Bad Economic Strategy

I was reading the news earlier today. The news actually stood out and surprised me—more and more people are tapping into their 401K plan to make their monthly payment.

While groceries and utility bills are getting more expensive, many borrowers are having a hard time to make their SUV, mortgage, and credit card payments. Even though the interest rate has been cut a few times last month, the banks are tightening up their standard for loan borrowers. Many credit card companies, such as American Express, have already reduced their consumers’ credit limit.

Many middle income class Americans have their credit cards maxed out. They have mortgages that are not affordable. They also drive large SUVs or luxury cars that they can only lease. The bad financial situation has pushed many Americans to the edge. People are withdrawing their retirement money from their 401K plan. They are borrowing loans every month from their retirement savings. A 401K plan allows the contributors to take out loans up to $50,000 or 50% of the total investment, whichever is less.

For many 401K contributors, this is a very bad plan. People who can repay their loan back in a fixed period might not suffer from the penalty. People who eventually claim default will be in big trouble. Even if you can pay back your loan, you will earn less on your contribution. Besides that, many plans would not allow you to contribute until you pay off your balance.

What a terrible idea to withdraw from personal retirement savings. We are lowering our future living standard because we are buying luxury goods we can’t afford. Borrowing money is like a rolling a snowball. The more you add to it, the bigger the snowball is, and the worse the problem becomes.

http://biz.yahoo.com/ap/080219/borrowing_against_retirement.html?.v=2&.pf=retirement

http://www.msnbc.msn.com/id/23241606/