Debt Repayment/Savings Priority

[raebies]

Here is my situation;

I have around $17,000 in student loans that I am paying about $213 a month on it.
-$6000 has a 2.47% variable interest rate
-The remainder is at 6.8% fixed
I have a $4500 401K loan which will be paid off in November of 2012.
I have a $2500 car loan which I will have paid off by September of this year.
I have a emergency savings fund started, which will have $1000 or more in it by September of this year.
I have no credit card debt.
I put 5% of my pre-tax income towards my 401k.
I am 25 years old.

My goals:
-I want to have 3-6 months of expenses saved in an emergency fund (about $9-18k).
-I want to get a down payment for a house in the $100-150K range with a 15 year mortgage.
-I want to have as little debt as possible.

My question is, once I pay off my car loan I will have an extra $400 a month to distribute towards all my goals and I am wondering what my priorities should be.

My concerns:
-I've heard MANY different reports with varying opinions on paying off student loans early. However, I don't like the idea of having that much debt hanging over my head. I had to get a forbearance for my loans once, I don't want to do it again.
-I know that the 401K loan is a liability if I should lose my job. However, I am very sure of my current situation as long as it doesn't drive me crazy.
-How should I balance my savings goals with paying down my debt? Also, which loans should I pay down first?

Any advice would be appreciated,
~Rae

[littleroc02us]

Pay off the 401k first because if you lose your job you have to pay it back asap. Then I would do it like this.

1. Get rid of the 2500 car loan next, that will free up some more cash.
2. Pay off the 6k next
3. Finish the school loans
4. Build up EF to 3-6 months expenses
5. Invest 15% of income
6. Save for DP of 20%

[raebies]

Pay off the 401k first because if you lose your job you have to pay it back asap. Then I would do it like this.

1. Get rid of the 2500 car loan next, that will free up some more cash.
2. Pay off the 6k next
3. Finish the school loans
4. Build up EF to 3-6 months expenses
5. Invest 15% of income
6. Save for DP of 20%

I know the 6k is variable, but it is currently less than half the percentage of the rest on the fixed percentage.

Also, I really don't feel safe without having an EF with at least one month's expenses, should I really wait until ALL my debt is paid before I do that?

Another thing with buying a house, I intend to live in a basement or a bedroom suite and rent out the rest so I make my house work for me while I'm single.

Isn't there a way to balance saving and paying off debt without doing one to the exclusion of the other?

[jpg7n16]

I know the 6k is variable, but it is currently less than half the percentage of the rest on the fixed percentage.

littleroc never considers interest rates - he only looks at the balance owed.

What are the rates on the car loan and 401k loans?

I think your EF must be a bit lower while in debt elimination mode - then switching to a 3-6 month one later. (likely 5-6 months for you since you seem more risk averse - say $15k or so)

[littleroc02us]

I know the 6k is variable, but it is currently less than half the percentage of the rest on the fixed percentage.

Also, I really don't feel safe without having an EF with at least one month's expenses, should I really wait until ALL my debt is paid before I do that?

Wben i was getting out of debt I was following David Ramsey's plan which is to put 1000k in an EF while getting out of debt. It always covered my emergencies when I was getting out. You can bulk it up after to pay off the debt.


Isn't there a way to balance saving and paying off debt without doing one to the exclusion of the other?

IMO, you could but both items will take longer, it's like using one rock to throw at 2 birds. Attack one and then go after the next one. You spread yourself to thin.

[raebies]

What are the rates on the car loan and 401k loans?

The car is 4.99% but I would like to get that paid off because I want the title to be clear because I am considering getting a different car within the next year or two (Fortunately, the car is worth a little more than twice what I owe!)

The 401K loan is 4.25%, BUT that interest is being paid back to my account, not to some bank or financial institution. However, if I were to lose my job, I would have to pay early withdrawl penalties. Currently, my job is about as secure as you can get without a contract. I am also not allowed to pay early on the loan until the end of this month.

I think your EF must be a bit lower while in debt elimination mode - then switching to a 3-6 month one later. (likely 5-6 months for you since you seem more risk averse - say $15k or so)

This is why I'm starting out at aim for a $1k fund for now. I would like to have at least 1 month's security while paying things down. Fortunately, I could make 1 month go to almost 1.5 months if I REALLY cut back and pay minimums on my debt. I also have a friend who owes me $1000 for rent on a shared place a while back which they have now started to repay which I am slating for my EF.

[littleroc02us]

littleroc never considers interest rates - he only looks at the balance owed.

I don't think interest rates are important when eliminating debt to explain it in my words, I base it on smallest balance first because you gain motivation from conquering debt faster. Plus if you truly are dedicated to getting out of debt quickly why would a $100 matter in interest when your getting rid of debt. It' all about the mind and what makes it tick, not the interest mathematical comparisons for me. it worked great for me.

[raebies]

Oh, another thing with only having $1k in an EF, my rent alone is $1,100 and I'm living pretty inexpensively for my area. I wouldn't feel safe with not even being able to pay rent. Fortunately, the $1,100 includes utilities which is a godsend.

[jpg7n16]

Then my payoff order would go as follows:

1) 6.8% student loans (even after tax deduction, they cost more than any other debt)
2) Car loan (4.9%)
3) 401k loan (4.25%)

4) Then save up 3-6 months expenses
5) Then save 10% for retirement, while saving up for downpayment
6) Once you have downpayment, save 15-20% for retirement

7) Then, pay extra on the house (if you have extra)
8) Only then, pay extra on the 2.47% student loans (if you really want to)


During steps 1-4, I would take the company match in your 401k - no more, no less.

[littleroc02us]

Oh, another thing with only having $1k in an EF, my rent alone is $1,100 and I'm living pretty inexpensively for my area. I wouldn't feel safe with not even being able to pay rent. Fortunately, the $1,100 includes utilities which is a godsend.

Then what would you feel safe with as an EF for the short term while your paying off debt?

[raebies]

Then what would you feel safe with as an EF for the short term while your paying off debt?

Probably 3k

[littleroc02us]

Probably 3k

Than why not save that and then do my plan that I suggested?

[jpg7n16]

Than why not save that and then do my plan that I suggested?

Maybe because you keep the most expensive debt around the longest and ignored all the OPs concerns about the debt?


The car will be paid off shortly anyways, but the OP is concerned about the level of student loan debt, and it is the most expensive debt OP has. (even after tax deductions)

So not only is it OPs main concern, it's the most expensive - so your plan is to keep it around the longest??

OP wasn't concerned about the car (should be paid off soon, and has a car worth double what's owed) and isn't concerned about the 401k loan - so you make these the first items paid off?


Were you listening to the OP at all, or just looking at the balances?

[musicrocks0304]

Shout out! I concur with jpg7n16. To me it doesn't make any sense to tackle the weakest things first to build motivation. What's working as motivation for me at the moment is to pay off the BIGGEST thing first. Do you have any idea how good it's going to feel to have that off my shoulders? Amazing. RAE- I advise you do the same.

[snshijuptr]

I agree with jpg except I would pay the 401k loan off first because 1) gah job loss is scary and 2) not only is it costing your interest, but it's not invested in the market.