Okay guys, this is a help-a-reader request. As always, when we do this, please be gentle. This is a real person with a real problem. They would like your help and input into their situation. Names are changed to protect the debt-laden but the e-mail and story is very real. Please do not comment if you can not give constructive advice. Let’s hear “Amy’s” story. Here goes.
I came across your financial blog while Googling something weird (don’t ask) and I’m fortunate I did because I need a normal, financially savvy person’s suggestion on what I might do about my 401K.
A little about me: I’m a 32 year old woman from LA. I was recently fired from my legal industry job of 7 years in May 2012. I’ve been receiving unemployment benefits since then—so it’s been about 6 months now. And of course, I’ve been looking for employment but have gotten nowhere. Since I wasn’t getting any results in my job search, I concluded that I needed to make myself more marketable, thus, employable and earn a much higher income. So, I decided to enroll in a paralegal certificate training program in order to make myself more marketable in the legal industry (the semester begins late January 2013). The setback is that my application is on hold because I don’t have the $250 certification fee needed to complete my enrollment. My dilemma: As of now I have completely depleted my savings and my sole source of income is unemployment. I have debt: -School loan #1: $10,300
-School loan #2: $2,200
-Credit card debt: $7,100
-Car note: $6,700
-Debt owed to friends: $2,080 Total debt: $28,380 And of course there are those recurring miscellaneous items like car insurance, rent, mobile bill, etc. Now, currently I have a little over $2 in my checking account. Yes. Two. And about $20 left in credit to spend on my card. Having been on unemployment for 6 months, I’m now waiting for the extension to kick in and I don’t know how long that will take because I have to be “eligible” for it, which I’m pretty sure I am, as nothing in my financial life has changed since I became unemployed. In any case, the $1,800 monthly maximum in benefits I receive would still only be just enough to simply survive off of (unfortunately, not enough to put away for a rainy day and only enough to pay the minimum on my debt, excluding my school loans which I’ve had to defer). As a result, sometimes I go hungry and I don’t mind since I’m single with no dependents. How financially responsible am I? I have never, EVER, been late on a bill or rent in my entire life…even on unemployment. I’m obviously proud of this fact. I’ve always done what was needed in order to avoid not only late payment penalties but a negative report on my credit history and score. I’ve always only had one credit card and I’m not frivolous with money at all and only purchase essentials (groceries, toiletries, gas). I also know that should I be fortunate enough to pay off my debt, particularly my credit card, I WILL NOT start spending like there’s no tomorrow and put myself back in the hole; I’ve never been that type anyway so it won’t be a difficult task. The possible solution??? I have a 401K account still sitting with my former employer in the amount of roughly over $21,000. I have read and read at length, about the nasty penalties and tax repercussions I’d suffer if I withdraw before I’m 59 1/2 years old. But right now, I don’t even have money to buy tampons. I mean it’s really gotten so bad for me that even if I landed a job interview, I wouldn’t have the money to get gas (or take public transport) in order to go to the damn thing. I’m not trying to pour it on thick with some sob story, I’m only trying to get you to see things in perspective and know just how literal I’m being in terms of how dire my financial straits are. I feel that using my entire 401K is the only solution because other than my school loans, I wouldn’t have any more of that nagging debt draped around my shoulders. Thus, I would have more money freed up to start saving again each month, even with unemployment, instead of living hand to mouth. For me, I wouldn’t be borrowing from my 401K. It’s not an option because I’m not in a situation where I’m able to pay that money back, so completely withdrawing with a steep penalty is pretty much my only option in order to prevent myself from becoming homeless.
My advice:
Amy is in a serious financial situation that many millions of people are in. According to Bureau of Labor Statistics more than about 5 million people have been unemployed for 27 weeks or more. They make up a little more than 40% of the total amount of unemployed individuals. Even with a six month emergency fund, individuals facing long-term unemployment will eventually run out of cash.
You’ll hear everyone tell you that you should never touch your 401K. Financial Samurai just wrote a post stating that you just borrow from your 401K only if you are a “petulant fool”. From my window seat in HR where I administer our 401K plan and can see all of the loan activity for our company, I would agree that many people treat their 401K accounts as a virtual piggy bank. Many individuals will end a loan one week and enter a request for a new loan the following week, never giving their money the chance to work for them. But that situation does not apply here.
What we have is an individual about to fall over the cliff into virtual poverty seemingly with little to no resources. But, I’ve realized that sometimes we think that we have no resources when we do have some available to us.
First, I would do the following:
- Food is a major priority. I would visit local food banks and churches for food giveaways. Second, I would apply for the SNAP program. Even though you are getting unemployment, you may still be taking home too much money to qualify, but it doesn’t hurt to try. Edit: Check out this article on how to eat like you’re on SNAP even if you aren’t.
- Shelter is the second priority. If you have the ability to downsize do it now. If that means sharing an apartment with someone or taking in a roommate (as your lease allows) then now is the time to do so. Housing is often the most important bill that we all have. Cutting that down to size will help significantly.
- Sign up for any FREE job training programs. Since you are unemployed, your local employment office will have a list of these resources available. If not, the internet is a beautiful thing. If you can avoid having to pay out of pocket, now is the time to do so.
- Continue getting hardship deferrals on the student loans. Even bankruptcy doesn’t wipe these suckers out, so defer, defer, defer.
- Consider getting an internship within your chosen field. Even unpaid internships can get your foot in the door to a paying job. It ain’t pretty, but it’s something.
- How about a seasonal job? Plenty of places are hiring just for this season. Yes, this will take you off of unemployment, but when the season closes, you will be able to go back on unemployment if needed. I have a list of places hiring for Christmasthat you can look into.
- If not seasonal, how about one day gigs? Try looking at Craigslist for your area for those one day things. They often pay cashola at the end of the day. There are some other ways to make extra money listed in the article that I linked to.
Now, on to your main question of the 401K. The thing is, you can take a hardship withdrawal in very specific cases. Here they are:
- To purchase a primary residence
- To make a payment that would prevent eviction or foreclosure of your primary residence
- To make repairs certain repairs to your primary residence
- For funeral expenses
- To pay medical expenses for you, your spouse, or dependents.
- To pay for college expenses for you, your spouse, dependents or children who are not dependents
With that list in mind, the only way that I see that you can even qualify for a hardship withdrawal is if you were facing an eviction. I’ve had the joy of processing a few of these requests. You would have to submit documentation from your landlord or mortgage company which specifically states that you are in arrears when that action is pending. Unless you are in this particular situation, you probably will not qualify for a hardship withdrawal. You can read more about hardship withdrawals when you have time.
Now we have to ask ourselves, what’s left? You shouldn’t use your credit card. You can not access your 401K. You have no money.
Readers, any suggestions?
