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Author: TradewindRider One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 21  
Subject: Re: How to stop the bleeding Date: 10/15/2008 11:16 PM
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Well, back in the late '80s when the market also wasn't doing so well, I did something very much like that. What I did was borrow some of my 401(k) balance to pay off both our car loans early. They were used cars, and small cars, so we're not talking a ton of money, but I figured that:
- The interest rate (around 7% if I recall correctly) was lower than what I was paying on the car loans;
- I was paying myself a better return than I was making in the market at that time;
- I saw it as a way to effectively make an *extra* contribution above the normal contribution limit (I maxed out then, and still do).

I paid back the loan using payroll deduction without any problems, and the market recovered afterward, so I guess my timing was pretty good (read: lucky).

The biggest risk I see is that if you lose your job, the entire loan becomes due *immediately*, and if you don't have the cash, you get nailed with penalties and taxes due on the balance. The other risk, of course, is that the market rebounds while your loan is locked up in those CDs, and you're stuck earning 3-4% on that money when the S&P 500 is going up 20% or more.

To me your plan sounds like a stretch, frankly, chasing a couple of percentage points to deal with a short-term problem. Does your 401(k) offer a money market fund? My plan has one that currently yields about 4%. That might be a middle-ground solution for you.

Jeff
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