Author Topic: How to tackle debt?****Updated 3/31/16  (Read 10376 times)

TheInsuranceMan

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How to tackle debt?****Updated 3/31/16
« on: March 15, 2016, 03:09:29 PM »
So, here is what I have going on.
DW and I just sold our house, and we'll net about $106,000 from the sale.
Our existing mortgage on that property is $55k.

So, quick and simple math shows that we'll net 51k, the difference between the two.
So, where is what we have left to pay off, and what we want to do.
Efund, currently at $2,500 - I would like to get that to $5k minimum (family of 3, 4th due in May).
Next, I have 47k in student loan debt.  Of that debt, 12k is at 3.15%, the remaining 35k is at 6.55%
I also have a loan out that was used to replace a motor in one of our paid off vehicles, which is at $5,500, and is the highest interest rate we have.

We also purchased a new house, had the 20% down, and have $6k in cash in our money market account that we are using to pay for some updates.
I expect that those updates will run us about 12k total, that will need to be paid from the 6k in the money market, and 6k from the house sale.
So, that puts us at $45k left to pay down towards debt.
So, do I fund the EFund, pay off the engine loan, and then the rest to student loans?
Or do I pay off the engine loan and put everything else on the student loans?

The EFund will be easily loaded as we are going from $1,200 a month between mortgage and student loan payments down to a $300 mortgage (and escrow) payment, and whatever my remaining student loans will amortize out to.

***Note, we do not have any vehicle loans and we do not carry any credit card debt that will need to be paid off with this.
Locked in our new mortgage on a 15 year @ 2.875% - balance on the loan is $24,400 :)
Updates on the new house will make it probably around 45k in value, if not slightly more.***

What say you, mustache's?
« Last Edit: March 31, 2016, 12:26:03 PM by TheInsuranceMan »

GrowingTheGreen

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Re: How to tackle debt?
« Reply #1 on: March 15, 2016, 03:43:20 PM »
I vote for paying down the $5,500 debt, the portion of student loans at 6.5%, and using the rest to put in your eFund. Once your eFund is topped, go after the 3.15% debt.

nanana13

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Re: How to tackle debt?
« Reply #2 on: March 15, 2016, 03:49:34 PM »
What is the interest rate on the car loan?

TheInsuranceMan

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Re: How to tackle debt?
« Reply #3 on: March 15, 2016, 03:57:43 PM »
What is the interest rate on the car loan?
8.1%, it's a personal loan, not a vehicle loan.  Had the motor in one of our vehicles, which always had routine maintenance completed by a very, very good mechanic, fail.  I didn't have the $6k in cash, so we had to get a loan for it.  Sucks, but such is life at 27 years old.

nanana13

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Re: How to tackle debt?
« Reply #4 on: March 15, 2016, 04:08:37 PM »
With a soon-to-be family of four, I would try to have a bigger e-fund. Maybe 6 months of expenses to be on the safe side.

Your highest interest per day (in dollars) loan is the $35K student loan - about $6.26. While the personal loan rate is high, your interest per day is only about $1.22.

So, priority #1 is getting e-fund to a healthy level, given the fact that you have a family. Priority # 2 is the large student loan.

nanana13

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Re: How to tackle debt?
« Reply #5 on: March 15, 2016, 04:09:36 PM »
I'm 27 also. :)

Ever since moving back to the US, I am finding that I am spending more and more money, despite netting less money than on my previous job. I put part of the blame on this country and how literally every financial organization is after your $.

little_brown_dog

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Re: How to tackle debt?
« Reply #6 on: March 15, 2016, 04:16:41 PM »
I don't know what your income and expenses are, but a 5k efund may be pretty sparse with an upcoming birth. All it takes is a complication, a few extra nights in the hospital, and you could get hit with a big bill. Our daughter was a prime example - easy birth but needed to be hospitalized for feeding trouble soon after discharge.

My vote would be to get that efund up to 10k (7500), then pay off the motor loan (5500), and finally, throw the rest at the 35k student debt (32000) which should almost wipe it out. Then take whatever extra you were going to plop in the efund every month, and use that to quickly pay down the remaining debts.
« Last Edit: March 15, 2016, 04:20:16 PM by little_brown_dog »

forumname123

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Re: How to tackle debt?
« Reply #7 on: March 15, 2016, 04:27:32 PM »


Your highest interest per day (in dollars) loan is the $35K student loan - about $6.26. While the personal loan rate is high, your interest per day is only about $1.22.

So, priority #1 is getting e-fund to a healthy level, given the fact that you have a family. Priority # 2 is the large student loan.

This doesn't make any sense at all. Why does the amount of the loan matter when trying to pay them off? Pay off the one with the highest interest rate first.

nanana13

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Re: How to tackle debt?
« Reply #8 on: March 15, 2016, 04:31:14 PM »
It makes complete sense. Would you pay off a $1,000 loan with 20% interest as opposed to a $100,000 loan with 3% interest? One is costing you a lot more money to keep it around.


forumname123

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Re: How to tackle debt?
« Reply #9 on: March 15, 2016, 04:33:40 PM »
It makes complete sense. Would you pay off a $1,000 loan with 20% interest as opposed to a $100,000 loan with 3% interest? One is costing you a lot more money to keep it around.

If I had $100,000 I would pay off the high interest $1000 loan, then put the other $99,000 towards the $100,000 loan. The net result of both of these strategies is $1000 worth of debt, except your way it's at 20% and my way it's at 3%.
« Last Edit: March 15, 2016, 04:37:17 PM by forumname123 »

therethere

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Re: How to tackle debt?
« Reply #10 on: March 15, 2016, 04:35:07 PM »
No. It actually makes nosense because you have to look at the amount of money you have to pay the loan. 1000 towards a 8% loan helps out a lot more than 1000 towards a 3% loan. It has nothing to do with the overall balance.

 I The one argument I would have for not paying in highest interest order first is if you are trying to reduce your risk of not-making your monthly obligations in the event of a job loss. In that case I would look at the payment to balance ratio and knock out those with the highest ratio.

nanana13

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Re: How to tackle debt?
« Reply #11 on: March 15, 2016, 04:45:30 PM »
It makes complete sense. Would you pay off a $1,000 loan with 20% interest as opposed to a $100,000 loan with 3% interest? One is costing you a lot more money to keep it around.

If I had $100,000 I would pay off the high interest $1000 loan, then put the other $99,000 towards the $100,000 loan. The net result of both of these strategies is $1000 worth of debt, except your way it's at 20% and my way it's at 3%.

Am I taking crazy pills?!!

You have to look at the individual circumstances - each person will have a different mix of balances, rates, money available to put toward debt, etc.

Your example makes complete sense if you had $100K laying around to put toward the debt immediately. If you have limited resources, as most of us do, then putting debt, TO ME, is a decision I make based on my day-to-day cost of keeping it around and the overall balance. Example: I had a $500 credit card with a typical credit card APR. I also at one point had $45K in 6.75% interest student loans. Would it have satisfied me to pay off the $500 first? Maybe, if you rely on the psychology of knocking small debts out one at a time. However, I did the math, based on my individual circumstances, and realized I was better off paying a minimum of $25 on the CC, and instead aggressively putting extra money towards my loans (which at one point was about $8/interest per day). The faster I got rid of my loans, the faster my daily interest amount decreased. I'm doing pretty well now, have gotten my student loan debt to below $3 interest per day. Whereas it's pennies for my CC, which is at around $250 balance at the moment.

It all depends on each individual's scenario. It also depends on how long you plan to keep each debt around - obviously the longer you keep it, the more interest it accrues.

nanana13

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Re: How to tackle debt?
« Reply #12 on: March 15, 2016, 04:48:34 PM »
No. It actually makes nosense because you have to look at the amount of money you have to pay the loan. 1000 towards a 8% loan helps out a lot more than 1000 towards a 3% loan. It has nothing to do with the overall balance.

 I The one argument I would have for not paying in highest interest order first is if you are trying to reduce your risk of not-making your monthly obligations in the event of a job loss. In that case I would look at the payment to balance ratio and knock out those with the highest ratio.

If the balances are EQUAL, then yes, OBVIOUSLY, pay the higher-interest-rate one.

nanana13

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Re: How to tackle debt?
« Reply #13 on: March 15, 2016, 04:59:05 PM »
More information would be helpful, OP, like the minimum payment amounts (this would show me the time window of how long you intend to have this debt in your life). Then I could do a detailed calc on what would be more beneficial. My recommendation to pay off loan $35K off first depends on you intending to keep personal loan amount for a short period of time. If it will be a long time, then the personal loan could end up being more expensive.

therethere

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Re: How to tackle debt?
« Reply #14 on: March 15, 2016, 05:16:41 PM »
There is no spreadsheet or calculation (made correctly) that can make your logic end in you paying the least amount possible for a starting debt load. You should be looking at the total interest paid for a debt. Not the interest paid on a per day basis. Sorry to say you've been doing your payoff a little misinformed.... You should payoff that $250 debt TODAY.


nanana13

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Re: How to tackle debt?
« Reply #15 on: March 15, 2016, 05:47:30 PM »
Spreadsheets are everything, for an analytical mind.

Yes, absolutely you should be looking at total interest. Which is why the timeframe for keeping the debt around is so important, as I mentioned already. The higher the balance, and the longer you drag out the payments you need to make, the higher the total interest.

I'm handling my personal finances just fine, thank you. Superbly, actually. I've made all kinds of scenarios, and in my personal situation, my method works best - I am saving thousands by doing what I'm doing.

Next time you want to give me your opinion on my finances, you can do it as a reply to an original post from me asking for your opinion. In the meantime, move along.
« Last Edit: March 15, 2016, 05:49:40 PM by nanana13 »

Gronnie

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Re: How to tackle debt?
« Reply #16 on: March 15, 2016, 07:10:47 PM »
nanana,

Time to step away form the keyboard. What you are posting is complete bollocks. Posting things that are so obviously wrong authoritatively over and over is awful.

nanana13

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Re: How to tackle debt?
« Reply #17 on: March 15, 2016, 07:14:35 PM »
nanana,

Time to step away form the keyboard. What you are posting is complete bollocks. Posting things that are so obviously wrong authoritatively over and over is awful.

I would hope nobody on the Internet believes ANY person's advice, word for word, without doing some investigation for themselves.

I am giving my input, as I have the right to, based on my experiences. If people want to take a simplistic approach to tackling debt, without digging into the numbers to see if MAYBE a different solution could work better, then that is very much their right as well.

Richardp10

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Re: How to tackle debt?
« Reply #18 on: March 15, 2016, 07:42:18 PM »
No one else has broke down the maths and I think it needs done as sorry nanana13 but your calculation is flawed.

35k student loan at 6.55% costs him 6.28 per day.

5.5k personal loan at 8.1%  costs 1.22 per day.

If he has 5.5k to put towards debt he can either pay off the 5.5k loan saving the full 1.22 per day or pay off 5.5k towards the 35k loan which takes that to 29.5k meaning the new daily interest is 5.29 saving him 0.99 per day.

forumname123

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Re: How to tackle debt?
« Reply #19 on: March 15, 2016, 07:58:00 PM »
nanana I think you should take the advice here and rethink your own strategy. I don't see any scenario where what you're proposing would work.

nanana13

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Re: How to tackle debt?
« Reply #20 on: March 15, 2016, 07:58:52 PM »
Ugh. See my attached spreadsheet. You can see that based on the payment amounts that I assumed (which were off the top of my head since OP hasn't specified), he ends up paying more interest when paying off the personal loan in full today.

The results might become more skewed to either side depending on the actual minimums, etc.


I love spreadsheets. Give me more to work with, guys. Things are a bit slow for me at the moment.

nanana13

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Re: How to tackle debt?
« Reply #21 on: March 15, 2016, 08:01:22 PM »
Granted, the difference isn't that much different. About $140 in savings. Therefore, if the OP would get more personal satisfaction from paying off the personal loan, then hey, that's okay. But he would pay $140 for that satisfaction.
« Last Edit: March 15, 2016, 08:04:26 PM by nanana13 »

nanana13

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Re: How to tackle debt?
« Reply #22 on: March 15, 2016, 08:42:05 PM »
.... waiting for any thoughts from you guys?

There's always a chance that I messed up somewhere in my calculations or something.

snarkstache

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Re: How to tackle debt?
« Reply #23 on: March 15, 2016, 09:29:23 PM »
Ugh. See my attached spreadsheet. You can see that based on the payment amounts that I assumed (which were off the top of my head since OP hasn't specified), he ends up paying more interest when paying off the personal loan in full today.

The results might become more skewed to either side depending on the actual minimums, etc.


I love spreadsheets. Give me more to work with, guys. Things are a bit slow for me at the moment.

In Scenario B, you included interest on the portion of the principal of Student Loan #2 that got paid off to start the scenario. I think to be a fair comparison to Scenario A, you would need to instead start Scenario B with $5.5k left on that principal.

Gronnie

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Re: How to tackle debt?
« Reply #24 on: March 15, 2016, 09:31:43 PM »
Ugh. See my attached spreadsheet. You can see that based on the payment amounts that I assumed (which were off the top of my head since OP hasn't specified), he ends up paying more interest when paying off the personal loan in full today.

The results might become more skewed to either side depending on the actual minimums, etc.


I love spreadsheets. Give me more to work with, guys. Things are a bit slow for me at the moment.

Now way I am downloading and opening a file from a random person on the internet, but based on your supposed results I can say with 100% certainty that your calculation is wrong.

nanana13

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Re: How to tackle debt?
« Reply #25 on: March 15, 2016, 09:38:11 PM »
Ugh. See my attached spreadsheet. You can see that based on the payment amounts that I assumed (which were off the top of my head since OP hasn't specified), he ends up paying more interest when paying off the personal loan in full today.

The results might become more skewed to either side depending on the actual minimums, etc.


I love spreadsheets. Give me more to work with, guys. Things are a bit slow for me at the moment.

In Scenario B, you included interest on the portion of the principal of Student Loan #2 that got paid off to start the scenario. I think to be a fair comparison to Scenario A, you would need to instead start Scenario B with $5.5k left on that principal.


Great catch on scenario B. I got sloppy toward the end. Interest for B then ends up being about $30 less than scenario A, in this scenario. Which could be pulled up or down depending on the payment amounts for each of the loans.
« Last Edit: March 15, 2016, 09:41:38 PM by nanana13 »

nanana13

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Re: How to tackle debt?
« Reply #26 on: March 15, 2016, 09:41:00 PM »
Ugh. See my attached spreadsheet. You can see that based on the payment amounts that I assumed (which were off the top of my head since OP hasn't specified), he ends up paying more interest when paying off the personal loan in full today.

The results might become more skewed to either side depending on the actual minimums, etc.


I love spreadsheets. Give me more to work with, guys. Things are a bit slow for me at the moment.

Now way I am downloading and opening a file from a random person on the internet, but based on your supposed results I can say with 100% certainty that your calculation is wrong.

I don't care. (chuckle)

All my point really is, is that number crunching and scenario analysis can be a beautiful thing. Sometimes (most times) age-old  advice holds true. However, it never hurts to run some numbers on your individual circumstances and see what you might find.

LeRainDrop

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Re: How to tackle debt?
« Reply #27 on: March 15, 2016, 10:15:29 PM »
I don't know what your income and expenses are, but a 5k efund may be pretty sparse with an upcoming birth. All it takes is a complication, a few extra nights in the hospital, and you could get hit with a big bill. Our daughter was a prime example - easy birth but needed to be hospitalized for feeding trouble soon after discharge.

My vote would be to get that efund up to 10k (7500), then pay off the motor loan (5500), and finally, throw the rest at the 35k student debt (32000) which should almost wipe it out. Then take whatever extra you were going to plop in the efund every month, and use that to quickly pay down the remaining debts.

Agree with all of the above.

galliver

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Re: How to tackle debt?
« Reply #28 on: March 15, 2016, 11:29:00 PM »
OP, I would probably do the house stuff, pay off the $5.5k loan, then...I think it's ok to break from mathematical optimization to optimize your sense of security. Pay some toward the higher-interest SL, keep the rest as a bloated E-fund until the baby is born. Assuming everything works out fine, you can throw the extra at the same loan in 3 months (your pre-baby E-fund doesn't have to be your post-baby E-fund!). God forbid it doesn't...you have a little extra wiggle room. If you hang on to all $35k,  you're paying ~$550-600 in interest during that time; if you only hang on to $10k (for a $17k temporary E-fund), you only pay ~$100-150 interest in 3 months. I'd consider it worth it, but everyone is different. PS: consult with your spouse.

Ugh. See my attached spreadsheet. You can see that based on the payment amounts that I assumed (which were off the top of my head since OP hasn't specified), he ends up paying more interest when paying off the personal loan in full today.

The results might become more skewed to either side depending on the actual minimums, etc.


I love spreadsheets. Give me more to work with, guys. Things are a bit slow for me at the moment.

In Scenario B, you included interest on the portion of the principal of Student Loan #2 that got paid off to start the scenario. I think to be a fair comparison to Scenario A, you would need to instead start Scenario B with $5.5k left on that principal.


Great catch on scenario B. I got sloppy toward the end. Interest for B then ends up being about $30 less than scenario A, in this scenario. Which could be pulled up or down depending on the payment amounts for each of the loans.

nanana13, if you had a choice between putting $35k into an account at 3% and putting $5.5k into an investment w/ 20% APY and $29.5k into an account with 3% APY, which would you choose? Could the first scenario ever yield you more than the second? Even in the first month? Could any manipulation of subsequent deposits into the accounts make them earn more than getting 20% APY from the first $5.5k from the get-go?

Before you say that's not comparable, imagine these accounts side by side with the debts.

Or, mathematically if you prefer, Future Value = P*(1+r/n)^(nt); if your principal is composed of a loan balance(P1) and a savings(P2) growing at the same rate/conditions, your net worth (from these two accounts) is FV = (-P1+P2)*(1+r/n)^(nt) = -P1*(1+r/n)^(nt)+P2*(1+r/n)^(nt)

FINate

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Re: How to tackle debt?
« Reply #29 on: March 15, 2016, 11:37:51 PM »
My vote would be to get that efund up to 10k (7500), then pay off the motor loan (5500), and finally, throw the rest at the 35k student debt (32000) which should almost wipe it out. Then take whatever extra you were going to plop in the efund every month, and use that to quickly pay down the remaining debts.

^^^THIS^^^

Edit: Also, snowball that debt! After wiping out the motor loan, continue paying whatever amount you were paying on this debt to the small remainder of the high interest student debt. Once that's paid off, keep paying the amount you were paying on the motor loan + high interest student debt towards the low interest student debt. Once that's done, do the same again with the mortgage.
« Last Edit: March 16, 2016, 12:12:05 AM by FINate »

FINate

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Re: How to tackle debt?
« Reply #30 on: March 16, 2016, 12:10:44 AM »
It makes complete sense. Would you pay off a $1,000 loan with 20% interest as opposed to a $100,000 loan with 3% interest? One is costing you a lot more money to keep it around.

Yes, absolutely without a doubt, pay off the 20% loan first, even though it is costing you "less" in daily interest than the 100,000 loan! The math on this is very straightforward, paying off the highest interest loan first is PROVABLY the most efficient, there is no debate about this. This is exactly why most personal finance books/approaches have people pay off high interest credit card debt first before paying off the much larger balance on a lower interest home loan.

From a psychological perspective some people argue for paying off the lowest balance first, which is less efficient (and they acknowledge this), but helps build momentum to become debt free. I'm more of a numbers guy so this never really resonated with me, though I guess it works for many people.

nanana, you're not accounting for the fact that once the higher interest balance is paid off you will have even more money to pay towards the larger balance loan, thereby paying it off even faster.

TheInsuranceMan

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Re: How to tackle debt?
« Reply #31 on: March 16, 2016, 08:08:35 AM »
Holy cow!  As you can tell, I do not check this forum after work, when I am with my family, but I am amazed at the responses (and the brief disagreement on what to pay)!

So, a bit more info...
The Efund will eventually be funded to 10k, that's our number.  I was debating on funding it to 5k with the sale of our house, then start adding to it.

Income wise, we net around $4,200 a month between DW and I.  Now, that isn't much, but you have to take into account a few other things...like our mortgage payment, of $309.  We live in a very LCOL area, the area is super nice, and is a big farming community, which we love (and help with for some extra income, not included in the amount above).

On the student loans, I pay $339 a month, until April, when my IBR payments fall off.  That payment then goes up to $550 a month, for the remaining 8 years on my loans (I think I have 8 years left).

My plan originally was to fund the EFund to 5k, pay off the loan on the truck (again, not a car loan, a maintenance loan to allow me not to have to purchase a new vehicle), and then start attacking the 6.55% student loan debt.

Now, I'm not against funding that EFund to 10k, in fact, that is probably a good idea.  Do that, pay off the 5.5k on the truck, and then tackle the high interest student loan debt.

nanana13

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Re: How to tackle debt?
« Reply #32 on: March 16, 2016, 08:24:38 AM »
It makes complete sense. Would you pay off a $1,000 loan with 20% interest as opposed to a $100,000 loan with 3% interest? One is costing you a lot more money to keep it around.

Yes, absolutely without a doubt, pay off the 20% loan first, even though it is costing you "less" in daily interest than the 100,000 loan! The math on this is very straightforward, paying off the highest interest loan first is PROVABLY the most efficient, there is no debate about this. This is exactly why most personal finance books/approaches have people pay off high interest credit card debt first before paying off the much larger balance on a lower interest home loan.

From a psychological perspective some people argue for paying off the lowest balance first, which is less efficient (and they acknowledge this), but helps build momentum to become debt free. I'm more of a numbers guy so this never really resonated with me, though I guess it works for many people.

nanana, you're not accounting for the fact that once the higher interest balance is paid off you will have even more money to pay towards the larger balance loan, thereby paying it off even faster.

I am accounting for that fact.

In my $100K/$1K example, the difference is literally pennies (7 cents) higher paying off the $1K first if you assume:

- $1,500 payment on $100K
- $25K payment on $1K
- You have an extra $1K laying around next month to put toward either debt.

In such a circumstance with an immaterial difference, then I would agree with just getting rid of the $1K to simplify the balance sheet. I probably picked too extreme of an example.

I would not necessarily put extra toward a mortgage (UNLESS I had lots of extra money laying around and/or exorbitant rates) because then I would give up any tax benefits of the mortgage interest rate deduction for the years to follow, so making the $100K a mortgage makes it an unfair comparison.

I'll keep my $250 cc debt lingering around paying the minimum, since it costs me a few pennies a day. Any and all extra money that comes my way, I throw at my student loan debt. Works for me, I am paid ahead 7.5 years and my daily cost has decreased greatly.

Everyone else, run your numbers for yourself and do what makes the most sense and makes you happy at the end of the day.

nanana13

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Re: How to tackle debt?
« Reply #33 on: March 16, 2016, 08:28:15 AM »
Insurance Man, what are the respective minimums on each of the loans (including personal?)

TheInsuranceMan

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Re: How to tackle debt?
« Reply #34 on: March 16, 2016, 08:36:34 AM »
Insurance Man, what are the respective minimums on each of the loans (including personal?)
Personal loan is $272 a month (we pay $275)

Student Loans
Direct Loan- Unsub
 1-01    ✓  $2,535.70  6.55%  $27.42  03/28/2016 
   Direct Loan- Unsub
 1-02    ✓  $3,694.91  6.55%  $33.33  03/28/2016 
   Direct Loan - Sub
 1-03    ✓  $5,584.42  5.35%  $37.75  03/28/2016 
   Direct Loan- Unsub
 1-04    ✓  $2,358.50  6.55%  $15.46  03/28/2016 
   Direct Loan- Unsub
 1-05    ✓  $8,830.09  6.55%  $57.91  03/28/2016 
   Direct Loan - Sub
 1-06    ✓  $5,276.23  3.15%  $37.75  03/28/2016 
   Direct Loan- Unsub
 1-07    ✓  $2,304.97  6.55%  $15.11  03/28/2016 
   Direct Loan - Sub
 1-08    ✓  $758.00  3.15%  $5.97  03/28/2016 
   Direct Loan- Unsub
 1-09    ✓  $7,201.27  6.55%  $47.23  03/28/2016 
   Direct Loan - Sub
 1-10    ✓  $4,520.76  3.15%  $32.35  03/28/2016 
   Direct Loan - Sub
 1-11    ✓  $1,692.78  3.15%  $12.11  03/28/2016 
   Direct Loan- Unsub
 1-12    ✓  $2,542.12  6.55%  $16.67  03/28/2016 

I pay $338.76 right now, last payment for that amount will come out on 3/28/2016
Effective 4/28/2016, those payments go to $537.02 a month.
Looks like I have til 2/28/26 to pay them off on my current schedule

The reason the payments are going to go up is last year, my wife was in college still, so we qualified for some low IBR levels.  Now that she is gainfully employed, we no longer qualify for that.

TheInsuranceMan

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Re: How to tackle debt?
« Reply #35 on: March 16, 2016, 08:39:43 AM »
A quick breakdown for ya
$4,200 net income
$309 mortgage
$500 daycare (going up late summer)
$100 energy
$105 cell phone
$300 fuel
Water bill, unknown, as we live on an acreage that we are selling, and I have no idea what an in town water bill will run
$91 in car insurance
$83 in life insurance
$40 for internet
Then we have groceries, dog food, and other incidentals.
Throw on the student loans of $540

Should leave us with $1,500 extra a month, which is why I'm uncertain whether I want to load up the EFund to 10k right away, or pay down debt to minimize those student loan payments, which would make us have more in our pocket after bills are paid

FINate

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Re: How to tackle debt?
« Reply #36 on: March 16, 2016, 10:05:37 AM »
It makes complete sense. Would you pay off a $1,000 loan with 20% interest as opposed to a $100,000 loan with 3% interest? One is costing you a lot more money to keep it around.

Yes, absolutely without a doubt, pay off the 20% loan first, even though it is costing you "less" in daily interest than the 100,000 loan! The math on this is very straightforward, paying off the highest interest loan first is PROVABLY the most efficient, there is no debate about this. This is exactly why most personal finance books/approaches have people pay off high interest credit card debt first before paying off the much larger balance on a lower interest home loan.

From a psychological perspective some people argue for paying off the lowest balance first, which is less efficient (and they acknowledge this), but helps build momentum to become debt free. I'm more of a numbers guy so this never really resonated with me, though I guess it works for many people.

nanana, you're not accounting for the fact that once the higher interest balance is paid off you will have even more money to pay towards the larger balance loan, thereby paying it off even faster.

I am accounting for that fact.

In my $100K/$1K example, the difference is literally pennies (7 cents) higher paying off the $1K first if you assume:

- $1,500 payment on $100K
- $25K payment on $1K
- You have an extra $1K laying around next month to put toward either debt.

In such a circumstance with an immaterial difference, then I would agree with just getting rid of the $1K to simplify the balance sheet. I probably picked too extreme of an example.

I would not necessarily put extra toward a mortgage (UNLESS I had lots of extra money laying around and/or exorbitant rates) because then I would give up any tax benefits of the mortgage interest rate deduction for the years to follow, so making the $100K a mortgage makes it an unfair comparison.

The tax benefits on a mortgage are overrated for most people. It's a tax deduction on the interest, and the way mortgage is amortized means that interest paid reduces over "the years to follow." Also, because it's a deduction (not a credit), all it does is lower the effective interest rate on the loan. You can calculate this if you know your top marginal tax rate. Let's assume 25% since that's the top rate for the median income, and let's assume a 3.5% interest on the mortgage. The effective interest rate with the tax deduction is 0.035 x (1-0.25) = 2.625%. So that tax deduction brought the effective interest down by just under 0.9%. This is a small enough difference that for many middle- to lower-income tax filers they still come out ahead by going with the standard deduction instead of itemizing, which means that the oft praised tax deduction is exactly zero for those folks. Now, if you have a large mortgage and are in a high tax bracket, and with many other itemized deductions then yes, the mortgage interest deduction pays off big time.

I'll keep my $250 cc debt lingering around paying the minimum, since it costs me a few pennies a day. Any and all extra money that comes my way, I throw at my student loan debt. Works for me, I am paid ahead 7.5 years and my daily cost has decreased greatly.

It's only $250, why carry a balance on this when it is at around 18%??? Assuming minimum payments cover just the finance charges, that means you are paying $45 a year on a $250 debt just to maintain that debt! You are getting nothing out of this relationship, just sending your hard earned $45 to the CC company every year. That's crazy!!!

Everyone else, run your numbers for yourself and do what makes the most sense and makes you happy at the end of the day.

Multiple people on this thread have pointed out that your method doesn't make sense. All the personal finance books I've read also disagree with you. So does math. Obviously you're free to continue doing whatever you like, and paying down debt is always better then accumulating debt regardless of the order in which debts are paid, so you have that going for you.

For everyone else out there, please don't carry balances on your CC or other high interest debt. However small they are relative to your other debts doesn't matter. It's the interest rate charged that really matters.

Prioritizing on the absolute $ amount paid in interest on each loan results in nonsensical results. Going back to the $1000 at 20% vs $100,000 at 3% example. For the sake of simplicity, let's assume these are simple interest loans with no minimum payments. With nanana's method you would start paying entirely on the $100k loan first because it costs you $3000 a year in interest, and ignore the 20% loan because it only is costing you $200 per year in interest. However, that 20% loan will start compounding and grow to just over $15,000 in about 15 years ($1000*1.20^15). At this point in time (actually earlier depending on how much is paid on the 100k loan, but you get the idea) that 20% loan will start costing more in interest than the $100k loan, so you start paying on it until it drops a little bit, then you switch back to the 3% loan for a little bit, then back to the 20% loan....repeat ad nauseam. Don't do this. Kill that 20% loan with fire as quickly as possible.
« Last Edit: March 16, 2016, 12:35:05 PM by FINate »

forumname123

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Re: How to tackle debt?
« Reply #37 on: March 16, 2016, 12:36:49 PM »
Whatever you do, please do not take any advice from nanana. Holding on to $250 in credit card debt when you can afford to pay it off is sheer lunacy. Convincing yourself it's a good thing is beyond comprehension.

Nanana, you would serve yourself well to listen when people tell you your spreadsheet is broken.

FINate

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Re: How to tackle debt?
« Reply #38 on: March 16, 2016, 01:00:04 PM »
Whatever you do, please do not take any advice from nanana. Holding on to $250 in credit card debt when you can afford to pay it off is sheer lunacy. Convincing yourself it's a good thing is beyond comprehension.

Nanana, you would serve yourself well to listen when people tell you your spreadsheet is broken.

Apparently Nanana is an accountant and CPA?! I'm at a loss for words...

nanana13

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Re: How to tackle debt?
« Reply #39 on: March 16, 2016, 04:05:38 PM »
I thought this was a forum where people came to help each other, and not adopt a condescending attitude because you don't like the advice that someone else is giving.

Nobody is being forced to take my advice.  And I am not keeping a debt around - I pay all of my bills on time, the way that I see that works for me.  If it bothers you that I am not paying off my small credit card debt, then I can give you a P.O. box to send me a check to.

Yes, I'm a CPA, and a good one that has gotten multiple promotions (in my short 4.5 years working), but please go ahead and try to put me down if that makes you feel better about yourself.

forumname123

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Re: How to tackle debt?
« Reply #40 on: March 16, 2016, 04:15:21 PM »
I thought this was a forum where people came to help each other, and not adopt a condescending attitude because you don't like the advice that someone else is giving.

Nobody is being forced to take my advice.  And I am not keeping a debt around - I pay all of my bills on time, the way that I see that works for me.  If it bothers you that I am not paying off my small credit card debt, then I can give you a P.O. box to send me a check to.

Yes, I'm a CPA, and a good one that has gotten multiple promotions (in my short 4.5 years working), but please go ahead and try to put me down if that makes you feel better about yourself.

Yes, this is a place to help each other. Many people have tried to help you in this thread, but you resist their help and continue to stand by your miscalculations.

I really don't care how you treat your own debt and if you're happy with your current strategy then all the power to you, but I'm not going to stand by and watch you give terrible ill-informed advice to others.

You don't seem very responsive to being told you're wrong, so maybe we should all just drop this and let the original poster make up their own mind.

nanana13

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Re: How to tackle debt?
« Reply #41 on: March 16, 2016, 04:40:18 PM »
If I was seeking advice for my own personal situation, I would post a thread, which I have done a few times already. And debt reduction was not one of the topics, because I am handling that area quite well with my given circumstances. My net worth has been increasing by an average of ~50 percent each month.

Fair enough if you also want to give the OP advice on what to do (e.g. to ignore what I'm saying). But there's absolutely NO need to be an asshole. I'm not here for that.

forumname123

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Re: How to tackle debt?
« Reply #42 on: March 16, 2016, 04:43:38 PM »
If I was seeking advice for my own personal situation, I would post a thread, which I have done a few times already. And debt reduction was not one of the topics, because I am handling that area quite well with my given circumstances. My net worth has been increasing by an average of ~50 percent each month.

Fair enough if you also want to give the OP advice on what to do (e.g. to ignore what I'm saying). But there's absolutely NO need to be an asshole. I'm not here for that.

In most cases I would agree with you. Your opinion is as good as mine, but this isn't a matter of opinions. You're telling him 2+2=5, and the rest of us are trying to get you to stop.

bearkat

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Re: How to tackle debt?
« Reply #43 on: March 17, 2016, 04:32:30 AM »
Congrats on the new baby and netting so much on your house sale.

A few questions and then what I would recommend:
How critical are these updates to the new house?
Can they wait until you're student loan debt free?
One income earner or two?
Cost of expected medical bills for birth?
If after paying minimums on student loans and normal bills, you have $1,500 leftover each month, how did you get in this situation in the first place (in which you needed to borrow to replace a motor)?

My recommendation (I may be simplifying too much but it seems straight forward to me):
To play with: $51k from sale + $6k from checking +$2.5k efund = $59.5k
-$5.5k of motor loan
-$35k of student loan at 6.55%
-$12k of student loan at 3%
-$7.5k of emergency fund

Next steps:
- Get efund to $16k (6 months living expenses) -  6 months
- Save up $12k for home updates -  8 more months

Looks like no matter the order you'll be set  in 14 months (assuming the expenses don't rise).

Typed on a phone in the dark, sorry for any typos or poor mental math.

Nanana et al,  I can't tell who is be trolled or doing the trolling, but that was highly entertaining. Maybe we can focus on the OP's issues from here on out.

TheInsuranceMan

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Re: How to tackle debt?
« Reply #44 on: March 18, 2016, 07:18:51 AM »
Congrats on the new baby and netting so much on your house sale.

A few questions and then what I would recommend:
How critical are these updates to the new house?  The are critical, including moving from a fuse box (which is mostly uninsurable) to a breaker box.  And one of the bathrooms really needed to be updated, in a bad, bad way.  I'll see if I have a picture to add, so you can see! 
Can they wait until you're student loan debt free? Updates are already completed, or will be by next week.
One income earner or two? Two
Cost of expected medical bills for birth? My wife has a $750 deductible, so it shouldn't be much over that
If after paying minimums on student loans and normal bills, you have $1,500 leftover each month, how did you get in this situation in the first place (in which you needed to borrow to replace a motor)?  My wife has only been employed for one year, after finishing her latest degree.  We were a one income family with a new born, and my income was $2k a month after 401k and benefits were taken out.  Not only that, but as you can imagine, we did a piss poor job of saving money, which we are now correcting.

My recommendation (I may be simplifying too much but it seems straight forward to me):
To play with: $51k from sale + $6k from checking +$2.5k efund = $59.5k
-$5.5k of motor loan
-$35k of student loan at 6.55%
-$12k of student loan at 3%
-$7.5k of emergency fund
That all makes sense to me, and was my plan as well.  Just was debating how much to seed over to the eFund right away.
Next steps:
- Get efund to $16k (6 months living expenses) -  6 months
- Save up $12k for home updates -  8 more months

Looks like no matter the order you'll be set  in 14 months (assuming the expenses don't rise).  That's what I'm thinking too, even if we have something minor come up, there is no reason I can't be putting $1,000+ a month towards the student loan debt once we are in our new house

Typed on a phone in the dark, sorry for any typos or poor mental math. No problem, I appreciate the response!

Nanana et al,  I can't tell who is be trolled or doing the trolling, but that was highly entertaining. Maybe we can focus on the OP's issues from here on out.

TheInsuranceMan

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Re: How to tackle debt?****Updated 3/31/16
« Reply #45 on: March 31, 2016, 12:30:15 PM »
So, we closed on our acreage last night, and netted $51,000.
This is what we've decided to do, and you won't all like it, and that's fine.

First, we paid of $29k and change, or whatever the total of my 6.55% student loan debt was.
We paid off my truck loan
We paid off some credit card debt that had been accruing due to this move and updating the house
We will write a check for $4,100 to one of our contractor's - still waiting on 3 other bills (electrician, flooring, and countertops)

We didn't add any to our emergency fund yet - we are keeping the remainder in our money market account until the remaining bills come in.  Once that happens, and we pay them off, we will move the remaining funds as needed, between our emergency fund and the other student loan debt.

With the 6.55% paid off, our student loan bill each month will be $189.xx, which saves us $375 a month in payments versus what it was increasing too eff 4/28/16 withdrawal.  The reason we didn't use the whole check right away is because we are waiting on those other bills previously mentioned, and with kid #2 due just a month or so out, we figured we had better play it safe.

So, a step in the right direction.  This should allow us to have about a $1,500-$1,700 surplus every month (besides when my wife is on maternity leave, because her leave pay sucks - not a huge deal, as we will only be taking DD #1 to daycare twice a week during that time, drastically reducing that bill).

So, I'm happy.

Cassie

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Re: How to tackle debt?****Updated 3/31/16
« Reply #46 on: March 31, 2016, 02:34:08 PM »
Awesome!!!

TheInsuranceMan

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Re: How to tackle debt?****Updated 3/31/16
« Reply #47 on: March 31, 2016, 02:55:16 PM »
Awesome!!!

Thanks!  It's a huge step forward for us, I'm just glad she didn't bring any student loans into the marriage!  Mine are bad enough...

LeRainDrop

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Re: How to tackle debt?****Updated 3/31/16
« Reply #48 on: March 31, 2016, 06:43:55 PM »
First, we paid of $29k and change, or whatever the total of my 6.55% student loan debt was.
We paid off my truck loan
We paid off some credit card debt that had been accruing due to this move and updating the house
We will write a check for $4,100 to one of our contractor's - still waiting on 3 other bills (electrician, flooring, and countertops)

We didn't add any to our emergency fund yet - we are keeping the remainder in our money market account until the remaining bills come in.  Once that happens, and we pay them off, we will move the remaining funds as needed, between our emergency fund and the other student loan debt.

Hey, that's great!  And I personally think it's wise that you're leaving the balance in your money market account until the contractors' bills are all paid.  Then you'll be in the best position to soundly decide how much to apply towards e-fund versus student loans.

As a funny aside, only with your most recent update did I realize that this baby will be your second child, as I mistakenly interpreted your original post -- "family of 3, 4th due in May" -- to mean that your fourth child was on the way, LOL!

dess1313

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Re: How to tackle debt?****Updated 3/31/16
« Reply #49 on: March 31, 2016, 09:02:11 PM »
Great work so far!  Tons of positive changes!  Good luck with your next child!  And good choice to leave a few $ free during this big time for your family