Recently, one of my coworkers asked my opinion about taking out a 401k loan to help replace a blown engine in his wife’s car. This is a horrible idea. Your retirement plan is not an emergency fund.
Car troubles, uninsured medical expenses, house renovations, and other everyday items are not great uses for money that you have invested in your retirement fund. You should not use your 401k as an emergency fund.
It was not designed for that, and you potentially ruin the benefits that the retirement plans were designed to give you. Some studies estimate that as many as 28% or more 401k retirement plan holders have taken out loans against their 401k plans.
Your 401k Retirement Plan Is Not An Emergency Fund
Ruins Future Earnings
Many people think that borrowing money from their 401k retirement plans is no big deal because they are simply paying themselves back with the interest on the loan. While that is true, borrowers are missing out on compounding interest that that loan amount would have produced over the life of that investment while it is not in the account.
One of the biggest mistakes I made was borrowing about $10,000 from my 401k retirement plan after only having graduated from college for five years. I paid back my loan with interest over a three year term. But, not only was my $10,000 not earning interest during those three years.
That interest does not compound over the course of my future career. And, after just five years out of the gate from college, I have probably another good 40 years of work in my future before I fully retire.
It may not exactly be fun to everyone, and it may invoke memories of piano lessons of our youth. But, you are good at what you practice every day. Malcolm Gladwell is famous for pointing out in his awesome book, 