Payoff Student Loan or Car Loan First?

[Xtreme Thunder]

Greetings all,

I am having a little trouble deciding which I should pay off first, a small student loan or a small remaining car loan.

Background info:

My fiance (22yrs) and I (27yrs) are getting married September 25, 2011 and will be most likely getting some cash from guests we have invited. No wedding debt will be incurred.

The remaining student loan is her's with a balance of $1,490 (@ 5%).
The remaining car loan is mine with a total of ~$4,800 (@ 8.1%) after October 1, 2011 payment.

Student loan has just been interest only and first principal and interest payment is due this month. The payment is some ~$30 or so.

The car loan is $470 a month and has 11 payments remaining for a vehicle I purchased new in August 2007 (5yr loan).

We have no recurring CC debt.

Monthly Income (Net):

Me: $2,600 ($1,300/ 2 weeks)
Fiance: $1,900 ($950/ 2 weeks)

Monthly Expenses:

Mortgage: $1,297 (Prinicpal, Interest, Land/ School/ Fire Taxes and Home Insurance) [175K @ 4.75% closed November 2010]
Car Loan: $470
Student Loan: $10 (When it was interest only)
Car Insurance: $215 (2 cars, Premium paid in full every 6 months)
Electric/Gas: $193 (Budget Bill)
Verizon: $290 (2 Cell Phones (smart phones including unlimited data, 700 mins shared/ mo.), Home Phone, Home Internet, FIOS)
Water/ Sewer: $25 (Billed and paid every 3 months)
Gas: $400
Grocery: $400 (~$150/ 2 weeks; extra 100 is for extra small shopping trips and or dining out one or twice a month)
Medical: $100 (Doctor office visits, medication, vet etc.)

Net monthly savings: $1,100

Our EF is currently at less than $1,000, danger zone for me, especially owning a home.

Keep in mind we budget for 2 pay periods a month (24/ yr), leaving 2 pay periods a year (24+2=26)for extra savings and or home repairs. So in theory, we save more than $1,100/ mo.

We are real good at sticking to the budget, but purchasing the house this past year we are finally getting in the swing of things and not needing to spend money on random items for the house (lawn equipt, furniture etc.).

This month we have already committed to the following:

$1,000 Honeymoon (Hotel for 6 nights is slightly less than half that allowance)
$1,800 Home Repair from recent Tropical Storms.
$800 Last min stuff for the wedding between both mine and her CC.

$3,600 Total.

This will be one of the months of "extra" pay checks as mentioned above. Our total in savings this month is about $3,500 + ~$4,000 from the wedding guests for a total of about $7,500.

$7,500-$3,600-(1,000 EF)=$2,900

Seems like we should just get rid of the student loan first being we could cover that in full right away. After that I would like to do an additional $575/ mo. on the car until paid off which could be Feb 2012 instead September 2012.

If we do the car first, that means we could save a little over $1,550/mo. once paid off and start saving that amount sooner, then ditch the student loan.

After those are paid, we want to pay an additional $300/ mo. toward the mortgage.

What are your thoughts? Each day I change what we should pay off first and getting a headache!

Sorry for the long post!

Regards,
Joe

[disneysteve]

I am having a little trouble deciding which I should pay off first, a small student loan or a small remaining car loan.

The remaining student loan is her's with a balance of $1,490 (@ 5%).
The remaining car loan is mine with a total of ~$4,800 (@ 8.1%)

This is a no-brainer for me. The car loan goes first due to the higher interest rate. Neither loan is big and you should be able to have them both paid off pretty quickly so in the end it won't really matter all that much but you should always do the highest rate first.

[jpg7n16]

My thoughts: your EF is not as low as you make it seem. You actually have $3,900 available for an emergency if needed.

7500 - 3600 earmarked = $3,900 w/ no set purpose at this time, and available if something happens

Just because you haven't specifically earmarked it for an EF, doesn't mean it doesn't count.

Other thoughts:
If your company offers a 401k match, you should start taking it immediately. You have a large monthly cushion, and can afford to start saving for retirement.
I agree w/ DS to pay off the car before paying the SL. So after adjusting to take the match, pay extra on the car.
Then I'd actually up my retirement savings to 10% of pretax salary (both of you) before paying extra on the SL.
Then I'd pay extra on the SL.
Then up cash to $10k
Then start raising retirement to 15-20%.
Then pay extra on the home.

With the marriage, you guys need to get life insurance policies (don't see life premiums in your budget). You're counting on each other financially.
Also you should review your beneficiary designations on any accounts you guys have. ie. - You should prob leave your 401k to your new wife, not your brother (or worse, to your ex)

[Xtreme Thunder]

This is a no-brainer for me. The car loan goes first due to the higher interest rate. Neither loan is big and you should be able to have them both paid off pretty quickly so in the end it won't really matter all that much but you should always do the highest rate first.

Thanks, and that's what I was thinking, plus it has the least monthly amount.

My thoughts: your EF is not as low as you make it seem. You actually have $3,900 available for an emergency if needed.

7500 - 3600 earmarked = $3,900 w/ no set purpose at this time, and available if something happens

Just because you haven't specifically earmarked it for an EF, doesn't mean it doesn't count.

Other thoughts:
If your company offers a 401k match, you should start taking it immediately. You have a large monthly cushion, and can afford to start saving for retirement.
I agree w/ DS to pay off the car before paying the SL. So after adjusting to take the match, pay extra on the car.
Then I'd actually up my retirement savings to 10% of pretax salary (both of you) before paying extra on the SL.
Then I'd pay extra on the SL.
Then up cash to $10k
Then start raising retirement to 15-20%.
Then pay extra on the home.

With the marriage, you guys need to get life insurance policies (don't see life premiums in your budget). You're counting on each other financially.
Also you should review your beneficiary designations on any accounts you guys have. ie. - You should prob leave your 401k to your new wife, not your brother (or worse, to your ex)

That is a good way of looking at the EF, I didn't really think about it that way.

My company has a 3% (max) 414H retirement match and fully vested after 10. Have 5 years in already. That comes out of my check. After that time I will have additional from another outside investing company.
Fiancee does not and she is looking to get information regarding that from employer.
I have life insurance, enough to cover the mortgage in full plus, if something were to happen to me in the next 30yrs. That comes directly out of my check.
Fiancee I believe has a small policy, and looking to increase that shortly.

So, as I figured, the best path is to ditch the CL first then attack the SL.

[riverwed070707]

Am I understanding correctly that you are counting expected gifts from guests as part of what you potentially have in savings? What if people buy you gifts instead of giving money? I would wait to budget that money until it has actually been gifted to you.

[riverwed070707]

Also, if you're looking for feedback on your budget, your car insurance is outrageous. Why do you spend so much on gas? Do you commute a long way? You could cut that verizon bill way down. Do you need a home phone? Budget is also missing a lot -- gifts? Personal care? Haircuts, etc. Fun money? Dinners out? Vacations? Car repairs and maintenance?

Do you contribute to retirement? What is your medical insurance like -- will it go up once you get married? Seems like you guys are in a decent place for your ages and you have a good income to build a solid foundation from but you still have room for improvemnt.

[disneysteve]

GCar Insurance: $215 (2 cars, Premium paid in full every 6 months)

Also, if you're looking for feedback on your budget, your car insurance is outrageous.

This comment comes up regularly around here. riverwed, you need to keep in mind that auto insurance rates vary DRAMATICALLY based on location. I wish we were paying only $215/month for our two cars but we live in a high insurance state and when we lived in PA, our rate was double what it is now. So it totally depends on where you live, as well as what you drive and your driving record of course. What seems insane to you might be quite the norm to OP or me.

[Xtreme Thunder]

Also, if you're looking for feedback on your budget, your car insurance is outrageous. Why do you spend so much on gas? Do you commute a long way? You could cut that verizon bill way down. Do you need a home phone? Budget is also missing a lot -- gifts? Personal care? Haircuts, etc. Fun money? Dinners out? Vacations? Car repairs and maintenance?

Do you contribute to retirement? What is your medical insurance like -- will it go up once you get married? Seems like you guys are in a decent place for your ages and you have a good income to build a solid foundation from but you still have room for improvemnt.

Car insurance - 2 cars; Fiancee's car liability/ comprehensive only. Mine has collision, comprehensive, liability, full glass. All deductibles are $250. Separate policies, combining after get married. Her's averages ~$98/mo and mine averages $132/ mo. Considered low, I have gotten quotes, both have one or two tickets each that are about 3-5 years on record somewhere.

Gas - 2 cars x $50/ week = 400 mo. (4 week cycle). Sometimes we are right at that and sometimes about 100 left over depending how much we drive on weekends.

Verizon - We have talked about ditching the home phone, can't until 11/2012 when contract expires. All we get is spam on it anyway.

Dinners out are only 1-2 times a month and included in grocery budget. Vacations, we usually go camping, no need to save any more than $250 for a site for 5-10 nights. We are not the type to spend gobs amount of money on vacations. Car repairs and maintenance, well, that is somethig that generally comes out of the EF, but I admit that it could have it's own line item.

Retirement - Yes, mentioned in previous post.

We will be saving money on medical insurance as adding her to my policy will be cheaper then cost of her's...and for better coverage.

This comment comes up regularly around here. riverwed, you need to keep in mind that auto insurance rates vary DRAMATICALLY based on location. I wish we were paying only $215/month for our two cars but we live in a high insurance state and when we lived in PA, our rate was double what it is now. So it totally depends on where you live, as well as what you drive and your driving record of course. What seems insane to you might be quite the norm to OP or me.

Agreed!

I would pay off the student loan simply because you can pay that off now.

If I am reading your post correctly, you really seem to have $3,900 in your E.F. You could take $1,490 out of that, pay off your student loan and still have $2,410 in your E.F.

Then I think you should make double car payments and throw the rest of the extra $1,100 per month into your E.F.

In 6 months you should be debt free except for your house and have an E.F. of about $6,000.

Thanks for the imput. This may be the actual direction we go. Even though the car note has a larger interest rate, I almost feel that getting rid of the SL first would be good just to get rid of it.

Paying the CL off first would only be saving us <$100 in interest anyway. No matter which way we slice it, the CL will not be paid off in one shot anyway, and still will be incuring some interest. If there was much more owed on the CL, I would be swayed to do the opposite.

Debt free around Jan/Feb 2012 (except house of course) is our ultimate goal.

Both directions make since though!

[Frugal]

Personally, I don't want to give you the wrong advice. However, since I am in a similar situation, this is what I have done. I pay mostly 6.8% on my old student loans. Since I am paying them off really fast, I have noticed that I have already saved about three thousand in interest over about a year period or less. We have a mortgage that has a lower interest rate than my loans, by far (mortgage interest rate fixed 30 years = 4.25%), so I am not making pre-payments on that since we can't afford it on top of my paying down student loans.

Even if you have to really work to find extra money to put towards your loans (like student loans) with higher interest rates, it really pays off even in the short-term, when you look at the amortization tables and see how much interest you have already saved by paying off extra. It helps to see that number driven down, when you feel like they will never be paid off.

[Xtreme Thunder]

Hey all, just wanted to update. We got married last weekend and it was such a wonderful day!

We ended up getting a little more for the wedding than I estimated, so that was nice.

We were able to pay off our credit cards as to incur no interest charges (as we always do), paid off the student loan, and added $500 toward the principal of the auto loan. Our EF is currently sitting at $3,100, so we are fine with that. The auto loan, should have ~$3,900 after standard and principal payment posts this Monday.

[Eric80]

If I were you I would maximise the car payment and reduce the student loan as the interest isn't as high- to be sure though maybe visit your citizen advice bureau to make sure that what you are doing is right

[Xtreme Thunder]

If I were you I would maximise the car payment and reduce the student loan as the interest isn't as high- to be sure though maybe visit your citizen advice bureau to make sure that what you are doing is right

I paid off the student loan the beginning of October, 2011.

I have projected car loan payoff to be either end of November, 2011.

Current payoff as of statement received a couple days ago is:

$4,445
- $2,200 (additional principle payment on October 28, 2011)
= $2,245
- $445 (projected principle amount for November 1, 2011 payment)
= $1,800
- $1,800 (payoff November 25, 2011)
= $0

[BMEPhDinCO]

Looks like y'all are right on track! Once the car is paid off, I'd take Dec - Apr to dump a ton into a Roth IRA for both of you ($350 each = $700 * 4 months = $1,400 per account for 2011 - rest to a new account for car expenses, house expenses, etc - ie, not an EF but an expense account).

Then, I'd start contributing to the 2012 Roth, along with the expenses account. Once that's up (let's say, June), then yes, start putting more on the mortgage or budget for other expenses that may have come up.

[Xtreme Thunder]

Update:

$2,200 transferred and additional principal payment initiated. Probably will not post to account until Monday October 31, 2011 though.

Tuesday November 1, 2011 regular scheduled payment due, and that won't post to account until November 2, 2011.

November 25, 2011 I will get the payoff amount and CL will be paid off! ...10 months early (on a 5 year note)!

[LivingAlmostLarge]

Very nice. Next up Roth IRA for both of you. You can put in $5k each so $10k by April 15th, then $10k for 2012 Roth IRA then focus on EF and upping retirement to 15%. Then prepay mortgage.