Author Topic: Debt. Pay off current, but take on more?  (Read 1744 times)

morethanconquerors

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Debt. Pay off current, but take on more?
« on: March 25, 2019, 03:10:16 PM »
My spouse and I (both 27) are working on coming up with a strategy for our debt. We currently have $36,795 in total debt:

Car Payment 1 -- $5,165 @ 2.09% -- $264/month payment -- 1.5 years remaining
Car Payment 2 -- $18,413 @ 1.90% -- $383/month payment -- 4 years remaining
Student Loan 1 -- $12,217 @ 3.33% -- $136/month payment -- 6 years remaining

It pains me that every month, almost $800 is going toward loan payments. I realize the interest is very reasonable, but I would love to have this cash flow back. On the other hand, I would also love to never take out another loan again in my life (not counting a mortgage). So here's my dilemma:

My spouse is most likely going back to grad school in the fall. The program costs ~$30,000 total over 3 years. Due to some recent cash inflows, we currently have $13,000 sitting in a 2.1% savings account. My initial thought was to pay down my current debt as quickly as possible with this extra cash. By doing this, I could get both Car Payment 1 and Student Loan 1 paid off easily by the end of the year. However, this would require us to take out more student loans for grad school. So I'm second guessing myself and am wondering if saving that money to pay for grad school out of pocket and saving up for future car purchases or other "big ticket" items is the right call here to prevent the need to ever take out a loan again.

Any insight? Thanks in advance!!

RWD

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Re: Debt. Pay off current, but take on more?
« Reply #1 on: March 25, 2019, 03:13:43 PM »
The only reason you should pay down those debts is if you sell one of the cars. Those rates are incredibly good and you will be better served by investing more. Possibly needing the capital again in the near future is another reason to leave the loans on minimum payments. It may be hard to get rates like that again.

Check out the Investment Order post.

catorbe

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Re: Debt. Pay off current, but take on more?
« Reply #2 on: March 25, 2019, 03:18:35 PM »
The only reason you should pay down those debts is if you sell one of the cars. Those rates are incredibly good and you will be better served by investing more. Possibly needing the capital again in the near future is another reason to leave the loans on minimum payments. It may be hard to get rates like that again.

Check out the Investment Order post.

To expand on this: The rates you have in your savings account alone already beat two of the three loans you're contemplating paying off.

What I think is most important is using the money to pay for the grad school because as RWD said, you're pretty much guaranteed to get rates for new loans (for school) that are above any of the current loans you possess.

morethanconquerors

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Re: Debt. Pay off current, but take on more?
« Reply #3 on: March 25, 2019, 03:24:24 PM »
The only reason you should pay down those debts is if you sell one of the cars. Those rates are incredibly good and you will be better served by investing more. Possibly needing the capital again in the near future is another reason to leave the loans on minimum payments. It may be hard to get rates like that again.

Check out the Investment Order post.

Thank you for the reply. I know the investment order would point me in another direction, but I have trouble when I look at our debt and see $800/month of cash flow getting eaten up every month. How do you justify continuing to spend that kind of money every month and investing what's left elsewhere? I realize the math works in the favor of investing, but my brain still tells me to go after the debt as aggressively as possible. I know that's short-sighted, especially with the interest rates as low as they are, but I can't seem to get the right perspective.

RWD

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Re: Debt. Pay off current, but take on more?
« Reply #4 on: March 25, 2019, 03:32:17 PM »
The only reason you should pay down those debts is if you sell one of the cars. Those rates are incredibly good and you will be better served by investing more. Possibly needing the capital again in the near future is another reason to leave the loans on minimum payments. It may be hard to get rates like that again.

Check out the Investment Order post.

Thank you for the reply. I know the investment order would point me in another direction, but I have trouble when I look at our debt and see $800/month of cash flow getting eaten up every month. How do you justify continuing to spend that kind of money every month and investing what's left elsewhere? I realize the math works in the favor of investing, but my brain still tells me to go after the debt as aggressively as possible. I know that's short-sighted, especially with the interest rates as low as they are, but I can't seem to get the right perspective.

You are not "spending" $800/month on your loans. You are transferring $800 of assets per month towards your liabilities. The actual cost of those loans is currently $72.05/month (and decreasing).

Imagine if you had the $36k available to pay off the loans all at once. $36k invested in your savings account is $63/month. The loans are only $9/month more than that. And if you invest in safe bonds (VBTLX yield 2.81%) that $36k could be gaining $84/month. Invest in stocks (e.g. VTSAX) and you'll probably average $270/month (though obviously there will be large fluctuations).

cincystache

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Re: Debt. Pay off current, but take on more?
« Reply #5 on: March 26, 2019, 06:15:55 AM »
C'mon MMM community, don't let this person get away with owning two clown cars with payments.

Please sell the $18,000 clown car ASAP. If you HAVE to buy another one, get a used fuel efficient car for 5-7k paid for in full with CASH.

Pay off your other car loan assuming you want to keep the car long term. I don't care about your low interest rate, just be done with it, simplify your life. You said yourself you NEVER want to take out another loan besides your mortgage.. I agree, stop rationalizing your conflicting decisions just because the loans have low interest rates.

Okay, so now you have two modest cars FULLY paid off and you have 6-8k left in cash and 12k in student loans. How about you use the extra cash flow that was going to your car payments and wipe out that student loan in 6 months (648*6 + 8000 = ~12,000)

Now you start grad school with no money in the bank but also 0 debt and with an extra $800/month in cash flow which, by the way, is almost exactly what your grad school will cost. No need for additional student loans.

« Last Edit: March 26, 2019, 06:19:35 AM by cincystache »

RWD

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Re: Debt. Pay off current, but take on more?
« Reply #6 on: March 26, 2019, 06:31:07 AM »
C'mon MMM community, don't let this person get away with owning two clown cars with payments.

Please sell the $18,000 clown car ASAP. If you HAVE to buy another one, get a used fuel efficient car for 5-7k paid for in full with CASH.
I did hint at the possibility of selling a car. Though we don't know what kind of car it is so it's hard to cast absolute judgement on it at the ~$18k level. Mr Money Mustache's own article on choosing a car (written in 2012) has the very first option costing ~$12k (~$13.2k in 2019 dollars). I don't think $18k is so much above that that it requires immediate condemnation. Because of the transaction costs of selling/buying a car if you're already close enough it's usually not worth changing vehicles.

However, I will say that if the vehicles are inefficient then replacement should definitely be considered.

Pay off your other car loan assuming you want to keep the car long term. I don't care about your low interest rate, just be done with it, simplify your life. You said yourself you NEVER want to take out another loan besides your mortgage.. I agree, stop rationalizing your conflicting decisions just because the loans have low interest rates.
This is not the fastest way to build wealth. I agree that one should not buy stuff just because they can finance it for cheap. But if you have to purchase something anyway and there is low cost financing available you should take full advantage. Getting the ball rolling on investments early on is much more important than avoiding 2-3% interest debt.

YoungGranny

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Re: Debt. Pay off current, but take on more?
« Reply #7 on: March 26, 2019, 07:09:10 AM »
Could you sell either car and buy a less expensive one? That would allow you to put the money you've saved towards grad school AND free up $400 a month. If you go that route you might not have to take on further debt for schooling which would probably be more expensive debt than the ~2% interest rates you have now.

Either way it's an interest rate game; use your savings to pay for school if those loans would be higher and you don't want more debt. Then invest the difference since right now your maximum loan is 3.33% which means in the long run you are better off investing rather than accelerating the payoff schedule.

cincystache

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Re: Debt. Pay off current, but take on more?
« Reply #8 on: March 26, 2019, 07:23:38 AM »
@RWD
I think we're speaking the same language, you are just a lot nicer :-) your points are well taken but I still disagree.

Two 27 year olds on the verge of graduate school shouldn't be borrowing 24k for 2 cars that will be worth virtually nothing in 15 years. That is face-punch worthy. I don't care if they are at 0% interest, they don't NEED that much car, period. The money would be more useful in index funds or cash flowing graduate school.

If you WANT that much car, I have no problem with it, go ahead, it's a free country, but you can't simultaneously complain about cash flow issues and rationalize crappy decisions just because they come with a low interest rate.

RWD

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Re: Debt. Pay off current, but take on more?
« Reply #9 on: March 26, 2019, 07:33:13 AM »
@RWD
I think we're speaking the same language, you are just a lot nicer :-) your points are well taken but I still disagree.

Two 27 year olds on the verge of graduate school shouldn't be borrowing 24k for 2 cars that will be worth virtually nothing in 15 years. That is face-punch worthy. I don't care if they are at 0% interest, they don't NEED that much car, period. The money would be more useful in index funds or cash flowing graduate school.

If you WANT that much car, I have no problem with it, go ahead, it's a free country, but you can't simultaneously complain about cash flow issues and rationalize crappy decisions just because they come with a low interest rate.

They are not both on the verge of grad school. One of the two is going back to grad school (I think I am reading correctly). So presumably the other has a steady job. This is a vastly different scenario than two people still in school. I agree that 27 years old is probably too early to be spending that much on cars and definitely so if it is causing cash flow issues but this is not a case study where we know their income/expenses.

bisimpson

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Re: Debt. Pay off current, but take on more?
« Reply #10 on: March 26, 2019, 08:12:26 AM »
Doesn’t the argument for low interest debt only work if you are buying some asset that creates value in some way?

I’d look at grad school as an investment. Before you go into debt for more school, ask how it will impact your income.

cincystache

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Re: Debt. Pay off current, but take on more?
« Reply #11 on: March 26, 2019, 08:12:58 AM »

They are not both on the verge of grad school. One of the two is going back to grad school (I think I am reading correctly). So presumably the other has a steady job. This is a vastly different scenario than two people still in school. I agree that 27 years old is probably too early to be spending that much on cars and definitely so if it is causing cash flow issues but this is not a case study where we know their income/expenses.

Yes, @morethanconquerors if you do a full case study we can offer better advice.
@RWD I understand only one of them is going to grad school but that still isn't my point.

24k at 27 years old is too much in cars unless you're FI or willingly delaying FI because you'd rather have a nice car. Again, I'm not judging you if you value having a nice car, but the OP is asking for thoughts about a cash flow issue so I'm assuming they aren't bringing in tons of money to where $800 is irrelevant and I'm also assuming that they don't get massive amounts of joy out of their cars in excess of the $600 plus they are sending the bank every month. This problem has a clear solution. SELL THE CAR, buy cheap cars and invest the excess in index funds and/or grad school where your long terms returns will be massively better.

If you're coming here trying to solve your cash flow problems then do what I'm saying. If you're trying to feel better about your past decisions and not take any action, then rationalize away and tell yourself that your low interest rate makes this a good idea...

I'm not trying to be mean, but I've been in similar situations and I wish someone would have told me that I was being straight up stupid instead of telling me what I want to hear. That's why I'm thankful for this community, people call you out on BS

RWD

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Re: Debt. Pay off current, but take on more?
« Reply #12 on: March 26, 2019, 08:26:37 AM »
Doesn’t the argument for low interest debt only work if you are buying some asset that creates value in some way?

The decision to pay extra on debt is completely independent from what the debt is for. Money is fungible so you could pretend the loans went towards groceries and rent and you paid cash for the cars and it wouldn't make a difference. The only reason it matters is for collateral if you default on the payments or when you sell the collateral (because the bank will want their money back when you sell).

My opinion is that if you can't pay cash for a depreciating asset you can't afford it. But even if you have the cash you should still finance the purchase if offered a great rate.

Slow2FIRE

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Re: Debt. Pay off current, but take on more?
« Reply #13 on: March 26, 2019, 08:33:45 AM »
The only reason you should pay down those debts is if you sell one of the cars. Those rates are incredibly good and you will be better served by investing more. Possibly needing the capital again in the near future is another reason to leave the loans on minimum payments. It may be hard to get rates like that again.

Check out the Investment Order post.

To expand on this: The rates you have in your savings account alone already beat two of the three loans you're contemplating paying off.

What I think is most important is using the money to pay for the grad school because as RWD said, you're pretty much guaranteed to get rates for new loans (for school) that are above any of the current loans you possess.

That savings account rate isn't higher than any of them after taxes...
assuming a 12% top marginal tax rate the savings account works out to be about a 1.85% rate of return.

morethanconquerors

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Re: Debt. Pay off current, but take on more?
« Reply #14 on: March 26, 2019, 10:19:12 AM »

They are not both on the verge of grad school. One of the two is going back to grad school (I think I am reading correctly). So presumably the other has a steady job. This is a vastly different scenario than two people still in school. I agree that 27 years old is probably too early to be spending that much on cars and definitely so if it is causing cash flow issues but this is not a case study where we know their income/expenses.

Yes, @morethanconquerors if you do a full case study we can offer better advice.
@RWD I understand only one of them is going to grad school but that still isn't my point.

24k at 27 years old is too much in cars unless you're FI or willingly delaying FI because you'd rather have a nice car. Again, I'm not judging you if you value having a nice car, but the OP is asking for thoughts about a cash flow issue so I'm assuming they aren't bringing in tons of money to where $800 is irrelevant and I'm also assuming that they don't get massive amounts of joy out of their cars in excess of the $600 plus they are sending the bank every month. This problem has a clear solution. SELL THE CAR, buy cheap cars and invest the excess in index funds and/or grad school where your long terms returns will be massively better.

If you're coming here trying to solve your cash flow problems then do what I'm saying. If you're trying to feel better about your past decisions and not take any action, then rationalize away and tell yourself that your low interest rate makes this a good idea...

I'm not trying to be mean, but I've been in similar situations and I wish someone would have told me that I was being straight up stupid instead of telling me what I want to hear. That's why I'm thankful for this community, people call you out on BS


@cincystache

 Thank you for your response.

To give a little more background:

Car 1 ($5k left) is a 2015 Corolla and Car 2 ($18k left) is a 2018 Civic. I was relocated to our current location a few years ago, which is an economically depressed region. Due to the location of my workplace and the surrounding area, I chose to live ~15 miles away from work due to multiple reasons including high crime rate, drug activity, and low quality housing near my workplace. My spouse was able to find a job after being laid off ~35 miles away (in the other direction) from our current location. I understand this is not ideal, but there are very few opportunities close by, so we are making it work for the time being. My spouse has negotiated working from home ~2 times a week, which has helped. Because of the commutes, we both need cars, which is why we purchased two reliable, fuel efficient cars. Also, I estimate that we're upside down by about $3k on the Civic.

Again, the majority of these decisions have been made because of the location we live in. Hopefully in the next 1-2 years, I will be able to be relocated back to my original location where I used to bike to work daily, which could drastically change the scenario.
« Last Edit: March 26, 2019, 10:59:50 AM by morethanconquerors »

cincystache

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Re: Debt. Pay off current, but take on more?
« Reply #15 on: March 26, 2019, 12:04:48 PM »
@morethanconquerors 

Thanks for the added details. I stand by my advice. The civic and corolla are great choices of cars but the ones you have are way too new for your life stage.

similar make and model cars that are 10 years old with 120k-150k miles on them are still plenty reliable for your needs and cost 6-7k.

The civic being underwater isn't a problem because your corolla more than makes up for it (you owe 5k but it's probably worth 10k assuming it is in decent shape)

Sell both cars, buy used cars for 10k-12k total. (since your wife has a longer commute maybe you get her an 8k car and you a 4k car?)

This leaves you with a couple thousand in the bank, two reliable cars for your commutes and an extra $647 a month in cash flow to tackle student loans and/or pay for grad school.

What do you think?

RWD

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Re: Debt. Pay off current, but take on more?
« Reply #16 on: March 26, 2019, 12:33:33 PM »
@morethanconquerors 

Thanks for the added details. I stand by my advice. The civic and corolla are great choices of cars but the ones you have are way too new for your life stage.

similar make and model cars that are 10 years old with 120k-150k miles on them are still plenty reliable for your needs and cost 6-7k.

The civic being underwater isn't a problem because your corolla more than makes up for it (you owe 5k but it's probably worth 10k assuming it is in decent shape)

Sell both cars, buy used cars for 10k-12k total. (since your wife has a longer commute maybe you get her an 8k car and you a 4k car?)

This leaves you with a couple thousand in the bank, two reliable cars for your commutes and an extra $647 a month in cash flow to tackle student loans and/or pay for grad school.

What do you think?

You are suggesting replacing a $10k car with an $8k car? The transaction costs involved make that pretty much a wash financially and you end up with a worse vehicle.

Replacing the $15k car with a ~$4k car could make sense though.

RWD

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Re: Debt. Pay off current, but take on more?
« Reply #17 on: March 26, 2019, 12:41:18 PM »
Also, in defense of keeping the 2015 Corolla. If you wanted to replace it with an $8k Corolla you would need to drop back to the 2012-2013 model years, which was the previous design. The 2014+ has a lot of small improvements and gets 7-10% better fuel economy (depending on which transmission you're comparing).

cincystache

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Re: Debt. Pay off current, but take on more?
« Reply #18 on: March 26, 2019, 02:20:01 PM »

You are suggesting replacing a $10k car with an $8k car? The transaction costs involved make that pretty much a wash financially and you end up with a worse vehicle.

Replacing the $15k car with a ~$4k car could make sense though.

@RWD
good point. I would be fine with keeping the corolla with a small loan and getting rid of the civic and buying a car for 4k cash to replace it.

Villanelle

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Re: Debt. Pay off current, but take on more?
« Reply #19 on: March 26, 2019, 02:32:59 PM »
I'd keep the Corolla and ditch the Civic, opting for something older (but still reliable) and generally cheaper (small, not a lot of features, etc.).  Aim to spend about $8k.  There are plenty of decent, reliable cars in that range.

I'd use the money generated by that (as well as the monthly cash flow generated from ditching a car payment) to put toward grad school (assuming the decision to attend isn't negotiable).  Will your wife be attending school while still working at her current job?  And has she looked for any scholarships?

morethanconquerors

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Re: Debt. Pay off current, but take on more?
« Reply #20 on: April 03, 2019, 06:47:06 AM »

You are suggesting replacing a $10k car with an $8k car? The transaction costs involved make that pretty much a wash financially and you end up with a worse vehicle.

Replacing the $15k car with a ~$4k car could make sense though.

@RWD
good point. I would be fine with keeping the corolla with a small loan and getting rid of the civic and buying a car for 4k cash to replace it.


@cincystache @RWD

Thank you again for your input. Have either of you had success with $4k cars? I understand what you are saying, but I'd like to see the numbers laid out. I attempted to below, but I'm not sure if some of my assumptions are correct. Could you review? I appreciate it!

Civic 10 years - $29,300 - $244/month -  ($21,500 purchase price + $1,150 interest + $6,600 maintenance (found here: https://clark.com/cars/most-and-least-expensive-cars-maintain-repair/))
$4k Cars 10 years - $25,000 - $208/month - ($3k underwater on Civic + Buy 3? cars @ $4k = $12,000 + $10,000 maintenance (just an estimate $1,000/year??, couldn't find any solid articles))



RWD

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Re: Debt. Pay off current, but take on more?
« Reply #21 on: April 03, 2019, 07:50:42 AM »

You are suggesting replacing a $10k car with an $8k car? The transaction costs involved make that pretty much a wash financially and you end up with a worse vehicle.

Replacing the $15k car with a ~$4k car could make sense though.

@RWD
good point. I would be fine with keeping the corolla with a small loan and getting rid of the civic and buying a car for 4k cash to replace it.


@cincystache @RWD

Thank you again for your input. Have either of you had success with $4k cars? I understand what you are saying, but I'd like to see the numbers laid out. I attempted to below, but I'm not sure if some of my assumptions are correct. Could you review? I appreciate it!

Civic 10 years - $29,300 - $244/month -  ($21,500 purchase price + $1,150 interest + $6,600 maintenance (found here: https://clark.com/cars/most-and-least-expensive-cars-maintain-repair/))
$4k Cars 10 years - $25,000 - $208/month - ($3k underwater on Civic + Buy 3? cars @ $4k = $12,000 + $10,000 maintenance (just an estimate $1,000/year??, couldn't find any solid articles))

I have bought three vehicles for under $4k ($2400, $3400, and $1500). They served me quite well. They do typically require more maintenance/repairs than a newer vehicle but nothing crazy.

Your calculations look weird to me. Here's how I would do it:

2018 Civic - $270/month
Current value: $16.4k (KBB private party)
10 years depreciation cost: $11.6k (current price minus 2008 Civic KBB value)
Interest cost: $739
Opportunity cost: $13.5k (assuming 8.5% investment returns)
Maintenance/repairs: $6.6k

12 year old Civic - $178/month
Current value: $4.4k
5 year depreciation cost: $2.2k (replaced with another 12 year old Civic after five years)
Interest cost: $0
Opportunity cost: $7k
Maintenance/repairs: $10k

$1k/year in maintenance sounds high to me, but I used those numbers anyway. You could replace the older car more often without changing the numbers much because depreciation is so minimal. Two just fits easier into 10 years for calculation purposes.

Proud Foot

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Re: Debt. Pay off current, but take on more?
« Reply #22 on: April 03, 2019, 11:20:24 AM »
I will ignore the cars since you have already gotten outstanding information there. For the student loan, is it yours or your spouse's and what type is it? (private, fed subsidized, fed unsubsidized) If they are your spouse's then you can defer them while she is grad school to help free up your cash flow. This is most optimal if they are federally subsidized loans but can still be beneficial as long as you get the accrued interest paid off before it capitalizes after deferment.

How will your cash flow change once your spouse starts grad school? Will they be able to continue to work full time, part time, or have to stop working?