Personal Finance

Dave Ramsey says to never do it but I'm liquidating my 401(k) and pay off my debts

David Beren

Published: December 15, 2024 9:33 am

In today’s uncertain financial climate, many people are worried about the status of their 401(k) accounts. In the case of one Redditor posting in r/DaveRamsey, they are asking the subreddit whether it’s wise to cash out a 401(k) to pay off debt, which would, in turn, fix their credit and allow them to buy a new home. 

24/7 Wall St. Key Points

• It’s never a good idea to empty your 401k unless you have no choice. 
• This Redditor needs to focus on keeping the family’s expenses in check. 
• Shopping at Whole Foods is costing them more than they are aware. 
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I love posts like this one because they pose a real question about the best method to manage people’s financial struggles. There’s something honest about someone who wants to do right by getting out of debt, rebuilding their credit, and working toward buying a home. 

The Scenario 

Let’s be clear and say that anyone posting a question like this one on Reddit is already taking the first step toward rebuilding their financial future. Even if they don’t get the answers they want, they are doing something by asking questions on the best next step. 

The post and comments show that this Redditor is married, and his wife does not want to control her spending. We also know they have four kids now, but when the couple bought their duplex ten years ago, they only had two children. 

We also learned that the family’s financial difficulties improved, but they haven’t come far enough after filing for bankruptcy in 2013 due to overwhelming medical expenses. While he says they are trying to be smart about spending by indicating they don’t eat out, they also shop at Whole Foods, which is more expensive than most grocery stores. 

Regarding debt specifics, the existing home loan has a $100,000 balance, which we imagine will be paid over time. In addition, two used cars have $14,600 left in outstanding payments, there is an $800 balance on credit cards, and roughly $5,000 in medical debt. 

What’s puzzling is that the family’s income is roughly $150,000 annually, which should be more than enough to control their spending and begin climbing out of debt. 

The Recommendation 

While I am not a financial advisor, I know immediately that any move to cash out of the 401 (k) to pay off the debt is an absolute no. Yes, this Redditor has 401 (k) money available, but you can’t back get all the years spent building that up. This shouldn’t even be a question, as it’s universally agreed upon in the comment section of this post that this shouldn’t even be a consideration. 

The bigger issue is that the family needs to get on the same page regarding a budget. The Redditor indicated that he and his spouse are not on the same page regarding cutting expenses and need to fix this problem immediately. The reality is that this is where the family needs to start, and by getting on the same page, they can work themselves out of debt. 

This said, there is something concerning about the lack of any discussion around building an emergency savings plan. Ultimately, this person needs to connect with a financial advisor who can guide them, potentially using the “snowball” method, to start getting out of debt. It will not be a quick process and might involve cutting some expenses the wife is aggravated by, but it will be better for the whole family in the long run. 

The Takeaway

Whenever I read a Reddit post like this one, I worry that people out there make long-term financial decisions without the benefit of long-term thinking. This is the exact scenario here. Yes, in the short term, cashing out the 401 (k) might provide immediate debt relief, but this family doesn’t sound like they can put away enough funds to repay whatever they take out of the 401 (k) balance. 

Ultimately, the biggest takeaway is that they must figure out how to reduce spending enough to begin chipping away at their debt. If this means shopping at Walmart instead of Whole Foods and still making healthy choices, this is precisely what they need to start doing.