Here at ReadyForZero, we’re all about taking a holistic view of your finances. While we want to focus on helping you get out of debt, there are many ways that you can optimize your finances to both get out of debt and build wealth. One of the most important aspects of this is to educate yourself – which is why we cover so many topics on our blog and our resource centers.
But now we’re going to take a step further to make sure that we address everything you need to know in order to optimize for the best financial future possible. How are we going to do this? With the help of our good friend, Steve Rhode! Steve is a well-known debt expert who answers questions on his own website and is now offering help specifically to ReadyForZero users. Read on for today’s topic and answer from Steve!
Today’s question is from someone who is ready for zero – now. He is 29 years old and has enough money in his retirement account to wipe out all of his debt, but isn’t sure if it’s a good idea to do so. Question: Should you use retirement funds to pay off debt?
Steve’s answer to Should You Use Retirement Funds to Pay Off Debt
It really depends on how much of a future sacrifice you are willing to make. There is something called hyperbolic discounting that address just such a situation. Basically that means people will put a greater weight on something happening now rather than in the future. When we do that we tend to abandon logic.
Right now that money in your retirement account feels like it’s burning a hole in your pocket and it’s there to spend. It’s not. It’s there to grow.
Let’s say you tap that fund for $15,000. In fact what you are really doing is draining $154,285. How’s that? Well, if you left that $15,000 in the retirement account and you only average a six percent rate of return, in 40 years it would be worth $154,285. If you averaged a seven and a half percent return it would be worth more than a quarter of a million dollars. To be exact, $270,663.
The better bet would be to use ReadyForZero to pay off the debt in the smartest way possible in the shortest period of time and for the least amount of money. Leave the retirement funds alone. You older self will thank you.
Besides, I’m still waiting to met someone who tells me they retired with too much money.
The opinions stated in these posts are solely the opinions of Steve Rhode, not of ReadyForZero. Are you interested in asking your own question for Steve? Send me an email directly at email@example.com and use the subject line, “My Money Question”. If you’re more into social media than email, write your question on our Facebook wall or send us a tweet - don’t forget to include the hashtag, #mymoneyquestion!
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