The odds of winning a lottery are infinitesimal. Yet inevitably, someone does. Inspired by the idea of a huge payoff, millions of people burn money on lottery tickets.
The financial strategies below aren’t as much of a long shot as the lottery. More than a handful of people may actually benefit. But many who are tempted to use them don’t understand how high the odds are stacked against success. What seem like smart money moves on the surface may hide perils underneath.
USING A 401(K) LOAN
The pitch: Retirement fund loans may be cheaper than other loans, and borrowers pay themselves interest instead of paying a lender.
The problem: The risk of a loan turning into a withdrawal is huge.
A study published by the National Bureau of Economic Research found that 86 percent of workers who had outstanding 401(k) loans defaulted when they left their employer. Most plans require borrowers to quickly pay back balances after they quit, get laid off or get fired. Those who can’t are considered in default. The money owed becomes a withdrawal, triggering taxes, penalties and the potential loss of tens of thousands of dollars in future tax-deferred, compounded gains.
Rather than asking if a 401(k) loan will be cheaper, the real question might be whether borrowing is the right move at all. The answer often is no. Loans can mask overspending that the borrower doesn’t want to confront.