Author Topic: Is this debt snowball plan sound?  (Read 4765 times)

InPursuitOfFIRE

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Is this debt snowball plan sound?
« on: May 31, 2018, 06:19:01 PM »
Hello community!  I just recently discovered the concept of financial independence and am really excited to get started on my journey.  I started tracking all my expenses in May and trying to stick to a budget with YNAB.  My current savings rate is 34%, although my expenses this month had some large non-monthly occurrences such as a new dishwasher, life insurance, pool membership, and new kidís summer clothes, I know I can do better.

I am now working on cutting my grocery bill, dining out, and household expenses in order to free up further savings.

I also have four installment loans, not including our mortgage which we do have, that I would like to attack via a snowball.  We are also not maxing out my wifeís 401k, although we are funding it well past the employer matched limit.  Her yearly contribution is $11,000 and her employer matches about $6,500.  I max out my 401k and my employer contributes $14,000.  I read on this forum somewhere that we should be maxing out our 401k first before attacking low interest debt.

Here are the terms of our 4 loans (rate, payment, balance):

  • Wifeís car payment: 1.99%, $587.55, $14,897
  • Home Equity Loan: 3.75%, $549.36, $24,429
  • 401K Loan (I know a big no-no): 3.25%, $145, $29,828 (was used to help fund a down payment on our current home)
  • My car payment: 1.75%, $644.98, $25,039

We have about $800,000 in retirement accounts and our current savings account (cash) balance is about $23,000.

What I was thinking of doing is pay off my wifeís car (lowest balance) from our savings account which would leave around $8,000 left in savings.

I would then use that payment of $587.55, plus $600 that we were using to fund our kids' (7 and 9) 529 accounts (pay ourselves first, right?), plus $1,000 we were saving each month and add another $1,000 from spending less to come up with a snowball payment of about $3,200 to attack the 3 remaining installment loans starting with the home equity loan, followed by the 401(k) loan, then finally my car loan.

According to the debt snowball calculator the home equity loan would be paid off in 7 months, the 401k loan in 15 months and finally my car loan in 18 months.

In 18 months we would have wiped away $94,000 in debt and free up $1,900 in monthly savings! 

At this point we would fully fund my wifeís 401(k), start an after-tax investment account, and go back to saving at least $1,000 back into our savings account.

Is this a wise plan?  Should we be maxing out my wife's 401k regardless?  Or should we setup an after tax retirement account now and start funding that instead of her 401K? Is using the 529 budgeted money to fund the debt snowball advisable? We are in our early 40ís and would like to FIRE in about 10 - 15 years.

Thank you!!!

Milizard

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Re: Is this debt snowball plan sound?
« Reply #1 on: May 31, 2018, 06:42:34 PM »
This is MMM, not Ramsey. Sell the expensive cars and get something more modest.

PDXTabs

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Re: Is this debt snowball plan sound?
« Reply #2 on: May 31, 2018, 06:46:02 PM »
According to the debt snowball calculator the home equity loan would be paid off in 7 months, the 401k loan in 15 months and finally my car loan in 18 months.

I'm going to be a little contrarian and say that the 401k loan is the least of your problems, because you are paying yourself. I would leave it for last.

Rosy

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Re: Is this debt snowball plan sound?
« Reply #3 on: May 31, 2018, 07:26:22 PM »
Welcome to the forum acubides:)!

What might help you the most is to do a case study in the case studies thread. Without looking at the whole picture advice about debt repayment might be misplaced...

We are all about optimization here at MMM.
It looks like you have plenty of money on the surface, so seeing a loan for a DP on your current house is sort of a red flag that you might have a cash flow/savings/problem.
Those two big car payments are a problem strangling your cash flow, the interest is too low to be of concern - can't tell for sure if this is a "your hair is on fire" debt situation but it might well be.

Perhaps @MDM might have some helpful advice to get you started in looking at the whole picture.

Cassie

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Re: Is this debt snowball plan sound?
« Reply #4 on: May 31, 2018, 07:36:27 PM »
I think you have a good plan.

MDM

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Re: Is this debt snowball plan sound?
« Reply #5 on: May 31, 2018, 09:08:22 PM »
The snowball approach may be preferable for finance novices.

Your $800K in retirement accounts makes you not a novice. :)

If you are talking about the spreadsheet in http://forum.mrmoneymustache.com/ask-a-mustachian/which-loan-to-pay-extra-first/msg1307278/#msg1307278, compare your cost for snowball vs. "highest interest first".

Consider the generic advice in Investment Order - how does that look to you?

CindyBS

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Re: Is this debt snowball plan sound?
« Reply #6 on: May 31, 2018, 09:20:15 PM »
Sell the cars and get something significantly cheaper.  You owe almost $40K in just car loans. 

inline five

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Re: Is this debt snowball plan sound?
« Reply #7 on: May 31, 2018, 09:25:06 PM »
FYI this community is more about reducing overhead than how to pay off debt.

Example get rid of cars and drive a clunker or ride a bike. Live in reasonably sized homes. Etc. No, we are not poor but choose to live well under our means.

InPursuitOfFIRE

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Re: Is this debt snowball plan sound?
« Reply #8 on: June 01, 2018, 05:37:11 AM »
Thank you all!  Yes, the advice to get rid of our expensive cars has been heard loud and clear :)  And we have already gave up the prospect about moving to a larger home next year and staying put in our starter home.  Like i said I just found out about this community recently and can't expect myself and my wife to jump in immediately and start driving clunkers.  We will (or at least I will) soon though.  Trying to prove to ourselves first that we can cut our expenses elsewhere first (debt, grocery, dining out, clothes, etc) and when when we see the difference it is making we will look to our cars and get something older and cheaper but didn't want to start there as our first step.  I am envious of all the mustachians here and hope to be there eventually!!

CindyBS

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Re: Is this debt snowball plan sound?
« Reply #9 on: June 01, 2018, 06:52:48 AM »
How big is your family and what are the cars used for?  Just everyday things?


MMM has some great articles on cars.  Basically, don't get a car that will cover EVERY possible need you have for it, just get a car that will cover virtually all of them.  It is significantly cheaper to occasionally rent a pick up truck or van or just pay to have something delivered than to pay for some feature your rarely need.

DH and I have 2 teens (not driving yet) and we have a 2010 Civic that is used as the "commuter" car and the vast majority of miles are put on that.  Then we also have a 2009 Subaru Outback, which is nice for things like going camping for the weekend or moving items.  Both paid off in full, nowhere near "clunkers" and they work very well for our family.

I'm sure other Mustashians can recommend good cars based on your (actual not perceived) needs. 




Milizard

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Re: Is this debt snowball plan sound?
« Reply #10 on: June 01, 2018, 07:07:09 AM »
There is a big range between $1200+/month car payments,  and driving clunkers.  My family has  2 car payments for nice vehicles that total  $600/month. We could have paid cash for both, but wanted the money available/invested instead.  The interest rates on your cars aren't bad at all. You're just throwing a lot of money at a depreciating asset.

Bateaux

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Re: Is this debt snowball plan sound?
« Reply #11 on: June 01, 2018, 07:17:57 AM »
Keep the cars.  The mistake is already made.  Pay off smallest car loan,  then next car loan, then home equity loan and then 401k loan.  You're not broke so you'll be ok.

radram

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Re: Is this debt snowball plan sound?
« Reply #12 on: June 01, 2018, 08:13:59 AM »
While I agree a case study would help, the numbers you gave us look pretty good so far. I see you have a home equity loan. Do you also have a mortgage? What is that amount per month and total owed?

Another car voter here.

You do not need a clunker.

I think you should stop paying $15,000 a YEAR on cars. Shit that is a lot of money. And that is to just leave them in the driveway. This is just a whole other level I can not comprehend. For reference, when we had a mortgage, it was $670.00 a month, including the property taxes. My mind is blown by this one.

Just last month, I found and bought a 2008 Honda Fit with 73,000 miles for $5000. Not at all a clunker.  It is going to replace a 2009 Chevy Aveo we bought 6 years ago for $7,000. It had 60,000 miles when we bought it. It now has 130,000. I would definitely put our Aveo in the clunker category today, but not at all when we bought it. It gave us 70,000 miles of use, with very little repair costs. I consider the Fit to be a tremendous upgrade, and we plan to sell or donate the Aveo. It is too early to tell, but the Fit just might be the best car I have ever bought.

How much is your car insurance for these 2 cars? If you downgrade, carry collision only, and apply the difference to your loans, what does that do to the numbers?

Based on the numbers you gave us so far, here is what I would do:
1. Buy a car to replace yours. Use your Savings cash to buy a car in the $5,000-$8,000 range.
2. Sell your car. If you take a loss, feel better about it my calculating how many months of no car payment it will take before paying for it. Buy some steaks and grill them that month to celebrate.
3. Buy a car to replace your wife's car. Same price range.
4. Sell your wife's car. Plan another steak dinner.

This will deplete your savings, BUT you will have over $1,200 per month that is no longer an outflow. In 1 year, you have "saved" the amount of BOTH cars, with no more to pay. Using the other figures you gave us with this $1,200, you would pay off the 401k loan in less than 1 year.

Normally I would suggest you pay off the equity loan first, only because it is the highest interest rate. In your case though, I would pay off the 401k loan first. If there is a job loss, that loan is due IN FULL soon after termination. For half of a percent, the peace of mind knowing that nut can not become due at a moments notice is worth it. Oh yeah.... and never do that again.

If you get a state tax break for the kids 529's, you might want to keep it up. It would depend on the amount of the break. We need more info here.

Was your home loan a HELOC? If it was, and you really want to be aggressive, your cash flow would allow you to carry a very small emergency fund (1 month or so), and then use your HELOC as your emergency fund until all loans are paid off.


Keep us posted. I love reading about people putting out financial fires :)

radram

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Re: Is this debt snowball plan sound?
« Reply #13 on: June 01, 2018, 08:21:16 AM »
Keep the cars.  The mistake is already made. 

I respectfully disagree here. Every month you have $40,000-$50,000 in depreciating assets in your driveway, you are making the same mistake again every month, whether or not there is a loan against them. There are tons of high quality used cars available that can free up 80% of those funds for other purposes.

If you are a car person, and you get great joy out of these cars, that is an entirely different matter.

dogboyslim

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Re: Is this debt snowball plan sound?
« Reply #14 on: June 01, 2018, 10:02:58 AM »
Generally agree on the cars, but assuming cash flow isn't a problem for you, I'd do the 401k loan first, because as mentioned, if you leave your job it is due immediately, and if not paid back it becomes a distribution subject to penalty if you aren't at least 59.5.  I don't like being tied to a specific job.  After that I'd go back to the car/HE.  Also, be sure that you never buy a car with a loan again (or at least that you don't have to, if you borrow at super low rate and invest the difference for a better long term, go for it).  All your rates are pretty low, so I wouldn't freak out about paying highest interest first.

Catbert

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Re: Is this debt snowball plan sound?
« Reply #15 on: June 01, 2018, 10:16:56 AM »
If you decide to keep the cars, I wouldn't rush to pay off those l-o-w loans.  I woud work on the 401K loan b/c as others have noted if you leave your job (voluntarily or involuntarily)  they will likely be due immediately or count as a withdrawal.

Proud Foot

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Re: Is this debt snowball plan sound?
« Reply #16 on: June 01, 2018, 10:20:46 AM »
I agree with the others saying to get rid of the cars and find less expensive ones. You are spending over 1,200 each month on those cars! What term did you get for payments to be that high with low interest rates? If you have any equity in these cars then use that plus your cash to get cheaper cars without loans.

I would also move the 401k loan to payoff #1. It can make it harder for you to change jobs if necessary and gives you more risk as it typically is required to be repayed upon the termination of your employment.

Laura33

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Re: Is this debt snowball plan sound?
« Reply #17 on: June 01, 2018, 10:40:30 AM »
The math says that the best approach is to fully-fund both 401(k)s and IRAs/Roth IRAs before paying off debt at such low interest rates.  See the Investment Order that MDM posted -- read that as many times as needed until you internalize it.

The only caveat would be if your debt is causing you serious cash-flow problems.  But even then, that is merely a signal that you are living beyond your means; the problem is the quantity/cost of the "stuff" you are buying, not the loan terms.  Ergo, the solution is to wean yourself off of said uber-spendy stuff.  Debating when and how to pay off 1% loans to free up cash flow is like rearranging deck chairs on the Titanic -- the real problem is that you bought the Titanic that you wanted instead of the dinghy your budget could afford.  If you want to be FI, future needs must come before current wants and luxuries.

I would also encourage you to re-think how you plan to wrap your arms around the concept of FI.  Most people get blocked by the big stuff, not the little stuff.  So you and your DW can drive yourself nuts trying to save $200/mo on groceries -- and yet you're still hemorrhaging $1200/mo solely on car payments, without even considering depreciation or insurance or gas or maintenance.  I bet all told, those cars are costing you at least $25K/yr -- that would more than max out both of your 401(k)s and Roths.  I understand that you are just sort of edging into the concept, and you guys need time to adjust; that's fine and understandable.  But part of that process is challenging your assumptions and learning to look at financial decisions logically.  Logically, those cars are making a giant sucking sound at the bottom of your wallet -- and that sound is probably a lot louder than the one made by your excess grocery bills.  Ergo, logically, you will get much further, faster, by getting rid of the cars than just about anything else.  Logically, you will come out much further ahead by investing money in the market for the long-term than by paying off 1% debts.  Etc. 

Tl;dr:  If you don't have a cash-flow problem, maximize your investments in your tax-protected accounts before paying off such low-interest debt.  If you do have a cash-flow problem, sell the assets that are causing that problem, then maximize your investments in your tax-protected accounts before paying off such low-interest debt. 

NorthernBlitz

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Re: Is this debt snowball plan sound?
« Reply #18 on: June 01, 2018, 10:59:22 AM »
Your plan seems fine. Without running the numbers, I think that the rates are similar enough (~ 2% - 4%) that snowball vs. highest rate won't matter. That would be different if one was a CC @ 20%. I like the idea of paying back the 401k loan first because you buy flexibility by eliminating large downside risk.

If you want to retire earlier, the posts about changing cars are probably correct. This would also be a great idea if you were forced to lose your job and had to pay back the 401k loan now.

But it's up to you to determine if you're optimizing for retirement date or something else (like how you alluded to funding your kid's education).

FireHiker

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Re: Is this debt snowball plan sound?
« Reply #19 on: June 01, 2018, 02:12:15 PM »
I just want to chime in to suggest you confirm what the terms are on your 401k loan. It is not always true that the balance is due in full upon termination. I know because a former co-worker had one to pay for a home down-payment, and when he left Vanguard allowed him to continue repaying as scheduled; he just had to set up a payment plan as opposed to having it automatically deducted from his pay. This is fairly recent data, but I don't know if you also have Vanguard for your 401k, so you should really confirm what the specific terms are in your case.

Holy hell that is a lot of money on cars each month. We just bought a new car, very unmustachian,and hate the fact that we have a $364/mo payment (for 3 years, although we'll pay it off within one). I am blown away at how high your payments are; what are your cars and how do you use them? I don't have your original post up in front of me otherwise I would do the math, but how many more scheduled payments do you have?

I think you should really do a full case study because the feedback you'll get will be much more relevant to your specific circumstances. Congrats on amassing 800k in your 401k though; you're lightyears ahead of the norm at that anyway!

Happily Irrelevant

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Re: Is this debt snowball plan sound?
« Reply #20 on: June 02, 2018, 01:01:09 PM »
The two car payments are under 2%.  I would just make the payments on those until they are paid off, no additional money.  Pay off the other two and then save the payments it free's up.  So debt snowball the two and let the low rate cars go full term. 

FIRE 20/20

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Re: Is this debt snowball plan sound?
« Reply #21 on: June 02, 2018, 03:01:48 PM »
The two car payments are under 2%.  I would just make the payments on those until they are paid off, no additional money.  Pay off the other two and then save the payments it free's up.  So debt snowball the two and let the low rate cars go full term.

I respectfully disagree, and the reason is buried in the requests for a full case study and has also been mentioned by others.  It seems likely (but we can't know without a case study) that the car loans are just the tip of the iceberg for the absurd amount the OP is spending on those cars.  How much are registration fees on those (likely) new and (likely) expensive cars?  Newer and more expensive cars cost a lot more to register.  How much is insurance?  How much is being wasted on fuel?  Expensive cars often have large wheels, and tire costs rise dramatically with wheel size.  The (probably) expensive cars are an anchor weighing down their ability to achieve their financial goals.  I bet @Laura33 is correct and they're wasting close to $2k each month on cars.  If they keep that attitude about car ownership going forward, using the 4% rule and a likely low estimate of $20k / year in car expenses they'll need about $20k * 25 = $500,000 extra in savings just to maintain their car addiction through the rest of their lives.  Half a freaking million dollars because they want nice new cars.  Not to mention the fact that it's forcing them to leave free money on the table from tax benefits because they're not maxing out the wife's 401(k) and they have a 401(k) loan. 

They must have very high incomes to have around $1M in assets (assuming they have home equity of $~300k) in their 40s with just a 34% savings rate.  If they fix just a few things they should easily be able to retire in under 5 years, although I'm making a lot of guesses and assumptions without a case study. 

BTDretire

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Re: Is this debt snowball plan sound?
« Reply #22 on: June 02, 2018, 03:35:38 PM »
I agree the cars are probably more than you need, but I would like to know what each could be sold for,
before pronouncing judgement.
 I would not pay off a 2% loan. I probably would not pay off the 3.75% mortgage, if you get a tax deduction for it,
 I would not pay it off.

PDXTabs

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Re: Is this debt snowball plan sound?
« Reply #23 on: June 03, 2018, 04:38:10 PM »
Normally I would suggest you pay off the equity loan first, only because it is the highest interest rate. In your case though, I would pay off the 401k loan first. If there is a job loss, that loan is due IN FULL soon after termination. For half of a percent, the peace of mind knowing that nut can not become due at a moments notice is worth it. Oh yeah.... and never do that again.

I would check your plan first. Some plans are happy to setup a payment plan if you leave. I have personally done this with Fidelity (but could still vary plan to plan).

Happily Irrelevant

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Re: Is this debt snowball plan sound?
« Reply #24 on: June 03, 2018, 05:22:02 PM »
The two car payments are under 2%.  I would just make the payments on those until they are paid off, no additional money.  Pay off the other two and then save the payments it free's up.  So debt snowball the two and let the low rate cars go full term.

I respectfully disagree, and the reason is buried in the requests for a full case study and has also been mentioned by others.  It seems likely (but we can't know without a case study) that the car loans are just the tip of the iceberg for the absurd amount the OP is spending on those cars.   

Since they have already purchased the cars they are in.  Selling a used car to buy an older used car isn't going to save them a whole lot.  I've never lived any place where it was possible to bike or take public transportation to work so a reliable car is mandatory.  So they  have their cars.   I've outsmarted myself before with trading in a newer car for an older car to "save money".  Never worked out that way.  So I stand by just making the payments as the interest rates are low.  Then get ready to face the real problem.  Buying a new car again in a couple years.  I'm confident that they trade their cars in for new ones before paying them off.

Telecaster

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Re: Is this debt snowball plan sound?
« Reply #25 on: June 03, 2018, 06:45:51 PM »
Thank you all!  Yes, the advice to get rid of our expensive cars has been heard loud and clear :)  And we have already gave up the prospect about moving to a larger home next year and staying put in our starter home.  Like i said I just found out about this community recently and can't expect myself and my wife to jump in immediately and start driving clunkers.  We will (or at least I will) soon though.  Trying to prove to ourselves first that we can cut our expenses elsewhere first (debt, grocery, dining out, clothes, etc) and when when we see the difference it is making we will look to our cars and get something older and cheaper but didn't want to start there as our first step.  I am envious of all the mustachians here and hope to be there eventually!!

@acubides I'm not sure you need to start driving clunkers.  You need to get out a pencil and look at it carefully.  You are already driving used cars, so selling your used cars and buying different used cars might not be a huge improvement.  Although your car payments are pretty high, the sunk costs might be big enough you won't gain a whole lot.  Without knowing more, it is hard to say.  Might have to chalk this one up to live and learn.   

That said, the debt snowball idea is stupid.   If the idea is to get out of debt, then you should get out of debt as quickly as possible.  That means paying down the highest interest rate loans first.  If you want to stay in debt as long as possible, then by all means do the snowball.

However, the 401(k) loan is a special case.  It is almost the same interest as your HELOC, and you are losing the opportunity cost while the loan is outstanding, AND you are paying yourself back with after-tax dollars.  You cannot afford the 401(k).  It is literally insane to pay off the cars first before tackling the 401(k)

The other thing is that the car loans are quite low interest.  Perhaps below the rate of inflation.  That makes them a low priority.  But the HELOC is probably variable interest, correct?  And interest rates are tending up.  That makes the HELOC a potential time bomb.  Definitely kill that one after you fix the 401(k) problem. 


FIRE 20/20

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Re: Is this debt snowball plan sound?
« Reply #26 on: June 03, 2018, 09:41:21 PM »
The two car payments are under 2%.  I would just make the payments on those until they are paid off, no additional money.  Pay off the other two and then save the payments it free's up.  So debt snowball the two and let the low rate cars go full term.

I respectfully disagree, and the reason is buried in the requests for a full case study and has also been mentioned by others.  It seems likely (but we can't know without a case study) that the car loans are just the tip of the iceberg for the absurd amount the OP is spending on those cars.   

Since they have already purchased the cars they are in.  Selling a used car to buy an older used car isn't going to save them a whole lot.  I've never lived any place where it was possible to bike or take public transportation to work so a reliable car is mandatory.  So they  have their cars.   I've outsmarted myself before with trading in a newer car for an older car to "save money".  Never worked out that way.  So I stand by just making the payments as the interest rates are low.  Then get ready to face the real problem.  Buying a new car again in a couple years.  I'm confident that they trade their cars in for new ones before paying them off.

You're right that their next cars are the real problem.  Without knowing what the cars are, there's no way to know how much their current cars are dragging them down.  I still highly doubt they could avoid saving huge amounts of money by selling the cars and getting something more reasonable, but without knowing what they have it's just a guess. 

Timmm

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Re: Is this debt snowball plan sound?
« Reply #27 on: June 03, 2018, 11:42:53 PM »
Normally I would suggest you pay off the equity loan first, only because it is the highest interest rate. In your case though, I would pay off the 401k loan first. If there is a job loss, that loan is due IN FULL soon after termination. For half of a percent, the peace of mind knowing that nut can not become due at a moments notice is worth it. Oh yeah.... and never do that again.

I would check your plan first. Some plans are happy to setup a payment plan if you leave. I have personally done this with Fidelity (but could still vary plan to plan).

Fidelity did that for me too, though it wasn't exactly termination. A corporate split put me with the new company and a different 401k provider. Fidelity just had me set up a monthly ACH withdrawal instead of paycheck withholding (2x month). No other change in terms. I did wait to roll over that account until the loan was paid off on its original 5 year term.

If a lump sum payoff would be an expensive problem, maybe it should be a priority. But in general, paying it off quickly so that you don't have to worry about paying it off VERY quickly later isn't something I'd prioritize.

radram

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Re: Is this debt snowball plan sound?
« Reply #28 on: June 04, 2018, 07:57:14 AM »
Since they have already purchased the cars they are in.  Selling a used car to buy an older used car isn't going to save them a whole lot. 

Can you give some real numbers to show your point?

The sample numbers Fire 20/20 used sure sound like a whole heck of a lot to me. And yes, if the plan is to just sell your car and get another one every few years is your plan of attack, that will lead to a large chunk of stash that will need to pay for it through time. The winners on car sales are the ones who profit from sales of cars, like dealers, advertisers, loan entities, states that charge tax on all transfers of cars, insurance companies insuring newer cars, etc.

patchyfacialhair

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Re: Is this debt snowball plan sound?
« Reply #29 on: June 04, 2018, 09:05:02 AM »
The two car payments are under 2%.  I would just make the payments on those until they are paid off, no additional money.  Pay off the other two and then save the payments it free's up.  So debt snowball the two and let the low rate cars go full term.

I respectfully disagree, and the reason is buried in the requests for a full case study and has also been mentioned by others.  It seems likely (but we can't know without a case study) that the car loans are just the tip of the iceberg for the absurd amount the OP is spending on those cars.   

Since they have already purchased the cars they are in.  Selling a used car to buy an older used car isn't going to save them a whole lot.  I've never lived any place where it was possible to bike or take public transportation to work so a reliable car is mandatory.  So they  have their cars.   I've outsmarted myself before with trading in a newer car for an older car to "save money".  Never worked out that way.  So I stand by just making the payments as the interest rates are low.  Then get ready to face the real problem.  Buying a new car again in a couple years.  I'm confident that they trade their cars in for new ones before paying them off.

Since you're giving an anecdote, I'll give mine! Wife and I both drive 15 year old cars when we previously had much newer cars. We haven't had a car payment for a few years and even when a $1-2k repair comes up, we don't sweat it because even if we rented a car while ours were being repaired (we're lucky/privileged to have family with extra cars), the repair + registration + rental car costs still are about half as much as a car payment would be, annually.

There's plenty to be said about finding well-maintained "grandma" cars as I like to call them. Something like an old Lexus or Toyota or Honda that some old lady/dude kept well maintained but drove minimally. Both our cars are "grandma" cars, and it has allowed us the flexibility to make serious headway on our financial goals. OP can do the same.

Dragonswan

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Re: Is this debt snowball plan sound?
« Reply #30 on: June 04, 2018, 09:42:18 AM »
I say keep the cars and pay them as currently structured.  Once they're paid off, keep on driving them into the ground.  If you feel reasonably secure in your job, pay off the HELOC first then the 401K loan.  If not, do the 401K first then the HELOC. Then commence to maxing your accounts.  With the new tax brackets and standard deduction, it may be best to take the hit now (keeping contributions at current levels) while attacking the loans to free up cash you can use to invest when you really need the tax break (upping your contributions - especially once the new tax provisions expire).

MilesTeg

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Re: Is this debt snowball plan sound?
« Reply #31 on: June 04, 2018, 10:50:35 AM »
First step is to assess your goals and what you are willing to do:

I'm guessing you are a fairly high income household ($150k+), given you have 800k in retirement in your early 40s and while having a family and spend quite a bit.

1.) If your goal is to trim some excess spending, pay off your debt, and get to FIRE in 10-15 as you state but you aren't willing to drastically change your lifestyle, then MMM is not the place for you.

2.) If you goal is to get to FIRE in the shortest possible time so you can quit your job and you are willing to drastically change your lifestyle in at least some big ways, then stick around. Hint: most people here would say you are _already_ ready to FIRE if you "just" sell all your cars and bike instead, move into a ~1,000 sqft house, make every single meal from scratch from your own garden, etc.=) If that ballpark idea is not appealing to you, you aren't going to like this place. I'm not saying anything is wrong with that idea, it's just not what most people will be willing to do.

inline five

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Re: Is this debt snowball plan sound?
« Reply #32 on: June 04, 2018, 12:03:40 PM »
With the car payments being fairly high it makes me think luxury cars...while trading in and buying older cars may not save on the surface, it will most likely save in long term repair costs. Also insurance, registration/taxes etc will all be substantially less.

When looking at transportation costs it's not so much new vs old that costs you money, it's the initial purchase price of that new car. Example, a $20,000 car bought new and kept for fifteen years isn't a bad choice. A $60,000 car bought new is...and both do the exact same job of transporting you from A to B.
« Last Edit: June 04, 2018, 12:05:44 PM by inline five »

Happily Irrelevant

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Re: Is this debt snowball plan sound?
« Reply #33 on: June 04, 2018, 02:33:38 PM »
I scrolled back up to look at the car payments and the amounts owed.  It would be interesting to hear form the OP what the value of the cars are as one he still owes $25k on.  Is there any equity?  If these are 5 year notes the original amounts are maybe mid $30k so not luxury cars.  If they own two Honda's or Toyota's that will last the next 20 years does that change the "sell the cars" people to the "keep the cars" camp?  I will not be satisifed until the original poster clears this mystery up. 

InPursuitOfFIRE

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Re: Is this debt snowball plan sound?
« Reply #34 on: June 04, 2018, 07:52:11 PM »
Hey guys sorry for the delay and getting back to this post!  Thank you all for the advice!

As for the 401k loan, this is from a previous employer and the plan allowed me to continue making automatic payments from my checking account so I'm good on that front.

My car loan is a 2016 Jeep Wrangler JKU (I know, i read the MMM article about that guy who had the Jeep and know it is not smart... i will look to be selling it soon) and I have about $10,000 in equity.  My wife's car is a 2012 Audi Q5 which we bought used in 2015.  Have about $2,000 equity in it.  Believe me, this Jeep was my dream car and is taking a lot for me to come to grips and sell it but i am open to the idea... baby steps! 

I went ahead and posted my case study in the Case Study forum to paint a complete picture of our finances and 10 year FIRE plan.

Today we maxed out my wife's 401K and will make a $500 extra payment to our home equity loan (the rate is not variable) and let the other 3 loans go to maturity as is.

If we can stick to our budget which seems doable, we would be starting a Vanguard taxable account and start funding in a low fee index fund.

https://forum.mrmoneymustache.com/case-studies/hope-to-fire-in-10-years/

Thank you all for your advice!

inline five

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Re: Is this debt snowball plan sound?
« Reply #35 on: June 04, 2018, 09:26:51 PM »
Jeeps are trending right now. I've always wanted one since I was a kid but they retain their value so well they don't interest me in buying used and new is out of the question for the $$ they want for that car!! Good for you, if there is one car you could've bought new you did good. It retains its value so well that you can easily get out from under it.

The Audi on the other hand....sell that post haste..VAG cars are POS and will fall apart around you while costing thousands in repair.

One thing I will note is you seem retirement fund heavy but cash poor. You really should build up a hefty cash balance as well. IMO.
« Last Edit: June 04, 2018, 09:28:34 PM by inline five »

InPursuitOfFIRE

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Re: Is this debt snowball plan sound?
« Reply #36 on: June 05, 2018, 05:03:11 AM »
Is $23,000 in savings cash poor?

Fomerly known as something

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Re: Is this debt snowball plan sound?
« Reply #37 on: June 05, 2018, 05:36:32 AM »
Yes $23,000 is cash poor since you don't appear to have any investments outside of employer sponsored retirement accounts.  Especially since this is less than a year of just the debt you have posted.

I haven't looked at your case study.  Going there next.

If you have IRA's and outside taxable accounts then you aren't cash poor but if this is all you have outside of your home and retirement yes you are.


Telecaster

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Re: Is this debt snowball plan sound?
« Reply #38 on: June 05, 2018, 01:14:31 PM »
Is $23,000 in savings cash poor?

That's one of those topics that is hotly debated around here.  Personally, that's more cash than I would be comfortable with. 

The argument in favor of a big cash emergency fund goes something like this:  Recessions and stock market crashes tend to occur at the same time, so if your money is tied up in stocks, AND you have an emergency (like a job loss, which is a higher risk during recessions),  then the money won't be there when you need it.

The argument against a big cash emergency fund goes something like this:  Actual emergencies are rare (the water heater going out isn't an emergency, it is an irregular, but predictable expense).   If you simply invest regularly in a taxable account, the dividends and price appreciation you could reasonably expect to double your money in say, 10 years.  And then if there was an emergency coinciding with a stock market crash, you probably would be in no worse financial position than if you hadn't invested, and very likely might be in a better position.  So an "emergency fund" invested in stocks actually makes you safer over time (more money = more safety).  And in the event of an emergency, you can cut expenses and access springy debt, like a LOC or other borrowing, to get though the short term. 

Plus, if your goal is one year's expenses, saving 15% of your income it will take you about six years to get there.  15% isn't a particularly high savings rate for this board, but it is extremely high for the general public.   Regardless, you are delaying your financial independence by years if you try to accumulate that much cash.  And of course you lose the potential price appreciation and the opportunity cost.   To quote MMM "Safety is an expensive illusion."  A big cash position doesn't necessary make you more safe, and it costs a lot.   

inline five

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Re: Is this debt snowball plan sound?
« Reply #39 on: June 05, 2018, 02:14:29 PM »
Is $23,000 in savings cash poor?

That's one of those topics that is hotly debated around here.  Personally, that's more cash than I would be comfortable with. 

The argument in favor of a big cash emergency fund goes something like this:  Recessions and stock market crashes tend to occur at the same time, so if your money is tied up in stocks, AND you have an emergency (like a job loss, which is a higher risk during recessions),  then the money won't be there when you need it.

The argument against a big cash emergency fund goes something like this:  Actual emergencies are rare (the water heater going out isn't an emergency, it is an irregular, but predictable expense).   If you simply invest regularly in a taxable account, the dividends and price appreciation you could reasonably expect to double your money in say, 10 years.  And then if there was an emergency coinciding with a stock market crash, you probably would be in no worse financial position than if you hadn't invested, and very likely might be in a better position.  So an "emergency fund" invested in stocks actually makes you safer over time (more money = more safety).  And in the event of an emergency, you can cut expenses and access springy debt, like a LOC or other borrowing, to get though the short term. 

Plus, if your goal is one year's expenses, saving 15% of your income it will take you about six years to get there.  15% isn't a particularly high savings rate for this board, but it is extremely high for the general public.   Regardless, you are delaying your financial independence by years if you try to accumulate that much cash.  And of course you lose the potential price appreciation and the opportunity cost.   To quote MMM "Safety is an expensive illusion."  A big cash position doesn't necessary make you more safe, and it costs a lot.

Investing in a taxable account is important. By being cash poor he has all his money in tax deferred accounts that carry large penalties to use.

He desperately needs a taxable brokerage investment account.

At their income and expense levels I would personally want at least $50k. Maybe $100k. That's what we carry right now with similar income. It's under 10% of our total portfolio. I don't feel that is too much. In a downturn the last thing I want to do is sell my investments. I'd rather pull from cash. That being said $100k is 2.5 years of expenses for us.

InPursuitOfFIRE

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Re: Is this debt snowball plan sound?
« Reply #40 on: June 05, 2018, 02:53:39 PM »
I will work on starting to fund a taxable account as soon as we can.

But what about the Backdoor ROTH?  Isn't that a way to tap into my 401K without incurring a penalty?

Milizard

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Re: Is this debt snowball plan sound?
« Reply #41 on: June 05, 2018, 03:07:27 PM »
$23k is cash poor if you have a 401k loan >= cash on hand.

PDXTabs

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Re: Is this debt snowball plan sound?
« Reply #42 on: June 05, 2018, 03:11:12 PM »
But what about the Backdoor ROTH?  Isn't that a way to tap into my 401K without incurring a penalty?

You can take contributions out of a Roth IRA without penalty at any time. However, this trick doesn't work for a Roth 401k.

EDITed to add: don't forget about I-Bonds. You and your wife could each buy $10k/year, interest is tax deferred and guaranteed to keep up with inflation, and after 12 months they are as accessible as cash.
« Last Edit: June 05, 2018, 03:14:10 PM by PDXTabs »

InPursuitOfFIRE

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Re: Is this debt snowball plan sound?
« Reply #43 on: June 05, 2018, 03:27:27 PM »
The the correct term I meant to say was the Roth Conversion Ladder as outlined by the Mad Fientist:
https://www.madfientist.com/how-to-access-retirement-funds-early/

inline five

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Re: Is this debt snowball plan sound?
« Reply #44 on: June 05, 2018, 04:01:45 PM »
The the correct term I meant to say was the Roth Conversion Ladder as outlined by the Mad Fientist:
https://www.madfientist.com/how-to-access-retirement-funds-early/

That is a long term strategy for retiring now not in ten years like your present situation.

InPursuitOfFIRE

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Re: Is this debt snowball plan sound?
« Reply #45 on: June 05, 2018, 07:00:12 PM »
Is there a time limit on when to convert a previous employer's 401k to the Traditional IRA then to the Roth?  Between my wife and I we have about 5 or 6 accounts with previous employers of at least $20K.  Could I not initiate a rollover 5 years from now for one of those accounts?

MDM

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Re: Is this debt snowball plan sound?
« Reply #46 on: June 05, 2018, 07:19:28 PM »
Is there a time limit on when to convert a previous employer's 401k to the Traditional IRA then to the Roth?
No.