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 kid’s 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 wife’s 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):
- Wife’s 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 wife’s 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 wife’s 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 40’s and would like to FIRE in about 10 - 15 years.
Thank you!!!