What should I work towards paying off first?

abrewer5 · August 2014

I just started reading TMM so I know about debt snowballing, and I'm somewhat following that plan. I currently owe $3900 on my car which should be paid off in April (woo hoo!!). After that my only debt will be my federal student loans currently at $10,900 and my mortgage.

Before I had any MM sense, a little over a year ago my FI (now H) bought a nice townhouse as a starter home with 0% down using a rural housing loan with no PMI but a great rate of 3.4%. It was nice to have extra cash in our pockets because I got furloughed shortly after, and we've made some nice improvements to the house.

In January I'll get a pretty good raise, about $11K.. Once my car is paid off (I'll start making $700/ month payments after my raise) should I focus on snowballing my student loans to get them paid off or increase my student loan payment a little, throw some into savings, and increase my mortgage payment by about $300/month to pay it off quicker? My H and I aren't planning to stay in the house more than 7-10 years but it would nice to have some equity, along with other savings to purchase our next home.

If I throw the $700 a month at my student loan that I'll be throwing at my car things will be really tight, but it will paid off in roughly 14 months. On the other hand if I throw an extra $300 at my mortgage every month I could pay it off 11 years earlier.

Sorry for rambling.. Now that my credit cards are paid off I'm really excited to pay off my other debts, I just want to make sure I do it the best way. I'm currently contributing 10% to my retirement account and plan to up it to 15% when I pay off my student loans.

lifeonthehill · August 2014

Only putting $500 to your student loans would slow down the process by half a year if I am calculating right.

Personally I would pay of the student loans next. My H and I found that if we threw everything that we had at one goal instead of spreading it around it felt like we were getting them accomplished much faster.

For instance we have about 5 financial goals we want to meet in the next 22 months. It is tempting to spread the money out to each student loan, baby fund and my college fund but I know I would be discouraged sitting on debt longer and I wouldn't be able to take as many classes that way.

Good luck!

brij2006 · August 2014

I would continue in the baby steps as Dave Ramsey describes. Roll the debt payment onto the student loans and get those paid down next. Then save up your emergency fund, begin the 15% toward retirement (fund college funds for any kids), and THEN focus on paying down the home.

If you plan on staying in the home for the next 10 years, then you will definitely get to the point of baby step #5 and paying off your home. Any money you put toward it will help you to have more equity back out of it.

hoffse · August 2014

Honestly, I think paying off a mortgage with a rate that low is crazy. I'm clearly not a DR follower, but mathematically it makes no sense to pay off a 3.4% loan when you can earn twice that much in the market without breaking a sweat. DR is very anti-debt leveraging... which, frankly, is the #2 reason why we don't follow him (the #1 reason is his approach to retirement). There is no one-size-fits-all solution for managing money, and for people who can manage the low-interest debt they have just fine, it's usually better to invest the difference instead of paying off low-interest debt more quickly. Your return is usually higher in the market, and if you DID run into financial problems in the future, then you have those investments to fall back on, which can be used for anything. Whereas, money you spent previously to save yourself 3.4% on a mortgage is now gone. You can't use it for anything else in an emergency.

Also keep in mind that the extra equity you have by paying extra on your mortgage doesn't do anything that you couldn't do with external savings. All it does is hold that equity to roll into another, presumably more expensive, house down the road. Whereas, if it were invested externally, you could use that cash you invested plus your earnings on those investments to put down more on a second home than you would be putting down if you just paid extra on the mortgage.

My last piece of advice - increase your retirement contributions NOW instead of waiting until your student loans are paid off. I'm serious - that matters so much. My #1 beef with DR is the point at which he tells you to start saving for retirement. It's insane to me to wait until step 3 or whatever. Step 1 should be high-interest credit cards, then step 2 should be retirement because the most valuable thing you have is your time. Contributions need to be up to snuff as early as possible in your life so that you maximize the amount of time they are invested.

Sisugal · August 2014

Also keep in mind that the extra equity you have by paying extra on your mortgage doesn't do anything that you couldn't do with external savings. All it does is hold that equity to roll into another, presumably more expensive, house down the road.

Hoffse - it does more than hold the equity - by paying more than is required you decrease the amount of interest you pay on your mortgage. I agree in TODAY's stockmarket you would get more return for your money than on the mortgage. However, there is no guarantee with funds in the stock market - so I stick with mutual funds and index funds rather than stocks.

My approach it avoid "either-or " choices. Divide the amount you have to use among your various goals.

CuriousKiddosMama · August 2014

I follow Dave Ramsey too- so I would go with the snowball approach. Get your car, then student loan paid off. Then make sure you have 15% going into retirement. Then you can start paying extra towards the mortgage every month.
Focusing on one goal helps keep me motivated, so that is why I find this approach appealing, whether for paying off debts, or for saving for an upcoming house project.

abrewer5 · August 2014

Thanks for the input everyone. The rates on my student loan are relatively low also around 6% for a small portion and 3.5% for the larger portion, but the two are combined so I can't make payments specifically to the higher rate porition.

My thoughts were to either do: $500 SL; $200 Savings; $140 Extra Mortgage (the extra $140 comes from the payment I currently make on my loan). This would give me equity, savings, and pay down the SL quicker.

But after talking to you guys I guess I'll go with paying the $700/ month for 14 months. Once the 14 months is up I'll start doing 15% in retirement and do more savings/higher mortgage payment.

@Hoffse I completely agree with you that DR doesn't give good advice on retirement, I'm currenlty contributing 10% and my employer matches 5%... It's tempting to bump it up to 15% now, but at the same time I think it will be easier when I have some debt paid off. I'm 24 so I'm far from retirement, and hopefully in a pretty good position already.

ETA: My student loan payment would actually be $840 a month and paid off in 12 months once my car is paid off... I apparently can't do math haha

hoffse · August 2014

Sisugal said:

Also keep in mind that the extra equity you have by paying extra on your mortgage doesn't do anything that you couldn't do with external savings. All it does is hold that equity to roll into another, presumably more expensive, house down the road.

Hoffse - it does more than hold the equity - by paying more than is required you decrease the amount of interest you pay on your mortgage. I agree in TODAY's stockmarket you would get more return for your money than on the mortgage. However, there is no guarantee with funds in the stock market - so I stick with mutual funds and index funds rather than stocks.

My approach it avoid "either-or " choices. Divide the amount you have to use among your various goals.

I do too - and I probably phrased that badly. My point is a mortgage with an interest rate that low is nearly guaranteed to be a lower return with pre-payment than funds over time. Even after the crash you would have made more than what you save in interest if you just stayed in and let it recover.

strickland8052 · August 2014

I DEFINITELY agree with not paying off that mortgage early. That interest rate is awesome, so no point in sweating the interest you pay. I get that you want more equity in the house, so you can eventually sell it and buy a nicer home. BUT, your money will be safer and will work harder for you if you just save it elsewhere. As demonstrated by the 2008 housing market bubble bust, real estate is not a safe investment. That would be awful if you worked so hard to pay off your home and then home prices in your market plummeted and you couldn't sell it. On top of that, the money you save for a down payment on the next house could also be used in the event of an emergency. It just makes so much more sense to not pay off the mortgage and use that money elsewhere.

As for your student loan, what is the interest rate? If it is high, I agree with the idea on rushing to pay it off. If it is relatively low, I would instead consider using the extra money to save for retirement, an emergency fund, and other savings (maybe for that next house!). Or maybe split that extra money and use $400 for student loans and $400 for other savings.

As PP said, saving for retirement young is SO important. Here is a good article on it: http://www.forbes.com/sites/financialfinesse/2012/07/25/what-young-people-need-to-know-about-retirement/

If nothing else, read the section that says 'The most powerful force in the universe". If you save for only 10 years while you are young, you'll eventually have MORE than someone who starts when they are older and saves for 30 years. Amazing!

What should I work towards paying off first?

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