Americans are well known for their infatuation with debt and their inability to save. However, there have been two places that Americans have managed to save to accumulate wealth. do not take a heloc to pay off other debt
* The first is their primary residence, their home (believe it or not).
* The second is in retirement plans such as IRA and 401Ks.
The primary reasons these investment vehicles have been successful amongst the free spending is that they are both forced savings plans. People will pay their mortgage first. Before any bills.
If you have a fixed rate mortgage , principal will accrue and likely offer a nice savings nest egg down the road. The retirement plans/IRA also are often pre-tax withdrawals prior to receiving your after-tax paychecks. Again, a forced savings.
Amidst these surviving opportunities to save money for later in life is a growing problem that is happening much too often.
Americans who are facing difficult financial situations are pillaging both these valuable resources.
Now, there are circumstances that require a move to empty a 401K or get a (HELOC) /Home equity line. Though, these are last resorts. And, sadly, more and more frequently, people are taking on new debt (yes, these are loans) to pay other debt.
The problem with taking from a Home Equity Line is that you rarely pay off the debt. Most hope to sell their home at some point in the future. However, debt accumulates quickly. Also, you are paying interest (more than 7%) on your own money.
If your home grows at historical rates, you are just breaking even; not at all saving for the future.
Taking money from an retirement account poses a whole new set of issues. There are serious tax implications for early withdrawal distributions that you must be aware. These tax issues need to be explained by a CPA only!
Also, and most dangerously, it is very rare that someone every repays their IRA or 401K. Typically, if you need money for financial hardship, you rarely pay it back in a lump or installments. Ultimately, that money is not working for you over the years and you will pay the price when you need that money down the road.
When people are struggling the predators come out with promises and untold offers to reduce debt and offer debt consolidation. It may sound callous. However, Yes, I do mean to scare you.