Adjustable or Fixed Rate First

[LivingLife]

Hi Everyone,

In the past year my husband & I decided to tackle our debts and get a handle on our finances. This past month, we finally paid off all of the credit cards and my student loans.

We still have 3 debts left to demolish and I am not sure which to focus on and would really love some guidance.

Here's some basic financial information to start with (please let me know if I missed anything)

Gross Salary - $200K
Discretionary - $1700 month - putting $500 into Emergency Fund
Emergency Fund - $4,500

Student Loan - Refinanced Jan16 from 7.50% to adjustable rate which is at 3.44% (max rate 8.95%); Balance $64,000; 7 years loan; Pmt $910.

401K Loan @ 4.25%; Balance $11,000; Semi Monthly Payroll deduction of $280. We feel that the job is secure....

Auto Loan @ 3.99%; Balance $27,500; 72 payments left at $430

Should I focus on paying as much as I can towards to student loan debt OR stick with the highest interest rate?

Thanks!

Mae

[LivingAlmostLarge]

Get money together for 401k loan then pay it off one shot. Then look at getting an ef of 3 months then I'd do student loans then car loans.

[Petunia 100]

I'd pay them off in this order:

401k loan

student loan

car loan

[dczech09]

You make too much money to be making decisions like this...

First of all, changing your student loan to an adjustable rate was really not a good idea. Sure, you have a lower rate right now, but rates have no where to go but up. The loan has a max rate of 8.95%... well you can be certain you will be paying that well before that loan is paid off. Unless of course you speed up the process, which really you're gonna have to!

Adjustable rates were created so that banks can transfer the risk of higher rates to the customer. Banks and other lenders are going crazy with marketing their adjustable rate products. The reason why is because the interest rate environment is very uncertain right now. Rates are very low, but could go up at virtually any time. The Fed will not keep rates this low forever; they will eventually have to raise rates. And when that happens, higher rates will be here and anyone with an adjustable rate loan will wish they hadn't done that deal.

Secondly, why such a large 401k loan? Regardless of job stability, 401k loans are not good ideas (unless it is to avoid bankruptcy or foreclosure, and even then I hesitate on the bankruptcy part). Your 401k loan needs to go first, because if something happens, that loan becomes due in full immediately. You will have 90 days to repay the loan, and if you don't you will be penalized by the IRS.

Finally, the car loan is a problem. Not so much the amount that you took out (you make more than enough to support that debt). Personally, I would never take out a car loan, much less such a large one, but based on your income it is not at of whack or anything. What is problematic however is the duration of the loan. 72 months remaining?! That's crazy!

I do not advise people to borrow on a car loan unless they absolutely must, and even then I recommend sticking to something that can be paid off within 2 years. I would never recommend a 72 month car loan. The problem is that your loan will probably survive longer than the car. Then what happens? You end up taking out a new car loan to finance your deficit and a new car. And so on. It puts you on this perpetual merry-go-round of payments. By the time your working lifetime is over, you have lost SO MUCH in opportunity cost that you could have bought over 20 cars outright.

Anyway, you wanted advice on what to do...

1. Stop contributing more to your emergency fund. Keep what you have for now; it is more than enough to weather out any unexpected events.

2. Take out the 401k loan as fast as you can! That 401k loan is pretty crazy and needs to be treated as if it were a pay-day loan. No job is secure enough for that!

3. Get on top of the student loans. Yeah, it has a lower rate than your car loan, but that could change at virtually any time. The loan is very uncertain right now and needs to be paid off as soon as possible, unless you can refinance back to a fixed rate.

4. The car loan is going to take the back burner. Stick with the minimum payment, but not a penny more. Your 401k loan and your student loan will take priority. Had you not done the adjustable rate deal on the student loan, then the car loan will be priority number 3. However, things are different.

I hope this make sense! I know I gave you more feedback than you asked for, but that is what I do

[pflyers85]

Welcome to SA! The good news is you have a decent income to dig out of this mess. How quickly is really up to you and your husband and how much you are willing to sacrifice. Do you have children together? Can either or both of you pick up an extra part time job to supplement your income? Is it possible to downgrade cable/cell phone plans? Eat out less? I know these seem like small nickel and dime suggestions but they can go a long way in freeing up some extra money to throw at your debts.

I'm glad to see you have some emergency fund in place. For now I would agree with the previous comments that you should temporarily hold off on anymore contributions to the Efund. From there I would make the minimum payments necessary on the student loan and vehicle loan and throw everything I had at the 401K loan. If you add the $500 that you put towards your emergency fund with to the semi monthly $280 deduction you could have that paid off within 11 months. If you can make sacrifices elsewhere in the budget and free up more money you can pay it off even faster.

I also concur with dczech's reasoning to attack the student loan over the vehicle loan after the 401K loan is paid off. Assuming you made the minimum monthly payments on the student loans your balance around the time you complete paying the 401K loan should be slightly above $55K. If you rollover $500 + $560 (2x280 payroll deduction) then add the $910 payment plus an extra $30 per month you can pay $2000/mo towards the student loan and get that cleaned up in just over 2 years. Assuming you have followed this plan exactly as described you should have just under $11K left on the vehicle loan after paying off the 401K loan and student loan in just over 3 years.

In summary if you follow these steps and not add to your debt you can be debt free (mortgage/rent outstanding) in about 4 years. If you are really ambitious and have the time to add part time work or make other sacrifices you could have this cleaned up between 2.5 - 3 years.

[corn18]

There's more info required. You gross $200k, I would guess you net around $134k. Minus the $1700 / mo discretionary, that means you are spending around $114,000 a year or $9,500 / month. What do you spend the $9,500 / month on? As pflyer85 said, just figuring which one to pay first is a good thing and I agree with all the recommendations so far. But you could go a lot faster if we knew what you spend that $9,500 on each month and how to reduce that to get rid of this debt faster.

[tripods68]

Discretionary - $1700 month - putting $500 into Emergency Fund
Emergency Fund - $4,500

I'll stop putting more $$ into the EF. Put the rest of $1700 discretionary spending towards auto loan instead. Once that is gone, snowball 401k loan, follow by the student loan with intensity.

[Goldy]

I'd pay them off in this order:

401k loan

student loan

car loan

I agree with this payment plan and I think refinancing to a adjustable rate was a fine idea for the short term.

With that said it would be very helpful to see an actual budget since you make great money but have a very small emergency fund I wonder if there are other areas you might be able to find some cash. There are budgeting apps like Mint that are really helpful for getting a handle on these things.

[LivingLife]

Thanks everyone! I will stop contributing to the EF and roll that into the 401k loan. Dczech09's quote stating that it "needs to be treated as if were a pay-day loan" really struck a cord.

Here's my new plan of attack:

• 401K
• Student Loan
• Car Loan

In September, we anticipate receiving his yearly bonus. The amount varies, but I anticipate around $6000 which will be used for debt reduction. That should pay off the 401k loan.

I am planning on refinancing the adjustable loan when rates start rising. The original plan was to pay as much as I could on this to lower the principal balance as this debt is driving me insane.

I will pull some numbers to see where the money is going later this week. We do have some high expenses, such as rent and auto insurance because we live in South Florida. My husband works from home so our internet and cell phone package is outrageous ($300) as he needs multiple means of connectivity. Unfortunately, he is not reimbursed for these expenses

Many of you mentioned the "B" word. I know, I know. I get major resistance. To counter, I am going to start printing a weekly report showing where the money is going. Hopefully this will help get things under control.

I'll give an update once I pull those numbers and provide a realistic budget.

Thanks!!!

[Nutria]

Many of you mentioned the "B" word. I know, I know. I get major resistance. To counter, I am going to start printing a weekly report showing where the money is going. Hopefully this will help get things under control.

I'll give an update once I pull those numbers and provide a realistic budget.

Note that your budget doesn't need 15,000 categories. Just account for everything.

Here are our categories. They're all fixed. No overage at all. With one exception, no shortfall at all. Note the Slush Fund. That's our catch-all for "everything else" (clothes, fun stuff, restaurant over-budget, DVDs, political bribes, etc). Our checking account starts the calendar month with $600 and ends with $600, and the credit cards start and end at (approximately) $0. This way, we know we stay on budget.

Debt – Van
Debt – Mortgage
Debt – Camry
Food – Groceries
Food – restaurant
Insurance (auto)
Insurance (home)
Misc – CheckFree
Misc – Water
Misc – Storage Unit
Fuel
Savings – 401k (DW)
Savings – 401k (me)
Savings – General
Savings – Medical
School Lunch, kids
School tuition (DCC)
School tuition (kids)
Slush fund
Tax – Property
Util – Cable / Internet
Util – cell phone
Util – Electricity
Util – gas company
Util – Security
Util – Sewerage
Util – VoIP
DW – weekly Cash
DW – Parking

[sv2007]

Hi Everyone,

In the past year my husband & I decided to tackle our debts and get a handle on our finances. This past month, we finally paid off all of the credit cards and my student loans.

We still have 3 debts left to demolish and I am not sure which to focus on and would really love some guidance.

Here's some basic financial information to start with (please let me know if I missed anything)

Gross Salary - $200K
Discretionary - $1700 month - putting $500 into Emergency Fund
Emergency Fund - $4,500

Student Loan - Refinanced Jan16 from 7.50% to adjustable rate which is at 3.44% (max rate 8.95%); Balance $64,000; 7 years loan; Pmt $910.

401K Loan @ 4.25%; Balance $11,000; Semi Monthly Payroll deduction of $280. We feel that the job is secure....

Auto Loan @ 3.99%; Balance $27,500; 72 payments left at $430

Should I focus on paying as much as I can towards to student loan debt OR stick with the highest interest rate?

Thanks!

Mae

Hey, I thought the reason we take adjustable rates is to take advantage of its lower rate. So if you want to pay it off first... woulldn't that kind of defeat the purpose?

I'd say pay your Auto loan off first because it's got strings on you like if you total your car, or something.

Next, pay off your student loan; and

Finally your 401k loan (while your 401k loan is outstanding, you won't be earning return , but unless those returns are higher than your loan interest rates, it's better to not pay it off before).

In a limited way, the 401k loan is a lon you took against yourself, so you are paying yourself interest. Of course, it's killing your 401k savings, but better than those other loans you've got.

[JeffH]

I agree with the others. For the time being stop putting more money into the EF. Use the full $1700 extra to pay down debt.

There's two ways to do a debt snowball:
1) smallest amount first
2) largest interest rate

Google debt payoff calculator snowball or any variation of that. It will tell you which way to pay down to save you the most amount of money in the least amount of time.

However my experience from when I've help people is that they need to see results quickly otherwise they stop doing the snowball. This is a decision that you have to make which way you want to go.

If you have any other questions feel free to PM me.

[chestynuts]

Good luck with paying off your debt, LivingLife. I have a feeling you're gonna be able to do it. I mean, you have the funds it's just a matter of allocation.

Do update us if you can. I personally love to hear about it.