Debt repayment order

[ronb]

Rutgers07,

The reason why the Dave Ramsey snowball method works is because of behavioral psychology. People feel empowered and self confident when they pay off their debts. So, if you dump the $2,500 you will get the psychological boost of being a bit more debt fee.

I personally like that feeling a lot.

Plus, if you pay off the $2,500, you can always use the amount you were paying to the debt to rebuild your savings. It probably won't take too long to get your savings built back up.

[rutgers07]

Now that we're pretty well settled in our home, it's time for the wife and I to really figure out how we want to pay back our debts. Here is the run down (balances are approximates since I don't have the info right in front of me):

Student Loans:
1 - $2500 @6.9% (64/month)
2 - $16,000 @6.9% (185/month)
3 - $50,000 @5% (in deferment but will be about $400/month)

Car - $14000 @1.9% (376/month)

Update: Loan 1 has been paid off, loan 2 is down to somewhere around 8k. The 50k loan we have refinanced about 37k of it. I was wrong with the math I believe and it was confusing at first. 13 or so was at 2.8% and the other 37 was at a 6.8% rate so now I can pay extra on the high interest one and pay just the minimum on the low interest. Slowly getting there...

[snafu]

Terrific to have paid off SL #1, $ 2,500. What progress is identified on Ramsey Everydollar app? Is it your plan to re-direct SL $ 64.+$ 50. from gym fee to SL #2 [$ 114.+ $ 185.] done in slightly more than two yrs?
What was result of action to reduce cell rate?

What does DW see as the best method to slay the $50,000. SL when it comes out of deferment? Since it's seen as DW's debt, would she be amenable to using the majority of her net income to get it paid down as quickly as possible, thereby reducing interest added and stress/drag of more than 10 years of payments? You are in control of how you use your money rather than your money obligations controlling your choices.

[rutgers07]

Terrific to have paid off SL #1, $ 2,500. What progress is identified on Ramsey Everydollar app? Is it your plan to re-direct SL $ 64.+$ 50. from gym fee to SL #2 [$ 114.+ $ 185.] done in slightly more than two yrs?
What was result of action to reduce cell rate?

What does DW see as the best method to slay the $50,000. SL when it comes out of deferment? Since it's seen as DW's debt, would she be amenable to using the majority of her net income to get it paid down as quickly as possible, thereby reducing interest added and stress/drag of more than 10 years of payments? You are in control of how you use your money rather than your money obligations controlling your choices.

Currently all extra money is being put towards debt. She's definitely not as "gazelle intense" as Dave Ramsey is, but is coming over to my side. I'm at the point where I don't see her debt as just hers since we are married. It would be nice to pay off 50k in 2 years but that is a lot, and it'll be hard for me to sustain that level of work to support paying that off. Maybe 2.5. We still have the remaining balance of the other 6.8 loan left.
Cell rate will go down in the next month or two as my parents and I finally come off of our family plan and DW and I can be on one plan. Should drop our monthly amount to $120.

[LivingAlmostLarge]

Still good working on paying off debt. Sometimes you have to compromise to get ahead.

[rutgers07]

Question: Do I deplete most of my EF to finish paying off the last ~8k on one of the loans? If I did, that would leave me with ~$1800 liquid cash but another 10k in my Roth for real emergencies. I like having liquid cash but that much may not be necessary. We also have great parents whom we could borrow from in a real tight pinch. I could do that and then divert all extra cash to rebuilding the EF and then starting over again with the rest of the loans. It is just painful to be that illiquid, something I have a hard time wrapping my head around. Running the numbers it looks like we'd save 1k paying the minimum (now up to 225) for the loan that's left.

[snafu]

rutgers, perhaps I misunderstood...
SL #2, @ $ 8K suggests...regular payment $ 185.+ redirected sums $64. & $50. should clear in about 24 months. In order to call future earnings your own, what does DW see as reasonable, accelerated repayment schedule for SL #3? Extra income, whatever the source...raises, bonuses, tax refund, lower cell cost, monies not targeted, selling items no longer used, no longer needed, small reduction in ROTH contributions [unless there is a significant drop in Index when redirected for retirement is a bargain]

*we're being told the current cycle is getting old

[GoodSteward]

Question: Do I deplete most of my EF to finish paying off the last ~8k on one of the loans? If I did, that would leave me with ~$1800 liquid cash but another 10k in my Roth for real emergencies. I like having liquid cash but that much may not be necessary. We also have great parents whom we could borrow from in a real tight pinch. I could do that and then divert all extra cash to rebuilding the EF and then starting over again with the rest of the loans. It is just painful to be that illiquid, something I have a hard time wrapping my head around. Running the numbers it looks like we'd save 1k paying the minimum (now up to 225) for the loan that's left.

I don't mean this harshly, but you are already setting yourself up for failure by assuming your responsibility on someone else. It is a bad idea to obligate family as your EF, and when we assume they will take care of us we often make choices that make that happen. I feel this is a misplacement of responsibility. One I made too many times to mention myself, and it wasn't good. I do not recommend keeping this as a fallback, even if it is. We do not want to be a burden on our families. That's just my .02 on this.

I get a bit anal about it because I"ve watched my brother have this mindset, and it has been a disaster on my parents. I don't think you mean anything by it. I just wanted to warn you to be careful doing that.

[Jluke]

Question: Do I deplete most of my EF to finish paying off the last ~8k on one of the loans? If I did, that would leave me with ~$1800 liquid cash but another 10k in my Roth for real emergencies. I like having liquid cash but that much may not be necessary. We also have great parents whom we could borrow from in a real tight pinch.

Chip away at it... put 2k, 3k or 4k now... wait a few months and then chip away more if possible.

I would not deplete my EF to that low a level in case something hits the fan (car, appliance, home, medical bill, etc).

[rutgers07]

I don't mean this harshly, but you are already setting yourself up for failure by assuming your responsibility on someone else. It is a bad idea to obligate family as your EF, and when we assume they will take care of us we often make choices that make that happen. I feel this is a misplacement of responsibility. One I made too many times to mention myself, and it wasn't good. I do not recommend keeping this as a fallback, even if it is. We do not want to be a burden on our families. That's just my .02 on this.

I get a bit anal about it because I"ve watched my brother have this mindset, and it has been a disaster on my parents. I don't think you mean anything by it. I just wanted to warn you to be careful doing that.

I didn't mean to imply we would borrow from them, but in an absolute crisis we are not in dark waters. That's why I've always kept some sort of an EF, since I would never want to rely on them. It was more of a statement to acknowledge that we would not be foreclosed on or anything drastic if a mega-emergency hit.

[rutgers07]

rutgers, perhaps I misunderstood...
SL #2, @ $ 8K suggests...regular payment $ 185.+ redirected sums $64. & $50. should clear in about 24 months. In order to call future earnings your own, what does DW see as reasonable, accelerated repayment schedule for SL #3? Extra income, whatever the source...raises, bonuses, tax refund, lower cell cost, monies not targeted, selling items no longer used, no longer needed, small reduction in ROTH contributions [unless there is a significant drop in Index when redirected for retirement is a bargain]

*we're being told the current cycle is getting old

The regular minimum payments are up $225 now since she was on some type of graduated payment plan. We have already been selling things, she is on board with tax refunds going to where it needs to be best allocated; right now, payments are being set at around $400 and I will pay more as needed.

[rutgers07]

Chip away at it... put 2k, 3k or 4k now... wait a few months and then chip away more if possible.

I would not deplete my EF to that low a level in case something hits the fan (car, appliance, home, medical bill, etc).

Perhaps I've just been listening to too much Dave Ramsey. The 1k EF keeps bouncing around in my head.

[scfr]

Question: Do I deplete most of my EF to finish paying off the last ~8k on one of the loans? If I did, that would leave me with ~$1800 liquid cash but another 10k in my Roth for real emergencies. I like having liquid cash but that much may not be necessary. We also have great parents whom we could borrow from in a real tight pinch. I could do that and then divert all extra cash to rebuilding the EF and then starting over again with the rest of the loans.

Maybe . . .

The amount of EF you need depends. You have 3 sources of income between the 2 of you - that is good. Do you have good insurance (medical, dental, vision, homeowners, auto) with low deductibles? Is your home new and/or still under builder's warranty? Do you have 2 cars, and if you do, would you be willing to sell 1 of them if necessary to raise some quick cash? Any chance that there will be a pregnancy?

It also depends on your state of mind, which only you know. Is the "parental safety net" something that you would easily fall back on just because it is there, or is it an "only in the absolute worst case scenario and I'm just thinking of it so I can sleep at night" type of thing? An adult child relying on parents so that they can live beyond their means is NOT COOL, but on the other hand simply coming up with a plan of what that adult child would do if their world totally fell apart is PERFECTLY OK.

In your situation you may be able to get by with a lower EF for a short amount of time than a household with 5 people, only 1 breadwinner, and a house that is about to fall down.

Before you do anything I suggest that you run your 2016 taxes. You've had some big life changes (marriage and home purchase) and your tax situation may have changed significantly. You don't want to be surprised by a large amount of tax owing when you prepare your tax return with no way to pay it. Conversely, if you find out that you will be getting a large refund you could adjust your withholding right now and use the extra monthly takehome to either pay down the debt or rebuild the EF.

Another suggestion: Do you and your wife exchange gifts (winter holiday, birthday, anniversary)? Could you agree to stop that until all debt is paid off? Could you give each other the gift of financial freedom in lieu of material objects?

[rutgers07]

Maybe . . .

The amount of EF you need depends. You have 3 sources of income between the 2 of you - that is good. Do you have good insurance (medical, dental, vision, homeowners, auto) with low deductibles? Is your home new and/or still under builder's warranty? Do you have 2 cars, and if you do, would you be willing to sell 1 of them if necessary to raise some quick cash? Any chance that there will be a pregnancy?

Insurance is good not great. Home is not new at all, and we would, in a desperate emergency, sell one of the cars and could get by. No chance or pregnancy whatsoever. DW cannot have children.

It also depends on your state of mind, which only you know. Is the "parental safety net" something that you would easily fall back on just because it is there, or is it an "only in the absolute worst case scenario and I'm just thinking of it so I can sleep at night" type of thing? An adult child relying on parents so that they can live beyond their means is NOT COOL, but on the other hand simply coming up with a plan of what that adult child would do if their world totally fell apart is PERFECTLY OK.

We do not live beyond our means. Since we've been together we have never carried a credit balance although I guess the car purchase could be considered living beyond our means to some degree. Other than that though, no other debts incurred.

In your situation you may be able to get by with a lower EF for a short amount of time than a household with 5 people, only 1 breadwinner, and a house that is about to fall down.

Before you do anything I suggest that you run your 2016 taxes. You've had some big life changes (marriage and home purchase) and your tax situation may have changed significantly. You don't want to be surprised by a large amount of tax owing when you prepare your tax return with no way to pay it. Conversely, if you find out that you will be getting a large refund you could adjust your withholding right now and use the extra monthly takehome to either pay down the debt or rebuild the EF.

That's a great idea. I was surprised by our 2015 tax liability and have not run the numbers this year at all. I should do that before we do anythings; thanks for that.

Another suggestion: Do you and your wife exchange gifts (winter holiday, birthday, anniversary)? Could you agree to stop that until all debt is paid off? Could you give each other the gift of financial freedom in lieu of material objects?

We generally do something small, nothing too big. For one year we didn't go away anywhere and just went out to dinner and I bought her a small wrist bracelet.



Answers in blue. Thanks for your very thorough and in depth questions/comments.

[GoodSteward]

Perhaps I've just been listening to too much Dave Ramsey. The 1k EF keeps bouncing around in my head.

I'm a big fan of Dave Ramsey, and he helps me stay motivated on some things, I'll admit that. However, I do not agree with him on every point. One is the amount of an EF. We have discussed that here before but with your income and ability 1k$ is simply not enough. The fact is 1k$ isn't enough to cover a major repair or other emergency and will leave you dipping into debt in place of it. Rebuild a transmission is 1500-2000$.

Two things contribute to this question of how much, in my mind anyway.

1. How much cash flow you have. For instance, to cover a smaller emergency it's better to just stop debt repayment for one month if it means leaving the EF alone.
2. How easy it is for you to save up(again, cash flow). If you have plenty and can cover 1k$ quickly just add another couple to it to REALLY avoid using debt. If someone has a small cash flow 1k$ will be a struggle so just stop with that. These are some of the reasons I don't think it has to be a one size fits all approach, and to really guard yourself you need more than just 1k$.

TO me an EF isn't for emergencies, it's to avoid debt. Because, really, we always have some way of getting the money we need in a tight, thanks to credit. EFunds help us to avoid that way and keep us the black instead of red, which also protects our cash flow. Cash flow is the real asset we must protect.