Why I Will Be Borrowing From My 401K to Pay For My First Home

It wasn’t easy deciding to go against popular advice of not borrowing from my 401K now that I’m condo hunting. When it came to saving for the down payment and closing costs I weighed three saving strategies:

  1. Saving aggressively in liquid savings accounts, only contributing the minimum to my 401K to receive my employer match.
  2. Continuing to max out my 401K and then borrow from it
  3. Saving the notoriously recommended 15% of my income in my 401K and the rest in liquid savings.

I did a comparison of the three strategies and quickly realized borrowing from my 401K is most advantageous.
Strategy 2

Strategy 1 Strategy 2
(1) Time to save 1.5 years 0 years
(2) Amount to Save* $27,500 $25,000
(3) Time to repay self 0 years 5-10 years**
(4) Foregone 401K contributions $21,000 $0
(5) Lost interest income× $140,000 $30,000××
* – Strategy 1 requires more savings due to anticipated increases in housing prices
 ** – 10 years is the worst case scenario. I actually anticipate less than 5 years due to salary increases
 ×- this is an extremely crude estimate that assumes a 7% market return and no market fluctuations over 30 years
 ××- For every additional $1,000 saved towards a condo outside of my (maxed out) 401k, I’ll save ~$2,200 in potential interest

The main risk associated with Strategy 2 would be the need to repay the 401K loan if I were to lose or change jobs else I’ll have considerable taxes and fines. I do not anticipate either but I have emergency funds in place otherwise.

Strategy 3 would obviously have pros and cons that fall somewhere between the first two strategies.

After being on the housing market for about a month I’ve learned it’s brutal out there! I may not find a place for a while since those with cash or sizable down payments scoop up places 1-2 days after listing. I’ve placed one offer on a condo and bid equally to an all cash offer so mine was not accepted.

Net Worth Update – August 2017

I’m continuing my condo hunt but am also still aiming to max out my retirement accounts this year. I’ll only be placing an offer on the perfect place.  I do want to increase my cash on hand though. So, in August, I contributed less to my Roth and 401k than in previous months and plan to do the same in September. I’ll increase my contributions eventually and slowly tighten my monthly spend.

Here is where my accounts stand at the end of August:

Liquid Assets Jul-17 Aug-17 Change
Cash & Checking $1,000 $1,158  +$158
Brokerage #1 $0 $150  +$150
Emergency Fund $3,380 $3,385  +$5
Short Term Savings $1,125 $2,000  +$875
Vanguard Fund  $500 $500 +$0
Illiquid Assets Jul-17 Aug-17 Change
Brokerage $460  $466 +$6
Savings Bonds $2,060 $2,085  +$25
Retirement Jul-17 Aug-17 Change
Roth IRA $17,367 $17,657  +$290
Traditional 401K $26,171  $27,423 +$1,252
Net Worth $52,063 $54,824 +$2,761
% Change 5.3%

I’m surprised my net worth increased as much as it did. I usually aim for an increase of $2,500 which I exceeded even though a lot less of my money was placed in my pre-tax 401K account. I even opened a brokerage account with some extra income I received this month.

I’m now a little behind on my goals for 2017 since I’ve decided to adjust the timeline, but I’ll get there unless I buy a condo, I have fully funded my next vacation though:

Fund/Goal Contrib. Total  Goal Progress
401K $886 $11,552 $18,000 64.2%
Roth IRA $160 $4,160 $5,500 75.6%
Emergency Fund $30 $5,470 $5,500 99.5%
Vanguard
Fund
$0 $500 $3,000 16.7%
Vacation* $—- $1,125 $1,000 112.5%

 

August Budget

You saw the play by play of my August spending. I was pleased with my spending habits. I had an emergency towards the end which required me to buy last minute plane tickets in order to attend a funeral halfway across the country. Luckily I have a travel credit card with plenty of reward points so the ticket purchase wasn’t that expensive.  I didn’t have to dip into my emergency fund and it didn’t throw off my budget.

Category Budgeted Actual Remaining
Rent $1,650 $1,652 $2 over
Fixed Expenses $100 $91 $9 under
Medical $- $74
Food $200 $91 $109 under
Everything Else $250 $265 $15 over
Total  $2,200  $2,099 $101 under

Not included in the above is reimbursed (business) food spending. I had a business trip early in the month which explains the low food expenditure.

The daily budget approach seemed to be really helpful. I was $100 under budget, at the end of the month.  Things I would like to focus on in September include:

  1. Limiting online purchases to two days a week
    • I’m not sure I actively attempted to do this in August. I’m aiming for Mondays and Thursdays.
  2. Keeping track of daily expenses.
    • I’ll try to keep a manual diary from now on utilizing the daily $15/day budget. I’d like to decrease this to $10/day eventually.
  3. Limiting nonsocial eating.
    • I saw this suggestion elsewhere in the blogosphere. It essentially limits eating alone.  This means little to no starbucks, takeout, food deliveries, etc. I don’t do much of this anyways, but I would have saved $50 had I followed this rule in August.

August Spending – Week 4 & 5

Spending Overview:

I’m keeping track of my spending to hopefully break the habit of going over budget. This daily budget approach actually ended up going very well! It is definitely what I needed to get out of the monthly overspend habit. The weekly spend:

Shopping: $11
Food: $51
Travel: $33

I’ll post my monthly totals in my August net worth post, which will be coming shortly. My spending habits broken down by days:

Day 1-6

Beginning Balance: $90
Spending: $0
Ending Balance: $90

I did really well with no spending for 6 days in a row! My longest streak yet!

Day 7

Beginning Balance: $105
Spending: $33
Ending Balance: $72

I spent $33 oan very last minute plane tickets. Thank goodness for credit card reward points that allowed me to attend a funeral.

Day 8

Beginning Balance: $87
Spending: $24
Ending Balance: $63

I went out to eat ($13) and made a purchase on Target.com ($11)

Day 9

Beginning Balance: $78
Spending: $38
Ending Balance: $40

I stocked up on some snacks for my trip.

Day 10

Beginning Balance: $55
Spending: $0
Ending Balance: $55

The purchases I made on this day ended up showing up on my Credit cards as a September 1st purchase. My laptop that is in the repair shop has not been returned so the $75 was not paid out either. I was $55 under budget for the month of August!! The daily budget approach worked. I’ll try to keep this up but most likely not on my blog.