How can I make ends meet with a decrease in income?

Question

My job changed and I am now making 1/3 of what I was making. I have a large amount in 401k. I have no more savings, I have been using the remaining amount in my equity line to make ends meet. I have a great credit rating and I am not willing to risk that, this is why I have been using the equity, just to pay the bills. For the last 20 years, I have always made six figures and now with the economy, my pay has been cut drastically. I am lucky to have a job, but it does not pay enough to even cover my mortgage payment each month, not to mention the other bills (utility, credit cards, car payment, insurance, etc.). Should I withdraw from my 401k, if so, how do I do this? I did contact my plan management, but they said I need to do a loan, in which the repayment amount would be more than my weekly pay. So this is not an option, obviously. Can't I just withdraw all the 401k with penalty and close it out. I can eventually restart a 401k in the future when times get a little better.

Answer 1

You can't withdraw a 401K until you're 59 1/2.

A loan on a 401K is a lousy option, because if you get laid off, the loan becomes due immediately (at the worst time to try to come up with extra cash), and the IRS is the bill collector.  You don't want that.

But, I would immediately stop making new contributions to my 401K until you get this mess cleaned up.

If you can't increase your income, your home equity is going to run out, and the credit cards will eventually max out.

So borrowing only postpones the problem, it doesn't solve it.

You either need a new job, a second job, or cut expenses.

You say you have a car payment.

What if you sold the car, paid off the loan, and bought a $1,000 clunker?

What if you went through your closets and had the mother of all garage sales?

Do you have a written budget? If not, start.

Write out how much you're going to make this month.

Then, on the next line, start listing out expenses, in order of priority.  

If you don't have enough money to cover everything, then you need to choose what doesn't get money this month.

Give you a hint, the top priority expense is FOOD.

But I'm talking groceries, not restaurants.

Beans & rice, not steak & lobster.

Second priority is SHELTER

Within shelter, that includes ELECTRIC BILL, WATER BILL, and the other bills where you'll get disconnected for non-payment.

Also within shelter is MORTGAGE.

Third priority is CLOTHES.

I'm talking about what you need, not what's on sale at the mall.

Fourth prioirty is TRANPORTATION.

That includes CAR PAYMENT, GASOLINE, MAINTENANCE, OIL CHANGE.

If you can't cover those four items, then you need to start selling a lot of stuff, perhaps including the house.

Answer 2

With many if not most 401K plans, you can't withdraw the money if you are still employed with the company, you can only take a loan against it.

Good luck.

Answer 3

As every bit helps you might want to consider cutting on all excess spending (and what's purchased with a credit card usually is, so tear up those cards). If you live in a big city you might want to consider getting rid of the car and use public transit. If worse comes to worse you might want to consider selling the house and buying a smaller condo or some such. Also, as a temporary measure, I believe you could borrow money from your life insurance.  You realize the squeeze is on, so you'll have to reduce everywhere, and a lot. Good luck.