Author Topic: Optimal mix of paying off debt & saving?  (Read 2334 times)

pehrj

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Optimal mix of paying off debt & saving?
« on: May 31, 2015, 09:42:31 AM »
I have $9,562 in student loans and $6,841 in a car loan. Right now, I have about $10,400 in checking and net $2,400 a month from my job. I live with and take care of my grandparents, so my expenses only end up being about $500 a month. Auto loan is 4.45%, student loans are 5.6%, 6%, 6.8%. All rates are fixed. Would it be better to aggressively pay off the debt while my expenses are low, or should I just continue to pay them as scheduled while building up savings?

Trifele

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Re: Optimal mix of paying off debt & saving?
« Reply #1 on: May 31, 2015, 10:14:16 AM »
The money sitting in your checking account is likely not earning much interest, so you are really paying the interest on your loans just to have that money sitting there.  To put it another way, you are paying about $80 a month or so in interest on the debts, just to keep that money in your checking account.  So the answer is straightforward -- once you set aside an emergency fund (say 2-3 months' expenses, or whatever you feel you would reasonably need) then take what is left in the checking account and start paying off your loans, starting with the student loans. 

A different question is whether it is better to pay off debt or invest.  That answer depends on the interest rate you are paying on your debt, and the returns you can expect to see on your investments.  Some people will choose to invest as long as the expected returns are higher than the interest rate on the debt, while others place a non-mathematical value on being debt free, and will choose to kill even low-interest-rate debt as fast as they can, even if they would earn more on the investments.   With the interest rate on your debt, personally I would kill it all before investing.   

Good luck!  Sounds like you are in a good position financially and you could be debt free in just a few months if you choose to be.  Then you can start plowing all extra cash into investments.   

RWD

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Re: Optimal mix of paying off debt & saving?
« Reply #2 on: May 31, 2015, 10:41:49 AM »
Keep a buffer for emergencies (a few thousand should be sufficent) then use what is left over in your checking to pay off your debt starting with highest interest first. Make sure you're at least getting your company's full 401k match if they offer it, then divert whatever you don't need for expenses towards the debt. With this strategy you should be debt free in about half a year.

After that you can focus on contributing to retirement accounts (HSA, 401k, IRA). Save separately in a savings or checking account so that you can pay cash for your next car and for other goals (e.g. down payment for mortgage).

kpd905

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Re: Optimal mix of paying off debt & saving?
« Reply #3 on: May 31, 2015, 10:52:52 AM »
Those rates on the student loans are high.  I'd pay them off ASAP from highest to lowest rate.  The auto loan is your choice whether you want to pay it off or invest first.

BrickByBrick

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Re: Optimal mix of paying off debt & saving?
« Reply #4 on: May 31, 2015, 11:52:38 AM »
As others have said, save up an emergency fund (which you already have), and throw the delta at the student loans...you should have them paid off within a few months.  At that point, it's up to you to then knock out the car loan or start investing.  Personally I'd go ahead and knock out the auto loan after that considering your savings rate.  You should be debt free with an emergency in a year or less (really, less).  Then take full advantage of your living situation to put a lot into retirement.  Save up for your next (used) car in cash.

pehrj

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Re: Optimal mix of paying off debt & saving?
« Reply #5 on: June 01, 2015, 05:57:19 PM »
Thank you all for the help.