How aggressive should you get with paying off debt?

[GoodSteward]

I have a couple car loans that I can fairly easily knock over a year off the payoff, but after that, the return of time vs money starts to diminish. In other words, I don't see as drastic of a change in time left vs the amount of money I am allotting towards the loans. I owe a combined 13,800$ between a van and car. The payoffs are almost the same with the van having 28 months left, and the car having 35 months left. They are both 8%. I got these a couple years ago. Should have saved up and paid cash like a good boy, but instead thought my 250k Miles cars would last longer and blew that chance by being stupid. I got both well used, which is why the interest is higher. They are Toyotas so I feel good about keeping them for a long time.

I recently got a good raise, and just assigned the money towards these cars. That put them both at 24 months to pay off. Adding a couple hundred dollars knocks off another 6 months(will do this). After that, however, every 100$ a month only makes about 1-month less difference. I could put everything extra to these loans and potentially pay them off in around a year, however, I know what it is like to have all your money obligated to debt and it isn't fun. You have to leave some cash flow open for life. Things happen.

Dave Ramsey says dump everything on the loans, but I don't want to be artificially broke like that.

If I could do this for 4-6 months I would, but for a full year, I don't want to put the family in a bind like that. I was just curious how everybody else felt about attacking debt that isn't 0%?

[Jluke]

I would create an amortization schedule for each loan.

I would look at the total interest remaining for each loan.

I would look at the monthly payment for each loan.

Comparing both I would determine if the interest amount is drastically different for one of the loans. If so I would attack that one and make regular payments on the other. If similar interest amounts then attack the one with the larger monthly payment. If all the same then pick the nicer car (one you would keep over the other) and focus on paying that off. That could be the ultimate deciding factor without looking into the above.

Ultimately it comes down to leveraging money in a way that works for you.

If you are comfortable investing the money instead that would be an option too. Of course that 8% is a "big" number on paper but with a low balance it might represent small interest amounts.

[GoodSteward]

I have run the numbers many different ways. I have used debt snowball calculators, and loan calculators. It doesn't really matter if I pay them off evenly, or attack one and roll it to the other. Every scenario appears to put me at 1.5 years at my current pay rate. I guess it is partly because both are the same interest, and close on the balance, Within 800$ of each other.

To my original question, however, how do others feel about aggressive debt repayment? How aggressive do you feel is appropriate?

[scfr]

You have to leave some cash flow open for life. Things happen.

It sounds like you answered your own question. I don't have experience with that kind of debt, but I wouldn't feel comfortable without a little cushion to cover the "things happens" scenarios.

Stick with your current plan, but in the meantime look for ways to easily bring in some extra cash to apply towards the car loans. It doesn't have to be just you. It can be a family project. For example, if you've been meaning to have a garage sale or sell some things you no longer need on eBay but haven't gotten around to it, do it now. Look for rewards for opening a bank account. Look for dealers offering prepaid debit cards for test driving a car. Participate in focus groups. Try a variety of things to bring in a little extra cash.

[Jluke]

To my original question, however, how do others feel about aggressive debt repayment? How aggressive do you feel is appropriate?

Aggressive debt repayment can happen when you have enough liquid cash, taxable investments, (i.e. non-retirement savings) to hold you over in case of a screw up (job loss). AND you are contributing to a 401k, IRA/other, college savings of some sort if needed. Monthly salary plays a huge part in this.

I was always equally aggressive in cash savings, extra mortgage payments, and 401k contributions. Finally my mortgage got below 100k and I really accelerated paying that off over a 3 year period; 50k between Jan and May of this year (house paid off in 10 years). That is towards the higher side of the aggressive scale for me.

Debt becomes a math problem and I think the variable factor is Time in the calculation. On a loan, you have a pre-determined amount of time you are allowed to pay it off. Being aggressive gives you a window of time that you can manipulate by making extra payments.

[disneysteve]

Considering the super-high interest rate on the car loans (do you have bad credit?), I'd certainly focus on paying those off quickly but I think 1.5-2 years is certainly reasonable.

There needs to be a balance with personal finance. You need to maintain a good EF, be saving enough for retirement, and be dealing with debt as aggressively as you reasonably can, and at the end of the day, you need to be able to sleep at night, not lie awake worried about having enough money to meet your needs.

[kork13]

At 8% interest, I would pay those off as soon as possible. I understand that you don't like the idea of sending all of your spare cash to payoff debts, but I see that as much more preferable than continuing to watch money bleed out going to debts & accruing interest. If you can cut the repayment time from almost 3 years down to about 1 year, I would do that in a heartbeat. If the interest rate was very low (0%-2%), I might have a different opinion. But as is, 8% is excessive (IMO), and should be eliminated with all possible haste.

In general, my thoughts on "how aggressive is appropriate" would depend on how badly it's bleeding you dry, based solely on interest rate. Even if it's only a $1000 balance at 22% interest, that's still pretty awful and the balance will double & triple if you let it linger. So in my mind, I group debts together by their interest rate and deal with them accordingly.

- Payday loans & high-interest credit cards/loans (20% interest & up) are a plague in the pocket of American consumers. Do anything and everything possible to eliminate these IMMEDIATELY, even if that means just shifting debt around to get it to a lower interest rate.
- "Average" credit cards (10%-20%) aren't much better. Interest can balloon quickly, so these also need to get paid off pretty much ASAP.
- Moderate-rate loans (vehicle loans, personal loans, most student loans, etc) in the range of 5%-10% are definitely still a high priority, but there's some flexibility to manage them in turn... Get yourself into a good position (with your EF set up, expenses under control, saving for the future, etc.), then focus most of your attention on clearing these debts at a fast pace.
- Low-rate loans (mortgages, good car/student loans, etc) from 2-5% interest are pretty reasonable. Pay it off according to schedule, but whenever you have some free cash, it's a great idea to pay down some additional principle.
- Very low-rate loans (<2% interest) are a pretty minor concern. Pay them off according to schedule, and don't stress too much. If it starts to become burdensome to you, go ahead and pay it off faster, but it's not a necessity.

[GoodSteward]

Considering the super-high interest rate on the car loans (do you have bad credit?), I'd certainly focus on paying those off quickly but I think 1.5-2 years is certainly reasonable.

There needs to be a balance with personal finance. You need to maintain a good EF, be saving enough for retirement, and be dealing with debt as aggressively as you reasonably can, and at the end of the day, you need to be able to sleep at night, not lie awake worried about having enough money to meet your needs.

I agree.

The higher rate is due to the fact that the vehicles were higher mileage and older. My 07 Avalon had 130k miles when I bought it in 2014 (kinda regret this one, but I got a steal on it). My 07 Sienna van had 80k miles when I got it in 2013. My credit was ok to get approved, but not as good as it is now. Bankruptcy was only 2 years old at that point, so...eh. I don't intend to repeat this process again. I had two paid for very high mileage vehicles provided at just the right time through my parents. My dad had an extra, small truck I could drive and my grandmother was no longer allowed to drive. My mother took her car to use, and i got hers. Both had over 200k miles when we got them. I should have been saving for another car knowing I was on borrowed time. However, I waited until I had to do something and didn't save like I should. I also wasn't making near what I do now at that time, thus the reason for the bankruptcy. During this time I was going for responsible payment options vs overall debt. I financed both for 5 years, but from the start intended to pay them off in half of that. Never happened. This is why I say just because you pay off your CC balance every month doesn't mean you're doing ok. In my attempt to rebuild credit, I got back on cards after a couple years and to "prove" I could use them responsibly and made sure I paid them off. Every month was a push to make sure they were paid. I paid them off religiously, but at the expense of wiping out my other funds to save for future things(like a car). Lesson learned. I. Hate. Payments.

[GoodSteward]

Let me add that during this time I also had nobody to help me figure this out. As I have mentioned before, I'm surrounded by financially unwise people. The help I was provided always revolved around payments and debt, so I battled the same stupid choices as before because that is what was "normal" for me as my family did the same things.

I'm shifting that entire family tree, one opportunity at a time. I enjoy this site as it helps keep me looking at the right direction. You guys rock!

[Outdoorsygal]

I saw your health insurance thread. This may be a shot in the dark but if your family is fairly healthy, can you switch your employer health plan to an HSA?
That would give you a free $3400 more per year to save up for your retirement then maybe you could put less $ into your 401K to free up funds. Of course
this is not that simple as you would need to research HSA's or ask me, I can probably answer much of the questions while providing proof with my answers.
You'd need to wait until November though, open enrollment unless you have a qualifying event.

Also with your new raise, are you sure your kids still qualify for state insurance?
I am not exactly sure what that means BUT if you could somehow get some of your family on the Obamacare exchanges into HSA accounts, that might work too.
If you are 55+ yrs old, you'd be able to save $4500 per year likely fully funded by your employer freeing up other funds. Just a thought.

[GoodSteward]

I saw your health insurance thread. This may be a shot in the dark but if your family is fairly healthy, can you switch your employer health plan to an HSA?
That would give you a free $3400 more per year to save up for your retirement then maybe you could put less $ into your 401K to free up funds. Of course
this is not that simple as you would need to research HSA's or ask me, I can probably answer much of the questions while providing proof with my answers.
You'd need to wait until November though, open enrollment unless you have a qualifying event.

Also with your new raise, are you sure your kids still qualify for state insurance?
I am not exactly sure what that means BUT if you could somehow get some of your family on the Obamacare exchanges into HSA accounts, that might work too.
If you are 55+ yrs old, you'd be able to save $4500 per year likely fully funded by your employer freeing up other funds. Just a thought.

Thank you for the concern and offer for help. Based on what I hear, I'm not sure I can really do much better for insurance as far as a plan goes. I am not really up on HSA accounts in general. We have a baby coming in December, and it is a planned C-section so I am guessing this year may not be the best time to drop insurance. Last time the bills were over 30k$ before insurance.

I have yet to report the income change, but based on my current evaluation I should still qualify. If not, it will raise my insurance a lot to go to a full family plan at work. I do gross a fair amount, however, the second income is from pastoring a smaller church. I am not paid a salary, but rather off tithes. Tithes can fluctuate. I have setup a way based on an average that comes into the church to create a consistent pay by pulling less than average and leaving a surplus. I pull from the surplus all along as I need/want to as it builds up. I never let it drop below one full months income. Because of this being sorta considered self-employment (Fed Gov see's it as both employed and self-employed..shesh..) I do get to write off some. I drive an hour and a half to the church, and make sure I do more than just preach to count the miles. Thankfully, the state honors the self-employment side of this when figuring insurance so I can reduce that income a lot. My raise was around 6000$, thanks to the updated salary law coming into effect. At the same time, I then lost a side job I was getting paid for that was 2600$ a year. So, a net increase of a little over 100$ a check after 401k, ins, taxes, etc.

[GoodSteward]

I saw your health insurance thread.

Also, just to put this out there. I hate paying health insurance, so if there is another way please let me know! We rarely use it, and I think the idea that we have to have it is stupid. I can see having an emergency health insurance plan for much cheaper on the off chance you get cancer or have an accident. But either way they sucker you into thinking you are getting a deal by having health insurance. I believed the hype of it being income protection until I realized I am doing nothing but financing possible health fees up front. That's all.

So I pay 320$ a month for insurance(and that is cheap now!). How is this protecting me? If I get hurt and have a 20,000$ medical bill....I will be paying a monthly payment to pay that off. If I have a 20,000$ medical even with Insurance I'm stilling paying ON TOP of the insurance fee. We are not winning here, only the ins company is. We are stuck with payments no matter what.

If you have ongoing medical conditions, or are high risk I can see it being a need. For MOST Americans, we are just pre-paying POSSIBLE medical needs. Silly...

[frugalNH]

You're right, things happen. But you plan/budget ahead for what you can (holidays, replacing big items you NEED, car expenses, and the like) and keep a decent emergency fund for things that TRULY are a surprise. Don't use the 'life happens' excuse from really going after that debt if that's your goal. That being said...

From your first post, I kind of feel like you've already decided not to go pedal-to-the-metal on debt repayment. That's certainly fine, if that's your preference. Everyone's got their own level of 'going after it'. It has to fit your life and your comfort level. If you don't feel good about paring down to bare bones to knock it out, it's not worth the stress trying to force yourself to do so. Go with your gut for what's right for you and your household.

[disneysteve]

I hate paying health insurance,

If you have ongoing medical conditions, or are high risk I can see it being a need. For MOST Americans, we are just pre-paying POSSIBLE medical needs. Silly...

I hate paying for life insurance. I've been paying for over 20 years now and haven't died yet. What a waste!

I hate paying for auto insurance. I've been driving for years and haven't had an accident. What a waste!

You're missing the entire point of insurance. You can't wait until you have an ongoing condition to get coverage. First off, you don't know when that will happen. It could be 10 years from now or it could happen tomorrow. Second, the whole structure of insurance is based on pooled risk. Money collected from a large pool of customers funds the claims paid to a small subset of those customers. If only people who were using the insurance had the insurance, the system would fail.

I think it's ironic that in your signature you have the quote about things happening because you make bad choices. Not having health insurance would be one of those bad choices. Sure you think you don't need it until the moment when you do. Health care is expensive. All it takes is one relatively minor illness or injury to wreck your finances if you are uninsured. And you don't have to be old or sickly for that to occur. You could slip and fall tomorrow and incur thousands of dollars in bills. You could develop appendicitis next week and run up a 5-figure hospital bill.

Carry health insurance and be grateful that you've got it. There are millions of people out there who aren't that fortunate.

[disneysteve]

If I get hurt and have a 20,000$ medical bill....I will be paying a monthly payment to pay that off. If I have a 20,000$ medical even with Insurance I'm stilling paying ON TOP of the insurance fee.

Why would you have a $20,000 bill if you are insured? You probably have a deductible and a maximum out of pocket amount that you are responsible for but I'm certain that figure is less than $20,000. Deductibles of $2,500-$5,000 are pretty standard and max out of pocket might be $10,000. But the way it generally works is that after you meet your deductible, the plan kicks in and pays the majority of the charges (like 70 or 80%) and you pay the remainder until you hit the max out of pocket amount. So on a $20,000 bill, you might pay the first $2,500. Then the plan pays 80% and you pay 20% of the remaining $17,500, meaning you'd pay $3,500 and they'd pay $14,000. Your total out of pocket cost would be $6,000 instead of $20,000.