend all your time nickel-and-diming everything, the result is that nothing gets done very well. You need to really move the needle and see results because personal finance is 80 percent behavior and only 20 percent head knowledge. It’s not really a math issue because if you’d been doing the math all along, you wouldn’t have a bunch of debt.

That’s why, for a short period of time, I want you to concentrate with laser intensity on knocking out debt. Once that’s out of the way, you can pour even more money into saving, investing and achieving financial peace. — Dave

 

Dear Dave: My wife and I make about $100,000 a year. We have $63,000 in the bank, and we owe $47,000 on our home. The house is worth about $250,000, and it’s our only debt. We’d like to go ahead and pay off the house, but we’re worried about depleting our savings to that extent. What would you do? —Matt

Dear Matt: If I were in your situation, I’d cut a check and pay off the house. Keep in mind that by doing this we’re not saying you’ll keep your savings at that lower point. Once that mortgage payment is off your backs, you’ll be able to save more and save faster than ever.

That’s my advice. Pay off the house and become completely debt-free today. You’ll still have $16,000 dollars in the bank and a six-figure income. It won’t take you long to rebuild your savings all the way back to what you had before, if that’s what you both want. You could do it in just a few months.

I’m looking at this as an opportunity to achieve the kind of financial independence everyone wants but few actually have. Go for it, Matt! — Dave