How to prioritize consumer and student debt?

[kayteemacbee]

Hello all!

I am a brand-spankin-new mustachian and I find myself in quite a pickle. I have quite a large amount of consumer and student loan debt due to historically poor financial decision making... classic story of attending college for too long, living off of student loans and credit cards, etc. I have very little savings, but recently stumbled upon Mr. Money Mustache, and quickly acquired a bike and a second job, which helped me pay off one credit card, and two others will be taken care of by the beginning of next month. Now I'm to a point where I'm just dealing with loans - consumer and student.

Below is a breakdown of everything I have and owe.

• LOAN 1. 7,018.31 balance, 11.50% int, 208.00 mo payment
• LOAN 2. 5,182.66 balance, 15.70% int, 114.00 mo payment
• LOAN 3. 5,009.47 balance, 8.00% int,  89.50 mo payment

• STUDENT LOAN 1. $23,620.29 balance, 4.75% int, $79.00 mo payment
• STUDENT LOAN 2. $36,112.45 balance, 4.75% int, $79.00 mo payment

• CAR. $20,790.82 balance (worth around 13k now), 6.3% int, $369 mo payment

• SAVINGS 1. $2,400 ("Non-prototype" fidelity account through employer that I cannot touch in any way and cannot add to)
• SAVINGS 2. $90.87 in 1.5% APY savings account
• ROTH IRA.  $34.50

I work from home for my primary source of income ($40k annually), and my second job is weekends-only at my discretion, and requires quite a bit of driving (so far I estimate an average of $150 earned per month).

I've worked a lot of angles and can't see myself getting out of debt sooner than over the span of a few years unless I receive lump-sum bonuses from my primary employer. With credit cards, it was easy to figure out what to focus on, but a lot of these loans are starting to look the same to me. I am asking for mustachian input - given that every dollar of income from my second job is thrown at my debt, what is the best way to prioritize these payments so I can get out of debt ASAP and start saving more?

I appreciate your thought and input!

[simonsez]

https://forum.mrmoneymustache.com/investor-alley/investment-order/

Simple version, go by interest rate.  Throw everything extra (as in, after you meet your monthly required payments, make EXTRA payments) at the 15.7% loan.  When that is zapped, then put the extra on the 11.5%, and so on.

The advanced version can be looking into SOFI et al.  or other repayment plans that lower what's due each month so you can prioritize throwing even more onto your loan with the highest interest rate.  Note: SOFI will not necessarily lower your payment each month, it lowers your interest rate but the payments may stay the same or go up or down.  Repayment plans are all about lowering your payments each month to optimize your flexibility with your targeted extra payments.

After the car payment is gone, you start to come into the territory that depends on your risk aversion.  i.e. paying down lower interest debts or investing.

Good luck!

[Raenia]

The mathematically optimal path is to prioritize by interest rate, highest rate first, like so:

1. LOAN 2. 5,182.66 balance, 15.70% int, 114.00 mo payment
2. LOAN 1. 7,018.31 balance, 11.50% int, 208.00 mo payment
3. LOAN 3. 5,009.47 balance, 8.00% int,  89.50 mo payment
4. CAR. $20,790.82 balance (worth around 13k now), 6.3% int, $369 mo payment

Put every dollar extra toward Loan 2 to start.  Once that is completely paid off, put every extra dollar plus the 114/mo you used to pay toward Loan 2 toward Loan 1 instead.  Continue snowballing the payments into the next debt as each one is paid off.  This will minimize the interest you wind up paying.

Does your employer provide access to a 401k or other retirement account?  Even while paying off debt, you want to be contributing enough to get any employer match that they offer.

Once the car is paid off, you hit the point where it may or may not be worth continuing to pay off debt aggressively.  If you want to be debt free, go ahead and snowball into the student loans.  I would recommend, however, to increase your savings/investments at that point.  Make sure you're contributing to your Roth IRA up to the max, contribute to any other retirement accounts you may have available, or start saving in a taxable account if you don't have retirement account options.  The link simonsez posted is a good one to follow.

[kayteemacbee]

https://forum.mrmoneymustache.com/investor-alley/investment-order/

Simple version, go by interest rate.  Throw everything extra (as in, after you meet your monthly required payments, make EXTRA payments) at the 15.7% loan.  When that is zapped, then put the extra on the 11.5%, and so on.

I will keep hacking away at it, thank you!!

Does your employer provide access to a 401k or other retirement account?  Even while paying off debt, you want to be contributing enough to get any employer match that they offer.

Unfortunately it's a smaller company with no retirement options available other than what they add to my fidelity account, which is entirely at their discretion. I've personally never heard of non-prototype accounts, but from my understanding it's a savings account started by a company for an individual, which is only payable upon retirement or separation from the company. I'm working on that little Roth IRA, though! ;)

Thanks for your input!

[Raenia]

In that case, since the retirement account is outside your control, you can safely ignore it.  Focus on the debts, and once you've gotten down to <5% interest rates, you can turn your focus to savings rather than debt repayment.

Also, I would be remiss if I didn't mention that car loan - what vehicle is this for?  Can you sell it and get a cheaper car?  Quite simply, this car is too expensive for you.  The remaining loan balance is half your annual salary!  Selling this and getting a 5-10k used car could help you a ton.

[Lady SA]

I agree with the advice to go by interest rate. You have to be patient as this method doesn't give you the dopamine hit of accomplishing much at first, but over time this is the optimal way.

I also agree that your car is like an anchor, an albatross around your neck. If I'm reading this right you are underwater on it (you owe more than it is worth). But it is your highest monthly payment, and it is way too much car for this phase of your life. I recommend a hybrid approach just so you can get rid of the car and get something appropriate. Right now this looks like a cash flow problem.

Trim down your monthly expenses to the bare minimum, including your min loan payments. Everything extra goes toward your highest priority loans. In your case, I would split this extra portion, and put 1/2 toward Loan 2 (the 15% interest one) and 1/4 toward the car loan to begin digging yourself out, and the last 1/4 toward saving for a sensible USED car.

Once your car loan is to the point you could sell it and cover the difference with your other savings, get rid of it asap, and then buy a used corolla or civic for like $3-4k. That frees up $369 per month to throw at all of your other loans, in order of highest interest rate first. But seriously, this car is sinking you, you should focus on getting rid of it as soon as you can, while also making significant progress on that 15% loan (yikes!)

[Lady SA]

Also, if you post a case study in the Case Study section of the forum, people here can give you more concrete advice tailored to your situation and find ways for you to squeeze a bit more out of your budget.

Do you have any plans/thoughts on raising your income? Your most pressing problem is your debt, of course, but if you could significantly boost your income (certifications, training, switching jobs, etc) that would give you more breathing room and extra cash flow to put towards digging yourself out.

[MDM]

Agree with all those suggesting you pay the highest interest first.

See http://forum.mrmoneymustache.com/ask-a-mustachian/which-loan-to-pay-extra-first/msg1307278/#msg1307278 and download the Excel spreadsheet mentioned there if you would like to quantify why this is best.

[Laura33]

I am asking for mustachian input - given that every dollar of income from my second job is thrown at my debt car, what is the best way to prioritize these payments so I can get out of debt ASAP and start saving more?

FTFY.

First, I am a huge fan of the basic approach laid out here:  tackle your debts in order of interest rates.  You just cannot get ahead if you're paying 15% interest on anything.

Your situation is complicated by the car, however.  Because your second job requires lots and lots of driving, and nets you only about $150/mo.  I am assuming that $150/mo. is after gas, right?  But are you considering depreciation?  The reality is that the more expensive the vehicle, the more money you lose with every mile you drive.  It's basic math:  if you have a $40K car that depreciates 15% over the course of a year, it loses $6K in value.  OTOH, if you have a $4K car that depreciates that same 15%, it loses only $600.  So the problem here is that your fancy car means that every mile you drive is costing you way more than you think.

If you want to get a better estimate of the real cost of driving, use the IRS mileage reimbursement figure (which is usually something like $0.50-0.55/mile).  I wouldn't be surprised if the math said that you're actually losing money on your side hustle, because getting to the job costs more than you earn doing it.  The only way a side hustle with lots of driving makes sense is if you do it in the cheapest, most fuel-efficient vehicle you can get.

Of course, the problem is that you don't have the cash for a different car right now, and you really don't need more debt.  So I am going to modify my standard advice somewhat and agree with Lady SA:  cut expenses to the bone, and then split the extra between that 15% loan and the car loan.  And that includes the Roth contributions -- a Roth does not get you either a match or an immediate tax deduction, and over the long haul, it is very unlikely that the market will return more than that 15% you are currently paying on that first loan, so until the first two loans and the car are gone, it makes more sense to devote your excess cash to the loans than to the Roth.

In addition, look for a different side hustle that can net you more cash.  And if that isn't realistic, then do as much extra work as you can, as efficiently as you can, to maximize the amount you have available to dig yourself out of this hole (e.g., if the problem is a long commute, can you work one 10-hr weekend day instead of two 5-hr ones?).

Finally, congrats on digging out of CC debt on a relatively low salary.  I know the hill looks big now, but if you just continue to tackle the remaining loans with the same attitude you used to tackle the CCs, you really can do this.

[frugaliknowit]

Besides the "debt avalanche", I would carefully evaluate whether it is worthwhile to engage your car in your side hustle.  If it's not making financial sense, sell the car, pay off the loan (perhaps with another loan for the shortfall), then buy a beeter.  Also, get a different side hustle (minimum wage that you walk to is better than losing money with your car...)

[kayteemacbee]

Thanks, everyone! My car is a 2017 Chevy Cruze. The short story is that I bought a 2009 model which fell apart immediately after purchase a few years ago - the dealer could only offer me a new model to replace it, and I was not careful enough in my research.

I wholeheartedly agree, I can't afford this car- unfortunately, it's no longer worth enough for me to recoup what I need to swap cars - I would need to pay off around 7k in negative equity before I could grab something older.

In your case, I would split this extra portion, and put 1/2 toward Loan 2 (the 15% interest one) and 1/4 toward the car loan to begin digging yourself out, and the last 1/4 toward saving for a sensible USED car.

I am going to take on this strategy. To answer your question about raising income, I'm considering Free Code Camp to teach myself web development and boost my income without creating the necessity to drive around so much.

Agree with all those suggesting you pay the highest interest first.

See http://forum.mrmoneymustache.com/ask-a-mustachian/which-loan-to-pay-extra-first/msg1307278/#msg1307278 and download the Excel spreadsheet mentioned there if you would like to quantify why this is best.

I love this calculator!!

Because your second job requires lots and lots of driving, and nets you only about $150/mo.  I am assuming that $150/mo. is after gas, right? 

Finally, congrats on digging out of CC debt on a relatively low salary.  I know the hill looks big now, but if you just continue to tackle the remaining loans with the same attitude you used to tackle the CCs, you really can do this.

Yep, that is after gas. I calculated that my longest-distance gigs cost me about $7.00 round trip in gas alone, but I did not factor in vehicle depreciation. It's a position that can require several 2-3 hour events throughout the day (at $25 per hour), so I could easily make 3 trips like that on a given Saturday. Thank you for the words of encouragement! :)