Keep saving or crush debt?

[toby2]

I've been reading a lot of MMM lately, and starting to get serious about my finances.

I somewhat confused about what to do in my situation. My wife and I have about 20k in savings, and about 50k in total student loan debt, as well as 15k on a car loan (0% interest, our other cart is paid off). We make a combined 98k per year. We are expecting our first child sometime next week!
 
Which begs the question – what should we do with the money we have stashed away? I'm sure MMM would suggest using most of it to knock out our debt. However, we’re currently living in a cramped townhouse (2 BR, with one of those rooms being an open loft space and not a "true" bedroom) and would like to move in a year or so. We have a mortgage on our current house and would not make anything in a sale - we intend to hold as a rental. At this point next year, we project to have about 30k in the bank in projected savings.

 I suppose at this point it’s the age old question – should we crush our debts with the money we have or use as a down payment for our next house?

[livetogive]

What's the rate on your student loans?

[toby2]

I have several loans:

• $12k at 2%
• $25k at 7%
• $13k at 6%

[MikeinOhio]

A huge misconception is that babies can't or won't adapt. You have probably 2 years at least before baby number 2 and you cam revisit that idea  later.

Once the house size creeps up and the baby costs begin creeping too, those are hard to stop.

[Frankies Girl]

If it was me, make sure there was a good emergency fund, then I'd take out the 7% and the 6% loans ASAP.

I'd also figure out why the 2 BR (or just call it a 1BR with a loft) is cramped for just two people. Take a good hard look at your stuff in your home and maybe figure out if you could reduce and rearrange and live there a few more years - at least. Your child won't even be mobile for about a year, and even when mobile, they take up surprisingly little space as long as you don't go crazy on the clothes and toys and other stuff that you are told you "have" to have (but really don't).

With you both making a combined income in the neighborhood of $100K, you should be able to knock out ALL of your loans in roughly a year/year and a half if you got serious about taking them out. THEN if you stayed put for another 2 years, you could amass a nice downpayment for a bigger home if that is really what you feel you need.

You say that you expect this time next year to have 30K in savings - and if that is counting the existing 20K you already have - means you're only saving about 10% of your gross income. You can do SO much better than that - take a good look around here because there are many folks that save 50% or better of their takehome, and with larger families as well.

[toby2]

Thanks for the thoughtful replies.

To answer a few of the questions:

I'd also figure out why the 2 BR (or just call it a 1BR with a loft) is cramped for just two people.

It's not cramped right now - we actually don't own that much "stuff." I'm just trying to envision how having a child will impact the space. Part of my logic as well is that rates are good right now, and home prices seem to be climbing. Would we priced out in a few years?

You say that you expect this time next year to have 30K in savings - and if that is counting the existing 20K you already have - means you're only saving about 10% of your gross income. You can do SO much better than that - take a good look around here because there are many folks that save 50% or better of their take home, and with larger families as well.

I'm figuring to spend about 1k a month on daycare, which is what will dent our ability to save more. I have a few items that contribute to my spending as well, including a 4% city wage tax and a $185/month rail pass. We're going to cut cable, but otherwise not sure how much better we can really do.

[brandino29]

I'm figuring to spend about 1k a month on daycare, which is what will dent our ability to save more. I have a few items that contribute to my spending as well, including a 4% city wage tax and a $185/month rail pass. We're going to cut cable, but otherwise not sure how much better we can really do.

Without having a clue about your budget, I'm going to make a blanket statement and say "Probably a lot." 

I've always thought we did a great job controlling our spending, and generally we have, especially compared to many of our friends, but these last few months of really diving down and figuring out where our money is going, thanks to help from MMM and YNAB, I'm still discovering how much we've wasted in silly ways. 

[Mr.Macinstache]

I have several loans:

• $12k at 2%
• $25k at 7%
• $13k at 6%

Can you consolidate? Or use a low or 0% intro credit card to cut some of it down? 6 and 7% is obscene. I would consider that an emergency to cut down.

Also if you have access to a large amount of credit, consider that your emergency fund if you need it and use your savings to pay down the debt.

[toby2]

We've actually started YNAB this month, but haven't gotten far enough along to notice any trends yet. We max out our 401k, which takes some $ off the top. The student loans bang us, and we do have a tendency to spend a good bit on gifts minor home improvement and things like that. We also have a dog that requires prescriptions.

[toby2]

Can you consolidate? Or use a low or 0% intro credit card to cut some of it down? 6 and 7% is obscene. I would consider that an emergency to cut down.

I haven't looked into this, but we do have pristine credit and could probably get a line of credit.

[Rebecca Stapler]

Is the $20k your emergency fund? I look at the E Fund like this: you need access to spending power in an emergency -- can you pay on your CC and pay it off the next month? Can you withdraw from a Roth IRA penalty-free for a huge, unexpected expense? If so, you can cut down that E Fund.

I would knock out the $13k loan right away with your savings. That makes you more stable month-to-month because it wipes out a payment. You will have $8k in your E Fund. If that feels comfortable for you, then so be it (although, I would consider making it your 2013 Roth IRA contribution if you haven't already contributed in 2013 -- that way it's your E Fund but, if you don't need it, it's earning money for your retirement).

Then I would start off on the right foot with baby, plan for baby to sleep in the loft (or whichever is more comfortable -- loft or BR) and adapt to that until you pay off the $25k loan. To pay that off, I would take a serious look at expenses and see what can be cut. Little cuts make a big difference. I thought we were living frugally, but after posting my budget here, I "found" $700 in expenses to cut. And I don't miss it. You may find that you don't spend a lot during maternity leave because babies are entertained in very simple ways -- walks in the park, wiggling around on a blanket, etc. Although, you baby could be mobile as early as 6 months, and it's likely that s/he'll be mobile long before 1 year -- that's just typically when babies start walking. But they crawl or cruise much earlier than 1 year.

[Rebecca Stapler]

Can you consolidate? Or use a low or 0% intro credit card to cut some of it down? 6 and 7% is obscene. I would consider that an emergency to cut down.

I haven't looked into this, but we do have pristine credit and could probably get a line of credit.

I would be extraordinarily surprised if you could find a personal loan for less than 6% without collateral, unless it's a cc with a 12-mo intro rate. If you do that, you really have to make sure you pay it off before the 17% APR kicks in. If your SLs are federal, you also lose a lot of safety net options in repayment if one of you loses a job.

[Mr.Macinstache]

Can you consolidate? Or use a low or 0% intro credit card to cut some of it down? 6 and 7% is obscene. I would consider that an emergency to cut down.

I haven't looked into this, but we do have pristine credit and could probably get a line of credit.

I would be extraordinarily surprised if you could find a personal loan for less than 6% without collateral, unless it's a cc with a 12-mo intro rate. If you do that, you really have to make sure you pay it off before the 17% APR kicks in. If your SLs are federal, you also lose a lot of safety net options in repayment if one of you loses a job.

So you're saying he say pay that loan asap? If something happens and he does loose a job, at least he can default on a line of credit, wheras the student loan there is no give. So it would be safer to wipe out the loans asap.

[sassy1234]

"I would knock out the $13k loan right away with your savings. That makes you more stable month-to-month because it wipes out a payment. You will have $8k in your E Fund. "

I agree with Stan.  Pay off that loan right away. 

Cut back as much as you can and attack the 8% loan.  Try to stay where you are and make the space work. 

With a family on the way, getting ride of student loans is key, as it frees up your monthly cash.  I am in a sort of similar situation, and am doing everything possible to get ride of st. loans.  Although it is a bit risky (don't have kids yet, but we are trying), I just depleted my entire savings account and paid off $7,000 in loans.  It felt great! Note that I have very strong job security.  Best of luck. 

[livetogive]

I mostly agree with above. Is reduce any retirement savings to an emoter match level, then funnel it all towards your loans starting with the 6 or 7% one depending on the payment frequencies.  I would not consolidate. You have an option to pay off the expensive debt first; why would you consider weighting an average with the cheap debt?

My SO consolidated against my advice and now I'm pissed we can't pay off the high debt first.

[tomsang]

Coming from a guy who doesn't like having an emergency fund in cash, I would still wait a month or two before paying down debt.  With a new baby on the way you two are not going to know what hit you.  I think you will sleep better at night(ha ha), knowing that you have $20k in the bank.  After you see that you are going to survive in a month or two, then I would re-evaluate the e-fund and your debt payback plan. 

Congratulations!!! 

Tom

[Rebecca Stapler]

Can you consolidate? Or use a low or 0% intro credit card to cut some of it down? 6 and 7% is obscene. I would consider that an emergency to cut down.

I haven't looked into this, but we do have pristine credit and could probably get a line of credit.

I would be extraordinarily surprised if you could find a personal loan for less than 6% without collateral, unless it's a cc with a 12-mo intro rate. If you do that, you really have to make sure you pay it off before the 17% APR kicks in. If your SLs are federal, you also lose a lot of safety net options in repayment if one of you loses a job.

So you're saying he say pay that loan asap? If something happens and he does loose a job, at least he can default on a line of credit, wheras the student loan there is no give. So it would be safer to wipe out the loans asap.

If the student loans are federal, there is a LOT of give -- give that won't negatively impact the OP's credit like defaulting would. OP could apply for an income-sensitive repayment option, which would lower payments, or apply for a 1-year forbearance.