-Â Â Pay back 401(k) loan. Hampton has $35,000 in his 401(k). Three years ago he borrowed from this retirement plan to pay for his car. He must pay off the existing balance of $1,750 before he leaves his current employer. In most states, borrowers have 60 days after they leave a job to pay back any outstanding 401(k) loans. But Hampton has been making regular installments directly from his paycheck and will have the loan paid off in two months. Once he starts his new job, he should continue contributing 10% or more of his income to his retirement account. The state will match his contributions up to 3% of his salary. Fulbright cautions Hampton to avoid tapping into his 401(k) for loans and instead rely on emergency savings. If Hampton were to lose his job and be unable to repay the loan within 60 days of separating from his employer, he’d have to pay a 10% penalty on the balance of the funds (since he’s not yet 59 1/2) and he’d also owe taxes on the money, explains Fulbright.
-Â Consolidate student loans. Hampton has a total of $30,000 in student loans; two private loans–$5,500 at 9.75% and $4,200 at 7.75%–the remaining $20,300 are federal loans, which carry interest rates under 3%. Fulbright recommends that Hampton contact the lender of his highest interest-rate loans and request a loan consolidation. If he’s not able to consolidate them, Hampton’s focus should be to pay off the highest interest-rate loans first. He’s paying $200 a month in total on his high interest-rate loans. If he puts $150 on the highest interest-rate loan (9.75%) he could pay the loan off in a little more than three years. While aggressively attacking that loan, he should use the remaining $50 toward the loan with the second highest interest-rate (7.75%). After paying off the first loan, he can then start applying that money to the second loan and have it paid off in just under five years (assuming he continued to pay the $50 for the first three-plus years). He should make whatever the minimum payments are on the lower interest-rate loans for which he currently pays $165. After paying off his two highest interest loans, he can apply the $200 to the lower interest-rate loans (now contributing $365) and be debt-free in about eight years assuming he does not take on any more debt. Hampton should also look into loan forgiveness programs offered through Teach for America.
-Â Avoid cosigning for others. Hampton cosigned on a vehicle for a relative. Although the owner has been up to date on payments, if he were to default on the loan Hampton would become liable. When a person asks a friend or relative to cosign it means they either have bad credit, no credit record, or a history of not paying bills. This is why almost all states require a co-signor to be told in writing of the risks of co-signing for someone. The co-signor is being asked to guarantee the debt. Therefore, if the borrower doesn’t pay the debt, the co-signor will have to. Fulbright suggests that Hampton be clear with friends and family, letting them know he cannot afford to incur any extra debt if they were to default.
- Create a financial plan before getting married. Hampton is planning to propose to his college sweetheart in the upcoming weeks. Before planning for a wedding and getting married, the couple should sit down and access their finances and come up with a plan. There is no right or wrong time to get married but they should pick a time when they are on strong financial footing. “They shouldn’t go into debt to pay for it,†adds Fulbright.Â