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If you are in debt, you are not alone. Experian reports that the average American consumer pays $1,237 in monthly debt across their various obligations (1).
Meanwhile, the median weekly earnings for American workers were $1,196 during the second quarter of 2025, according to the U.S. Bureau of Labor Statistics (2). That’s an annual salary of $62,192, assuming 52 weeks of work. And when we divide that by 12, it’s a monthly income of approximately $5,183.
This means that the typical American could spend about a quarter of their monthly income on debt payments alone. But while getting out of debt can be difficult when you earn a typical salary, the task should be much easier when you have a high salary.
That’s why Dave Ramsey was dismayed when a caller with a six-figure career recently asked him if he should take out a 401(k) loan to pay off his roughly $33,000 debt (3).
Dave, from New York, explained that his household income is $205,000. Ramsey felt he was earning more than enough to get out of debt in less than a year, given the relatively small amount he owed.
“Dude, why don’t you stick to a budget?” Ramsey said. “Clean up this mess. Stop trying to find a trick.”
After all, the first step to paying off debt is developing a strategy based on saving money to pay for things.
Generally speaking, there are two ways to do it: the avalanche method and the snowball method. The avalanche focuses on paying off the largest debt first and then eliminating the smaller ones. Meanwhile, the snowball technique aims to build momentum by paying off smaller debts one after another.
But when it comes to debt, the first step is determining how much you can contribute to your principal plus interest each month.
Fortunately, calculating a budget can be easier than ever with Rocket Money.
The app tracks and categorizes your expenses, providing a clear view of your cash, credit, and investments in one place. You can even uncover forgotten subscriptions, helping you cut unnecessary costs and potentially save hundreds a year. This could spend money to help pay off debts like Dave’s.
For a small fee, the app can also negotiate lower rates on your monthly bills, making it a valuable tool for keeping your finances on track.
After coming up with a budget, Dave’s priority should be to pay off his debt as soon as possible. As he explained to Ramsey, his debt comes from a variety of sources. He must:
$13,323 in back federal taxes
$13,250 on a credit card
$4,909 on a car loan
$1,138 on another credit card
Dave’s logic was that since he could borrow from his 401(k) at a 5% interest rate, it made sense to do so, rather than pay a higher interest rate on his remaining debts. His largest credit card balance had an APR of about 27.8%, well above the average rate of 22.83% in the Federal Reserve’s latest consumer credit report (4).
But Ramsey was vehemently opposed to Dave borrowing more money to pay his debts, given his income.
“If you want to work on a different plan, you called the wrong place because we’re going to get you out of debt so you can build wealth, change your family tree, and be outrageously generous.”
He told Dave to spend the next 12 months paying only the essentials and put the rest of his salary toward debt. He even suggested that Dave stop saving and investing until he is debt-free, a very different path than borrowing against retirement savings.
While Dave is figuring out his finances, it may also be the right time to look for places to save on monthly costs to free up more money to pay off his debt. Insurance premiums have increased 55% since 2020 and shopping around could save you a lot. According to a LendingTree survey (5) of approximately 2,000 U.S. consumers, 92% saved money when they switched auto insurance providers.
You can compare auto insurance rates from reputable lenders, such as Progressive, Allstate, and GEICO, through OfficialCarInsurance.com.
All you have to do is answer a few basic questions about yourself, your driving history, and the type of vehicle you want to insure, and OfficialCarInsurance will review its database and show you rates starting at just $29 per month.
While you’re looking at insurance costs, it might also be a good idea to take a closer look at your outgoing home insurance payments. This is where something like OfficialHomeInsurance.com can come into play.
In less than two minutes, this free service can help you find the best rates for you in your area. How it works is simple: simply answer a few questions, like about your zip code and property type, and OfficialHomeInsurance.com will connect you with providers in your area.
Even better, this side-by-side comparison tool can save you an average of $482, depending on your situation.
According to Ramsey, Dave’s idea of ​​borrowing from his 401(k) was not good for his situation.
But what happens if you have a lot of debt and don’t earn as much? It may not be feasible to pay off all your debt simply by cutting back and spending more carefully. Therefore, you may find yourself considering a 401(k) loan if it allows you to pay off your debt at a lower interest rate.
It could be a good idea in theory. Not only can you reduce the interest rate on your debt, but you can also pay yourself that interest, since it is your money. However, there are some risks associated with a 401(k) loan that you need to be aware of.
Firstly, while the interest rate may be affordable, the sum you have borrowed is money that will no longer be invested. Worse yet, if you can’t pay back your 401(k) loan, there could be big consequences.
You might think you have plenty of time to pay back your 401(k) loan—the typical period is five years—but there’s a problem: As Fidelity (6) points out, if you leave your employer, either because you get a new job or because you get laid off, you’ll end up having to pay off your loan in full in a short period of time.
If you don’t pay your balance on time, it’s generally treated as a withdrawal, which could leave you subject to taxes. And if you’re not yet 59½, on top of that, you’ll face a 10% early withdrawal penalty.
Not only that, but you’ll also lose the growth you would have otherwise gotten with that money.
Let’s say your 401(k)’s annual return is 7%, a little below the stock market average, and you take out a $12,000 loan from your 401(k) that you intend to pay back, but are unable to do so.
If you take out that loan at age 45 and retire at 65, it could mean retiring with about $46,400 less. The additional $34,400 is lost earnings on the $12,000.
At the end of 2024, 13% of 401(k) plan participants had a loan outstanding against their balance, Vanguard reports (7), with the average loan amount being $11,067. So while it’s clear that 401(k) loans are not uncommon, that doesn’t make them the right choice.
Of course, that doesn’t mean a 401(k) loan is the wrong option for you. If your job is very stable and you have no plans to leave, and borrowing from your 401(k) is by far the cheapest option to pay for debt consolidation, then it might make sense.
It might also make sense to take out a 401(k) loan for an emergency expense if you don’t have enough regular savings to pay for it. But you may want to discuss it with a financial advisor first, as they may be able to suggest other debt consolidation methods that leave your savings intact.
One option is to work with Advisor.com to find a qualified financial professional who can help you secure your financial situation. All Advisor.com experts are fiduciaries, meaning they are legally obligated to act in your best interest.
Getting started is also easy. All you have to do is answer a couple of questions about where you live and your financial goals. Advisor.com will then connect you with one to three financial professionals who fit your needs.
From here, you can book a free, no-obligation call to make sure it’s the right option for you.
If you’re going to borrow from your 401(k), make sure you understand the rules, including the repayment period and what happens if you end up leaving your job. It is important to enter with all the correct information so that there are no surprises in the future.
Read more: Warren Buffett used 8 simple money rules to turn $9,800 into an impressive $150 billion – start using them today to get rich (and then stay rich).
We rely only on verified sources and credible third-party reports. For more information, see our editorial guidelines and ethics.
Experian(1); Bureau of Labor Statistics (2); @Ramsey Show Highlights (3); The Federal Reserve (4); Loan tree (5); Fidelity (6); Vanguard (7)
This article originally appeared on Moneywise.com with the title: New York man wants to borrow from 401(k) to pay off $33,000 in debt. Dave Ramsey is against it, but this is where it makes sense
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
