Author Topic: Which to Payoff first??  (Read 4809 times)

LiseE

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Which to Payoff first??
« on: August 27, 2014, 10:06:59 AM »
At the end of the year I will have 13K outstanding on a 401K loan.  I will also have 15K remaining in credit card debt which I've worked very hard to pay down this year after getting "it" together and planning for FIRE.

SO .. the questions is .. at the end of the year should I pay off my 401K loan or apply my year end bonus monies toward the credit card debt?  (BTW the bonus money has been consistent for the past 15 years and so far this year looks to be good so I can assume I will be getting my usual bonus)

Thanks in advance for your advice!


Cheddar Stacker

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Re: Which to Payoff first??
« Reply #1 on: August 27, 2014, 10:15:18 AM »
Without interest rates it's hard to reply properly, but in general I would say payoff the credit cards first because they likely have a higher interest rate and with the 401K loan the interest is paid to future you so it's less crucial to pay it off quickly.

LiseE

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Re: Which to Payoff first??
« Reply #2 on: August 27, 2014, 03:42:32 PM »
The interest rates on the credit cards is definitely higher.  Paying off the 401K loan would put 800 a month back into my paycheck.  I also have to pay that off in full if/when I want to pay it off.  I cannot make large incremetal payments against that loan.

I could then put the additional 800 against the cc debt.


tomsang

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Re: Which to Payoff first??
« Reply #3 on: August 27, 2014, 03:56:52 PM »
The interest rates on the credit cards is definitely higher.  Paying off the 401K loan would put 800 a month back into my paycheck.  I also have to pay that off in full if/when I want to pay it off.  I cannot make large incremetal payments against that loan.

I could then put the additional 800 against the cc debt.

The 401k interest is going into your pocket. Reduce your bond allocation and keep the 401k loan.

If cash flow was a problem or the likelyhood of layoff was imiment then I would pay off 401k.

LiseE

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Re: Which to Payoff first??
« Reply #4 on: August 27, 2014, 08:07:03 PM »
Why do you say to reduce my bond allocation?

Cheddar Stacker

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Re: Which to Payoff first??
« Reply #5 on: August 27, 2014, 08:12:28 PM »
The loan has a guranteed return of 4.25%. It acts like a bond. So if you have $100k in your 401k the 13k loan is acting as a 13% bond allocation. If your are also holding x% bonds you likely have too much bond exposure. If your ideal mix is 85% stocks and 15% bonds, the loan is filling most of your bond bucket.

LiseE

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Re: Which to Payoff first??
« Reply #6 on: August 28, 2014, 05:27:09 AM »
got it ... last question.. my hubby and I are in our late forties .. shouldn't we have a higher percentage of bonds?  (more like 60% bonds and 40%)

TomTX

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Re: Which to Payoff first??
« Reply #7 on: August 28, 2014, 05:33:16 AM »
got it ... last question.. my hubby and I are in our late forties .. shouldn't we have a higher percentage of bonds?  (more like 60% bonds and 40%)

Well, do you both plan to die soon? With your age and average health, there is a pretty good chance one of you will live another 40-50 years.

From what I've been reading, bonds over something like 20% don't do much (if anything) to improve 30-year portfolio survival and they drag down overall return. I would personally only consider that high a bond % with a fairly short (<10 year) time horizon for end-of-use for the portfolio (ie, death.)

Play around at cfiresim or the Vanguard simulator with various percentages and see what happens.

LiseE

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Re: Which to Payoff first??
« Reply #8 on: August 28, 2014, 08:21:41 AM »
Thanks  .. no we don't plan to die soon and we are in good health! .. I stupidly put my 401K at 80% bonds after hearing/reading about a pending crash which I know if highly speculative.  My hubby's 401K is 100% stock but has a smaller balance since he started later.

Cheddar Stacker

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Re: Which to Payoff first??
« Reply #9 on: August 28, 2014, 09:24:01 AM »
Long term an 80% bond allocation will kill your portfolio quickly. If you are trying to time a major drop and then switch to 80% stocks it will be very hard to determine where the bottom is, or where the top is, so you might as well get into more stocks. If you're risk averse, I would suggest 60% stocks and 40% bonds. If you don't mind some risk I would suggest a range of 75/25 to 85/15. The heavier the stock balance, the longer it will last based on historical returns.

You need to keep enough in bonds/cash to fund a few years of expenses when you are in retirement, or as you approach retirement. Anything above that will likely drag down the performance level of your portfolio in the long run.

GoldenStache

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Re: Which to Payoff first??
« Reply #10 on: August 28, 2014, 11:20:46 AM »
Pay off the CC first and then use all of that money to go towards your loan.

I believe in the 100% stocks until you are within 4 years of retirement, then 2 to 3 years worth of expenses in bonds.

frugaliknowit

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Re: Which to Payoff first??
« Reply #11 on: August 28, 2014, 11:27:41 AM »
If you don't mind a little "tough love":  I think you both need to ask yourselves how you accumulated 28K (current balance) + what you've paid off in debt and how this can be avoided in the future.

If it was not a one time catastrophe, you might look at a combination of cutting spending/increasing income/increased cash reserves.

LiseE

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Re: Which to Payoff first??
« Reply #12 on: August 29, 2014, 02:02:31 PM »
Quote
If you don't mind a little "tough love":  I think you both need to ask yourselves how you accumulated 28K (current balance) + what you've paid off in debt and how this can be avoided in the future.

That's why we're here now!  We were mindlessly spending what we earned (and then some!).  I found this blog several months ago and have altered my state of thinking.  We've been on a budget for the past three months (still working out the kinks) but I now know where all of our money goes.  I started the year baffled as to where our money went and now I've got a handle on it.

We did a home renovation a few years back and that is what the 401K loan withdrawl was for .. the credit card debt just added up.  I'm working now to get my hubby on board with our new style of saving rather than spending.  He is the top consumer in the family so it's been hard but I just keep the emphasis on early retirement = freedom to work or not work.  No more being a slave to our paychecks!