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January 11, 2010

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It is not clear if this is in a retirement account or not, but if this is from a savings account, I would say go for it. Especially if you had some cash left over for a small emergency fund.

You will be able to rebuild the money quickly without any payments, and your new focus on planning your spending.

Getting mad is frequently a great motivator for change.

I would say as long as there aren't substantial penalties involved, I would pay them off. Better not to have to worry about the debts and just get started rebuilding the savings.

I would recommend this only if the poster has an emergency fund in place. If not, consider leaving a small amount untouched for emergencies and put the rest toward the debt.

In the interest of full disclosure, I really hate debt...especially debt that charges a high interest rate.

Given that, I would pay off credit card debt with mutual fund money if that's the only way I could get rid of it.

I concur with everyone else - cash it out and pay off the debt.

It's hard to imagine that you would get better than a 15% return on your mutual funds. By eliminating this debt that's what you are doing with the money (assuming it's not in a 401k or IRA where there will be penalties for using it).

Once the debt is gone, you can roll payments that previously went to credit cards into building your portfolio right back up without the burden of high interest rates sucking your money away.

As is typical with questions like this, the writer doesn't say what will happen with all of the credit cards after they are paid off. There is a lot of recidivism in this area so until the spending and plastic addiction is 100% cured, this move may be premature.

Assuming the mutual funds aren't in an IRA or 401k then I'd say sell them. If you don't have an emergency fund then keep some of the cash from the mutual fund for emergency fund.

I personally prefer to do a loan from a 401(k) account or similar, but the mutual fund idea can be an option. Just be careful that you don't later accrue any new CC debt!

IF the funds are not encumbered in an IRA, then , especially if there is a "tax loss" to gain, it's a no brainer - on paper. MY 16 years as a financial planner has taught me, HABITS are hard to break. WIll you increase amounts to reirement plans now that cash flow has been increased? WHAT are you doing to save even more? $24K is a pittance but, a start. Time to make some NEW money habits and no using credit might be a great start. Reducing expenses is another....do it, in addition to a NEW financial and spending plan

More information is really needed, i.e.
1) How secure is the family income?
2) How many months can your emergency fund keep you afloat?
3) The mutual funds are obviously in a taxable account or you would not have mentioned a capital gains liability.

Providing the answers to questions 1) and 2) are good and taking into account that the stockmarket is in a very overbought position right now and ready for a substantial correction it looks like a great idea to me to lessen your market exposure and eliminate all of your debts apart from your house payment and one car payment. You also didn't provide your ages and retirement plans which could possibly be factors in the decision. The further you are away from retirement the better your plan looks.

Poster,
Pay attention to what Old Limey said.
One add on. Don't cash out and pay off, then turn around and fell debt free and so able to run up more debt. Hide your credit cards.

Thanks for the comments everyone! To answer Old Limey. Our income is okay, I have a great job and my husband just started a new job with good benefits and more money than he had been making in the past year. Because we had been paying down debt, we haven't built up a large emergency fund. We have about $3,000 in savings and we have used those funds to pay for things that pop up instead of putting it on the cards. We are both in our early 40s and have 401(k), a couple of IRAs and the mutual fund. Our plan is not to use the cards unless we can pay them off before interest accrues or within a couple of months if we have to use them. We are adding a part of our monthly savings from no credit card bills to savings and then paying off the car in 2 years instead of 4.

Jennifer, your response sounded great until you said, "...or within a couple of months if we have to use them..." You've got to get your mindset hard and fast on either not using the credit cards (or any other credit) unless and until you are sure you will pay it off monthly, before interest accrues. Until you can do this, you aren't ready to let go of all that cash. Often, carrying a balance on your cards, as sucky and expensive as it is, saves you from putting more on it. I encourage you to pay it off only after you are sure you have cured the credit card habit.

Whatever you do (and I think most of the advice above is sound), cut the credit cards up now - ALL of them. Then close them as you pay each one off, smallest to largest. Get intense about it - forget about your FICO! You really don't need to keep credit cards in order to become financially healthy - as you are seeing (to the tune of $24k), having them around can become too much of a temptation for some people. And I would knock out the car loan as well - those will suck away your income for life.

Removing these obligations not only takes the financial weight off your shoulders, but it also simplifies your life. I say this as one who has experienced what it's like not to have car loans, credit cards, student loans, etc. You just can't beat the debt-free road - my wife, son, and I wouldn't have it any other way!

If you ever think you will carry a balance on a credit card again, cut them up. Unless you know that you will never pay credit card interest again, it's not worth having the cards around to tempt you. If an emergency pops up, credit cards really shouldn't be your way of handling them. $3000 should be able to cover most emergencies, but as soon as you pay off your debt, I would raise that fund to a minimum of $5,000-$10,000. Even if you have an emergency that costs more than $3000, there are usually other options. If you have a medical emergency, they will usually work with you on a payment plan. If you have a car emergency, a car loan would have a lower interest rate than most credit cards.

My husband and I built up a $10,000 emergency fund within a year of getting out of college. It single-handedly has made the rest of our financial plan possible and allowed us to sleep better during difficult financial situations. We would never have bought our home so early in life (23 and 24) if we didn't have a solid cushion.

Use some of your mutual fund money to pay the debt. Think of the capital gains tax as the interest you would have paid on the credit card debt. Every dollar of debt reduced now is that much interest not paid later, and that much more debt you can pay off as part of your snowball.

As for your credit card usage, you need to have a "clean" card. This is a card you will use for your monthly charges that you know, without a doubt, will be cleared each month, so you don't pay interest on those charges. Meanwhile, you keep reducing the debt on the other cards.

Good luck, Jennifer.

Would you borrow money on a credit card to invest in a mutual fund? In effect, this is what you've done. I would pay off the credit card with the mutual fund money unless it is a retirement fund and penalties would need to be paid.

As others have mentioned the key is to not increase spending as a result of this decision. And it's even a step beyond some of the suggestions of not carrying balances back on the card. You must do more than just not carry balances on the card. You must be certain that getting out from under this debt does not cause you to increase your spending.

The reason this can be such a temptation is right now your expenses are higher due to your credit card interest and your credit card balance paydown (even though principle paydown is not a true expense per se it feels like one and looks like one in the budget).

So for example if your monthly budget looked like this:

living expenses: $3000
credit card interest: $500
credit card balance pay down: $1000
savings: $500

So thats based on $5000 of monthly income and $3000 of monthly living expenses.

Now you take the money from the mutual funds and pay off all the credit cards your budget looks like this:

living expenses: $3000
savings: $2000

If it doesn't look exactly like this next month and next year then paying down the credit cards will have hurt you financially. Even if you don't carry a balance on your cards, if you now start living on $4000 per month and only putting $1000 into savings, you might feel good about having no debt and saving $500 more than you did before but remember, that before you had the 24,000 in the mutual fund that was there and growing. Now you have none of that and you need to save every penny you can to replenish that and start building your savings and retirement funds. I will add that its not like you need to live like a hermit. You can splurge once in a while, but thats a lot different from just increasing your life style as a result of your new found debt freedom.

It sounds like you have very little net savings and being in your 40s you are a bit behind the savings curve. It's great that you recognize the situation and are working to remedy it, but the tough work is just beginning. It will take great diligence over the coming couple decades to not over spend and to pile every extra dollar you can to savings. Once you have lets say 100K in savings it can be so easy to just pull up and say well we don't have to be as diligent about the savings now, we have 100k, we could withstand some pretty tough times. Yes you could in the short term. But if you don't want to work until you are 85, you will need a whole lot more than that.

So the short answer is this: IF you have the diligence thing 100% figured out, its a great plan, go for it. But that answer starts with an IF and its a big if. Without the diligence you will end up worse off in the end if you do this. Please make sure you understand that and the power of the psychology of feeling like you can "afford" to spend more because you are out of debt. It's a horrible lie!

Be ever diligent, good luck!

Regarding cutting up the cards and closing the accounts - I like the idea of freezing the cards - I mean physically placing them in a cup of water, and putting them in the freezer until they are frozen solid.

That way, you still have a credit card if you absolutely need one in an emergency, and you will not have to deal with refusals in future when you are finacially ready to use cards again. But you will not have them in your purse, and you won't have an easy way to put them in your purse either.

Go debt free and switch to using a debit card and quit the credit cards FOREVER. Think about it this way...If you dont like being debt free, you could always rack up more debt again to buy mutual funds...My bet is you wouldn't be that foolish.

here's a twist... would you borrow 24K from your credit card to put into a mutual fund? Probably not. That is the same thing as not paying them off with your mutual fund money.

Ans yes, DO NOT USE THE CARDS AGAIN...

Thank you Dave Ramsey!

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