Should I pay off my 401(k) loan early?

[lovemygoofy]

Sorry, plans are already made. This thread isn't really about the vacation. It's about, if I have 10k, should I pay off the loan or use that towards other investments or goals

My personal opinion is you should pay the loan off as quickly as possible. Something will continue to take away from the "extra" money that could help pay it off quickly and be on your way to next goal. It is human nature to want more and plan other fun things and kick the can down the road for the unfun stuff leaving something as the 401K loan hanging over your head.

 

[2TxAgs]

Agreed, but it's an emotional thing for my wife and the family after I got sick this year. I dont' agree on the resort, but I do think we need the trip, as a family, for some good memories

Sometimes I feel really behind financially, as a 27 year old with the 401k debt/student loan debt. Then I talk to my friends, and go on debt dumpers, and I feel wayyyy better about my situation

This is a mistake! Do not compare yourself to the bottom bar and feel superior and justified in making questionable decisions. There are hundreds of ways to make memories that don't cost what the Grand Californian will cost. You are under 30, have student loan debt, have a child, have been ill and had to borrow money from your future self, and live with your MIL (which you say is an intolerable situation). There is not a financially savvy person out there who would agree with your vacation decision. However, if it's been made and you cannot/will not change it, please take off the blinders, consider where YOU want to be in the future (with those folks barely scraping by, or under less stress because you're not living paycheck to paycheck?) and make future decisions with that goal in mind. Adulting is hard and a 25+ year retirement is paid for by savings over 40 years, that's the only way to get there (short of being the founder of Apple!)

 

[2TxAgs]

I have a suggestion.

Yeah, it aint gonna go over well....

 

[RamblingMad]

This is a mistake! Do not compare yourself to the bottom bar and feel superior and justified in making questionable decisions. There are hundreds of ways to make memories that don't cost what the Grand Californian will cost. You are under 30, have student loan debt, have a child, have been ill and had to borrow money from your future self, and live with your MIL (which you say is an intolerable situation). There is not a financially savvy person out there who would agree with your vacation decision. However, if it's been made and you cannot/will not change it, please take off the blinders, consider where YOU want to be in the future (with those folks barely scraping by, or under less stress because you're not living paycheck to paycheck?) and make future decisions with that goal in mind. Adulting is hard and a 25+ year retirement is paid for by savings over 40 years, that's the only way to get there (short of being the founder of Apple!)

He’s paying himself back with interest at a rate most likely higher than treasury bonds at a point in time when the market is trading at 25x trailing earnings. This is better than paying a credit card off at a 20% rate.

Why is it okay to tell someone with credit card debt that it’s ok to go to Disney but not this guy?

 

[pryncess527]

Why is it okay to tell someone with credit card debt that it’s ok to go to Disney but not this guy?

Well, from my experience on this board most people wouldn’t say to someone with credit card that it’s OK to go to Disney.

 

[2TxAgs]

He’s paying himself back with interest at a rate most likely higher than treasury bonds at a point in time when the market is trading at 25x trailing earnings. This is better than paying a credit card off at a 20% rate.

Why is it okay to tell someone with credit card debt that it’s ok to go to Disney but not this guy?

I don't personally tell other people on this board that it is/isn't ok to go to Disney with CC debt. I don't happen to believe it's a good idea financially, but I don't typically respond to all those threads. You're getting my opinion on this particular question. This individual has listed NUMEROUS financial obligations and my response is to them specifically that it is silly to bury one's head in the sand and claim that compared to others, their choices aren't so bad. If you're asking a bunch of strangers on the internet what their opinions are, then you're bound to get some you like (agree with?) and some you don't like (don't agree with?).

 

[mjkacmom]

I don't personally tell other people on this board that it is/isn't ok to go to Disney with CC debt. I don't happen to believe it's a good idea financially, but I don't typically respond to all those threads. You're getting my opinion on this particular question. This individual has listed NUMEROUS financial obligations and my response is to them specifically that it is silly to bury one's head in the sand and claim that compared to others, their choices aren't so bad. If you're asking a bunch of strangers on the internet what their opinions are, then you're bound to get some you like (agree with?) and some you don't like (don't agree with?).

I agree, no one deserves a vacation, or has earned one. We go several years without vacations, we have zero debt, besides a mortgage, and wan’t to keep it that way. We are in our early 50’s, retirement is on track. We have had debt before, it‘s not a good feeling. The OP has no home, students loans, and has $10,000 to pay back, and needs money to move.

 

[Searc]

Sorry, plans are already made. This thread isn't really about the vacation. It's about, if I have 10k, should I pay off the loan or use that towards other investments or goals

Your week at The Grand Floridian could probably pay off that loan.

 

[ruadisneyfan2]

I agree, no one deserves a vacation, or has earned one. We go several years without vacations, we have zero debt, besides a mortgage, and wan’t to keep it that way. We are in our early 50’s, retirement is on track. We have had debt before, it‘s not a good feeling. The OP has no home, students loans, and has $10,000 to pay back, and needs money to move.

Actually, I'd call that a 'want' not a need. jmho

 

[ruadisneyfan2]

Also jmho, but if you need to borrow from your retirement to buy a home, then you're not financially ready for homeownership. Houses are money pits. It's always something. Dh is super handy but he says to own a home you either have to be handy and able to fix things, or make plenty of $$$ so you can pay people to do the work. Taking out a loan for the down payment is a bad start. What do you do when you need a new roof? Another $10k. When the small driveway cracks gradually become large ones and it looks like crap? Another $8k. We've been in our home since 1996 and things we replaced back then need replacing again. It never ends.

 

[kiddo76]

Pay off the loan and never touch your 401K again.

You are married with a child living with your MIL. All that money you are saving on rent needs to go towards paying off debts, building an emergency fund, and saving for a down payment. You can not afford the Grand Floridian. You can not afford Motel 6. You are basically homeless.

 

[kiddo76]

Yeah, that trip to the Grand could go a long way towards paying off the 401K loan.

That thread makes me cringe. "We have $80,000 in credit card debut, but we MUST spend $10,000 on a Disney vacation!!!!!!!!!!"

I just popped into that thread to see what it's about. It made me want to put pencils through my eyes.

With that kind of attitude those people will never be debt free.

 

[RamblingMad]

I just popped into that thread to see what it's about. It made me want to put pencils through my eyes.

With that kind of attitude those people will never be debt free.

If everyone around you uses debt to inflate their income, then the cost of goods will go up even though salaries are too low to support those prices. This definitely happened with home prices pre crisis.

The problem is that wages are too low and credit is too easy.

But back to the OP. He’s paying down a 401k loan. I’m not sure at what rate, but if I had to guess, it’s probably less than 7%. If he only paid the interest portion, his yearly cash flow would be reduced by $700. If he made no payments at all, his Disney trip would cost an additional $700 since he opted to not pay it off. But he’s making payments, so the servicing cost is less than $700.

So the whole conversation is really about that trade off. Is going to Disney worth incurring up to a max of $700 in interest this year?

Now, there is the opportunity cost about how much he would make with the money invested. If you follow Vanguard, the estimated return for the next decade is 4-5% annualized, which is below the interest rate he’s charging himself. Remember that with 401k loans he collects the interest, not the bank.

 

[tzolkin]

I just popped into that thread to see what it's about. It made me want to put pencils through my eyes.

With that kind of attitude those people will never be debt free.

Ugh. Why did I even go look at that thread? I only skimmed, but it seemed like 90% of it was about vacations (cruises, Disney deluxe, Italy, etc).

I just posted in the FIRE thread the other day about understanding the value of enjoying life now and not just saving everything for retirement, so I'm certainly not opposed to vacations and making memories with your family but I simply can't understand how any of these vacations could be enjoyable at all if you're drowning in debt. For me, the entire time I would be stressed out and regretting that I'd made things even worse.

Which is why folks need liquid emergency funds available.

This is why people are commenting about the OP's vacation. Even if he had a schedule of how he was going to pay things off down to the penny (which he does not), taking a GF vacation is not going to allow him to have any emergency fund. So even if everything did get paid, the next time an emergency happens he'll be borrowing from his 401k again or taking on more debt.

It's frustrating because he just seems to dismiss everything anyone has mentioned:
Moving is expensive-- "No, I'm not hiring a moving company." (That's not the expensive part of buying a home.)
Your vacation is interfering with your savings/payoff goals-- "No, we live rent free so we have an extra $1500/mo" (Not really when at least $1000/mo is going toward the vacation)
You should make your finances/debt a priority-- "No, I think I'm doing great compared to most other people"

You are married with a child living with your MIL. All that money you are saving on rent needs to go towards paying off debts, building an emergency fund, and saving for a down payment. You can not afford the Grand Floridian. You can not afford Motel 6. You are basically homeless.

This is really why this seems insane to me. I can understand wanting to take some quality time or even a small trip as a family, but the expense of this trip is ridiculous in this situation. The OP claims to be living with MIL in order to be able to save money (401k & student loan debt, house downpayment, emergency fund, etc), but taking an expensive vacation seems completely counter to that goal. If I were allowing my adult child (plus their spouse and child) to live with me for the explicit purpose of giving them the opportunity to save money and then found out they were taking at $10k+ vacation, I would feel completely taken advantage of.

Both on this thread and the debt thread, the OP has mentioned multiple times that they "need" and "deserve" this vacation. I can't even fathom that mindset. No one needs or deserves a week long vacation at the Grand Floridian. Is it nice if you can afford it? Absolutely. But what the family really needs and deserves is to work hard to put themselves in a financial position where they don't have to take out loans when something unexpected comes up or have to live with family to make ends meet.

 

[tzolkin]

So the whole conversation is really about that trade off. Is going to Disney worth incurring up to a max of $700 in interest this year?

But that's not really the whole conversation. Even in the very first post (and later additions throughout the thread), the OP mentions multiple financial goals-- emergency fund, student loan debt, saving for a down payment on a house/moving expenses, medical issues, living with MIL.

It's not as simple as "Should I spend this $10k on my 401k loan or on Disney?" There are all these other factors that should impact how the money is spent. If there was no other debt, their living situation was different, and they had an emergency fund, then I would agree with you that it's just a personal choice of whether to allocate the $10k to one or the other (401k or Disney)

But to me, for this particular situation the 401k loan is almost irrelevant. The cost of the vacation isn't the $700 in interest on that loan. The cost is the interest on their other debt, the potential for taking on more credit card debt (due to no emergency fund), and not being able to move out of the MIL's house because they are unable to save for a down payment.

 

[RamblingMad]

This is really why this seems insane to me. I can understand wanting to take some quality time or even a small trip as a family, but the expense of this trip is ridiculous in this situation. The OP claims to be living with MIL in order to be able to save money (401k & student loan debt, house downpayment, emergency fund, etc), but taking an expensive vacation seems completely counter to that goal. If I were allowing my adult child (plus their spouse and child) to live with me for the explicit purpose of giving them the opportunity to save money and then found out they were taking at $10k+ vacation, I would feel completely taken advantage of.

Both on this thread and the debt thread, the OP has mentioned multiple times that they "need" and "deserve" this vacation. I can't even fathom that mindset. No one needs or deserves a week long vacation at the Grand Floridian. Is it nice if you can afford it? Absolutely. But what the family really needs and deserves is to work hard to put themselves in a financial position where they don't have to take out loans when something unexpected comes up or have to live with family to make ends meet.

Personal finance isn’t always rational. People buy stuff to make themselves feel good. People buy stuff to keep up with their neighbors. Social media influences their spending. People bought houses pre crisis that they couldn’t afford. The reality is that markets aren’t efficient because people don’t always make the optimal decision.

 

[tzolkin]

Personal finance isn’t always rational. People buy stuff to make themselves feel good. People buy stuff to keep up with their neighbors. Social media influences their spending. People bought houses pre crisis that they couldn’t afford. The reality is that markets aren’t efficient because people don’t always make the optimal decision.

I know, I know. My husband and I have the same personality type and are both exceedingly rational (sometimes to a fault). Since we are so similar and agree on nearly everything it's a constant struggle to understand why other people do what they do. Our two oldest children are intuition/feeling/emotion kind of people so it's going to be a challenge for us to completely refrain from helping guide their financial decisions.

 

[MantaRider]

I really feel like you guys aren't listening when I say this vacation isn't about me. I had a serious medical emergency this year, and because of that we have decided that before we hit any other goals, we are taking a nice vacation together as a family.

The ONLY thing I have asked about, is whether I should put that extra 10k towards a house, my savings, or towards the loan. Everything else is irrelevant. Would I personally like to put the 4k we are spending on vacation towards other things? Sure, but I also want to have good memories with my family incase something happens to me.

By the time we move, we will have roughly 6k in savings set aside post move, and at that point I plan to hit the 401k loan as our next goal. Thanks for your input, but it's time to close out this thread.

 

[tvguy]

Personal finance isn’t always rational. People buy stuff to make themselves feel good. People buy stuff to keep up with their neighbors. Social media influences their spending. People bought houses pre crisis that they couldn’t afford. The reality is that markets aren’t efficient because people don’t always make the optimal decision.

That's for sure. Not sure how staged some of those financial shows are on TV but on one a woman was spending more on clothing every month than rent and she thought that was NORMAL. And she was doing it all on credit and not paying it off for months, sometimes paying for something AFTER she had gotten rid of it. She was totally freaking out because the financial expert cut her clothing budget to zero for a few months and told her to wear one of the 100 plus outfits she had in the closet!

 

[TwoMisfits]

I really feel like you guys aren't listening when I say this vacation isn't about me. I had a serious medical emergency this year, and because of that we have decided that before we hit any other goals, we are taking a nice vacation together as a family.

The ONLY thing I have asked about, is whether I should put that extra 10k towards a house, my savings, or towards the loan. Everything else is irrelevant. Would I personally like to put the 4k we are spending on vacation towards other things? Sure, but I also want to have good memories with my family incase something happens to me.

By the time we move, we will have roughly 6k in savings set aside post move, and at that point I plan to hit the 401k loan as our next goal. Thanks for your input, but it's time to close out this thread.

I think other posters aren't saying you shouldn't have the vacation...they are questioning the choices made for that vacation.

Think of it like ordering a filet mignon on a hamburger budget. No one is saying you shouldn't eat...but you should probably stick to the hamburger if you want to make sure you'll be able to eat each week.

There are ways, just in a hotel switch, to cut thousands from your vacation and put it back towards your goals. That's what most folks are not understanding. Why you MUST have the most expensive hotel at Disney...and not the reasonably priced one that would still work for you, and definitely work for your finances much better...