Cashing in your mutual fund is not the best way to become debt free unless you have very high interest rates and an inability to pay on current loans. Depending on the type of retirement account you have, the penalties, fees and loss of future investment earnings from an early withdrawal could end up costing you much more than the interest on your debt.
Making an Informed Decision
Your brokers or financial advisor can provide you with the expected rate of return for a mutual fund going forward. Compare this rate to the fund's historical performance to ensure its accuracy. If the mutual funds pay dividends, this amount should be included in the assessment. If funds are held within a retirement account, find out the fees and penalties for cashing out. In many cases, cashing out of a traditional IRA before age 59.5 results in a 10 to 25% penalty. There are exceptions for withdrawals such as disability, medical debt, certain educational expenses and buying a home. Mutual funds held within regular brokerage accounts have the standard commission charges, but the fund itself may still charge a fee for redeeming your shares. Brokers and financial advisors are great resources for this information.
The interest rate on your debt and the length of the loan should provide the last pieces of evidence to make an informed decision. Debts such as credit cards and short-term loans typically have higher interest rates than longer-term debts such as vehicle loans or mortgages. Primary mortgage interest also has certain tax advantages. As of 2015, changes to lending practices and standards have made it much easier to be an informed consumer. Each credit card statement provides you with payment options, how long it takes to pay off the balance and the total amount you end up paying back. For mortgages, check to make sure you have a fixed interest rate. Adjustable-rate mortgages (ARMs) can keep increasing over time and lead to payments that might balloon over your ability to repay them.
Weighing Your Options
Your current net worth does not change by paying off debt. You are essentially making a transfer from a positive balance to a negative balance, and at the end of the day, you have the same amount of money minus any of the fees and the loss of investment income. Fees and penalties are red flags when thinking about cashing in your mutual funds. Loss of future investment income and the lack of a retirement account can put you in a worse situation later in life. You can make additional debt payments using current income to shorten the length of the loan and reduce the total amount of interest you have to pay. Some companies will work with you to lower your interest rates. It is always worth the call to find out.