Need advice on what to pay off first . . . sorry for the length!

[siggy_freud]

Hello all,

Wanted to run my situation by you and get some advice. First, some background information.

Debts (major):

I have about $50k (was 55k, paid off a 4k loan earlier this year) in private student loans (and 8k in government owned loans). The 50k in loans is broken up into 5 loans: Two at approximately 14-14.5k, two at approximately 8-8.5k, and one at approximately 6.5k. These loans cost me ~436 per month combined, with the breakout being; 126, 120, 69, 67, 53.

I have a car lease on a Volt that costs $217 a month ($6500 left on lease) (I put positive equity of my old car into the lease to offset payments). The car saves me $220 a month in gas, and costs me ~$17 a month to charge, so it was a smart decision .

I have a $100,000 mortgage at $603 a month (taxes and insurance included), but rent it for $735.

I have about $3,900 in credit card debt, however I'm still under the 30% threshold of both card's capacity (not that it makes it 'good debt).

Income:

My income, after taxes, per month, is about $3764.00 (this includes the extra mortgage money).

My GF and I currently live with her parents (I'm 27, shes 26), but are looking to move probably in the next year once her graduate school is finished and shes working. My home is over an hour from work, so I rent it out and stay with the GF, as that location is about 30 minutes from my job.

Goal: I'm trying to pay off debts as much as possible while we live rent/utility free.

I have saved about $12k, and am managing to put away a little less than $2,000 each month. My original plan was to pay off the biggest loan I have (14.5k) at the end of November, thus saving me about $126 a month. I absolutely HATE living under the burden of student loan debt, knowing it will always be there for the next 15 years. A house, car, motorcycle, etc I can sell. There is nothing I can sell to be rid of student loans.

I should be getting a promotion in the next month that will increase my income anywhere from 300-600 per month after taxes and that got me thinking: Would it be better for me to pay off my lease and a smaller loan instead of 1 big student loan? The lease + an 8k loan would be about 14k in outgoing funds, and would save me $285 a month. However, interest is built into the lease amount so it wouldn't save me any additional money paying it off early. The lease is over in 2.5 years.

I guess my question is, what would you do? The appeal of $285 a month is great, but I'll only benefit from that for 2.5 years until the lease would be over anyways. After that, I'd be saving $67 a month ongoing from the student loan. If I pay the big loan, I'm getting rid of 120 a month forever, but not getting the extra 165 a month immediately.

Any thoughts from the experts?

Thanks all, and apologies for the long post. Didn't have time to write a short one .

[disneysteve]

Can you simplify things for us. You left out one incredibly important detail - the interest rates.

Make a list of each debt with the outstanding balance and the interest rate. Also include the minimum monthly payment.

Generally, debts should be repaid based on interest rate from highest to lowest. Nothing else really matters. However, if there are a couple of small debts that could be knocked out in a month or two, it's nice to just get them out of the way to clean up the balance sheet and help the cash flow a bit.

[siggy_freud]

SL = Student Loan. Loans are in third year of payoff.

1. SL - $14,600 - 4.5% - $126
2. SL - $13,900 - 4.5% - $120
3. SL - $8,030 - 4.5% - $69
4. SL - $7,900 - 4.25% - $67
5. SL - $6,300 - 4.0% - 53
6. Lease - $6,531 remaining (includes interest) - $217 - ends summer 2015. Finance rate was ~3.5%, but there is no payoff that doesn't include interest. I'd simply prepay all remaining payments, turning onetime cash into ongoing savings.
7. Mortgage - $100,000 - 3.5% - $449 (principle & interest).

There really is no savings to be had prepaying the lease, other than freeing up month to month funds that could go elsewhere (like a Motorcycle).

I'm a car buff, and generally spend a lot of money on cars and performance. But I've been good and focused on debts, went electric, etc. Motorcycle bug bit me, and as much as I want one, I'd like to pay off enough debt, and get enough in raises to make it at least a cost neutral hobby.
Hope this helps.

[disneysteve]

SL = Student Loan. Loans are in third year of payoff.

1. SL - $14,600 - 4.5% - $126
2. SL - $13,900 - 4.5% - $120
3. SL - $8,030 - 4.5% - $69
4. SL - $7,900 - 4.25% - $67
5. SL - $6,300 - 4.0% - 53
6. Lease - $6,531 remaining (includes interest) - $217 - ends summer 2015. Finance rate was ~3.5%, but there is no payoff that doesn't include interest. I'd simply prepay all remaining payments, turning onetime cash into ongoing savings.
7. Mortgage - $100,000 - 3.5% - $449 (principle & interest).

Hope this helps.

The lease isn't exactly a debt. It isn't borrowed money. It is just a rental contract so I'd take that off the list.

The mortgage is the lowest rate, tax deductible, and is being covered by the tenant so ignore that one.

The student loans are all pretty close. I'd focus on the highest rates coupled with the lowest balances, so:
3, 2, 1, 4, 5 in that order.

HOWEVER, you forgot to include the credit card. What's the rate on that? I'm guessing it is over 4.5% which would put it at the top of the list to repay first. If it is at 0%, just make sure you repay it before the promo ends.

Keep a 3 month emergency fund and put everything else toward the debts.

[siggy_freud]

The credit card debts aren't in a promotional period, however the majority of costs are business related, and will be covered by my side business in the next few months. That said, I could pay them off now and reimburse myself over the next 2-3 months from the company.

I appreciate the advice.

The only reason I am thinking about paying off the larger loan first, is because I have the cash to do so. Though I don't expect anything to change, it will be easier for me to accumulate 6-8k chunks in the future, vs 14-15k at a time now to pay off the bigger loans. Any thoughts to that, or am I thinking about it illogically?

[disneysteve]

The credit card debts aren't in a promotional period, however the majority of costs are business related, and will be covered by my side business in the next few months. That said, I could pay them off now and reimburse myself over the next 2-3 months from the company.

Debt is debt. Doesn't matter if it is business or personal. If the interest rate is higher, pay it off first.

The only reason I am thinking about paying off the larger loan first, is because I have the cash to do so. Though I don't expect anything to change, it will be easier for me to accumulate 6-8k chunks in the future, vs 14-15k at a time now to pay off the bigger loans. Any thoughts to that, or am I thinking about it illogically?

No, that works fine. Really, loans 1, 2 and 3 are the same since they all have the same interest rate. It doesn't matter which of those you pay off first as far as saving on interest is concerned. If you can knock out #1, that frees up $126/month that you can snowball toward the others. Nothing wrong with that.

Just make sure you leave yourself a 3-month emergency fund. Don't use all of your savings to knock down the debt.

[siggy_freud]

Thanks for the advise.

I went ahead and paid off all my credit card debt. I think I wanted the symbolic victory of paying off my biggest student loan all at once, and was ignoring the fact that there were smarter things to pay off first.

Realistically, that will save me ~45 a month or so in interest, so it's not a bad deal .

I won't be able to pay off my 14k loan in November like I planned, but I could pay off the 8k loan instead, or wait until the end of December/January and perhaps pay off the big one.

[disneysteve]

Good job! Congrats on taking that step.

Don't wait to pay off the 14K loan. It makes no sense to wait. As I said, consider loans 1, 2 and 3 to be one big loan. It doesn't matter which piece of it you pay off first. The end result will be the same. Pay off 3 when you can. Then roll that $69 into the payment on 2 (or 1) which will help pay that off quicker.

[sblatner]

DisneySteve gives you good advice. You are in the mindset that you have to pay all or nothing. You can put a chunk of money towards a loan without paying it off :-).

[crazyliblady]

Advice on What to Pay Off

Now that you have paid off the cc, create a budget. Find extra money to put towards the other debts on a monthly basis. If you focus on the one with the biggest rate and pay it off quickly, you can roll that amount to the next one and so on. Also, since you are looking at moving soon, don't forget to set aside some money for moving expenses (moving truck, gas, deposit/rent, etc.). Terrific progress.

[crazyliblady]

Advice on What to Pay Off

I totally agree with sblatner. If you come into extra money (bonus at work, lottery, tax refund), it is smart to put some of it towards your goal to get out of debt at the time you get it rather than waiting to save up a big amount first.

[Ramose]

I totally agree with sblatner. If you come into extra money (bonus at work, lottery, tax refund), it is smart to put some of it towards your goal to get out of debt at the time you get it rather than waiting to save up a big amount first.

I agree, I find that people will just spend their windfall income when they really should save it or use if to reduce their debts.

[siggy_freud]

I agree, I find that people will just spend their windfall income when they really should save it or use if to reduce their debts.

I'm really really good about not spending money, hence we I'm able to save larger sums. As a landlord, I like having that extra cash on hand (in addition to some regular reserves) should something big go wrong with the home. Not that I expect it to as most everything is new, but you never know.

I actually have an excel that tracks my money to the day, with an automatic daily depreciation for food.

Fortunately, I'm good about budgeting and knowing my expenses up front. My GF and I had our own place awhile back, and then her parents took a job in another state but wanted to keep the house. So we moved in to their home, and it wasn't a month later they decided they didn't like that place and wanted to move back. We had little desire to move again so soon, and with the GF finishing her grad program this winter, figured we'd take the time to throw extra money at student loans.

I'm a big car guy. They're not just a mode of transport to me, they're a hobby. I see people's advice of "get an inexpensive car, drive it to 200k" and I agree that's sound financial advice, but it, in part, defeats what I'm working towards. I'm always working to increase income and reduce debt SO that I can maintain my hobbies in a healthy manner. If I'm not putting my money towards having fun and making my life more enjoyable, then what's the point?

[chrisburke21]

Advice

I completely agree with Steve's plan he outlined. When I was in debt I tackled it by highest interest rates first. Then I kept moving down the line. It will take some time so do not get discouraged. I think an important topic to bring up is creating a budget. This was what allowed me to get out of debt and remain debt free.

[disneysteve]

I'm a big car guy. They're not just a mode of transport to me, they're a hobby. I see people's advice of "get an inexpensive car, drive it to 200k" and I agree that's sound financial advice, but it, in part, defeats what I'm working towards. I'm always working to increase income and reduce debt SO that I can maintain my hobbies in a healthy manner. If I'm not putting my money towards having fun and making my life more enjoyable, then what's the point?

Great point. Most advice given here is general financial advice. We are all strangers. I don't know that your car is a big priority in your life. So I would likely be one of those people saying to buy an inexpensive used car that meets your needs to free up money for other things when that would be worthless advice to you.

On the other hand, until you clean up the debt issues, the expensive car should not be in the plan. For now, you should be driving the cheaper functional car. Once you can afford the preferred car, go right ahead and buy it and enjoy it.

Cars are one of the main areas (houses being the other) where people totally screw their budgets by overbuying beyond their means.