Why paying off loans would be better than fully funding 401k?

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simas
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Re: Why paying off loans would be better than fully funding 401k?

Post by simas » Wed Feb 14, 2018 8:13 am

"I think some people are missing the importance of the future "vacation" money. Wife lives on the west coast and her aging family is on the east coast. Likely the kids' grandparents are on the east coast. There is probably no family on her side out west.

Visiting once or twice a year is of primary importance to this family and it is not cheap to get 4 people across the country and back in a plane. I think it is overly harsh to expect these people to give that up. They NEED to do this."

Take it from first generation immigrant coming from the country that is
- significantly worse off than NC (in terms of growing up poor)
- 19 hours of flight time away (26 with layover)
- $2200 per person per ticket if you want to fly cheapest possible
and still have parents in the 'old country'

none of it is an excuse to sabotage your marriage and your family's future. Prioritize - yes. This -
"If my wife can't get a vacation each year, it will get ugly and she WILL use the CC to get one." absolutely not. is she an adult or not?

Crisium
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Re: Why paying off loans would be better than fully funding 401k?

Post by Crisium » Wed Feb 14, 2018 8:51 am

You said you take 1-2 vacations per year, $3k minimum each. Let's be less conservative and say you are spending $8k vacations per year. You estimate you make between $336k and $408k per year. That's 2% of your gross income per year at worst.

Your vacations are not your problem.

Yes, you should cut them back while you are trying to erase debt, obviously. Debt takes priority.

I don't mean to drive by post, and you mentioned a lot of other spending too. But I think you are scape goating the vacations. In your OP you say you went from $60k to $2.5k emergency fund in 1 year, and then blame it on vacations. And in another post you state the vacations are $3k minimum and 1-2 per year. This is not adding up.

You should, absolutely, be able to afford $3k-$8k annually on vacations if money were spent less elsewhere. So I will echo that a Dave Ramsey style makeover is needed.

ChinchillaWhiplash
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Re: Why paying off loans would be better than fully funding 401k?

Post by ChinchillaWhiplash » Thu Feb 15, 2018 12:40 am

Break down of montly expenses:
Fed tax $8450
State tax $1350
Disability $394
Employee 401k $1541
Health ins $1969

CPA fee $360.

S Corp so a bit of complex filing. Also have 5500 form because 401k over $250k just got rid of FA since we were paying him 1% of AUM to do nothing. Still working on moving accounts out of his set up with
Schwab Alliance. Will save around $3k year by doing this with current amount in retirement.

EF $500
Business savings $200 to cover licensing, certifications, other business expenses
HSA $250
Mortgage $3870
401k loan $1200 PAID OFF
Car ins $400 (17yr old male)
Jeep $870 (36 month 0%) 2 Months left
Subaru $360 3 Months left
Discover card about $5800 left. Paying minimum of $1200 month that was going to 401k loan
Heloc interest only $220
Life ins $120
Student loan $500 interest and principal payment minimum
PayPal $208 (0% until May)
Cell phone $247 (daughter has no phone and I have a flip phone. Wife and son have iPhone 6 and unlimited data)
Crossfit membership $195
Fuel $400 (3 miles to mail box and bus stop, wife commutes 108 miles day to work. Nearest anything is 20 minutes 1 way, affordable groceries and any department stores 45 minutes one way, nearest mall 2 hours 1 way)
Son $300 for his gas to school and back 1 hour round trip and food
Tutoring sessions for daughter with learning disabilities $200
Utilities in winter for 3400 sqft $700
Groceries $1000
Misc: eating out 3 times month, household items, pet food, wife's nails $700-800

This is the current budget. We have cut back on a lot of things. We used to eat out all the time. I now cook a lot at home. Groceries, gas are expensive here. We are in SW CO mountains.

Total for the month = $26969 if no unexpected expenses. Vehicle registrations will be due for 3 cars in next 2 months. Need set of tires for summer. Don't use snow tires all year and my other tires worn to cord. I was kind of using the taxable account as an emergency fund, but that will be gone now.

These are the minimum balances. Doesn't leave much extra to pay down debt or save. I sold off all my taxable holding to pay off the one high interest CC and reduce the 401k loan. Jeep paid off April, Subaru, 401k loan and PayPal in May. As each debt knocked out put that towards Discover card. Then everything towards Heloc. Once heloc gone put to student loan. Will put $500 in EF each month until at least $20k. Any extra each month to vacation fund account. That's my plan and I'm sticking to it. Debt, other than mortgage, can be knocked out in around 2 years. Don't have much more we can cut out. Already gave up a bunch of creature comforts. Wife cut way back on shopping. No more frivolous purchases. We eat out 2-3 times a month. This is about the best we can do for now. All extra income has been going towards paying down the CC without saving in the last 3 months.

Not sure we can sell the house until we build up some equity. It is probably a little upside down now. Can't sell the cars and get enough to buy anything with low enough miles. We put 25-30k miles a year on them. The Jeep was new less than 3 years ago and has 75k+ miles on it. Subaru was new 2013 and has 100k miles on it. I had an office job for a couple of years where I commuted 70 miles round trip 5 days a week. Combine that will kids soccer practice, games, ballet practice etc, ran up a ton of miles. We are in too remote of an area. Wasn't too bad when we 1st moved because our kids were not involved in so much when they were younger. One kid got his DL, which has helped a bunch, but our insurance doubled instantly. He plans on getting a job this summer, so I hope that he will be able to contribute.
Last edited by ChinchillaWhiplash on Thu Feb 22, 2018 4:34 pm, edited 3 times in total.

runner540
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Re: Why paying off loans would be better than fully funding 401k?

Post by runner540 » Thu Feb 15, 2018 2:33 am

ChinchillaWhiplash wrote:
Thu Feb 15, 2018 12:40 am
Break down of montly expenses:
Fed tax $8450
State tax $1350
Disability $394
Employee 401k $1541
Health ins $1969
CPA fee $360
EF $500
Business savings $200 to cover licensing, certifications, other business expenses
HSA $250
Mortgage $3870
401k loan $1200
Car ins $400 (17yr old male)
Jeep $870 (36 month 0%)
Subaru $360
Discover card $300
Heloc interest only $220
Life ins $120
Student loan $500
PayPal $208 (0% until May)
Cell phone $247 (daughter has no phone and I have a flip phone. Wife and son have iPhone 6 and unlimited data)
Crossfit membership $250
Fuel $400 (3 miles to mail box and bus stop, wife commutes 108 miles day to work. Nearest anything is 20 minutes 1 way, affordable groceries and any department stores 45 minutes one way, nearest mall 2 hours 1 way)
Son $300 for his gas to school and back 1 hour round trip and food
Tutoring sessions for daughter with learning disabilities $200
Utilities in winter for 3400 sqft $700
Groceries $1000
Misc eating out $300, household items, pet food, wife's nails $500

Total for the month = $26969 if no unexpected expenses. Vehicle registrations will be due for 3 cars in next 2 months. Need set of tires for summer. Don't use snow tires all year and my other tires worn to cord. I was kind of using the taxable account as an emergency fund, but that will be gone now.

These are the minimum balances. Doesn't leave much extra to pay down debt or save. I sold off all my taxable holding to pay off the one high interest CC and reduce the 401k loan. Jeep paid off April, Subaru, 401k loan and PayPal in May. As each debt knocked out put that towards Discover card. Then everything towards Heloc. Once heloc gone put to student loan. Will put $500 in EF each month until at least $20k. Any extra each month to vacation fund account. That's my plan and I'm sticking to it. Debt, other than mortgage, can be knocked out in around 2 years. Don't have much more we can cut out. Already gave up a bunch of creature comforts. Wife cut way back on shopping. No more frivolous purchases. We eat out 2-3 times a month. This is about the best we can do for now. All extra income has been going towards paying down the CC without saving in the last 3 months.
I would recommend looking at spending/taxes/income on an annual basis as well monthly. You guys definitely need Dave Ramsey to get motivated to keep cutting (crossfit, nails, cell phone, etc.). 17 year old can work to offset his gas/insurance. You can make him a PB sandwich to take with him.

What HCOL area is this that you have to commute so far to school and work? I usually associate HCOL with dense metroareas. How would it look to sell your house and downsize to help you accelerate debt paydown?

I'm not an expert on 401k loans but I thought you couldn't contribute to 401k while you had a loan outstanding? Maybe that varies by plan.

Check out this article from 2010 about a Chicago couple that were similarly high income and felt stretched. Not a lot of sympathy was given to them. http://articles.chicagotribune.com/2010 ... blog-taxes

Luke Duke
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Re: Why paying off loans would be better than fully funding 401k?

Post by Luke Duke » Thu Feb 15, 2018 8:07 am

This thread blows my mind. My wife and I are 10 years younger, make 40% of your household income, have a net worth 3x what you have and I still like I spend too much money on stupid stuff.

Crisium
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Re: Why paying off loans would be better than fully funding 401k?

Post by Crisium » Thu Feb 15, 2018 8:50 am

$247 for 3 phones service is too much. Look into one of the non big four companies for family deals. For ex, Cricket with 4 lines for $100 (not unlimited data though). Even a big four, T-Mobile, is running a special right now for 4 lines for $140 unlimited. Even if that $247 includes a payment for phone hardware, I recommend researching cheaper plans.

Math on the Jeep is $31,000. In a normal Ramsey or Mustachian fashion, one would recommend to sell that for $25k if possible, buy a $15k used, and suddenly you are ahead $10k. But with your income while this is still very helpful, it's not as impactful.

It's looking like the house is weighing you down, tbh. Mortgage + utilities + location (gas costs adding up and cars are depreciating faster). But accepting house downsizing is a tough pill to swallow.

Bwlonge
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Re: Help with what to do, pay debt, fund 401k, EF? TLH of taxable to fund one of these

Post by Bwlonge » Thu Feb 15, 2018 9:10 am

FiveK wrote:
Mon Feb 12, 2018 6:46 pm
ChinchillaWhiplash wrote:
Mon Feb 12, 2018 6:19 pm
Any specific advice on this?
What did you think of the advice in Investment Order?
I'm having trouble understanding step 7 vs 8. With debt at 3-4%, is it just about a personal preference as to dumping money into the loan vs. taxable + liquidity? I understand garunteed returns, but if the average return over a 5 year car loan or a 30 year mortgage can net a higher rate, why not? Even putting 10k into VTI on January 1 2008 made you $5000 over 5 years vs. less than 1000 out in car loan interest @ 3%.

Tracyfaa
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Re: Why paying off loans would be better than fully funding 401k?

Post by Tracyfaa » Thu Feb 15, 2018 12:26 pm

Jusy my $.02.

I read every single post. Some helpful. Some were a little harsh, but it seems a little “tough love” really could be what’s in order here.

Why the CPA? You’re unemployed dude! Take the time to really get to know your own finances! Is this the person who has gotten you mixed up in all of these confusing scenarios to creatively pay down your debt? (While not actually doing it) It seems you yourself, without outside help besides this forum, have been able to quantify your debt, and categorize each item from high interest all the way down to zero interest. What’s costing you is the CPA’s inability to truly provide you with a service. YOU need to take control of YOUR money. You’re throwing away $4000 a year. Start by eliminating your highest interest debt. Next pay off the next highest debt. And so on. Your zero interest debt costs you nothing other than the time spent worrying about it. Did your CPA come up with your debt pay down plan? I’d fire them on the spot. The only debt you should not pay down immediately is your mortgage and zero interest.

$250 health club membership? Drop it. There are thousands of ways to get great exercise and stay in shape without blowing money on an unnecessary monthly expense. Ever heard of Planet Fitness? (I’m guessing you live in CA, since I’ve dealt with every single one of your issues, except on a smaller scale. I could probably even guess your locale within 100 miles.) Don’t let me scare you with that knowledge. If there’s no Planet Fitness (oh my gosh it’s so NOT chic!) it’s time to bite the bullet and skip a club for a while.

My wife and I had the good sense to leave CA for the Midwest 15 years ago, against my judgement at the time, but for the standard of living we now have, it’s been soooooo worth it. One poster points out a good point...your wife will very likely make the same money wherever you both live. You may find employment opportunities for you could even be more numerous in the SE part of the US.

She “retired” in 2003, and I retired last year. We are both mid 50s. One 14 year old. 529k will be fully funded upon his graduation. Our only debt is our mortgage at 3.375% and we pay an extra $200 to principal every month. Home is over 3000 sq ft. We give to our church. We almost never throw anything away. It’s donated to SA, or Goodwill if it can be. I made less than half what your wife can potentially earn. You see, it’s all about COL. The cost of living here is way less than CA, but I was making the same money. It’s cheaper to live here and visit CA a couple times a year, or take a large vacation trip, than it is to just LIVE in CA with the same lifestyle. We are in a large metropolitan area within a few minutes of all the conveniences...30 miles from a very big city. We’re also just a days’ drive frome all but two of our relatives.

It hasn’t been easy. I quite often wish I still lived in CA. But the choices we did make have been the smarter ones. Every expense we have is either necessary or carefully thought out/discussed between the two of us. With that in mind we have a nearly $15,000 per year cash budget for vacations if we decided to dip into the bucket. It stays in the MM account if we don’t use all of it.

$6000+ Without costing you a dime is a pretty good start, don’t you think?

Good luck and I wish you well. :sharebeer

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FiveK
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Re: Help with what to do, pay debt, fund 401k, EF? TLH of taxable to fund one of these

Post by FiveK » Thu Feb 15, 2018 3:59 pm

Bwlonge wrote:
Thu Feb 15, 2018 9:10 am
FiveK wrote:
Mon Feb 12, 2018 6:46 pm
What did you think of the advice in Investment Order?
I'm having trouble understanding step 7 vs 8. With debt at 3-4%, is it just about a personal preference as to dumping money into the loan vs. taxable + liquidity?
Note that step 7 suggests paying debt with an interest rate "~3% or more above the 10-year Treasury note yield." One could quibble about whether that is the best proxy, but with the 10-year Treasury note yield running 2-3% recently, that means pay debt of 5-6% before dropping to step 8.

If your debt is 3-4%, it would suggest investing instead of paying the debt.

Note also "...the assumption that your alternative is "all stocks" or a "fund of funds" (e.g., target retirement date) that provides a blend of stock and bond returns. If you wish to consider separate bond funds, compare the yield on a fund with a duration similar to the time remaining on the loan, and put your money toward the one with the higher interest/yield."

akron1977
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Re: Why paying off loans would be better than fully funding 401k?

Post by akron1977 » Fri Feb 16, 2018 12:03 am

What will happen to your budget when the 17yo son heads to college in a year or two? Followed by a sister several years after that..........haven't seen any indication of college savings or the funds to "pay as he goes".

deltaneutral83
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Re: Why paying off loans would be better than fully funding 401k?

Post by deltaneutral83 » Fri Feb 16, 2018 8:57 am

Luke Duke wrote:
Thu Feb 15, 2018 8:07 am
This thread blows my mind. My wife and I are 10 years younger, make 40% of your household income, have a net worth 3x what you have and I still like I spend too much money on stupid stuff.
Personal Finance is 80% behavioral choices and 20% mathematics. Doesn't matter if you make $50k or $500k, you can always spend everything you make. Habits are habits, good and bad. Habit forming behaviors take far less time to take shape than habit breaking behaviors so habits that are 10/15/20 years in aren't changing short of 110% focus 24/7.

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Toons
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Re: Why paying off loans would be better than fully funding 401k?

Post by Toons » Fri Feb 16, 2018 8:59 am

Without a shred of doubt.
Pay off Debt.
Ball And Chain(s),
While traveling the road of
"Wealth Creation"


:idea:
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

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Ketawa
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Re: Why paying off loans would be better than fully funding 401k?

Post by Ketawa » Fri Feb 16, 2018 10:16 am

My 2 cents - I wouldn't bother with any 401k savings until all high interest rate debt is paid off.

OP, you were agonizing earlier in the thread about whether you should max out the employer contribution for the Solo 401k plan, but to my understanding, there is no difference mathematically between it and the employee contribution. Both defer taxes. There's no reason to draw a line between the employee and employer portion of contributions. (Someone correct me if I'm wrong about this, I don't know much about Solo 401k plans.)

Sometimes, "maxing out" tax-advantaged savings can be a good idea. If you don't do it now, you'll lose the opportunity, without being able to make up for the savings in the future. OP, you are not maxing out your tax-advantaged savings and it will be a long time before you're on track to do it, so don't worry about it.

If you pay off high interest rate debt now and earn a guaranteed return, then you can increase your 401k savings far more quickly in future years.

You also shouldn't prepay the 401k loan. Pay off the debt first. 401k loan interest mostly doesn't matter since you owe it to yourself. 401k loans can be a tool to "go back in time" as if you hadn't made savings and paid off debt first.

ChinchillaWhiplash
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Re: Why paying off loans would be better than fully funding 401k?

Post by ChinchillaWhiplash » Fri Feb 16, 2018 11:49 am

Forgot to mention that we do have 529 plans for both kids. Not a ton in there and no new contributions going in. Have to get our finances in order before funding 529. He might have to delay college a year or 2. he can work and save if he really wants to go.

runner540
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Re: Why paying off loans would be better than fully funding 401k?

Post by runner540 » Fri Feb 16, 2018 2:08 pm

ChinchillaWhiplash wrote:
Fri Feb 16, 2018 11:49 am
Forgot to mention that we do have 529 plans for both kids. Not a ton in there and no new contributions going in. Have to get our finances in order before funding 529. He might have to delay college a year or 2. he can work and save if he really wants to go.
Wow. To frame your budget numbers another way, nails + Crossfit = $750/month, or $9,000 per year, which would cover or go a long way towards instate tuition at a lot of public universities.

TwstdSista
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Re: Why paying off loans would be better than fully funding 401k?

Post by TwstdSista » Fri Feb 16, 2018 5:30 pm

You make terrible financial decisions and now the kid will have to delay college?

Tracyfaa
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Re: Why paying off loans would be better than fully funding 401k?

Post by Tracyfaa » Fri Feb 16, 2018 7:23 pm

ChinchillaWhiplash wrote:
Fri Feb 16, 2018 11:49 am
Forgot to mention that we do have 529 plans for both kids. Not a ton in there and no new contributions going in. Have to get our finances in order before funding 529. He might have to delay college a year or 2. he can work and save if he really wants to go.
Are you insane?? Not really trying to be overly critical, but cut out the frivolous spending and fund the 529. Even small contributions go a long way in 17 years. You've got to drop the crossfit and the other unnecessary spending now. The $250 split between the two 529s could get you nearly $100,000 in each come college time. Yes, that is probably at the upper end of the scale, but try telling the children what you just stated when they are old enough to understand it.

Church Lady
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Re: Why paying off loans would be better than fully funding 401k?

Post by Church Lady » Sat Feb 17, 2018 1:57 am

OP, you said:
These are the minimum balances. Doesn't leave much extra to pay down
debt or save. I sold off all my taxable holding to pay off the one
high interest CC and reduce the 401k loan. Jeep paid off April, Subaru,
401k loan and PayPal in May. As each debt knocked out put that
towards Discover card. Then everything towards Heloc. Once heloc gone
put to student loan. Will put $500 in EF each month until at least $20k. Any extra each month
to vacation fund account. That's my plan and I'm sticking to it.
According to your earlier post, Discover at 4.8% is the cheapest debt
you currently have, whereas the HELOC is the highest at 5.25% variable,
meaning the rate could go up?
Given that, I was just wondering you're tackling Discover first once
the cars are paid off? Is it because it is the lowest balance? And
another thing. Your HELOC loan interest may not be deductible starting
in tax year 2018. Here is one article I found:
https://www.greenbushfinancial.com/will ... ible-2018/

It's something to look into!

I have to admire you for posting your budget. That takes guts! I won't
repeat budget tips already posted, but I'll add some thoughts.

o I'm not sure I agree with those who say ditch the CPA, but your wife (I
presume the S corporation is for her) can discretely inquire of her
colleagues whether she's getting a competitive rate. All I know of S
corporations is that all persons I know having them, use an accountant.
Maybe someone with an S corporation and no accountant can chime in?
Maybe a separate post on whether you can ditch a CPA for the S corp?

o Once your cars are paid off, revisit your car insurance policies.
You'll be able to raise your deductibles if nothing else. You'll find
plenty of car insurance advice on Bogleheads

o With the distances you drive, you need cell phones, but
unlimited data? You should get a handle on how much your family uses,
and the nature of the use. Without unlimited data, you have cheaper
choices.

o $300/month eating out. If you eat out three times a month, you're
dropping $100 per meal, or $25 a person. Consider budget friendly
restaurants for a season. I'd put the dining out cash
in a physical envelope. When the envelope is empty, no more eating
out until next month. Make sure your kids know what you're doing so
they are exposed to budget concepts.

o son's food. If he is eating healthful meals at a subsidized school
cafeteria, this could be good value. On the other hand, my nephew's
school served only junk food -- not cool. Look into this. It might be
brown bag time for health as well as economy. Remember these years are
setting his lifetime eating pattern. It's not all about the money.

o household items, pet food, wife's nails $500. Here's a red flag. Not
because it is $500, but because you are putting necessities (household,
pet food) in with discretionary spending (nails). It's OK to spend on
these things, but a) your pet merits his own budget item, and b) don't
put necessities and discretionary in the same budget line item.

o car tires and car registrations coming up, and some wistful thinking about
no emergency fund. These are not emergencies; they are predictable
expenses you should be including in your budget ($x/mo towards car
expenses, taxes, and registrations). If you ate at home for a month, you
could buy yourself a set of tires. Just saying!

o When the 17 year old graduates from high school, it will be a good
time to move back to NC, or at least near a hub with good fares to NC.
If your son is thinking of in state tuition, it's good to be a
resident of the state where he'll be attending.

o home equity -- you must have equity in your home or you wouldn't have
a HELOC loan. It's a reason to prioritize working on your HELOC loan balance.
He that loveth silver shall not be satisfied with silver; nor he that loveth abundance with increase: this is also vanity. Ecclesiastes 1:8

selters
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Re: Why paying off loans would be better than fully funding 401k?

Post by selters » Sat Feb 17, 2018 6:36 am

https://www.daveramsey.com/baby-steps

I agree with everything there. Except maybe the $1,000 emergency fund, which you can expand to $10,000.

Your kids can take out student loans for a year or two while you, the parents, sort out your mess. Or they can work if they can find a job.

WhyAmeriprise
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Re: Why paying off loans would be better than fully funding 401k?

Post by WhyAmeriprise » Sat Feb 17, 2018 6:46 am

runner540 wrote:
Fri Feb 16, 2018 2:08 pm
ChinchillaWhiplash wrote:
Fri Feb 16, 2018 11:49 am
Forgot to mention that we do have 529 plans for both kids. Not a ton in there and no new contributions going in. Have to get our finances in order before funding 529. He might have to delay college a year or 2. he can work and save if he really wants to go.
Wow. To frame your budget numbers another way, nails + Crossfit = $750/month, or $9,000 per year, which would cover or go a long way towards instate tuition at a lot of public universities.
$750/month does go a long way, but I think OP is not looking at it completely correct - their children can still go to school, they can get scholarships, stay in-state, and they can get student loans if they have to. It's just my humble opinion, but no parent paid for my education, I found employers that would reimburse and I took loans when the employer reimbursement dried up.

I've always read that you should maximize tax-deductible and tax-deferred options. There is a downside to 529 plans due to limited savings options in some cases, and loses the 529 benefits if the funds/earnings are withdrawn for a non-educational reason.

ChinchillaWhiplash
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Re: Why paying off loans would be better than fully funding 401k?

Post by ChinchillaWhiplash » Sat Feb 17, 2018 1:03 pm

Thanks for the insight. Think my wife is entitled to at least get her nails done once a month for $50 and the Crossfit is something we both do together. It has helped get me back on my feet after having knee surgery. I was non weight bearing for 3 months and on crutches for 5. Crossfit helped me after insurance quit paying for PT. We can't give up everything. Unfortunately we live in a place where a burger will cost you a minimum of $10. Nearest fast food or any chain for that matter, is a 45 min one way trip. We don't eat out much, but it is expensive when we do. Try to eat cheap when we do go out.

My thoughts on 529, only deductible on State tax. Have $14k in each account. We need to fully fund our 401k since we are way behind and can fund 529 once 401k is maxed out. Can also dip into EF fund once it is built up. Not sure if my son will even be able to use the 529. He is planning on going to school in Almaty, Kazakhstan.

I'm still going to pay off the 401k loan 1st because it will free up the most $. Cars, Discover, PP and 401k will paid off in May. Then HELOC. And finally, student loan. I can basically have all this paid off in a little over 2 years from now, all while putting money into savings/retirement. Hoping to do a 15 year mortgage after paying off the student loan. I have started selling off some items to raise more money to help expedite the debt reduction. I found receipts for medical bills paid out of pocket and have filed reimbursement claims to get the tax free $ back to pay off debt too. Had about $750. So far have raised close to $15K with taxable account and other items sold to pay down debt this month.

ChinchillaWhiplash
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Re: Why paying off loans would be better than fully funding 401k?

Post by ChinchillaWhiplash » Sat Feb 17, 2018 5:48 pm

Updates above on debt plan. Enough on the harsh criticism. Reread what I have posted above. If you don't like, keep your opinions to yourself. :annoyed For the others that have helpful advice, thank you.

retiredjg
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Re: Why paying off loans would be better than fully funding 401k?

Post by retiredjg » Sat Feb 17, 2018 6:03 pm

It always happens when someone posts a list like that. Each reader sees something they think is dumb and some will comment. And sometimes they misread things as you have noticed ($500 for nails?????).

Just evaluate each comment for whether it is something you could improve on and then move on. There is nothing to be gained by trying to explain to strangers why something is important or necessary in your situation.

I'm not saying you should ignore the comments - occasionally there is a jewel of wisdom you had not considered. But don't feel you need to justify your every decision to people who are not living in your shoes. It wastes your energy.

You are making progress. You could make more progress if you were willing to cut back some things, but maybe you feel they are important enough to make your progress more slowly. It is not really up to us to judge your decisions, just make suggestions for things that could be helpful.

simas
Posts: 183
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Re: Why paying off loans would be better than fully funding 401k?

Post by simas » Sat Feb 17, 2018 6:10 pm

May be a stupid question - why stay in that area ? Is it close to your family (since she wants to be away traveling back to her folks)? Some sentimental attachment? Best schools in the nation? or is it simply where job ended up being?

Otherwise, you are (slowly) moving towards 'good' - cataloging what you spend (good!), figuring out what you own, etc. Keep it up and keep this going.

[OT comment removed by admin LadyGeek] Instead I will ask for you to honestly look into the mirrow and ask what will happen if say your wife cant work (with the whole nails, $250/month gym and other luxuries). what would be your plan? saying ' this will never happen to me'?

If I were you, I would
- seriously sit down to talk on where we want to live and why. see http://rootofgood.com/ for example of what living in NC costs and how two incomes both well under 100k were able to retire in their 30s
- if you want to stay same place, fine , focus on getting employment
- if you decide to move, do that and then get employment
- DESTROY THE DEBT or it (and the stress it creates,) will destoy you with certainty

KlangFool
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Re: Why paying off loans would be better than fully funding 401k?

Post by KlangFool » Sat Feb 17, 2018 6:52 pm

ChinchillaWhiplash wrote:
Sat Feb 17, 2018 1:03 pm

I'm still going to pay off the 401k loan 1st
ChinchillaWhiplash.

Why? With the 401K loan, you are paying interest to yourself. As opposed to all other loans that you are paying interest to other people. What do I miss here?

KlangFool

ChinchillaWhiplash
Posts: 397
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Location: Colorado

Re: Why paying off loans would be better than fully funding 401k?

Post by ChinchillaWhiplash » Sat Feb 17, 2018 6:55 pm

It was a drastic move for us. We love the area and moved here for skiing. Something our whole family enjoys. She loves her current work situation too and is a partner with the group. Her mother is nearby and is disabled. Would be hard for her to move and no one else in the family to look after her. Wife's sister used to live nearby also, but now lives about 8 hours drive away. We still visit her about every 2 years. We pretty much got stuck being house poor in a home that is going to be hard to break even on. That hopefully will change as the housing market is going up.

ChinchillaWhiplash
Posts: 397
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Location: Colorado

Re: Why paying off loans would be better than fully funding 401k?

Post by ChinchillaWhiplash » Sat Feb 17, 2018 6:57 pm

KlangFool wrote:
Sat Feb 17, 2018 6:52 pm
ChinchillaWhiplash wrote:
Sat Feb 17, 2018 1:03 pm

I'm still going to pay off the 401k loan 1st
ChinchillaWhiplash.

Why? With the 401K loan, you are paying interest to yourself. As opposed to all other loans that you are paying interest to other people. What do I miss here?

KlangFool
Thinking I would get it out of the way sooner. Have less time to pay it off (due 7/31/18). Will free up more money and I want to get it out of FA's control ASAP. He charges 1% AUM with a crappy portfolio.

pkcrafter
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Contact:

Re: Why paying off loans would be better than fully funding 401k?

Post by pkcrafter » Sat Feb 17, 2018 9:23 pm

ChinchillaWhiplash,

I would like to sum up the situation, but first, I like your moniker. Yes, it is an affliction you are suffering and it causes monetary disability. Chinchilla is expensive, and you get the whiplash when that expense is more than you can afford, regardless of your income.

Summary -
You have come to the board for help because YOU know you need help, but no one else in the family appreciates the severity of the problem. Your wife should be able to afford trips once a year, but right now there is just no funds available. No way things should be that tight, and It means you have a common, but serious problem. Spending beyond your means. Paying off this or contributing to that won't help with the problem. Just focus on the problem and get some help from someone who can help create a manageable budget.
We pretty much got stuck being house poor in a home that is going to be hard to break even on. That hopefully will change as the housing market is going up.
Yep, a common reason for lack of enough money to cover other costs. If and when the house appreciates isn't going to help with the problem. You need to address this head on.

Sorry, don't mean to come across too harsh, but it's time to put it on the table. There have been many suggestions to follow Dave Ramsey's advice, which could be helpful, but you may need some professional one on two help to develop a workable plan.



Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

ChinchillaWhiplash
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Location: Colorado

Re: Why paying off loans would be better than fully funding 401k?

Post by ChinchillaWhiplash » Sat Feb 17, 2018 10:44 pm

pkcrafter wrote:
Sat Feb 17, 2018 9:23 pm
ChinchillaWhiplash,

I would like to sum up the situation, but first, I like your moniker. Yes, it is an affliction you are suffering and it causes monetary disability. Chinchilla is expensive, and you get the whiplash when that expense is more than you can afford, regardless of your income.

Summary -
You have come to the board for help because YOU know you need help, but no one else in the family appreciates the severity of the problem. Your wife should be able to afford trips once a year, but right now there is just no funds available. No way things should be that tight, and It means you have a common, but serious problem. Spending beyond your means. Paying off this or contributing to that won't help with the problem. Just focus on the problem and get some help from someone who can help create a manageable budget.
We pretty much got stuck being house poor in a home that is going to be hard to break even on. That hopefully will change as the housing market is going up.
Yep, a common reason for lack of enough money to cover other costs. If and when the house appreciates isn't going to help with the problem. You need to address this head on.

Sorry, don't mean to come across too harsh, but it's time to put it on the table. There have been many suggestions to follow Dave Ramsey's advice, which could be helpful, but you may need some professional one on two help to develop a workable plan.



Paul
I agree with your assessment. She is not totally on board, YET. Got to get her to realize we can't afford to go on vacation unless we can pay cash. Hope to make that clear to her in the near future. Wish me luck
Will have to order the Ramsey book as it was not at my local library.

retiredjg
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Re: Why paying off loans would be better than fully funding 401k?

Post by retiredjg » Sun Feb 18, 2018 6:50 am

ChinchillaWhiplash wrote:
Sat Feb 17, 2018 6:57 pm
KlangFool wrote:
Sat Feb 17, 2018 6:52 pm
ChinchillaWhiplash wrote:
Sat Feb 17, 2018 1:03 pm

I'm still going to pay off the 401k loan 1st
ChinchillaWhiplash.

Why? With the 401K loan, you are paying interest to yourself. As opposed to all other loans that you are paying interest to other people. What do I miss here?

KlangFool
Thinking I would get it out of the way sooner. Have less time to pay it off (due 7/31/18). Will free up more money and I want to get it out of FA's control ASAP. He charges 1% AUM with a crappy portfolio.
What financial advisor? What 1% AUM?

ChinchillaWhiplash
Posts: 397
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Location: Colorado

Re: Why paying off loans would be better than fully funding 401k?

Post by ChinchillaWhiplash » Sun Feb 18, 2018 9:15 am

retiredjg wrote:
Sun Feb 18, 2018 6:50 am
ChinchillaWhiplash wrote:
Sat Feb 17, 2018 6:57 pm
KlangFool wrote:
Sat Feb 17, 2018 6:52 pm
ChinchillaWhiplash wrote:
Sat Feb 17, 2018 1:03 pm

I'm still going to pay off the 401k loan 1st
ChinchillaWhiplash.

Why? With the 401K loan, you are paying interest to yourself. As opposed to all other loans that you are paying interest to other people. What do I miss here?

KlangFool
Thinking I would get it out of the way sooner. Have less time to pay it off (due 7/31/18). Will free up more money and I want to get it out of FA's control ASAP. He charges 1% AUM with a crappy portfolio.
What financial advisor? What 1% AUM?
It's a local FA that set up all our retirement stuff. We were both sub contractors so we had to set up our own retirement accounts. The FA was recommended by our CPA that set up the S corp for my wife. This is in reference to my individual 401k with Schwab Alliance which has $79k in it currently. In addition to the 1%, there is a $250 a year fee that gets charged by Ubiquity. I'm pretty sure he was getting some kind of commission as he had about 10 funds in there. Some were front loaded and had ERs over 1%. At least he was using some good DFA funds, but a separation is in my best interest. I did call Schwab and get a login ID and changed most of the funds over to indexed funds and a 3 fund portfolio. I have to wait to sell some of the funds to avoid the early sale penalties. I have another standard 401k when I was a NC state employee that has $36k too. But don't think I can roll anything over into it.

retiredjg
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Re: Why paying off loans would be better than fully funding 401k?

Post by retiredjg » Sun Feb 18, 2018 10:09 am

ChinchillaWhiplash wrote:
Sun Feb 18, 2018 9:15 am
.....but a separation is in my best interest.
Absolutely. This advisor is not doing you any favors.

There will probably have to be a new 401k plan. I do not know if you can switch mid-year or if you have to wait and start it for 2019. I do know you can do better than what you have now. Or is it possible to continue the Ubiquity 401k and not use the advisor and avoid the 1% AUM?

Since you are not working, you might have roll your 401k to IRA. This will interfere with you using the back door (which I think you said you were doing, but I'm not going to go through this whole thread to find out). It will not interfere with your wife using the back door.
I have another standard 401k when I was a NC state employee that has $36k too. But don't think I can roll anything over into it.
Find out. It would be nice to roll it into this NC state 401k.

ChinchillaWhiplash
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Location: Colorado

Re: Why paying off loans would be better than fully funding 401k?

Post by ChinchillaWhiplash » Sun Feb 18, 2018 10:18 am

retiredjg wrote:
Sun Feb 18, 2018 10:09 am
ChinchillaWhiplash wrote:
Sun Feb 18, 2018 9:15 am
.....but a separation is in my best interest.
Absolutely. This advisor is not doing you any favors.

There will probably have to be a new 401k plan. I do not know if you can switch mid-year or if you have to wait and start it for 2019. I do know you can do better than what you have now. Or is it possible to continue the Ubiquity 401k and not use the advisor and avoid the 1% AUM?

Since you are not working, you might have roll your 401k to IRA. This will interfere with you using the back door (which I think you said you were doing, but I'm not going to go through this whole thread to find out). It will not interfere with your wife using the back door.
I have another standard 401k when I was a NC state employee that has $36k too. But don't think I can roll anything over into it.
Find out. It would be nice to roll it into this NC state 401k.
I can keep the setup with Ubiquity, but have to pay $250 annually. I already set up an empty traditional IRA account with Schwab. Think I will just roll it over to that as soon as the loan is paid off. The only advantage of having the account with Ubiquity is the ability to take a loan out, which I don't want. Wife's 401k is in the same set up, so might open a new i401k to transfer her's into. We have a lot to pay down and fund before we can take advantage of a back door Roth, but could definitly set one up for wife. I will look into the NC state plan. It is run through Prudential . They have NC indexed funds which have good ER. Not sure how good these funds are. Would be simpler than having all these separate accounts.

retiredjg
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Re: Why paying off loans would be better than fully funding 401k?

Post by retiredjg » Sun Feb 18, 2018 11:04 am

Take a look at Fidelity's Solo 401k. I think they do not charge a fee (not sure). Not sure the Vanguard Solo will work for you because I'm not sure they will accept a rollover from another 401k. From an IRA, definitely not.

ChinchillaWhiplash
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Location: Colorado

Re: Why paying off loans would be better than fully funding 401k?

Post by ChinchillaWhiplash » Sun Feb 18, 2018 11:59 am

retiredjg wrote:
Sun Feb 18, 2018 11:04 am
Take a look at Fidelity's Solo 401k. I think they do not charge a fee (not sure). Not sure the Vanguard Solo will work for you because I'm not sure they will accept a rollover from another 401k. From an IRA, definitely not.
If I get a standard account with Schwab, there are no fees. Think it will be easier to transfer too since I'm holding Schwab funds and ETFs.

Miriam2
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Re: Why paying off loans would be better than fully funding 401k?

Post by Miriam2 » Sun Feb 18, 2018 1:33 pm

ChinchillaWhiplash wrote: It was a drastic move for us. We love the area and moved here for skiing. Something our whole family enjoys. She loves her current work situation too and is a partner with the group. Her mother is nearby and is disabled. Would be hard for her to move and no one else in the family to look after her. Wife's sister used to live nearby also, but now lives about 8 hours drive away. We still visit her about every 2 years.
Sounds like you moved to an expensive ski resort. :moneybag No wonder you're in a pickle.

Thought your wife was very homesick and so your family had to take several expensive vacations every year to travel several thousand miles to visit her family :confused Earlier you said:
A lot of the issues are that my wife is homesick and it cost a bundle for a family of 4 to travel. Flights out of our closest airport are usually $500 or more per ticket. We often drive 6 hours to the biggest airport to save around $1k on airfare, but that is a lot of trouble. "Home" is 2k miles away, so driving is usually out of the question. Unfortunately, most of our relatives are unable to travel anymore and they can't visit us. A trip back home costs a minimum of $3k and we usually try to get a few days at a beach.
The reason I mention this is that what you consider "necessary" expenses for family "health" may not actually be so if you examine it more carefully. Looks more like "would like to's" rather than "necessities." By simply justifying your large expenses, you are making it more difficult to dig out of your hole.

Leemiller
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Re: Why paying off loans would be better than fully funding 401k?

Post by Leemiller » Sun Feb 18, 2018 3:21 pm

We have a similar income and also didn’t really make $ until about 30, I also grew up in a family with money problems. First go ahead and spend some money ordering books so that you can highlight, tab and reread them. Millionaire Next Door, Dave Ramsey and there are some other Booglehead recommended books. You can also download Dave Ramsey’s podcasts and watch the show on YouTube. But seriously go spend $100 on books.

Second, you really need a tight budget. We make more and your plan to payoff feels really aggressive to me. Maybe I’m wrong. Do you have a month by month breakdown?

Start planning for your kid’s college and maybe that is community college with a transfer in a year or two, but take some control there as the parent of a teen. You make so much money your kid will seriously suffer when applying for aid, so perhaps getting involved now and help come up with a realistic plan vs I don’t really understand the strange let the kid pick some schooling that doesn’t sound very marketable later.

Leemiller
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Re: Why paying off loans would be better than fully funding 401k?

Post by Leemiller » Sun Feb 18, 2018 3:27 pm

You’re destroying your cars. Anyway to move? At least talk to a realtor? The expenses you’ve listed are high but mostly due to past consumption. Something needs to give mainly because you have a 17 year old and no plan for college. Maybe you can rethink employment.

If you can get things under control, you’ll be millionaires in less than 10 years. Maybe you think people are being harsh, but if you read some of those recommended books maybe you’ll understand.

ChinchillaWhiplash
Posts: 397
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Location: Colorado

Re: Why paying off loans would be better than fully funding 401k?

Post by ChinchillaWhiplash » Thu Feb 22, 2018 10:34 am

Update:
11.25% card paid off
401k loan paid off and moving from FA account to tIRA that I set up so no more annual fees.
Chunk knocked out of Discover card. Will pay off in next 2 months
Put more money into EF. Now have $4K. Looks like I will have a little more at the end of the month to add too.
Cars paid off in May.
PayPal paid off in May.
Will then throw $3k a month at HELOC to pay off in 15 months.
Will also step up EF savings starting in June.
Student loan will be paid in full in a little less than 3 years.
Will fully fund taxable and chip away at mortgage once SL gone.

So in 3 year should have EF fully funded and no debt except mortgage.

Another question on EF. Would it be OK once I have a decent amount in savings account to start putting EF $s into a taxable account? Was thinking it will grow faster and if down, could TLH for tax credit. Would invest in something like VBR (small cap value index fund) since I don't have anything like this in our tax advantage accounts (3 fund portfolio, well, really 5 to get fee free international coverage w/Schwab).

retiredjg
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Re: Why paying off loans would be better than fully funding 401k?

Post by retiredjg » Thu Feb 22, 2018 12:24 pm

ChinchillaWhiplash wrote:
Thu Feb 22, 2018 10:34 am
Another question on EF. Would it be OK once I have a decent amount in savings account to start putting EF $s into a taxable account? Was thinking it will grow faster and if down, could TLH for tax credit. Would invest in something like VBR (small cap value index fund) since I don't have anything like this in our tax advantage accounts (3 fund portfolio, well, really 5 to get fee free international coverage w/Schwab).
No. That would be the same as not having an emergency fund.

An emergency fund is what keeps you from getting into debt. As you can see, it hard to get out of debt once you go there. Better to have some money on the side. It won't make you money. It's insurance. And like other kinds of insurance, you don't need it....till you need it.

retiredjg
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Re: Why paying off loans would be better than fully funding 401k?

Post by retiredjg » Thu Feb 22, 2018 12:25 pm

P.S. If you have the 3 fund portfolio, you already have small cap value.

Miriam2
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Re: Why paying off loans would be better than fully funding 401k?

Post by Miriam2 » Thu Feb 22, 2018 2:10 pm

ChinchillaWhiplash wrote: Another question on EF. Would it be OK once I have a decent amount in savings account to start putting EF $s into a taxable account? Was thinking it will grow faster . . .
Not your taxable, use an on-line FDIC insured bank for out-of-sight-but-ease-of-access and the best savings account rates. Look at Ally Bank www.ally.com at 1.45% and Barclays www.barclaysus.com at 1.50% and you can search the forum for other on-line banks that Bogleheads use for their emergency fund.

ChinchillaWhiplash
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Location: Colorado

Re: Why paying off loans would be better than fully funding 401k?

Post by ChinchillaWhiplash » Thu Feb 22, 2018 3:18 pm

retiredjg wrote:
Thu Feb 22, 2018 12:25 pm
P.S. If you have the 3 fund portfolio, you already have small cap value.
You are correct. 3% of the index fund, I believe. Was thinking of a little bit of SCV tilt.

ChinchillaWhiplash
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Location: Colorado

Re: Why paying off loans would be better than fully funding 401k?

Post by ChinchillaWhiplash » Thu Feb 22, 2018 3:20 pm

Miriam2 wrote:
Thu Feb 22, 2018 2:10 pm
ChinchillaWhiplash wrote: Another question on EF. Would it be OK once I have a decent amount in savings account to start putting EF $s into a taxable account? Was thinking it will grow faster . . .
Not your taxable, use an on-line FDIC insured bank for out-of-sight-but-ease-of-access and the best savings account rates. Look at Ally Bank www.ally.com at 1.45% and Barclays www.barclaysus.com at 1.50% and you can search the forum for other on-line banks that Bogleheads use for their emergency fund.
Yep, already using AmEx. Pays 1.45% too. Already collected $2.57 interest :moneybag

an_asker
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Re: Why paying off loans would be better than fully funding 401k?

Post by an_asker » Thu Feb 22, 2018 4:15 pm

OP:

One suggestion/request. Can you list ALL outgoes (I'm not referring just to expenses - I want to see the taxes etc that are taken out from the paycheck as well) for one month and report back? I am really curious what's happening to your wife's income and where the money is going! You could keep doing the things the others have suggested to get out of the current situation; however, I think your overall expenditure is what you guys need to focus on to get your financial life under control.

ChinchillaWhiplash
Posts: 397
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Location: Colorado

Re: Why paying off loans would be better than fully funding 401k?

Post by ChinchillaWhiplash » Thu Feb 22, 2018 4:46 pm

an_asker wrote:
Thu Feb 22, 2018 4:15 pm
OP:

One suggestion/request. Can you list ALL outgoes (I'm not referring just to expenses - I want to see the taxes etc that are taken out from the paycheck as well) for one month and report back? I am really curious what's happening to your wife's income and where the money is going! You could keep doing the things the others have suggested to get out of the current situation; however, I think your overall expenditure is what you guys need to focus on to get your financial life under control.
Here is the list: $9800 goes to taxes each month and about $2500 to insurance.

Break down of montly expenses:
Fed tax $8450
State tax $1350
Disability $394
Employee 401k $1541
Health ins $1969

CPA fee $360.

S Corp so a bit of complex filing. Also have 5500 form because 401k over $250k just got rid of FA since we were paying him 1% of AUM to do nothing. Still working on moving accounts out of his set up with
Schwab Alliance. Will save around $3k year by doing this with current amount in retirement.

EF $500
Business savings $200 to cover licensing, certifications, other business expenses
HSA $250
Mortgage $3870 minimum payment 30 yr fixed @ 4.5% jumbo loan
401k loan $1200 PAID OFF to get out of FA control
Car ins $400 (17yr old male) no accidents or tickets. Doubled when we added him to policy.
Jeep $870 (36 month 0%) 2 Months left
Subaru $360 3 Months left 1.9%
Discover card about $5800 left. Paying minimum of $1200 month that was going to 401k loan. Around 4.75% fixed.
Heloc interest only $220 5.25% variable (used to refinance at lower rate to cover down payment. Builder went way over budget and had to spend downpayment to get COO to be able to move in so was 100% financed :oops: )
Life ins $120
Student loan $500 interest and principal payment minimum 4.85% fixed
PayPal $208 (0% until May)
Cell phone $247 (daughter has no phone and I have a $25 flip phone. Wife and son have iPhone 6 and unlimited data. Would love to end this, but would have the fight of the century taking this away).
Crossfit membership $195 for both of us.
Fuel $400 (3 miles to mail box and bus stop, wife commutes 108 miles day to work 12-13 times a month. Nearest anything is 20 minutes 1 way, affordable groceries and any department stores 45 minutes one way, nearest mall 2 hours 1 way)
Son $300 for his gas to school and back 1 hour round trip and food
Tutoring sessions for daughter with learning disabilities $200
Utilities in winter for 3400 sqft $700-750
Groceries $800-1200. (Depends on who goes shopping. Wife buys too much stuff that goes to waste)
Misc: eating out 2-3 times month, household items, pet food, wife's hair/nails $700-800

bloom2708
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Re: Why paying off loans would be better than fully funding 401k?

Post by bloom2708 » Thu Feb 22, 2018 4:53 pm

The good thing is you have lots of room for improvement in that budget. Things will drop off.

108 mile commute daily. Oh my. I cannot fathom that much driving.

4 unlimited lines on Cricket $100. AT&T coverage. No taxes/fees on top. They have very reasonable phones, continue to use the iPhone 6.

Almost $2,000 for health insurance per month. Yikes.

Crossfit? When do you have time for Crossfit? :wink:

It seems the entire house needs a "spending awakening". I don't know how you right the ship with that many leaking holes. I guess one step at a time.

In some ways you are living the "American Dream". It just kind of is no fun. You have every type of loan except a boat loan. So up is close and achievable.
"We are here not to please but to provoke thoughtfulness" Unknown Boglehead

retiredjg
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Re: Why paying off loans would be better than fully funding 401k?

Post by retiredjg » Thu Feb 22, 2018 5:31 pm

ChinchillaWhiplash wrote:
Thu Feb 22, 2018 3:18 pm
retiredjg wrote:
Thu Feb 22, 2018 12:25 pm
P.S. If you have the 3 fund portfolio, you already have small cap value.
You are correct. 3% of the index fund, I believe. Was thinking of a little bit of SCV tilt.
You can certainly have a tilt if you want one. But you absolutely should NOT put your emergency fund into stocks, especially one of the most volatile asset classes of stocks. It won't be an emergency fund if you do that.

Well, I suppose if you want an emergency fund of $100k, you could put about $200k into SCV and call it OK. But that will throw your AA of considerably.

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