Paralysis by Analysis

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
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Paralysis by Analysis

Post by Placenshow » Fri Mar 17, 2017 8:23 am

I’m looking for some advice on the best way to tackle about $21k in debt.

We currently have a 401(K) loan at $7000 (17 months left) and an auto loan at $14,000 (2.5% APR, 48 months left).

Our emergency fund is sitting at $18k (6 months expenses), Roth IRA at $10k, and 401(k)/Trad IRA’s totaling $200k.

Excess monthly cash flow after expenses (including auto & 401(k) loan) is approx $1600.

Would you tap the emergency fund & Roth IRA to eliminate the debt today or use the excess cash flow every month to chip away at the debt.

Thank you in advance for your input. :happy

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Re: Paralysis by Analysis

Post by retiredjg » Fri Mar 17, 2017 8:26 am

I'd use excess cash.

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Re: Paralysis by Analysis

Post by tainted-meat » Fri Mar 17, 2017 8:27 am

Excess cash flow.

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Re: Paralysis by Analysis

Post by bloom2708 » Fri Mar 17, 2017 8:30 am

You will likely get various responses. The key is to make a plan, do it and then stick to it. If you pay off this debt, will you borrow again in the near future?

I like the Dave Ramsey "Total Money Makeover" plan. Keep your Emergency fund at $1,000. Pay off the 401k loan. Put the other $10k against the car loan. Pay off the balance of the car loan over the next 3 months. All the $1,600 goes to killing the $4k balance until paid. In three months you are clear of the debt. A fast win!

Once the debt is cleaned up, use the $1,600 to rebuild your Emergency Fund back to 6-12 months. Steer clear of debt.

If you haven't read the book, it is a quick read and will likely alter your views on debt. "Good debt" doesn't exist, no matter what you read.

Good luck!
Last edited by bloom2708 on Fri Mar 17, 2017 8:48 am, edited 2 times in total.
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Re: Paralysis by Analysis

Post by b42 » Fri Mar 17, 2017 8:31 am

What is the interest rate on the 401k loan? The auto loan interest rate seems to be relatively low.

I would keep the emergency fund as-is, since it's primary function is to pay for unanticipated expenses. It wouldn't be ideal to use the emergency funds to pay off the debt, something happens, and then you have to take out another loan of some sort. Others on the forum may be ok with taking the risk to avoid the extra interest. But if you are paying these off aggressively the total interest paid shouldn't bee very high.

I would take the excess cash flow and put it towards whatever debt has the highest interest rate. Without knowing the other payments, you could finish off the 401k loan in around 4-5 months (maybe before the end of the summer :happy ), and then tackle the car loan next. If the $1600 payments are kept up, you could essentially be debt-free at this point next year.

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Re: Paralysis by Analysis

Post by livesoft » Fri Mar 17, 2017 8:59 am

Get a part-time job and use the money to pay off the debt.
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Re: Paralysis by Analysis

Post by 260chrisb » Fri Mar 17, 2017 9:14 am

Well you didn't tell your age or income but you've obviously been able to save based on having a balance in two different retirement accounts and especially one that is 200K. It's interesting that some people find the need to use a retirement account as an ATM. While it's great to have a high balance it makes me wonder why one wouldn't have prepared better to avoid such a scenario as to taking a loan from it. I not saying you didn't prepare, I'm just giving my opinion. I would lump sum the 401K loan from your emergency fund and leave it at 11K as you pay off the car loan in lump sums and contribute to the 401K on a weekly basis and don't ever borrow from it again. Unless it's REALLY an emergency and the last resort.

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Re: Paralysis by Analysis

Post by jlcnuke » Fri Mar 17, 2017 9:37 am

I would only use, or recommend using, a 401k loan for an emergency that couldn't be paid for any other way. As such, I'd use the emergency fund to pay it off immediately. Then, I'd restock the emergency fund to your minimum level (3 months, 6 months, whatever you're comfortable with) with your excess cash flow so you don't need another loan if something comes up (I'm not a fan of Ramsey's minimalistic emergency fund while paying down debts). Finally, I'd eliminate the auto loan with your excess cash flow UNLESS you would use that same excess cash flow to invest in something expected to yield greater returns with that money. At a 2.5% interest rate, I'm a fan of leveraging other's money to make more myself as it is very likely to result in a higher net worth overall. However, if you're not going to invest it, then I'd use the excess cash to quickly pay off the loan.

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Re: Paralysis by Analysis

Post by sls239 » Fri Mar 17, 2017 10:38 am

Do you find yourself needing the EF for expected but irregular expenses - like a major home repair or a medical deductible, or does your budget cover those adequately with "sinking funds" and still have $1600 surplus?

Is the car loan upside down?

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Re: Paralysis by Analysis

Post by delamer » Fri Mar 17, 2017 10:43 am

Given that there are only 17 months left on the 401(k) loan and that the interest is going to you, I 'd sink all the excess cash flow into the car loan.

Don't touch the emergency fund.

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Re: Paralysis by Analysis

Post by ruralavalon » Fri Mar 17, 2017 10:48 am

Pay off the 401k loan, use excess cash flow to refill the emergency fund and then on the auto loan.
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Re: Paralysis by Analysis

Post by Placenshow » Fri Mar 17, 2017 11:43 am

Thank you all for your helpful replies. All options mentioned have been swirling in my head the past week and I just need to make a plan and stick with it. Right now I'm leaning towards knocking out the 401(k) loan from EF and using excess cash to build it back up a bit and then hammering away at car loan.

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Re: Paralysis by Analysis

Post by Epsilon Delta » Fri Mar 17, 2017 12:46 pm

For many people job loss is one of the more likely high impact "emergencies".

One disadvantage of most 401(k) loans is that many of them become payable immediately if you lose your job. If you don't repay the load balance becomes a distribution and you pay taxes and a 10% penalty. So if you lose your job you need to either take $7,000 of the emergency fund you were planning to live on or you end up paying a bunch to the IRS. This is not ideal.

OTOH if you lose your job you can keep paying the car loan at $300 per month (or what it is).

For this reason I would usually favor paying off the 401(k) load before the car loan.

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