What to pay off first?

[Slandgie]

A little background...we started out with about $60K in debt and started to tackle it early 2008 and we are down to about $17K...Our combined income is about $55K gross, or about $43K net. We owe about $8K at 14% interest rate on a 2009 Kia, around $6K at 13% interest rate on a 2007 Ford Focus, about $2500 at a 7% interest rate on a Discover card and $500 on a 401(k) loan. I only have $10 a week taken out of my paycheck to pay off the 401(k) loan, which will be paid off on it's own next July.

The problem is, I have over 100K miles on the 2007 Focus (I deliver pizzas as a second job) and I just had to shell out about $450 out of my emergency fund to have some repairs done on the car.

My thought is to pay off my Focus by next August and actually have a paid off car that I hope to drive for a few more years after it's paid off. But, I could pay off my 401(k) loan within the next two months, or pay off the Discover by April 2012.

Any thoughts?

[riverwed070707]

First of all, great job so far!

Regarding what to pay first, I'd probably knock out the 401k just because it's small (you didn't mention the interest rate) and then tackle the cars.

[jpg7n16]

Here's a good way to think about interest rates.


For every $100, this is what your debts are costing you:
Kia - $14
Focus - $13
Discover - $7
401k loan - ??

So if you have an extra $100 available, which expense would you like to save?

[bjl584]

Originally Posted by Slandgie

A little background...we started out with about $60K in debt and started to tackle it early 2008 and we are down to about $17K...Our combined income is about $55K gross, or about $43K net. We owe about $8K at 14% interest rate on a 2009 Kia, around $6K at 13% interest rate on a 2007 Ford Focus, about $2500 at a 7% interest rate on a Discover card and $500 on a 401(k) loan. I only have $10 a week taken out of my paycheck to pay off the 401(k) loan, which will be paid off on it's own next July.

The problem is, I have over 100K miles on the 2007 Focus (I deliver pizzas as a second job) and I just had to shell out about $450 out of my emergency fund to have some repairs done on the car.

My thought is to pay off my Focus by next August and actually have a paid off car that I hope to drive for a few more years after it's paid off. But, I could pay off my 401(k) loan within the next two months, or pay off the Discover by April 2012.

Any thoughts?

Congrats on the debt paydown so far. From an interest rate perspective you should focus on the Kia first. Then move to the Focus, then the Discover card.

Is your credit bad? I ask becasue of the high interest rates on your auto loans. When it comes time to replace your cars here is a rule of thumb. Pay cash if you can. If not, make sure that you finance for no more than 36 months and that the payment is not more than 10% of your monthly take home. Using that guideline, you can figure out how much car you can afford going forward.

[disneysteve]

The Ford is probably not worth much with 100K miles. How much is the Kia worth? The best option might be to sell it and get out from the insane interest rate and buy a beater until you have this mess cleaned up. Since you've paid down over 40K in debt, your credit score has hopefully improved and you may qualify for a much better rate today if you do need to borrow anything (not that I'm recommending that you borrow any more money).

[artwest]

I would suggest selling the Kia and getting out of that 14% interest rate...as disneysteve suggested.

Then I would pay off the 401k loan since it is so low.

After that, attack the Focus.

From now on, you should pay cash for any car. The easiest way to do that is to make a "car payment" to yourself each month. When you have accumulated enough money, go buy another car. For example, if you pay yourself $250 per month, you will have $3,000 after 1 year and $9,000 after 3 years. $9,000 plus the trade in value of your old car (probably $1,000-$3,000) should give you enough to get a pretty decent car.

[veronak]

While many do not agree, but I can say when I paid off all my debt the first time I followed the Dave Ramsey Total Money Makeover plan, paying off the smallest debt first moving to the largest. It worked for me, unfortunately, I went back into debt but am following the same plan which once again is working

Good luck

[thefrugallery]

Personally, I would take care of the 401k first since the amount is small. You will feel a sense of accomplishment if you wipe this off your plate. I think that you need to take a look at your lifestyle as a whole and see what you can do to find extra money to put towards your debt. The sad fact is that unless you make some major changes this debt is going to be hanging around for awhile.

[Eric80]

This is a tough one as you want to pay off both of them but you need to assess which one carries the highest risk if you neglect it? Ever thought of consolidating your debt? This can be a good way to collectively put your debts together and manage the payments that way?