In my article, Should I Take Out A 401k Loan, I reported that using a 401k loan to buy an asset is strategic. An asset is something that can make you money. One type of best types of assets you could buy with a 401k loan is a business or use the loan to start a business. Let’s discuss this this concept more so you don’t make any potentially devastating financial mistakes.
Should I Take Out a 401k Loan to Start A Business?
Using a 401k loan to start a business can be strategic, but be careful. Remember from my article, Should I Take Out A 401k Loan, I walked you through how a 401k loan works. You can borrow up to half of your 401k balance and pay the funds back over a 5 year period of time for a business. However, if you leave your job or are fired, you will be required to pay back your 401k loan almost immediately. You will get a short grace period, like 60 days, but, with that much debt hanging over your head, it will feel like it is immediate. With this in mind, don’t take out a 401k loan with the intention of leaving your job to start your own company – this is a bad idea.
How Should I Take Out a 401k Loan to Start a Business?
- Start or buy a business where you can work part time. By keeping your full time day job, you will be able to continue to make payments on the 401k through your pay check for the next 5 years. If your business is successful enough to allow you to quit your job, make sure the business saves up enough money to pay off the 401k loan early.
- Start a business where your spouse or child can work full time. Become an investor – the quadrant you want to be in according to Rich Dad Poor Dad. By taking out the loan, this can give you a quick cash infusion into the business to buy the necessary start up materials, such as a franchise purchase fee. Just make sure the business treats this loan as any other loan and pays you back. You can have the payback period delayed to start after the business gets on its feet if needed, but make sure you get paid back. If you plan on starting a business that cannot pay back the 401k loan, it is not a business worth starting.
Taking out a 401k loan to start a business can be risky, but very rewarding if you do it right. Have you ever taken out a 401k loan? Tell us about your experience below in the comments.