I think this is going to become a new series for me. At least until friends stop telling me about their financial issues.
I gave a friend some advice yesterday. I am not sure if it was the 100% proper advice, but I think it was good. Keep reading and let me know.
Real Life Situation
$2,000 in IRA
($10,000) in credit card debt at 4.3% interest (24 month introductory rate)
Should she take the money in her IRA out and pay off some of the debt.
Other things to consider: She is currently paying down the debt an extra $500 a month. My guess is that it will be 15 months and they will be debt free.
I told my friend that she should either not touch her IRA or consider converting it to their Roth if they were annoyed that it was sitting in a traditional IRA. I thought that completely pulling it out was a bad idea because of the 10% penalty for pulling funds out of an IRA.
She responded to this advice “it would only cost $200 to pay off $1800 in debt”. While technically correct, I rephrased it for my friend. I said, “if it was $200 for $1,800 or $200K for $1.8M, it shouldn’t make a difference. 10% is 10% and thinking like an economist, the person should try to optimize every dollar they have or will receive.
So how did I do? Is this what you would have advised?