Author Topic: Confused what debt to focus on  (Read 3279 times)

Allen

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Confused what debt to focus on
« on: May 30, 2013, 04:45:49 PM »
I have LOTS of very low interest rate debt.  Before this blog I thought I was doing pretty good by at least getting everything below 5%.  Then I was paying off the credit card.  I'm still certain the credit card is my #1 focus, but I'm lost what to focus on after that.

here's what I got:

Credit Card - Permanent 4.9% interest rate through credit union. $21,000.
Car #1 - $10k 2.9% interest. Will pay off itself in 2017 if I just pay minimum
Car #2 - $14k 2.9% interest. Will also pay off in 2017 if I pay minimum, but trying to get wife to sell and drop to one car. (I have switched to bus and bike)

Student Loan  $6700 2.8% interest - Will pay itself off in 2017
Student Loan Wife $32000 5.0% interest - Will pay itself off WHEN HELL FREEZES OVER (>20 years)

House $155000 at 4.88% APR - refinance not option as it's under water.  (Missed those sweet 2.5% rates). It's on a 30 year with about 26 years left.

My inclination was to pay the card, pay HER student loan (highest interest), then pay the house (next highest interest).  While I'm paying the house, the cars and my student loan will drop off in 2017, and I'll finish paying the house in December 2018 assuming I maintain my current velocity of 55% of our income going to debt.

Is this a dumb plan?

smalllife

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Re: Confused what debt to focus on
« Reply #1 on: May 30, 2013, 05:08:41 PM »
What does your cash flow look like?  How stable is your income through 2017?  Will you invest the difference between the minimums and what you *could* pay?  How much extra do you have each month to throw at debt?  What are the minimums?

Aka - more information needed. :-) 

Allen

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Re: Confused what debt to focus on
« Reply #2 on: May 30, 2013, 06:18:56 PM »
Great questions.  Income stable and likely to increase.  We are 100% committed to a Mustache style early retirement and are working hard to cut expenses further to get our savings rate up.  Right now we are at about 55% income devoted to debt, and we plan to continue that as savings once the debt is gone.  Our combined take home pay is 90k a year. 

Minimums are:
  • House 1102
  • CC 421
  • Student Loan A 155
  • Student Loan B 254
  • Car A 238
  • Car B (that we want to get rid of) 306

For our take home pay, that means 34.8% of our take home is going to debt.  Additionally we add AT LEAST $1300 a month more with our budget allowing for up to a $1,000 more than that unless there are unexpected expenses.

Our budget allows up to 63.89% of our take home to go fully to debt in a perfect month.  Right now, I figure 5.8 years to be 100% debt free including the house.  But I don't know if that's smart to plow fully into the house ahead of the car A and B and student Loan A, with no 'extra' savings.

I also contribute 6% to a 401k to get the 3% match.  We currently have 80k in retirement accounts, with no other savings.

WHEW.  Finally, I'm 37 and wife is 41.

Thanks!

Another Reader

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Re: Confused what debt to focus on
« Reply #3 on: May 30, 2013, 06:41:12 PM »
If your loan is owned by Fannie or Freddie and was sold to them before June of 2009, you might be eligible for a HARP refinance at a lower rate.  Contact your current servicer to see if they can do a HARP loan for you if that's the case.  The current servicer may even be able to do a streamline HARP, which is faster and requires less documentation. 

In your shoes, I'm paying off most of the other debt before I tackle the house.  Credit card first, then the student loans.  Student loans are risky because they cannot be bankrupted in a catastrophic situation.  You have a good-sized shovel, so you ought to be able to dispose of them fairly quickly.  If I can get a lower rate on the house, I would let the mortgage ride.  Pay off the remaining debts and sell a car if it makes sense.  Then I would start investing.  Over time, your returns should be higher than the mortgage interest, and contributing to IRA's sooner will give them more time to compound.

You say you have no savings other than retirement accounts.  In your shoes, I would want an emergency fund.  I am not comfortable without a few months of expenses in savings.  Your risk tolerance may be higher.

nktokyo

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Re: Confused what debt to focus on
« Reply #4 on: May 30, 2013, 06:43:50 PM »
Damn that's a lot of credit card debt. I would go after them in order and cancel the cards as they get paid off. You only need one with a 5K limit for emergencies.

Do you have anything you could sell to pay this off faster? Do you eat out? What else can you cut? Do you need 2 cars? Can you increase income? For a couple with 25 working years (approx) left you guys are a long way from the start line. Not only do you have to pay for all this stuff, you have to then put together a retirement package too.

smalllife

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Re: Confused what debt to focus on
« Reply #5 on: May 30, 2013, 07:26:00 PM »
Personal preference?

I would pay off the wife's student loan. Barring a refinance on the house, I think it's best to let the mortgage ride.  That's the debt that seems to be weighing on you the heaviest, and if you are confident in your income through 2017 then you can ride out the lower interest debt.  After that I would go full force on the credit card.  Really, tackling either one of these would be a good option.  Student loans because they cannot be expelled in bankruptcy and the credit card because they can change the terms at any time.

I would play around with a debt calculator to see what the optimal sequence is in your situation. 

davisgang90

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Re: Confused what debt to focus on
« Reply #6 on: May 31, 2013, 04:02:44 AM »
Try this debt calculator, it is what I'm using to track my various debts and snowball them out of existence!

http://www.vertex42.com/Calculators/debt-reduction-calculator.html

Senor Smallchange Soulpatch

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Re: Confused what debt to focus on
« Reply #7 on: May 31, 2013, 07:38:16 AM »
I'd pay the minimum on everything except the credit card, then throw every spare cent you have at that debt.  That keeps you liquid because you can always run the card balance back up in an emergency.  You don't have that option with the student or car loans.

After the CC debt is gone it probably makes sense to start attacking the higher interest student loan, but you should really sit down with a spreadsheet and figure out what those car loans are really costing you.  If the lienholder for the car notes is requiring you to carry collison/comprehensive insurance that you would be comfortable dropping otherwise, then those car loans are effectively costing you a hell of a lot more than 2.9%.

At least make some calls about refinancing your mortgage.  It may not pan out but at worst you're out a couple hours of your time, at best you save tens of thousands of dollars in interest over the life of the loan.  I did a HARP refi a couple months ago and I'm way underwater (121% loan-to-value according to Freddie Mac).  The process was super smooth - didn't even require an appraisal.  They even sent someone out to my house to sign all the documents.

Villanelle

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Re: Confused what debt to focus on
« Reply #8 on: May 31, 2013, 07:51:59 AM »
Start out with minimums on everything except for the CC.    After that, I'd channel nearly everything to to student loan, although because I am extremely cautious about things, I might take a look at the numbers and see what it would take at that point to get me back above water on the mortgage.  I'd stress about the idea that I couldn't afford to sell my house if something came up and if it was a matter of a manageable number, I'd tackle the mortgage to get it to that point, and then focus on the student loan.

In addition to giving you a little security, this would also allow you to look into a refi if rates are still low at that point, assuming that HARP doesn't work out for you.  (I'm assuming you are paying PMI currently so that would be a wash.)

You say you are "100% committed to the MMM lifestyle" but you have 2 car loans, so methinks you aren't as committed as you like to think.  Sell both cars and replace with one older, modest vehicle.  Even if you can't convince yourself to go down to one car, sell your current cars and buy 2 modest older cars.  If you aren't upside down on the cars, ditch them, now.