So, I'm a fairly new reader but have always been frugal, and have quickly bought into the FI/early retirement concept. We definitely have some Anti-Mustachian luxuries, but are willing to make some changes.
Here is our debt situation:
Car 1 - 22k @ 2% = $630 per month
Car 2 - 35k @ 2% = $610 per month
Student Loan 1 = 25k @ 3.25%
Student Loan 2 = 9k @ 5.25%
Student Loan 3 = 5k @ 2.1%
Student Loan 4 = 4.5k @ 4.6%
Total Student Loan payments ~$600 per month
House = 220k @ 4%
We are maxing both of our 401k's, have 30k we can use to payoff debt immediately, and 3k per month to put towards faster payoffs. I think the traditional logic would be to target the highest apr debt first, but I'm struggling with the idea of paying off the cars sooner to add to the money we have to payoff the other debt.
I'm currently thinking:
Use cash to payoff two highest interest rate student loans
Put remainder of cash towards Car 1
Use extra 3200 per month to payoff Car 1 in 2 months
Now I am struggling with whether to witch focus to the house, or payoff car 2 to add another $610 and then focus on the house?
Thanks in advance for any input!
In general, you should work toward paying off all debt; however, not all debt is bad debt. Just like a company, you can actually improve your overall financial progress by using debt strategically (e.g. student loan interest deduction and mortgage interest deduction).
If I were you, I would work to pay off (in this order) Student Loan 2, then Student Loan 4. At that point, I would just keep paying the minimum on all the remaining debt and then take your extra cash flow and invest it.
In the long term, 4% or lower rate debt is barely costing you anything.
In any case, to answer your specific debt question, attack them in descending order starting with the highest rate.
You didn't ask, but I do think you overspent on the car(s). Overspending is a much bigger problem than paying higher interest rates. You may have a reason (kids on the way, AWD if you live in a snowy region, etc).
Full disclosure: I also bought a nice car a few years back in 2009, I purchase a '08 Acura TSX with 30k miles for $24k. It was a little nicer than I needed, but I personally think the car is very high quality, and maintenance is barely higher than a Honda Civic (less the tires), and I do get more enjoyment out of it than something that I could have bought for $5k less. Right now, I have ~90k miles on it, and will likely keep it until at least 120k, longer if it keeps running smoothly and no costly problems come up. Also, I have total investments around $135k, so the $23k car doesn't really seem too outrageous. Also, I don't have any debt (pet peeve of mine).
I have realized that cars are just a money pit. They depreciate like crazy, are expensive to maintain, and are only really exciting for the first year or so. Then it's just life as usual.
On my next purchase, probably in ~5 yrs, I am targeting a $25k purchase used entry-level luxury car, sort of like the TSX I already have. It's a bit pricier, but the quality is there, and I appreciate the basic luxuries, plus it's not hurting my financial picture.
We're not all perfect, but I do commend you for re-examining your family's situation and starting to take action. That's always the first step.