How My 401k Loan Cost Me $1 Million Dollars

401k loan

401k loan

Today, I have a great guest post from a reader, Ashley Patrick. She asked if she could share her story with my audience, and I, of course, had to say yes! This is her personal story about how her 401k loan cost her a ton of money and why you shouldn’t take be borrowing from your 401k.

You’ve been thinking about getting a 401k loan.

Everyone says it’s a great loan because you are paying yourself back!

It sounds like a great low risk loan at a great interest rate for an unsecured loan.

But you know the saying “if it sounds too good to be true, it probably is”.

So you’re thinking, what’s the catch?

I take out a loan without having to do a withdrawal and I pay myself back. I’m paying myself back at a low interest rate right, so what’s wrong with that?

Well, I’m about to tell you how our 401k loan cost us $1,000,000 dollars.

You see, there are a lot of reasons to not take out a 401k loan and they all happened to ME!

Related content:

How My 401k Loan Cost Me $1,000,000

Let me start at the beginning….

My husband and I bought our dream house when we were just 28 & 29 years old. This was our second house and honestly, more house than we really should have bought. But you know, it had a huge 40×60 shop and we loved the house and property. So there we were buying a $450,000 house with a 18 month old.

This house was gorgeous on 10 acres of woods with floor to ceiling windows throughout the entire house.

So there we were with a $2200 a month house payment, an 18 month old in daycare, and both of us working full-time. Within 2 months of us buying this house we found out I was pregnant again! We had been trying for sometime so it wasn’t a surprise but there was a major issue with our new dream home.

The layout didn’t work for a family of 3. It was a small 2 bedroom with an in-law suite that didn’t connect to the main house.

There was a solution though. We could enclose a portion of the covered patio to include another bedroom and play area and connect the two living spaces.

The problem was this was going to cost $25,000. We certainly didn’t have that much in savings and the mortgage was already as high as it could go.

So what were we to do? We have numerous people that were “financially savvy” tell my husband that we should do a 401k loan. We would be paying ourselves back so, we weren’t “really borrowing” any money. It was our money and are just using it now and will pay it back later.

Our first issue with the loan

This seemed like a perfect solution to our problem. So we took out a $25,000 401k loan in the summer of 2013. I checked the 401k account shortly after the loan and realized they took the money out of the 401k. I was very upset about this and thought there must have been some mistake.

Come to find out, they actually take the money out of your 401k. So, it’s not earning any compound interest. I thought that the 401k was just the collateral. I didn’t realize they actually take the money out of it.

So, nothing else seemed like a good option so we just kept the loan. Construction was finished just in time for the arrival of our 2nd child. The layout is much better and much more functional for our family.

Everything seemed fine and the payments came out automatically from my husband’s paycheck.

Then issue #2 with 401k loans

Then came the second issue with the 401k loan…..

In January 2014, my husband was laid off from his job. So there we were with a newborn and a 2 yr old in an expensive house and my husband, the breadwinner, lost his job of 7 years. You know the one he never thought he would lose, so why not buy the expensive house? Ya, that one, gone.  

I cried about it but figured out how long our savings and severance package would last and knew we would be okay for several months.

Well, then we get a letter stating we have 60 days to payback the 401k loan, which at this point was over $20,000. We had made payments for less than a year out of the 5 year loan.

My husband didn’t have job yet and we didn’t have that much in savings. I certainly wasn’t going to use what was in savings to pay that loan either. I may have needed that to feed my children in a few months.

So, we ignored it because we couldn’t get another loan to pay it at this point.

Luckily, I married up and everyone loves my husband. So, he was able to find another job rather quickly.

We were thankful he had another job and didn’t think about the 401k loan again.

Then came issue #3

That was until a year later in January of 2015. Here came issue number three with 401k loans.

We got a nice tax form in the mail from his 401k provider. Since we didn’t/couldn’t pay back the loan in the 60 days, the balance counted as income. You know, since it actually came out of the 401k.

Then I did our taxes and found out we owed several thousand dollars to the IRS. We went from getting a couple thousand back to owing around $6500. So it cost us around $10,000 just in taxes. It even bumped us up a tax bracket and cost us more for taxes on our actual income as well.

I ended up putting what we owed on a 0% for 18 months credit card and chalked it up to a big lesson learned. I will never take out a 401k loan again.

The silver lining

In reality, my husband losing his job has been a major blessing in our lives. He is much happier at his new job. This also started my journey to financial coaching.

You see, when I put the taxes on the credit card, I didn’t have a plan to pay that off either. When I started getting the bills for it, I realized I had no idea how we would pay it off before interest accrued.

That led me to find Dave Ramsey. Not only did we have it paid off in a couple months, but we paid off all of our $45,000 debt (except the mortgage) in 17 months!

The true cost of 401k loans

Just recently I did the math and realized what our 401k loan really cost us.

It cost us $25,000 from our 401k and roughly about $10,000 in taxes. So that’s already $35,000 from the initial loan.

We were really young for that $25,000 to earn compound interest. If we had left it where it should have been, we would have had a lot more money come retirement age.

The general rule of thumb for compound interest is that the amount invested will double every 7 years given a 10% rate of return. And yes, you can earn an average of 10% rate of return after fees.

We were 28 and 29 years old when we took that loan out. If we say we would retire or start withdrawing between 65-70 years old, then that $25,000 cost us around $1 million dollars at retirement age.

Now yes, I could try to make up for the difference and try to put more in retirement but I’ve already lost a lot of time and compound interest. Even if we had $25,000 to put in retirement today to make up for it, I’ve already missed a doubling. 

But that won’t happen to me, so why shouldn’t I take out a 401k loan?

Life changes and now I am not working full-time and have an extra kid. So, thinking that you will pay it back later doesn’t always happen as fast as you think it will.  

Something always comes up and is more important at that time. So learn from my mistakes and don’t take out a 401k loan.

Actually, start saving as much as you can as young as you can. 

You may even be thinking that you aren’t quitting your job and will pay it all back, so no big deal, right? Actually you are still losing a ton of compound interest even if you pay the entire thing back.

The typical loan duration is 5 years. That’s almost a doubling of interest by the time it’s paid back in full. So, it may not be as dramatic as my example but you are still taking a major loss at retirement age.

The thing is, you have to figure in the compound interest. You can’t only look at the interest rate you are paying. You are losing interest you could be gaining at a much much higher rate than what you are paying on the loan.

Lessons Learned from my 401k loan

Some lessons I learned from taking out this 401k are:

  • Don’t miss out on compound interest
  • It’s not a loan, it’s a withdrawal
  • If you want to change jobs or lose your job, it has to be paid back in 60-90 days depending on your employer
  • If you can’t or don’t pay it back, it counts as income on your taxes

So if you are considering a 401k loan, find another way to pay for what you need. Cash is always best. If you can’t pay cash right now, wait and save as much as you can. This will at least limit the amount of debt you take on.

Determine if what you want is a need or a want. If it’s a want, then wait. A 401k loan should be used as an absolute need and last resort.

It keeps you tied to a job for the duration of the loan which is usually 5 years. This could limit your opportunities and put you in an even bigger hardship if you lose your job.

I hope you will learn from my mistakes and make an informed decision about these types of loans. Don’t be like me and make an ill-informed decision.

Ashley Patrick is a Ramsey Solutions Financial Master Coach and owner of Budgets Made Easy. She helps people budget and save money so they can pay off their debt.

What do you think of 401k loans? Have you ever taken one out?

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Source: makingsenseofcents.com

American History: Massachusetts Home Built in 1647 Is This Week’s Oldest House for Sale

The United States has seen presidents come and go since 1789, but the oldest homes in America have been standing even longer than that.

Only a handful of homes in the nation can claim seniority over the oldest house to hobble onto the market this week. Built centuries ago, in 1647, the residence sits near the Atlantic Ocean in Marshfield, MA, and is one of the oldest homes in Plymouth County.

Updated inside and decorated in a nautical scheme of navy blue with crisp white accents, this old house doesn’t look as if it’s been around for nearly 400 years.

Besides the 17th century abode, there are several other can’t-miss Colonials on this week’s list—two in Bridgewater, MA, alone. There’s also a gorgeously renovated historic home in Charleston, SC, filled with fresh touches that elevate its historic status.

Scroll on down and have a look at all 10 of the oldest homes to land on the market this week.

Price: $659,900
Year built: 1647
Kenelm Winslow House: Lovingly updated, this Colonial sits on just under a half-acre at the end of a cul-de-sac near Rexhame Beach. Besides a plaque denoting its historic status, there’s also a gravestone out front with information on Kenelm Winslow.

The four-bedroom interior includes wide-plank pine floors, six fireplaces, beamed ceilings, built-ins, and a seamless mix of antique and contemporary finishes. The property also has an antique carriage house and storage sheds.

Marshfield, MA
Marshfield, MA

realtor.com

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Price: $1,550,000
Year built: 1704
The Georgian House: Once frequented by a who’s who of historic figures—including the signers of the Declaration of Independence, according to the listing—this is one of the city’s oldest homes.

The five-bedroom home has its original red pine floors, new bathrooms and kitchen, exposed wood beams, an updated country kitchen, and mudroom. Outside, the garden includes a patio, a wisteria arbor, and mature trees.

Annapolis, MD
Annapolis, MD

realtor.com

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Price: $750,000
Year built: 1705
Whitman-Rome House: The listing says this four-bedroom home is loosely associated with the poet Walt Whitman, who once lived in the area.

The charming residence has been updated in all the right places. The old wide-pine floors are still there, as are four fireplaces.

Each door on the main floor boasts a unique design. The nearly 2-acre lot also has a three-stall horse barn, so you can saddle up and explore the nearby 800-acre West Hills County Park, with its miles of trails.

Huntington, NY
Huntington, NY

realtor.com

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Price: $515,000
Year built: 1716
Greek Revival: This 18th-century farmhouse sits on just over an acre. Completely restored in the 1970s by an architect and updated again in 2020, the two-bedroom, 1,722-square-foot home includes a light-filled living room with fireplace, repainted interiors, and a large eat-in kitchen. The basement has a brick floor and workshop, and there’s also a garden shed out back.

Bristol, RI
Bristol, RI

realtor.com

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Price: $524,900
Year built: 1736
Wood/Crowley House: This charcoal-colored, three-bedroom home sits on nearly 3 wooded acres, and includes professional landscaping, an oversized barn and a garage. The antique home recently received a new roof and insulation, as well as a new water heater.

Bridgewater, MA
Bridgewater, MA

realtor.com

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Price: $2,000,000
Year built: 1740
Exclusive Charleston: Situated on one of the most historic streets in the city, this beautiful brick three-bedroom home has undergone several recent renovations and upgrades.

Updates include the custom black wooden shutters and copper gutters, a kitchen with a Calacatta Gold marble island, and a private, brick-enclosed garden. The gorgeous interiors are a potent blend of vintage style and modern touches.

Charleston, SC
Charleston, SC

realtor.com

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Price: $749,000
Year built: 1750
LaBasseur-Martinangle House: This historic four-bedroom home sits close to the water and received a restoration in 2007. Curb appeal is readily apparent, thanks to its covered porch and patio. Awash in airy pastels inside, this dreamy home is a one-of-a-kind antique.

Beaufort, SC
Beaufort, SC

realtor.com

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Price: $549,000
Year built: 1765
Joseph Hewes House: Bearing the name of one of the signers of the Declaration of Independence, who is said to have owned this property, this historic Colonial is just steps from the waterfront, shops, and dining.

After several additions over the years, the handsome home has four bedrooms, a roomy kitchen, and an added closet in the owner’s suite. There are gardens and a storage building in the fenced backyard.

Edenton, NC
Edenton, NC

realtor.com

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Price: $579,600
Year built: 1760
Red, white and black: Impeccable from the exterior, thanks to its lovely lawn and bright-red front door, this Colonial has been updated throughout.

Highlights of the five-bedroom home include the sunny kitchen, four-season sunroom, wide-plank pine floors, and beehive oven. Outside, the 2-acre property has an in-ground pool, a barn with stables, plus a one-bedroom apartment with kitchenette and living room.

Bridgewater, MA
Bridgewater, MA

realtor.com

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Price: $239,900
Year built: 1770
Post and beam: This old farmhouse was restored to create a gorgeous, modern family home with character to spare.

Beamed ceilings, wood floors, and a stone fireplace are just a few of the vintage touches. A new kitchen, modern bathrooms, and updated systems have given this old three-bedroom house new life. The surrounding acreage is filled with fruit trees, raspberry bushes, a patio, and a small horse barn.

Warrensburg, NY
Warrensburg, NY

realtor.com

Source: realtor.com

How to Get Squirrels Out of Your Yard

Squirrels are adorable, but they can wreak havoc on your yard—digging up plants; eating leaves, bulbs, and bark; and ruining bird feeders. If you have a squirrel problem, here are six easy, all-natural ways you can fix it. 

By

Bruce and Jeanne Lubin
July 16, 2020

How to Keep Birds Away From Your Patio, Pool, and Garden

Protect Your Grill

Make sure squirrels and other rodents don’t chew through the rubber pipeline that connects your propane tank with your grill—reinforce the entire thing with duct tape by applying duct tape in rings around it. This is a good idea for anything else in your yard made out of rubber, as this is a favorite chew toy of rodents!

Keep Squirrels Out of Your Garden

Squirrels can be one of the trickiest garden pests to deal with. They chomp on flower bulbs and other leaves, dig up your favorite plants, and otherwise love to wreck your garden. Protect it by grating some Irish Spring soap around your plants. Squirrels can’t stand the smell of it and will stay away.

See also: How to Keep Snakes Out of Your Yard 

Plant Mint to Repel Squirrels

Squirrels hate the aroma of mint, so plant mint (which grows easily) around gardens and trees that squirrels like to frequent. It smells great (at least, to you) and you can even pick it and use it in drinks like iced tea and mojitos.

Another Great Squirrel Repellent

If you’ve ever bitten into a shred of foil that had gotten stuck to a piece of candy, you know how unpleasant the sensation is. Rodents hate the feeling of foil between their teeth, too, so placing strips of foil in your garden mulch will help deter squirrels and some bugs. If squirrels are eating the bark of your tree, you can also wrap the trunk in foil.

For more ways to get rid of pests from all around the internet, check out our Bug and Pest Natural Remedies board on Pinterest. And don’t forget to sign up for our newsletter and follow us on Facebook for our Tip of the Day!