Debt Plan Optimisation

[chronomancer]

Hello,


I have multiple student loans, and 2 credit cards with balances.

I've been doing pretty well at getting out of debt recently and I have a pretty sound plan. My question is a small one about optimizing it. My plan isn't original. It's just a "Roll-Over" plan in which you allocate a set amount of money per month for debt, then pay the minimum on everything but the debt with the highest interest rate. Put the remainder of your budgeted money on that one. Once that is paid off, repeat on the next highest rate account "rolling over" what you used to pay on the one that is paid off. Pretty simple.

I've been doing this for a couple of months when one of my older credit cards (already paid off) offers me an 18 month 0% balance transfer offer. Pretty sweet deal. So I did that. The rate after the intro rate is pretty high, about 18-20%.

My question is, since this rate is 0% for 18 months, should I start paying extra on the highest rate loan (highest now) or make payments on the 0% first since it will have the highest in 18 months? I'm leaning toward highest now.

Is there a simple answer for this that doesn't require a ton of math? Or maybe someone knows of a great spreadsheet that can help. I can provide more details if anyone needs them, like some balances and other rates.

Any input will help! Thanks!

[Nutria]

Which money did you transfer into the 0% offer? From the most expensive card?

I was faced with this exact problem a few years ago, and whipped out my spreadsheet program.. One column per card, and one row per month. It allowed me to work through a multitude of scenarios.

Remember that the monthly interest on a card who's APR is 15% is 0.15/12 so the monthly increase in balance is BALANCE x (1 + 0.15/12).

For more specifics, you'll have to give us details on what each of your CC balances and rates actually are.

[Petunia 100]

I'd focus on the one which is highest now. Remember, if you have good credit, you don't need to ever pay 18-20%. There are always good balance transfer offers out there.

[yupstrips]

Debt optimisation

Debt optimisation (sometimes referred to as “Debt Recycling”) is a financial strategy that creates wealth over time and improves an individual’s debt structure. Achieved, in the majority of cases by:

Using all surplus income to reduce the home loan (non-tax deductible “bad debt”);
Creating or increasing investment debt (tax deductible “good debt”) by drawing against equity in the home; and
Using this borrowed money to build an investment portfolio.
It is a great strategy that can be adapted to suit your goals and time horizons. Though, it is important to note that borrowing money to invest and budgeting are key components.

Here is an example of how the assets and cash flow involved in a debt optimisation strategy using a “split loan”:

Where suitable, it is possible to extend on the strategy above by using the newly created investments as security for a margin loan, with the proceeds used to further invest. In this type of strategy the interest costs are still generally met from the home loan, with investment income also used to reduce the home loan balance.

[Nutria]

Creating or increasing investment debt (tax deductible “good debt”) by drawing against equity in the home; and
Using this borrowed money to build an investment portfolio.

Where do you get the cash to pay back the HELOC or 2nd mortgage you took out to make those investments (which will need to start producing cash really darned quickly in order to start paying back the loan)?

And when the equity market drops, how will you pay back that loan (since when you don't, they'll foreclose on you)?

Bottom line: it was a great idea in 1986, but thirty years later? It's a horrible idea.

[sv2007]

Which money did you transfer into the 0% offer? From the most expensive card?

I was faced with this exact problem a few years ago, and whipped out my spreadsheet program.. One column per card, and one row per month. It allowed me to work through a multitude of scenarios.

Remember that the monthly interest on a card who's APR is 15% is 0.15/12 so the monthly increase in balance is BALANCE x (1 + 0.15/12).

For more specifics, you'll have to give us details on what each of your CC balances and rates actually are.

The monthly should be balance * (1 + .15) ^ (1/12), your formula over estimates.

How much money do you have on the CC?
If it isn't too much (since you are able to pay off in 2 months), then it is best to not optimize (esp with faulty formulas). Take that 0% interest as a freebie and just pay it off as usual (assume you've moved the most expensive debt onto it).