Car advice for resident physician

[DrJD]

So, hopefully this will be relatively easy.  I only just discovered MMM a couple years ago and have made some good progress towards being more mustachian.  My biggest problem is that as a physician, I was already too far down the rabbit hole in terms of student debt so I essentially have to stay this route. 

All that said, today, my specific question is about our families car situation.  We have two cars, details below, but we also have quite a bit of consumer debt (Around 30k) at 15% or so on credit cards from medical school.  (The last couple years of medical school were tough with children, and residency interviews/moving.)  So we are currently putting all the extra money we have towards that to get it paid off ASAP. However, should we do something different with our cars?

Currently we have:
2010 Rav4 - around 10K owed, 2.9% interest (43 more months) - family car, wife and kids
2010 Corolla - around 8200 owed, 1.9% interest, (48 left) - daily drive 10 miles to work

So, everytime I think about doing whats best I get confused.  Theoretically I should pay them off quicker or sell them and get something used with cash.  However, it doesn't feel right to put extra money towards the car loans when we have all that high interest debt hanging over our head.  Conversely, when I think about selling a car we owe 8k on, and putting 5k that we could have put towards debt, towards a new uknown car, that doesn't feel right either.

So, do I keep the cars and suck up the fact that I should have made a different choice a year or two ago?  Or, do I downsize and put off the CC situation to get cars with cash? 

Thanks for any thoughts!

[frugaliknowit]

We need your monthly inflows/outflows to give advise. 

[mskyle]

You certainly shouldn't be paying extra on low-ish interest car loans when you have 15% interest credit card debt.

If you pay for a car "with cash" while you still have credit card loans at 15%, you're effectively taking out a 15% interest loan for that car. That's dumb.

The only reason I would consider trading in the cars while not paying off the credit card debt is if they're costing you a lot in gas or repairs, but with a ten mile commute it doesn't sound bad.

Or of course you could become a one-car family - either one of you bikes to work or one drops the other off at work. But that might feel really difficult.

[DrJD]

We need your monthly inflows/outflows to give advise.

Sorry, was trying for some sort of brevity.

My for the next few years is roughly:
2015-2018 - Roughly 58k yearly salary.
2018 onward - Roughly 250k yearly

Monthly breakdown without going into boring detail
Rent - $1575 - Commute 45 minutes to get it this low, don't like living in a bigger city
Utilities - $350
Food/household - $600
Wife's loans - $320
Internet - $60
Car insurance - $150 for both cars
Gas - $150
Eating out - $60
Car payments - $420
Credit cards - $600 a month
Medical bills - $200

Summary: Every penny of my take home gets used, we break even each month.  However, I am about to start moonlighting which will allow us to have an extra 600-1200 a month. I intend to use this to pay down debt as fast as is possible since the high interest and monthly payments are killing our budget. 

Hope that helps!

[DrJD]

You certainly shouldn't be paying extra on low-ish interest car loans when you have 15% interest credit card debt.

If you pay for a car "with cash" while you still have credit card loans at 15%, you're effectively taking out a 15% interest loan for that car. That's dumb.

The only reason I would consider trading in the cars while not paying off the credit card debt is if they're costing you a lot in gas or repairs, but with a ten mile commute it doesn't sound bad.

Or of course you could become a one-car family - either one of you bikes to work or one drops the other off at work. But that might feel really difficult.

So far the cars have been fine, with nothing but general maintenance required.  Our lease was up this year and so I tried really hard to live within biking distance to work, but in order to do that our rent would go from $1600 for a 3 bed/2 bath to around $2000 for a two bedroom.  So I would spend more per month, and my stay at home wife would have way less room for the two kids to disperse in during the day.

I feel like you get my dilemma, I could save up 5k over the next few months but then it would make more sense to put it towards the CC debt based on interest rate alone.  So you think I should stick with the cars as is, though not ideal, and just focus on the CC debt?

[Forcus]

MMM would say get down to one car, move to the city where you work, the rent difference would be more than offset by the reduction in expenses for fuel, car, and the expense of time (1.5 hours a day commuting).

I would say if you are ok with the commute and it is worth it to you for the trade off of living in a particular area, I would keep the cars and just focus on putting all money towards credit card debt and student loans. If your 2018 income is a "sure thing" I wouldn't worry about a couple hundred a month for good reliable cars like you have.

Just my $.02 and see my signature for why.

[ShoulderThingThatGoesUp]

You have $200/month of medical bills?

[MayDay]

That's only 2400$ a year. For a family, that's low, if anyone has anything wrong whatsoever. Most people just have it taken out pretax so you don't really see it in their budgets.

[In the hole]

You have $200/month of medical bills?

Luckily he will soon be on the other side of that racket.

OP, I say keep the cars. Your student loans are probably between 6-8% so even once the cc debt is gone you still would benefit more by paying off the student debt. All bets are off if you are going for any sort of debt repayment program (PSLF, etc.) in which case you are incentivized to pay as little towards loans as possible.

Now yes, technically the most frugal choice involves downgrading and/or going to one car as a family. But if I were you I would value having a newer, extremely reliable car that I know won't leave me or my family stranded. A resident working 75 hour weeks can't afford to deal with the minor issues that come up, especially with a long commute and young kids thrown in the mix.

Use the moonlighting money to annihilate the credit card debt.

[DrJD]

MMM would say get down to one car, move to the city where you work, the rent difference would be more than offset by the reduction in expenses for fuel, car, and the expense of time (1.5 hours a day commuting).

I would say if you are ok with the commute and it is worth it to you for the trade off of living in a particular area, I would keep the cars and just focus on putting all money towards credit card debt and student loans. If your 2018 income is a "sure thing" I wouldn't worry about a couple hundred a month for good reliable cars like you have.

Just my $.02 and see my signature for why.

Thanks for the input!  Unfortunately with our family situation, for a house big enough for us to live, IE not a two bedroom 1000 sq ft. place, we'd have to spend well over $2500.  My friend rents a one bedroom near where I work for $1750.  So again, in the past (and in the future!) I will live in smaller cities where living near work is an option.  With residency I had very little say in where I ended up, since all the places to train for what I do are in bigger cities.  Ugh.

So if I spent $1000 more in rent, I don't think I'd get that back in car related expenses, which for my car are $180 payment at 1.9%, $40 a month in insurance, and around $50 in gas these days. 

Anyway, I appreciate the thoughts, and it looks like short of moving closer you also agree with keeping the cars, so that is helpful.

You have $200/month of medical bills?

Ya, I have health insurance through work, but unfortunately my son needed quasi-emergent surgery near the end of last year, which then spilled over into this year.  So the insurance company did a happy dance and reset our out of pocket max and deductible on January 1st. 

[DrJD]

You have $200/month of medical bills?

Luckily he will soon be on the other side of that racket.

OP, I say keep the cars. Your student loans are probably between 6-8% so even once the cc debt is gone you still would benefit more by paying off the student debt. All bets are off if you are going for any sort of debt repayment program (PSLF, etc.) in which case you are incentivized to pay as little towards loans as possible.

Now yes, technically the most frugal choice involves downgrading and/or going to one car as a family. But if I were you I would value having a newer, extremely reliable car that I know won't leave me or my family stranded. A resident working 75 hour weeks can't afford to deal with the minor issues that come up, especially with a long commute and young kids thrown in the mix.

Use the moonlighting money to annihilate the credit card debt.

Thanks, and you are right.  My MASSIVE (too large to write without a shiver) student loans are all in the 6-8% range.  If only I had been exposed to mustachian ideas sooner!

And you are right, certainly with my hours I do value knowing that my wife and kid won't likely be stranded somewhere random while I am unavailable to help them quickly.  I was considering being half-mustachian with the cars and sell my daily commuter and get a 2k car, but then again, I'm not sure the hassles of any repairs that came up would be worth it given the hours. 

Thanks for the advice.  I intend to put right around $1200 a month towards the debt, which will make a dent pretty fast, though not as fast as I'd like.

[waffle]

How much equity do you have in the cars? I would suggest that you keep the corolla for commuting, but if you have enough equity in the Rav4 to sell it and buy a cheap used car for your wife/kids to run errands then I would do that. It would lower your car payments as well as insurance which you could put towards the credit card debt.

[Abe]

Keep the cars with the low interest rate and work on the credit card debt. It can balloon out of control very quickly. Good call on using the moonlighting money for debt... I paid off all my debt this way during 2 years of research. The money problems should start to resolve after finishing residency (or fellowship). Which field are you going into?

[happy]

There is probably not enough in it to trade down the cars. Better to spend the time earning some extra income and go for the highest interest loans first. Have you thought about getting a 0% balance transfer card for the 30k credit card debt? You might be able to park some or all of that at 0% for 12 months or so. Make sure  you can pay it off when the time is up, or at least check out the interest rate first so you know what you are up for if you can't.

[nereo]

Hello DrJD

Your vehicles are a 'sunk-cost'; if you aren't familiar with the concept it would be good to read-up on it. 
As such (and with your CC debt) it only makes sense to change your vehicles if you can get something cheaper without adding more debt.  You *might* find something suitable in exchange for the Rav4, but to me it seems unlikely.  So just live with the vehicles.

I agree with happy that you could make some progress transferring some of your cc debt via a 0% balance transfer card and then paying off that balance within the specified time.  Only transfer as much as you know you'll be able to pay off.

Finally, you have a big, bright light at the end of your tunnel that's just a few years off.  By optimizing your life now, learning to live off of <<$56k (salary minus debt payments) you are in a position to have financial independence in under a decade.  Just don't go hog-wild and buy luxury cars and McMansions when your salary quadruples and you can choose your economic path.