help me with strategy

[deca]

We've been working on building up an emergency fund, but I'm turning my attention to some outstanding debt at this point. Our emergency fund is about $6,000 and it's in an Emigrant Direct account earning 5.05%.

The debt we want to pay off is:

Student loan: $12,450 at 8.25% interest, payments are $170/month
Car loan: $2,900 at 4.75% interest, payments are $225/month
DH Visa: $675 at 10% interest, payments are $25/month

We can spare around $1000 a month to put towards savings and/or debt reduction. A "minimum" emergency fund of say 3 months' expenses would be roughly $10K, so we're not quite there, but I'm starting to feel like that is less of a priority until the debt is taken care of. I mean if we don't have those debt payments that reduces our living expenses by almost $500/month meaning we NEED less in an emergency.

It seems obvious to me that the Visa should just be paid in full. I'm getting some resistance from DH but he's weird like that. He has agreed to pay $100/month until it's paid. He hasn't actually used the card in a couple years, he's just been making those minimum payments all along. Go figure.

Less obvious to me is whether to prioritize paying off the car or the student loan. Clearly the student loan is at higher interest, but I could write a check *today* out of savings and just be done with the car payment, which is very attractive, and would also free up that much more cash on a monthly basis to put towards the student loan. We could also in theory then drop collision coverage, but the car is still worth about $3500 and our collision doesn't cost that much so I don't know if that's the best choice just yet. From a pure interest perspective however, it seems to make the most sense to let our savings continue to earn interest and just make the car payments as they come due. In that case the car would be paid off a year from now.

Somehow it's harder psychologically to take that same chunk of money and put it towards the student loan instead, although I think perhaps the math works better for us that way? Let's see, $2900 toward the principal today, then $900/month for the next 11 months means it would be completely paid off right around when we're done paying off the car. But our savings would be mighty thin during that time.

Looking for some other perspectives on this scenario...

[Ima saver]

If you can spare $1000 a month, I would put it all towards debt reduction. Obviously, you should pay off the small credit card, right away. I would not drop your collision coverage. My daughter did that and then totalled out her car 2 weeks later.

[MonkeyMama]

I am sure you will get a few opinions, but if I were you I would pay off the Visa right away. What a waste of money to throw at interest. It is not that much at this point, but the $25 payments and interest saved would do better paying off your other debts.

I wouldn't touch the car. You may be paying slightly more interest that you are earning, when you factor taxes, but for the most part it is a wash. If an emergency does come up you will be glad to have the cash.

Assuming your dh still won't budge on the Visa, it leaves you about $900/month to spare, $4k away from your efund goal, and $12k in student loans. I would either put it all to savings for a few months and then apply it all to the student loans thereafter, or you can split the difference, 1/2 to student loans and have to efund, or however you want to split it. Even that way you would pay off the student loan in less than a couple of years and still have a fully funded efund by early next year.

Or you could divide it and then once your savings is funded you can split it between the car and the student loan, to pay it off a little faster. I think the only benefit going this way is a bit more of a snowball affect, where you can free up the car payments to apply to the student loans. But I wouldn't necessarily rush it and blow through the cash you have already saved.

It really depends on many factors. You could be better off just putting all your money to the car the next few months and then hitting the student loans after (snowball). It would be doable if you really think you have enough cash. Depending on the steadiness of your jobs and other resources for cash in case of emergency. But regardless I would be wary to touch the cash you already have saved up - particularly for the car loan which is a good interest rate.

[MonkeyMama]

Oh yeah - I am a big believer in dropping collission when you have an old car and the means to replace it. In your situation I would not drop it though. Get rid of all of your debts before even considering it.

[scfr]

There is a Credit Card Calculator here on this site:
http://www.savingadvice.com/calculators/creditcard.php

According to that calculator, if you continue to pay $100 it will take you 7 months to pay off the Visa and you will pay $25 in interest.

Wouldn't your DH rather use that $25 to go out to dinner with you (or, better yet, pay it towards another one of the debts)? If you explain it to him that way, he may agree to pay off the card at once, which would be my first choice.

[deca]

His argument is that paying it off slowly is better for his credit score. I have never read any personal finance advice that suggests that hanging on to debt of this type is better for your credit score than paying it off, but he's adamant, and there's really no way for me to prove it's NOT true.

I'd love to save the $25, but I'm still working on convincing him to save bigger numbers in other areas, so I'm probably going to let this one go.

[JanH]

Well, you've at least got him to increase the amount paid to the Visa account so it will be gone earlier. Little steps! Then you can work on another strategy. He might be more used to paying larger amounts by then.

[scfr]

Originally Posted by deca

His argument is that paying it off slowly is better for his credit score. I have never read any personal finance advice that suggests that hanging on to debt of this type is better for your credit score than paying it off, but he's adamant, and there's really no way for me to prove it's NOT true.

I'd love to save the $25, but I'm still working on convincing him to save bigger numbers in other areas, so I'm probably going to let this one go.

Would it help if you told him that I always pay my credit card balance in full, have NEVER carried a balance, and my FICO score was over 800 (815-ish) until I paid off my mortgage early? Hanging on to your cards is good for your score, but hanging on to balances on those cards does you no good! [It does hurt your FICO score to pay off your mortgage, so it's possible he misinterpreted that as meaning credit card debt.] If his FICO's in the 820's he may have a point, but if not, then maybe he should let you pay off that Visa. Good luck!!!

[jIM_Ohio]

Originally Posted by deca

We've been working on building up an emergency fund, but I'm turning my attention to some outstanding debt at this point. Our emergency fund is about $6,000 and it's in an Emigrant Direct account earning 5.05%.

The debt we want to pay off is:

Student loan: $12,450 at 8.25% interest, payments are $170/month
Car loan: $2,900 at 4.75% interest, payments are $225/month
DH Visa: $675 at 10% interest, payments are $25/month

We can spare around $1000 a month to put towards savings and/or debt reduction. A "minimum" emergency fund of say 3 months' expenses would be roughly $10K, so we're not quite there, but I'm starting to feel like that is less of a priority until the debt is taken care of. I mean if we don't have those debt payments that reduces our living expenses by almost $500/month meaning we NEED less in an emergency.

ask your husband if a credit score will win him anything. I have a high credit score (760??), but it doesn't make me feel like a world champion at anything.

$1000 to cc and be done with it.

I would then send $500/month to an IRA (Roth preferred) and anothetr $200 to a tax efficient mutual fund (taxable account) unless a spousal IRA is an option.

Then put around $300/month towards debt reduction. Student loans would be my vote. Should pay off in around 3-4 years.

How much is saved for retirement?

[deca]

He doesn't need the credit score for anything, that makes this all the more aggravating. We want to stay in our current house forever. He has a car he likes and no plans to finance anything new. There is absolutely nothing lacking in our lives that we would need credit to buy.

He's 45 and has $100 in in IRA. No, that is not missing any zero's. He's been self-employed most of his adult life and never got around to setting anything up. And the IRA is at a credit union where it's barely earning any interest. I want to get that up to 3K and then move it over to Vanguard, where I have my own IRA. (I also have a 401k plan at work I contribute 5% to and get a 4% employer match.)

I personally feel that paying down the student loan is our highest priority right now, over building up the EF or contributing to DH's IRA, but I'm interested in counter-arguments. I suppose the risk would be freeing up that monthly cash but NOT then putting it into retirement funds instead.

[tinapbeana]

Well, working on the assumption that all other things in your life are relatively stable, I would consider a 3-way split. A third to EF savings, a third to an IRA, a third to debt. This would get $333 a month to the IRA, which is right at the monthly amount needed for the 4k (this year is still 4k right?) max deposit. $333 a month to an EF would pretty quickly build up to at least a month or 2 of expenses, at which point you could redirect that money towards debt payment.

By setting it up this way, once the debt is gone you'll only be used to having $667 'extra' per month since the money has been coming out for an IRA all along...

[autoxer]

Originally Posted by deca

From a pure interest perspective however, it seems to make the most sense to let our savings continue to earn interest and just make the car payments as they come due. In that case the car would be paid off a year from now.

Somehow it's harder psychologically to take that same chunk of money and put it towards the student loan instead, although I think perhaps the math works better for us that way?

If you focus on how much interest accrues each month, then it is psychologically easier to pay off the student loan.

Originally Posted by deca

The debt we want to pay off is:

Student loan: $12,450 at 8.25% interest, payments are $170/month
Car loan: $2,900 at 4.75% interest, payments are $225/month
DH Visa: $675 at 10% interest, payments are $25/month

The student loan debt will accrue $85.59 over the next month in interest, while the car loan will cost $11.48 & the Visa will cost $5.63. If you put $2900 toward the car, then your interest cost will go down by $11.48. If you put that $2900 toward the student loan, then the interest on that loan would cost $65.66. So you can reduce your interest by $11.48 next month by paying off the car, or reduce it by $19.93 by putting that money toward the student loan.

Originally Posted by deca

He's 45 and has $100 in in IRA. No, that is not missing any zero's.

DH needs to learn about the power of compounding interest.

[disneysteve]

I would pay off the Visa, then split that $1,000/month between the student loans and building savings, both through the IRA and your EF. I'd leave the car loan alone. At 4.75%, it doesn't make sense to pay it off early. You'll do better with tax-free compounding in your IRA where you could be earning 10% or more with a good stock-based mutual fund.

[anonymous_saver]

Based on a get out of debt calculator, by putting your extra $1,000 each month towards paying off debt, you would be out of debt in 1 year, 1 month! This is if you put this extra money towards the highest interest debt first. Also, when you pay of one debt, use the minimum payment you used to pay on that debt and continue putting that towards the highest interest debt. With this way the credit card bill would be eliminated during the first month of your plan.

Alternatively if you only had $500 a month to put towards debt, you would have it paid off in 1 year, 7 months. This would allow you to have some money to put toward retirement for your husband (it greatly scares me that he is 45 and only has $100 for retirement!). I also second the suggestion of get him switched over to Vanguard A.S.A.P. At the very least he should start putting in the maximum amount allowed in an IRA (you could use the rest of the $1,000 to do this, and your debt would still be paid off in a reasonable amount of time).

Also, there are plenty of articles to prove your husband wrong with the paying off debt slowing helps your FICO score myth on the interenet. Maybe you should try a quick search and e-mail him a few. ;-)

[deca]

Originally Posted by autoxer

DH needs to learn about the power of compounding interest.

I know...in his defense he's had some really hard times. During most of his 30's he coped with some major illness in the family and he was the rock everyone else leaned on. It made it hard to focus on his career or build up his assets. I don't judge him at all for it, I just want to make up for the lost time.

Originally Posted by anonymous_saver

Based on a get out of debt calculator, by putting your extra $1,000 each month towards paying off debt, you would be out of debt in 1 year, 1 month!

We may have more than 1,000 each month, that would just be the minimum. It depends on the bonuses I get and how revenue is for DH's business. We only recently, like since the beginning of 2007, started making more money.

Originally Posted by disneysteve

I would pay off the Visa, then split that $1,000/month between the student loans and building savings, both through the IRA and your EF.

I think this would be true if we truly had no other resources, however we do have open credit cards as well as well-off family that would help us if we were in desperate circumstances. By no means do I mean to rely on those factors long-term. I just can't see the point of thousands of dollars sitting in the EF earning 5% when there are outstanding debts accumulating interest at a faster rate. I feel like we're better off to keep our EF at say $5000 for now and really address the debt. It truly can be paid off within less than a year if we decide that's our priority. Then the 1,000 each month can go to the EF and IRA, etc. I have had a $2K emergency (car repairs) but I have never had a $5K emergency that wasn't covered by some kind of insurance. Our jobs are extremely stable. Long-term I'd like to have more cash savings on hand but I can't see prioritizing that over debt reduction right now.

DH's IRA situation is complicated, as a self-employed person he is eligible for a different kind of IRA where he can contribute more than 4K. He can apparently contribute 25% of his income up to $44,000. But it's hard to figure out all the options and what he really CAN contribute, since we don't tend to know until tax time how much he really made in income. I realize you can still contribute up until April of the next year...but not knowing what his cap will be makes it difficult to contribute throughout the year.

I think we could start making contributions based on his income from last year, maybe? So far this year I'd say he's earned a lot more over last, but it's very unpredictable.

[disneysteve]

Originally Posted by deca

I just can't see the point of thousands of dollars sitting in the EF earning 5% when there are outstanding debts accumulating interest at a faster rate. I feel like we're better off to keep our EF at say $5000 for now and really address the debt. It truly can be paid off within less than a year if we decide that's our priority.

I wouldn't argue with that plan.

[autoxer]

Originally Posted by deca

DH's IRA situation is complicated, as a self-employed person he is eligible for a different kind of IRA where he can contribute more than 4K. He can apparently contribute 25% of his income up to $44,000. But it's hard to figure out all the options and what he really CAN contribute, since we don't tend to know until tax time how much he really made in income. I realize you can still contribute up until April of the next year...but not knowing what his cap will be makes it difficult to contribute throughout the year.

I think we could start making contributions based on his income from last year, maybe?

Yes, just get it started. Don't worry about contributing too much until tax time. If you withdraw the excess contributions by the due date of your tax return, then there is no penalty.

[PrincessPerky]

Psychologically is kinda more important than perfect numbers, so long as all the numbers are getting you out of debt and into comfortable retirement, I think it matters more what you two can decide together than the 'one right way'

sounds like he is unwilling to do more than 100 on the CC, so drop it for now, and be great full he isn't running it up.

If you are happy with how your retirement is coming along and it will cover both of you, I wouldn't worry about forcing him to pay into it. Unless someone else knows more than I (which most posters here do) Not that I wouldn't aim for it in the future, just take the battle slow and steady.

As to the car vs student loan, I would go by the numbers so long as the husband is ok with it (which other math experts have said SL right?), and if he isn't, so long as he is paying on some debt, eh, not gonna kill you one way or the other.

As to the EF...I would put some into it as you pay off debt, but not a lot...cause psychologically when you are done with the debt you have that 'wow 1000 to use!' and you want to have some of the saving already automatic....all about the psych to me. I tis easier to up a payment than to start one, so having it there is useful IMO.