Carrie Schwab Pomerantz

Dear Carrie: I have $30,000 in revolving debt and unsecured loans with high interest rates. I have about $30,000 left in a 401(k); I borrowed $20,000 a few years ago for my kids' college tuition and closing costs on my home. I am 46.

Should I borrow the money from my 401(k) to pay off the debt, or just leave my 401(k) alone and let it continue to build? -- A Reader

Dear Reader: You're in a tough spot, and I'm really glad you've asked me about it. The simple answer to your question is no, you shouldn't borrow more from your 401(k). In fact, you may not even be able to, as I'll explain in more detail. But before we get into theses details, the most important thing I want to emphasize is that you need to curb your spending and stop running up debt.

I realize that you borrowed from your 401(k) for worthy goals: to buy your home and to pay your kids' tuition. But the fact that you have $30,000 in "revolving debt and unsecured loans" sounds like you are living beyond your means. If that's true, you need to tackle that immediately.

CREATE A BUDGET -- AND STICK TO IT

Most people really don't know where their money goes, so start by getting a clear picture of your spending patterns. It's usually easiest to divide things into necessary spending (mortgage payments, insurance, taxes) and discretionary spending (vacations, restaurants, entertainment, etc.).

You probably already know if you're spending more than you're making, but really knowing where the money goes will help you find places you can economize. At this stage, the key is to create a budget you can live with -- and stop running up new debt.

REDUCE YOUR DEBT

The next step is to reduce your existing debt, particularly the high-interest, non-deductible debt. If you could pay off the $30,000 tomorrow, you'd see an immediate improvement in your budget (how much are you paying each month in interest charges on the revolving debt and unsecured loans?). But that's an enormous challenge.

Your idea of using your 401(k) makes some sense -- if you could actually borrow enough to eliminate your debt and you had the ability to repay the loan in the next five years (a requirement of most plans). If you don't pay, the 401(k) loan could be viewed as a distribution, which means you'll pay income tax and a 10 percent early withdrawal penalty -- onerously expensive.


Carrie Schwab Pomerantz

Carrie Schwab Pomerantz is a Motley Fool contributor.

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