What to do about debt?

[MEJG]

Yes, the short answer is PAY IT OFF, but I'm struggling to justify greatly accelerating my payments due to interest rates and would love some input.  All opinions and face punches welcome.

Current Debts:
Mortgage  $122,857 at  3.75% Monthly payment $1120 (includes taxes and insurance)
Student loan $112,000 at 0%, minimum monthly payment $800 (loan from family- yes I'm freaking lucky)
Student loan $18,382.71 at 4% monthly payment 105.57
Car loan $27,863.82 at 2.1% monthly payment $488.87

Total payments/month: $2514.44

First to give background on the car, we had been planning to save and buy a new-to-us mini van in the next 18 months but recently totalled our POS car. We purchased a low millage Toyota Sienna. Yes a more than 5 person car was needed due to number of children.  Neither DH or I are good with car skills so searching through criags list was less than ideal.  We plan on driving it to 300,000 mi, so while not a Musctacian decision it was well thought out and we are happy with the car choice.

Given the interest rates we're dealing with I am loath to pile on extra principle payments, but we're talking a BIG chunk of our monthly cash flow toward debt.  Maintaining them isn't a problem (Income projected to be $140,000 before taxes in 2015).  Prior to taking on the car loan I was letting these ride out and focusing on maxing our tax advantaged accounts (one 401k and two IRAs), then paying and extra $2,400/year on the 0% loan because it is a generous family member and I feel better paying back $12,000/year vs. $9,600 minimum agreed upon, and then planed to open a taxable account.  We don't project a change in jobs situations but life is never certain.

Until this past month we have been saving 50% .  Past month was hard for multiple reasons but I still project a 50%  savings rate for the year.

Thoughts?

[mlejw6]

As long as you are investing your savings smartly, I think your plan is a good one. The only thing I would add is, if you don't have one, get a sizable emergency fund in case something *does* happen with your job(s). Something like 6 to 12 months. You don't want to be derailed from your debt payments in the event of an emergency.

Is your income balanced between the two jobs, or does one person earn significantly more than the other? The more unbalanced the income, the larger I would make the emergency fund. If the higher earner loses their job, it will be a lot tougher without a decent E fund in place.

Other than that, if you're comfortable keeping the debt and investing instead, I think you can do that.

[RWD]

Are you including the principal portion of your debt payments (about $2k/month right now) as part of your 50% savings rate? How is your risk tolerance?

[MEJG]

Our jobs are uneven, one earner will bring home $50,000 and the other $90,000.  This is our before tax projected income- we both are heavily commission based.  I will bring home about $50,000 this year, which is pretty stable at around $2,000 every 2 weeks, yes I have up and down months but it's been averaging that for the 18 months I've been doing this job.  DH's income is a bit more variable and the bottom he could make is $60,000 but with monthly bonuses thus far our conservative estimate is $90,000 for the year.

I calculate our savings rate with 401k contributions, IRA contributions, principle mortgage (which is at 265 and creeping up slowly) and the principal repayment on the 0% loan as it directly impacts our NW. I don't count principle on the car loan or the 4% SL.

We have a pretty high risk tolerance.  Currently the 401k is 15% small cap, 15% mid cap and 70% SP500 index- the options at the company that holds the 401 are terrible.  The IRAs are held at Vanguard in 90% stocks, 10% bonds in the following funds:

VTSMX: Vanguard total stock Market index find: 50%
VGTSX: Vanguard total international stock market index fund: 25%
VEIEX: Vanguard emerging markets index fund - 5%
VGSIX: Vanguard Reit index fund: 10%
VUSTX: Vanguard Long term treasury fund: 5%
VIPSX: Vanguard inflation protected securities fund: 5%

I rebalance as we invest, and then once yearly if anything is out of whack with just balancing with new investments.

I've been working on our monthly expenditures- a LONG way to go but working on it.  My goals are to keep our expenditures including debt within my lower monthly income and then us DH's income to fund our investments and extra principle payments on the 0% family loan.

[RWD]

I'd consider putting more towards the 4% loan as with minimum payments it will take about 22 years to pay off. You're currently paying more in interest than principal with minimum payments on that loan.

Sounds like you'll do just fine with whatever road you choose though.

[Mother Fussbudget]

+1 to having an EF - 6-8 months savings should do.

Most of the time, the advice on loans is to pay off the higher interest rate loans first, then the lower interest rate loans in decreasing interest rate order.  In your case, since you're only saving $265/month, you could double-pay the 4% student loan - pay an extra ~$100 (pay $211.14) - until that loan is paid off.  Then pay an extra ~$100 on the CAR loan until that's paid off.  etc.

[Kaikou]

So you're approx. $270,000 in debt. 140000 base income.

Idk if you heard or are interested in the Dave Ramsey financial Peace university course, but I think you would benefit greatly. On his plan you could be out of debt in 3-4 years with today's income and if you are still doing retirement.

[Catbert]

It's hard to have a strong opinion without knowing more about your overall situation.  I definitely wouldn't pay a dime extra on mortgage.  I'd prioritize paying extra on either the 4% loan or the SL from a kind relative of yours.  The 4% loan b/c its your lowest balance and highest interest rate.  The SL b/c you want generous and kind relatives to feel good about their decision to loan you money.

B/c your income is so variable maybe save the extra $$ in good month and pay a lump sum in December or January.

[gillstone]

Nuke your debt with every spare post-tax dollar you have.  The sooner you clear this then sooner you have nearly $17,000 a year in breathing room.

1) Murder the 4% student loan. Its annual interest is roughly an extra monthly payment on the 0% one
2) Snowball the payment onto the car.  It's a depreciating asset and the sooner its clear the sooner you can...
3) Add 600/month to your payoff of the very generous relative. 

Until 1 and 2 are done pay the minimum to the relative - even explain why you dropped to the minimum it if you feel like it. A short time of paying 9,600 a year will end with you paying them 16,800 a year.

How generous is the relative? because if they would give you 18 months forbearance you could knock out the 1st loan and have a hell of a start on the rest.

Also, it goes without saying that every windfall, tax return and penny found in the couch cushions goes to the debt until its gone

[MEJG]

In general i've subscribed to pay off everything above 5% like your hair is on fire, and consider all aspects at below 5%, which is why I posted in the forum.  The 4% student loan was a refi from 6.8% federal down to 4% private at the same term length, 25 years.  It's such a small monthly payment at a low enough interest I've let it ride.  It is really the car loan that bothers me, even though I know it was a good long term purchase for our family. 

I appreciate all the input.  I think I'm leaning towards murdering the car loan, then re-looking at the 4% loan.  We really have no interest in paying the mortgage early, the house is worth about $200,000 and we pay less in mortgage, tax and insurance than a rental of the same size and schools system in our area and may be moving in the next 3-5 years in any case.   The VERY generous relative has stated repeatedly they are fine with $800/month or $9,600/year we can pay as we like and is very pleased that we've been pushing for $12,000/year so it won't be a problem to drop back down to the agreed upon minimum and to pay in a lump sum, which is an awesome idea for managing our income and keeping a healthy e-fund.

We've averaged $5,000/month available for investments and paying the 0% SL since March (other than September, September sucked).  So if pay everything else on minimum I should be able to pay off the car loan quite quickly, paying off the depreciating asset and killing our second highest monthly payment.  We're expecting a 12,000 tax refund for 2015 so that will make a sizeable dent no matter where we put it.

[MDM]

Given the interest rates we're dealing with I am loath to pile on extra principle payments....
Maintaining them isn't a problem (Income projected to be $140,000 before taxes in 2015). 
Prior to taking on the car loan I was letting these ride out and focusing on maxing our tax advantaged accounts (one 401k and two IRAs), then paying and extra $2,400/year on the 0% loan because it is a generous family member and I feel better paying back $12,000/year vs. $9,600 minimum agreed upon, and then planed to open a taxable account.

Thoughts?

Don't change a thing.  Your instincts seem great. 

[MEJG]

Thanks for your thoughts MDM- I was hoping you'd chime in.  I always find your take on things helpful.  So you wouldn't accelerate the car payments?  The upside is I really can't lose as long as I keep gaining ground on FIRE.

[MDM]

So you wouldn't accelerate the car payments?

No, not at 2.1%.  The purely financial look would suggest the 4% loan should be the first to get any extra payments, but your attention to the family member instead is commendable.

[Koreth]

I agree with MDM, your concern for paying off your relative early is commendable. That said, I'd talk with the relative and explain the situation. You had to take on a car payment because the previous one was totalled, and with cash flow now tighter than it was before, you'd like to focus on some the higher interest loans. If your relative agrees, then this is what I'd do.

Take the extra $200 a month you're putting towards the 0% student loan with the relative and shift it towards that 4% 18k student loan instead. that 18k at 4% will take just under 22 years to pay off with the current minimum payment. If you add the $200 to it, that instead becomes 5 3/4 years to be paid off. When the car is paid off in 5 years (I assume you took out a 5 year loan, that's what the loan payoff calculator I'm using indicates), you now have that $488 in monthly cash flow you can then put back towards your relative and you're tax advantaged accounts, and then in another 8 months, the smaller student loan is done you've got another $305 in cash flow you can put towards your tax advantaged accounts.

[dess1313]

Our jobs are uneven, one earner will bring home $50,000 and the other $90,000.  This is our before tax projected income- we both are heavily commission based.  I will bring home about $50,000 this year, which is pretty stable at around $2,000 every 2 weeks, yes I have up and down months but it's been averaging that for the 18 months I've been doing this job.  DH's income is a bit more variable and the bottom he could make is $60,000 but with monthly bonuses thus far our conservative estimate is $90,000 for the year.

You definitely need a good emergency fund.  At least a few months saved up in case things become lean on both sides at the same time.

I would work hard on your 4% loan.  That payment is ridiculously tiny.  About $61 is interest alone, its not going to drop any time soon at the rate you're going.  Get it out of the way or it will be with you when your children are graduating. 

It sounds like a lot of debt and a high payment per month.  If you get any bonuses or tax returns i'd focus it on debt.  What sort of returns are you getting on your investments?  Over the 4%?

The $2500 you're doing in payments monthly could make a huge investment potential down the road, but not until you've snowballed the student/car loans into extinction.  Then decide how to handle the mortgage down the road once the other 3 are out of the way.