Q: I’m a 29-year-old who has a mountain of debt to pay off from the high-interest credit card I racked up in college. I figured I’d tap into my 401K to pay it off, but something tells me that’s a dumb idea. I still want to save. What should I do?
A: Take a deep breath and draft a plan to get out from under your mountain of debt.
First, hands off the 401k.
Step away: 401Ks act as a tax-free retirement fund, not a piggy bank. Just pretend your retirement funds are completely inaccessible because not doing so will be more trouble than it’s worth.
If you’re really in a cash crunch, take out a low-interest loan from a family member instead. Yes, it’s embarrassing, but it beats dealing with Bank of America.
Set up a plan to pay off the card.
You can use the popular debt-snowball method, in which you concentrate on paying off your smallest loan first while making minimal payments on other loans, if you have them. The snowball method is not for everyone, though, so you might start paying your higher interest debts first.
MSN did the maths and found you’re actually saving money paying off, say, a 15% APR credit card first. Overall, you’ll be paying less.
If you’re carrying several high-interest debts, it might be worth it to consolidate your debt to one card. Like the snowball method, debt consolidation won’t work for everyone. Check out Smart Money’s debt calculator to find out for sure.
Out of debt? Start an emergency fund.
Once you come up for air, start an emergency fund. This should be an easily accessible account with up to six months of living expenses that you can dip into in a real emergency–like losing your job.
Open a high-interest savings account with an initial deposit of $100 and make minimum deposits when you get paid.
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