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Personal finance

How not to pay for your goal

There may be more convenient methods to pay for your purchase, but they usually have consequences.

4 minute read

Using credit cards

If you're looking to reach your goal in the most expensive way possible, then using plastic to pay for it is the way to go. Credit card balances are essentially pricey loans that can charge interest rates as high as 20% or more.

Putting a $5,000 vacation on a credit card could lock you into payments for the next 17 years. In the end, that $5,000 vacation could actually cost you more than $12,000.*

Carrying a credit card balance will also result in a hit to your credit score, which could hinder your ability to meet other financial goals.

Tapping into retirement money

Taking out money you had earmarked for retirement (or another goal, like college) could hurt you in a number of ways.

If you withdraw money from a tax-deferred account—a traditional IRA, a 401(k), or a 529 account, for example—you'll be hit with a 10% penalty in most cases. And don't forget to set aside part of what you withdraw, because you may need to pay income taxes on it as well.

So, for example, if you need to withdraw $10,000, you could be looking at total taxes and penalties of $3,200 (if you're in the 22% tax bracket)—leaving you with only $6,800 to use right now.

Withdrawing from a 401(k) means you'll lose a lot

And that might not even be the worst part.

The money you withdraw could eventually threaten your ability to reach your other goal. Going back to our example, $10,000 might seem like a small drop in your retirement bucket, but because your money will also miss out on compounding, you could be looking at a final loss of more than $57,000.

The true cost of taking a retirement withdrawal

This hypothetical example assumes that you miss out on 30 years of compounding at an annual 6% return. It doesn't represent any particular investment nor does it account for inflation.

Read chart description

Figure you'll just take some of your 401(k) money as a loan instead? Remember that if you fail to pay back the loan—or if you leave your employer and can't repay the loan immediately—you'll face the same taxes and penalties that come with a withdrawal.

Using your emergency fund

As the name suggests, your emergency fund is meant for large, unplanned expenses. Obviously, if you spend it on something else, you won't have any cushion when you encounter an actual emergency.

Don't have an emergency fund yet? Start one today.

Build your emergency fund

So how should you save for your goal?

Investing your savings in a separate account is the best way to reach your goal.

Get help finding investments for your goal

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Ready to start saving?

New to Vanguard?

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