Author Topic: Someone willing to help me with my debts? Not sure what to pay first if any.  (Read 4968 times)

hhehe45

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I'm a 30 year old single, childless woman. I am currently in debt for ~$32,000. One debt is $5,100 for my car. My other debts are for school loans. I make $65,000 as a base salary and earn commission of around $15,000 a year. Last year I pulled in about $80,000 and this year will likely be the same. My savings account has close to $19,000. I transfer $300 into my savings each month. Also, I loaned my brother $7,500 this year (from my savings if that matters) and he has paid me back $1,900 of that. He pays me in monthly installments of $600 which I add back into my savings. I also have another commission check coming next month (I receive these checks quarterly) for which I expect to receive close to $3,500. I put all or most of my commission into my savings. So that will bring my savings up to around $22,500. My question has been whether or not I should put some of my savings towards my debts? And if so, how much and which debts? I'd love to pay my loans off first as they are accruing interest and my car payment is interest free. I should mention my current payments are for $500 a month each for my car and my student loans. I suppose I am considering doing this since I am putting a steady amount into my savings monthly. Or should I just up my monthly payments? I'm just wondering if it's more important to get rid of this debt fast or keep a really good cushion in my savings. What do you think?

norabird

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Standard advice here is that you do not need a cash cushion. Once you've killed the debts, you'll have a bigger amount to start saving, but 22k cash is certainly overboard. What are the loan rates? I'd throw around 15k at your highest loan debt now. No reason to kill the car loan if it's 0%, but the others are costing you, and your cash is depreciating. It would be easy for you to get a 0% credit card to handle an emergency expense or to get your brother to speed up his repayment. But realistically, the chance of an emergency requiring that cash is slim. You may derive comfort from the access to cash, but it does come with a price tag due to inflation + interest on the debt.
« Last Edit: October 30, 2015, 02:30:21 PM by norabird »

Orvell

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What are the interest rates on your debts?
The one with the biggest ouch should get paid first. You have money to pay your debts down, that's great!
Figure out a 3-6 mo. living expenses emergency fund you won't touch (whatever you are comfortable with, it varies; I tend towards the more conservative), and then throw everything else at the nastiest loan you have. A big cushion is something for after the debt is gone. A reasonable, emergency cushion is all you probably want in your case.

ShoulderThingThatGoesUp

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Where the heck is all your money going? You make an excellent income, is the $19,000 your only asset?

K-ice

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You will need to list them kinda like this to get some good advice.

Student loan 1: $xxxx  at xx%  minimum required payment
Student loan 2: $xxxx at xx%  minimum required payment
Car loan :         $xxxx at xx %   "
Credit card....
.
.
.

Also how do you invest your savings?  What rate do you get?  0.5% savings account vs ~6% investment

Le Barbu

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Probably worth to learn about investing than care about your debts. If your car loan is more than 5%, then it's a no brainer. Considering your income and if the student loan rate is low, keep it for the tax deduction and invest all you can!

norabird

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At 6.55%, that adds up--you can wipe out the $14k one to start and see how you feel.

Then, once all the debt is gone, you need to invest your money after setting aside a smaller cash emergency fund. You are missing out on the comppounding interest. Does your company do a 401k match? Optimize that for starters, in a Vanguard or Fidelity Spartan Vanguard index fund. Investing in a low cost fund is very set it and forget it.

cheddarpie

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I agree with the suggestion to pay them off as soon as you can while keeping an emergency fund of 3 months living expenses. You are just losing money on interest, and 6.55% is nothing to snort at. Give the cash you have now, I'd knock out the two biggest debts and then keep working on the third.

Good luck, and good for you for thinking about these questions! Getting started is often the hardest part.

AmandaS1989

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I agree with norabird. Get rid of that 14k loan and start investing for your future. Vanguard is a great investment service. You can take a few grand in cash and sink it into one of their low-cost funds and set up an automatic deposit of however much you want per month. That makes investing much easier in my opinion.

You can also take the money you were paying towards the 14k loan and add it towards one of the other student loans. And having 3-6 months of expenses in the bank is a good amount for an emergency fund. You don't need 19k just sitting there earning you nothing but pennies.


Le Barbu

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At 6.55%, that adds up--you can wipe out the $14k one to start and see how you feel.

Then, once all the debt is gone, you need to invest your money after setting aside a smaller cash emergency fund. You are missing out on the comppounding interest. Does your company do a 401k match? Optimize that for starters, in a Vanguard or Fidelity Spartan Vanguard index fund. Investing in a low cost fund is very set it and forget it.

I would pay the 5,125$ and the 8,189$ first wich improve your monthly cashflow by 254$ and only 1 student loan to deal with.

What is your car loan rate? This one could be the next

If you know nothing about investments, paying debts is the easy/safe way to go. You make good money, you are young and you've got a lot of time to learn and invest.

Tjat

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yes, you could have thousands of loans at $1 a piece and it would be the same. It's the total amount and the average interest rate that matters.

I second (or fourth at this point) the opinion to  pay down 6.55% loans as fast as you possibly can.

monstermonster

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I'd say pay off the biggest student loan first - it's accruing the most interest (it's just the same as your savings account- the bigger the balance, the more in interest)

Then throw your student $246/month at the second biggest loan. That one will then be completely gone in less than 2 years, and you'll still be current on your other loan. You could also super-charge your repayment by taking the repayment of the loan you gave to your brother and putting some part of it towards debt. You gave your brother an interest-free loan when you're still paying out 6.65% interest every month, so you're in effect loaning him an extra hundred+ a MONTH by not paying back your own debt before you help him with his.

K-ice

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Thank you! This is incredibly helpful. I guess that's my other question, is it six of one, half dozen the other as far as paying off the biggest student loan ($14,555) or the other two first?

First what do you mean overpaid on the $5125 one?
Do any have penalties for early payment?

Since they are all at the same rate, it really doesn't matter from a math point of view. Psychologically there is a difference.



As for what order, if getting rid of the largest one makes you feel better do it first.

If getting rid of the smaller two feels good then do that first.

You are off to a great start!

K-ice

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I forgot to add. 

Since you are not experienced in investing yet ;)  and since the interest is 6.55%  paying these debts first is your priority.

If they were around 3% &/or if you had your small stash making 8%+, you might pay them a bit slower. 

Jacana

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For your cash cushion, consider Ally or another high interest savings account. We currently have $20,000 in Ally earning 1% interest, which is about $16 a month. Much better than pennies. And the process is very simple and convenient, mobile deposits, free transfers in and out of any checking account and even straight to Vanguard. Your e-fund probably doesn't need to be anywhere near that high though.

An IRA (traditional or Roth) is also a great place to start getting your feet wet in investing if you have no 401k match at work.

ysette9

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You have a good plan of attack for the loans. I would like to know next what sort of investment options you have. Do you have a 401(k)? Do you get a match? If not, have you started an IRA? If you have questions on what the best funds are to pick in these this group of Internet know-it-alls would be happy to help you there as well. 😀

ChicagoGirl

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Are you overpaying on that student loan to bring down the principal, or just to be one payment ahead of schedule?
There's a difference.  If you are overpaying each month, you need to make sure that the extra is being paid to bring down the principal of the loan. That may require you calling the place where you got the loan when you make your payment. This will bring down the interest charges slightly. 

Before the days of auto-pay, I would write one check for the loan amount I was required to pay and a 2nd check that I meant to go toward the principal and write PRINCIPAL in the memo area. 

Unfortunately, I don't think loaning banks will apply to the principal automatically you have to tell them that's how you want the extra applied if it's allowed. 

But...if you plan on knocking out some of these loans with your savings you won't have to worry...right? :)

monstermonster

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Negotiate for the new job's pay IF YOU GET IT. Pay off the debt - you haven't even gotten an interview for the job, let alone gotten it, so don't make decisions about debt you have now based on income you might have in the future- especially when you have so much cash assets.

I'm serious about the negotiation. Read Ask For It- invaluable guide to negotiating focused at women.

If you get offered the job, after you negotiate, weigh the pros and con of the job. People on this board are happy to help with that once you have details.

MDM

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Thank you! This is incredibly helpful. I guess that's my other question, is it six of one, half dozen the other as far as paying off the biggest student loan ($14,555) or the other two first?

You can download a spreadsheet built to answer this type of question at http://www.vertex42.com/Calculators/debt-reduction-calculator.html.

norabird

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Just don't prioritize the savings cushion at the expense of paying down debt--financially, it really doesn't make sense.

Great that you have options/opportunities ahead! Puts you in a great negotiating position.