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How to Escape The 5th Ring Of Financial Hell

Did you know there are 5 rings of financial hell? These "401K Killers" stop you from building your retirement nest egg. The first four lead you down a slippery slope to the 5th ring. If you don't get out of it your future retirement will become a figment of your imagination.

Here's a look at the four rings that land you there.

Ring #1: Credit Cards

Most Americans rack up credit card debt. It's so easy to whip out the plastic for items like gum on up to Christmas gifts. Once you replace cash with plastic your 401K can dwindle like sand in an hour glass.

The average U.S. household carries $9,840 in credit card debt as of 2007. This is up 25% since 2000. Let me ask you a question. What can $9,840 do for your retirement each year? With the power of compound interest you'd be sitting on top of 7 figures for your golden years! But it'll never see the light of day if you keep relying on credit cards.

The current financial mess has caused an increase in credit card delinquencies. The American Bankers Association reports that credit card delinquencies rose to 4.51% in the first quarter of 2008. This beat the five year average of 4.4%!

Let's say you open a 15 year 401K with $9,840. If you make an average salary of $40,000, earn an annual 3% salary increase and invest 5% of your salary, here's what will happen. With an employer match of 50%, and a 9% compound interest rate you'll end up with $140,067.78! Stretch that out to 30 years or more and you'll hit 7 figures for your retirement.

If you're relying on credit cards during the credit crunch, your hopes of a fat 401K are dying by the interest point.

Ring #2: Pay Day Loans

Okay, okay. I'm as guilty as the next retirement hopeful on this one. If you haven't fallen into this little trap, don't follow in my footsteps. It took several months to get out of this and I won't be back.

The Center for Responsible Lending reports that the pay day loan industry sucks $3.4 billion out of our wallets each year. Did you know 91% of pay day loans goes to folks who take one out 5 or more loans per year?

When you need some quick cash it's easy to run down to your local loan shark, I mean pay day loan center. On the surface everything seems fine. You hand over your banking and employment information and they hand you cash. It'll be conveniently taken out of your account on pay day. But in reality you're robbing Peter to pay Paul.

Guess what? You're Peter!

This is how the cycle worked for me. I'd get a pay day loan for $800. The fee cost me $95. Yes, I had real cash in my hand, but the $800 plus $95 was coming out in a week. The money got me by, but things came up and I needed more money. With loans and fees ranging from $595-$895 coming out of my account, it caused a "loan roulette." With creativity and patience that money could've went to my 401K.

Let's use this same formula for $595 being invested yearly. With employer matches and compound interest, your 401K will rake in $106.393.03 after 15 years!
Stay away from this path of quick cash. Just like a casino in Vegas the house always wins.

Ring #3: Check Roulette

The banking industry has been working on a hot scheme for the past ten years. It's called the "overdraft fee." Banks offer clients the convenience of covering bounced checks. It's supposed to cover essentials like a car or mortgage payment. But the fees can add up. Most fees range from $20-$50. But the scheme works in favor of the banks. They'll pay a large ticket item like your rent. Then smaller checks for gas, clothes or a night out on the town will bounce. The bank "comes to the rescue" and pays these items for a fee.

You're responsible for the amount of each check bounced and the overdraft fee. You might be able to get away with this for awhile. But unexpected expenses come up. When you're writing checks hoping they'll be covered by the bank, it's called "check roulette." Sometimes the ball lands in your favor. And other times it won't.
Banks don't have to tell you how often their fees go up. They can also give your account a "false balance." This is when the overdraft protection limit is higher than the actual balance. It looks like you have more money than you really do.

Constant overdraft charges can snatch $4,000-$6,000 a month from your account. In the end your 401K has less money to make it grow. Using the formula above your retirement will be worth $118,795.68.

Risk your money on your 401K rather than check roulette.

Ring #4: Overspending

If you don't understand money or how to manage it, this trap is easy to fall into. Have you ever asked yourself why you spend money? Do you do it to feel better? Or do you believe you deserve something "special?" There's no doubt you've work hard for your money. Blowing it on things that won't help you enjoy your golden years is not worth it. To find out if you're overspending, carry a small notepad and pen for a week. Every time you buy something write down the cost. When I first did this I discovered I was spending $25 a week on snack food! Think of what $100 into your 401K can do for your retirement.

Ring #5: Debt

That's right my friend, the big "D"! America is carrying $2.6 trillion in consumer debt. If you're drowning in debt having enough money to enjoy retirement won't happen. There are plenty of sad stories of those who can never retire. Instead they have to hold down a job to make ends meet. How do you wrestle your 401K money from this 5th ring?

First, start paying yourself. No one has worked harder for your money than you. Have $25-$100 per paycheck automatically sent to a savings account. When it reaches $5,000, roll 10% into your 401K. Its money you won't see until "Retirement Day." While you're leaving it alone your 401K will grow.

Second, get a reality check. Sit down and list out your monthly expenses. These will include your mortgage, car payment, groceries, utilities, etc. Find categories where you can save money. When we realized we were blowing $150 a month on tanning and gym memberships, we got an apartment with both at no charge.

Third, make a budget. If it weren't for our electronic check register, we'd be financially blind! A budget is a warning sign to not go over the edge. It's okay to set aside some "mad money" for fun activities. But budget for it. A budget keeps you from overspending.

Fourth, get all the help you can. I hesitate to recommend debt relief agencies. Some are as predatory as pay day loan centers. There are many good books on the subject. If you're looking for something radical, I'd highly recommend "The Total Money Makeover", by Dave Ramsey. He has a hot plan for getting out of debt fast! Another great read is "Money, Everything You Need to Manage Your Personal Finances Wisely", by Peter Sander, M.B.A. Read as many books on debt management and personal finance as you can. And of course you can always read articles on our sites.

Escaping the 5th ring of financial hell will ensure a fat 401K for your retirement.

Clyde McDade is a Financial Copywriter. He can be reached at

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