7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield. Again, you don't have any of these. It feels counterintuitive, but with such a low car loan (assuming you're keeping it), you shouldn't be tossing extra money at your loan every month. Overpaying your car only gives you a 0.9% return on that money, where it could be better spent maxing your HSA, maxing your 401(k), or funding your Vanguard account (VTSAX yielded 11.8% over the past 12 months). Sure, it feels good mentally to not have outstanding debts, but if the interest rates are that low, your money can work much harder elsewhere.
Will come back later when I have more time to go into spending details, but one thing I want to note: Paying off a car early can be very, very worth it if it allows you to change your insurance. Although the guaranteed return on the loan may be relatively small, you can often halve your insurance -- or maybe even more -- if you drop from the type of full comprehensive insurance typically required by banks to liability + self insurance for repairs/replacement. I did this for my much older car just recently, and it's going to save me more than $1500 in insurance over the next two and a half years. That's much more than I would likely have made investing with that money.
Since your car is very new and shiny and expensive, and you don't have a big net worth or cash reserves, self insurance for replacement may not be ideal for you (unless you're willing to significantly downsize on your next vehicle). It worked for me because I could buy a comparable replacement outright with cash -- it would suck, but I could do it. It's an option worth looking into, however.
Ah, I hadn't thought about insurance cost differences. I'm not sure reducing car insurance would be a large enough change to offset tax advantages on the overpayment money in other places (HSA/401k), or the 10% difference if that money's invested, but definitely something to add to the equation! (Also, this is why I'm typically just a lurker... :P)
It took me a very, very long time to realize that paying the car loan off would do me better than investing that cash, and that's because the place where it's worth it is a weird, narrow space. For it to be worth it to what I assume is your "average" Mustachian, you already have to be maxing your tax-advantaged spaces and have paid off any of the much higher interest debts while still having a car loan. I was in that weird place.
@wirednuke83, back to your spending!
First, congrats to your wife for making progress.
Second, one thing I've noticed is that these categories are very broad. If it works for you, awesome! But you may find some worth in digging in a little deeper at times to really understand your spending.
Re HSA: You shouldn't be eligible for HSA with only a $500 family deductible. Also, enjoy the hell out of that small deductible.
$700 groceries: With two adults and two very small children, there is room to cut in here, especially if this doesn't count restaurant spending or household supplies. Is there a lot of prepackaged snacks/kid-friendly foods in here?
(I also want to note: This is a GREAT place for you to lead by example, especially if your wife does most of the shopping/cooking, and veeeery especially if she doesn't particularly love it. If you take over some of the work here, you can make the changes you want to make AND take some work off her hands. That combo often goes over well! If she's into it, pick a few easy starter places (e.g. pre-cut apple slices, pre-mixed salads, etc). Join her in shopping, see how she does it (good reconnaissance too for future changes), suggest the small changes you had already zeroed in on, and then follow up at home by doing the kitchen work. Save money, model good spending behavior, AND spend more time with your spouse while taking some work off her hands? This should be an easy win.)
$440 utilities: Why are you watering your grass? Does your HOA require bright green grass, or can you stop watering and eventually replace the grass with something less water-greedy? If your HOA requires bright green grass... well. This is a reason I intend to never buy a home with a HOA.
$1040 transportation. Here is your transportation facepunch. What in here is your payments, and what's your gas and insurance?
$300 a month on kid supplies is $3600 a year. How does this break down? Where can you cut? For example, buying used clothes instead of new; buying different types of gifts; etc.
$300 a month on "family fun" in addition to $50 on entertainment. What counts as "family fun"? Is the fun worth the money? Would the kids have just as much fun playing a silly board game at home with you, or playing at the playground?
$110 Christmas fun = $1320 spent on Christmas. That's a lot of money to be spending on gifts. I'd cut down here. (FWIW, my yearly gift budget for birthdays, Christmas, and everything else is $500.)
*****
For your car question, I have questions for you first.
1. What's your mpg on the hybrid?
2. Why do you drive so much? (Work?)
3. If you drive that much because of work, work out your real wage for your job. Add in all your benefits (insurance premium your employer pays, 401k match, etc), deduct all your real expenses (like gas + wear and tear on car), and divide by your real hours (time spent at work plus time spent driving/commuting and any other time spent doing things you just wouldn't do if it weren't for work). Is your job still worth it at that point?