Debt vs. Savings...what would you do? Repayment plan feedback

bmo88 · April 2015

Ok, we are in the process of paying off debt while simultaneously building up our savings. Here is our situation:

2nd Mortgage*: $24,600 @ 5.99%--minimum: $125 (interest only), we pay $600 a month
Car Loan: $8,000 @ .9%--minimum: $317, we pay $317
DH's Student Loans: $21,000 @ 6.8%--minimum: $300, we pay $575
My Student loans: $1,300 @ 6.5%--minimum: $50, we pay $150
Furniture CC: $650 @ 0% interest for 12 months (due in July): we pay $250 a month to pay off with no interest, will be done in July

*2nd Mortgage: We elected to get a second mortgage during the home buying process because we did an 80/10/10 loan. So we put 10% down and had two mortgages. It made sense because we could avoid PMI and it would save money long term because our plan is to pay it down quickly. It's 5.99% interest, but it could increase if the "prime rate" increases. We have had the loan the for 1 year and no changes so far.

Savings:

Current: $11,000 in emergency savings (about 3.5 months expenses, goal is $18,000--6 months expenses)

Currently saving $750 a month toward emergency savings

Retirement: We currently save 15% of our income in 401ks, PERA and Roths.

My question is, should we slow down our savings plan now that we have reached 3 months expenses and throw more money at the debt? Our current repayment plan has us paying it off in 3 years, but it would be great to pay it off sooner.

Also, do you think our current repayment strategy makes sense (i.e., where our money is allocated)?

Xstatic3333 · April 2015

I'm not sure there is one right answer here, but I might pause building the e-fund and throw extra at the second mortgage. The variable rate would make me very nervous. I also might be tempted to just pay off your SL since you could do it so quickly.

As for your overall allocation I think it's fine if it is working for you guys and keeping you motivated. You're clearly making great progress! Our strategy is similar. Many, however, find they are more motivated by working on one goal at a time.

abrewer5 · April 2015

With 3.5 months of expenses saved depending on job security I would stop savings pay off the 12 months no interest card now, it's a small balance that you can easily knock out and free up $250/month.

Then I would probably work on getting your student loan paid off. Again it's a small balance that you could knock out pretty easily and free up an additional $150 a month.

Once you pay those things off I would put that extra money towards the 2nd mortgage because of the adjustable rate. And begin building savings again. I'm slightly more debt adverse to others on this board thou because I loosely follow Dave Ramsey, so others might have a better suggestion for you.

Once you're at the 6 months of savings I would then start throwing the extra money that's been going towards savings to the 2nd mortgage, again because of the adjustable rate. I would keep the other payments the same during this process, especially the car because the interest rate is so low.

Edited to correct spelling error.

hoffse · April 2015

Could you guys afford to live off of one income if one of you lost your job? If so, then that's a built-in e-fund.

I agree that you should knock out the furniture card first just to have it done, then probably the student loan. Those amounts are so small that it would irritate me having them around. And really.... you should make sure the furniture card is paid off at least a month before you think interest is due to kick in. Otherwise, you might find you've timed it wrong and suddenly you have a balloon payment to make at the very end.

The variable rate on the second mortgage doesn't bother me as much as it might bother some, but please know that there are rumblings that the Fed might finally start to raise interest rates by the end of this year. That's one reason why there is a lot of talk that the dollar and euro might reach parity by the end of 2016 - they are going through quantitative easing, and we are (supposedly) about to finally see interest rates being increased. That makes the dollar more valuable relative to other currencies.

Whatever happens, the Fed will not jack up rates by 5% overnight, because that could do some serious damage to people like you who have variable rates. Instead, it is likely to be a slow and steady march upward once it begins. You will have plenty of notice. But it would be great to have some of that principal paid down before it happens.

als1982 · April 2015

Do you have children or are you planning to have kids in the very near future? Do you have jobs in an industry that has a higher than average risk of layoffs? And echoing @hoffse, can you afford all your bills on one income? Also, is the interest paid on your second mortgage tax deductible, and if so, do you combined incomes allow for you to take that deduction?

Personally, I'm very debt averse but willing to be risky with emergency savings, so if I were you, I'd take everything but $1,000 of your e-fund and payoff your student loan, and then put the rest toward your husbands.

From there, I'd keep putting everything extra toward his student loan, then the second mortgage, followed by the car. I wouldn't worry about putting extra toward the furniture card or paying it any earlier than is absolutely necessary just as long as you're sure its gone before the time it would incur the back interest.

lifeonthehill · April 2015

I am very anti-debt so I would leave your E fund as is.

I would stop paying extra on anything and pay off the furniture card now. Next I would do your SL. You could have both of those paid off in the next two months and then you never have to worry about them again. Next I would pay off your car loan. Then his SL and then the 2nd Mortgage.

If you realize the interest rate on the mortgage is going to start going up I would switch to that.

If you get pregnant, lose your job, or some other major life event you could switch back to saving.

Sisugal · April 2015

I would REDUCE, not stop, the amount you are saving toward your e-fund to $250 and use the other $500 to pay off your furniture debt, then your student loan and after that apply the extra $500 to the second mortgage debt.
Your furniture debt will be paid off in 1 month,
Month 2&3 will pay off Student loan,

At that point you may want to reconsider the split on how much of the amount of money that will go to the emergency fund and how much to your 2nd mortgage.

AprilZ81 · April 2015

This is a very personal decision, but if it were me this is what I would do.

1) If you can cover your needs on one income I would temporarily STOP contributing to the e-fund. If you need both incomes I would reduce the amount to around $200-250 a month and use the extra funds to go towards other needs.

2) I would pay off the furniture in the next month or two just to get it out of the way and free up another $250.

3) I would then tackle your student loan, it should only take a month or two with the reduction in the e-fund contributions and the extra $250 that is freed up from the furniture payments.

4) I would then move on to the 2nd mortgage because it is a variable interest rate and it is best to get that balance as low as possible in case the rates start to go up again. Is your rate locked in for any amount of time? Our mortgage is an 8 year ARM and it won't go up for 7 more years. Anyway, working on the 2nd mortgage does two things, lowers debt (and risk) and increases equity.

jtmh2012 · April 2015

als1982 said:

Personally, I'm very debt averse but willing to be risky with emergency savings, so if I were you, I'd take everything but $1,000 of your e-fund and payoff your student loan, and then put the rest toward your husbands.

Not a good idea considering they actually own their home. All it would take is one major home repair to blow through that $1000 and now they're out having to get a loan or put it on a credit card and make payments.

als1982 · April 2015

jtmh2012 said:

als1982 said:

Personally, I'm very debt averse but willing to be risky with emergency savings, so if I were you, I'd take everything but $1,000 of your e-fund and payoff your student loan, and then put the rest toward your husbands.

Not a good idea considering they actually own their home. All it would take is one major home repair to blow through that $1000 and now they're out having to get a loan or put it on a credit card and make payments.

We own our home too and that's all the reserve we keep. It's not been a problem since we can afford our mortgage and bills on one income. We replaced our entire HVAC system last year paying it off in 2 months. Unless the OP provides more information, we can only tell her what WE would do if we were her, and my original post is what I would do.

als1982 · April 2015

als1982 said:

jtmh2012 said:

als1982 said:

Personally, I'm very debt averse but willing to be risky with emergency savings, so if I were you, I'd take everything but $1,000 of your e-fund and payoff your student loan, and then put the rest toward your husbands.
Not a good idea considering they actually own their home. All it would take is one major home repair to blow through that $1000 and now they're out having to get a loan or put it on a credit card and make payments.

We own our home too and that's all the reserve we keep. It's not been a problem since we can afford our mortgage and bills on one income. We replaced our entire HVAC system last year paying it off in 2 months. Unless the OP provides more information, we can only tell her what WE would do if we were her, and my original post is what I would do.

Here are some numbers, again based on my own situation, to back up my opinion. (I'll warn you, I'm no mathematician so please feel free to correct me if I've made a grievous error.)

My original student loan balance- $21,967.84 at 6.38%. Which is reasonably close to the OP's H's loan balance and interest rate.

Jan. 2014 was when we started to think about aggressively paying off our loans. At that time, my balance was a little less than $19,000, and of the standard repayment of $175, on average, $90-100 was going to interest.

By Jan. 2015, we had paid mine down to around $10,000, with the interest portion of the payment now ranging between $45-55 a month. Again, this would be close to the amount that OP's H's loan would be if they channeled their current savings (after setting aside $1,000) to their student loan debt. This would equate to a savings of more than $50 a month in interest, a number which goes up every month as the principal continues to go down.

Conversely, here's the numbers associated with putting our new central AC/furnace on a credit card:

Total cost of the HVAC system was just under $8,500 (we made certain the company we used didn't charge an additional fee for paying by CC).

We put the units on our Chase Southwest (at the time, we were chasing the SW Companion Pass, which is worth hundreds, if not thousands of dollars) at a rate of 15.24%. Considering it took two months to pay it off, we paid a total of $108 in interest.

If it were to happen now, we'd use our Barclay Arrival Plus card, which has a rate of 18.99% interest and would equate to approximately $135 in interest. However, we could redeem the points earned for $175 in statement credits, for a net gain of $40.

Again, these numbers are just based on our situation. Once we get closer to having a family, we'll start to stockpile more cash, but until then getting rid of any debts that charge interest and bulking up our retirement savings makes much more sense than having a giant e-fund sitting around earning close to no interest.

bmo88 · April 2015

Thanks everyone for the feedback so far! A little more context:

We do not have any children, but we plan to TTC in 2-3 years. The goal is to TTC once the all debt is gone (or near gone) with the exception of the primary mortgage. We make about $105,000 a year in a very reasonable area (median household income is $50,000). Our monthly expenses outside of our debt payments come to $2,800 (including our mortgage). So we keep our expenses low relative to our income.

I should have mentioned that we have a bent toward the debt avalanche approach. Therefore, we like the idea of saving more money on interest and have been pretty good with sticking to repayments (all automated), so we are putting money toward the bigger loans first.

Our furniture credit card is currently at 0% interest and jumps to 15% in July if we don't pay it off. Our current plan is to pay $250 a month and have it paid off by July. I am not inclined to pay it off sooner because there is no interest.

My student loans are low in balance and I am paid ahead on them. I may throw an extra $250 or $300 at them to get it lower quicker though.

Our income is really good, but I have some extra hours on the weekend and have picked up a tutoring job that brings in about $250 a month. So I plan on throwing that at either our savings or debt soon.

DH also just got a $2,500 bonus (before tax), so probably around $1,900 after tax. We plan on putting at least $1,000 of that into savings and probably $500 toward debt.

While we are motivated to get rid of our debt, I really want to have a good emergency savings account. I think once we hit $12,000-$15,000, we will slow down. We could both survive on my income (I make almost twice what DH makes), but it would be much more difficult to just survive on his income. Also, we work at the same company. So, if the place were to shut down (I don't think that would happen), we would both be unemployed.

With upcoming bonuses, I think we can get to $15,000 in the next few months. Then, I like the idea of reducing our savings down to $250 or $300 and throwing the extra $450-$500 at our debt.

AprilZ81 · April 2015

I would consider making sure to pay off your furniture in June, just to make sure everything is credited to your account before the deadline. I would hate for you to be doing everything right and then get hit with back interest because of an accounting error. Paying it off one month early will give you a lot of peace of mind.

bmo88 · April 2015

AprilZ81 said:
I would consider making sure to pay off your furniture in June, just to make sure everything is credited to your account before the deadline. I would hate for you to be doing everything right and then get hit with back interest because of an accounting error. Paying it off one month early will give you a lot of peace of mind.

That's a good idea. We have the funds, so we will probably do that. I would be pretty irked to have pay the interest balance because of a small miscalculation.

AprilZ81 · April 2015

bmo88 said:

AprilZ81 said:
I would consider making sure to pay off your furniture in June, just to make sure everything is credited to your account before the deadline. I would hate for you to be doing everything right and then get hit with back interest because of an accounting error. Paying it off one month early will give you a lot of peace of mind.
That's a good idea. We have the funds, so we will probably do that. I would be pretty irked to have pay the interest balance because of a small miscalculation.

I just did this with our Home Depot card (0% interest for a fridge). I just called the day I was going to make the payment to get the pay off balance to make sure that I had the right number, then paid it off.

simplyelise · April 2015

Hmmm, I'm curious about where the rest of your money is going.

You said monthly expenses are 2800, then your debt payments and savings add up to 2642 for a total of 5442/month going out plus your retirement contribution withholdings. But you should have another thousand or so, right? Do you guys follow a strict budget, or is the 2800 in expenses only accounting for fixed expenses?

Sisugal said and slow down your efund savings to $250/month to free up more money for debt payment.

I don't get why you're so hung up on 0% for $650 because you're really only saving a few bucks in interest (like literally $10) by putting that $650 somewhere else. But we all have our weird sticking points, I suppose.

As far as payoff strategy, if you feel more progress by doing avalanche payoff, go for it 100%. However, I'd probably suggest getting your piddly student loan out of the way (would take you only a couple months) then focus on DH's SLs. As @hoffse said, you should be able to predict if/when that ARM might go up and you can then turn your focus towards that over SL if need be.

Good luck!!

bmo88 · April 2015

simplyelise said:
Hmmm, I'm curious about where the rest of your money is going.

You said monthly expenses are 2800, then your debt payments and savings add up to 2642 for a total of 5442/month going out plus your retirement contribution withholdings. But you should have another thousand or so, right? Do you guys follow a strict budget, or is the 2800 in expenses only accounting for fixed expenses?

Sisugal said and slow down your efund savings to $250/month to free up more money for debt payment.

I don't get why you're so hung up on 0% for $650 because you're really only saving a few bucks in interest (like literally $10) by putting that $650 somewhere else. But we all have our weird sticking points, I suppose.

As far as payoff strategy, if you feel more progress by doing avalanche payoff, go for it 100%. However, I'd probably suggest getting your piddly student loan out of the way (would take you only a couple months) then focus on DH's SLs. As @hoffse said, you should be able to predict if/when that ARM might go up and you can then turn your focus towards that over SL if need be.

Good luck!!

That accounts for fixed expenses. We also save 15% of our income in ROTHs and 401ks as I mentioned before (so that's mostly pre-tax). Then we also have health insurance (not actually included above), which is $250 a month.

Additionally, we have 4 quarterly income payments that come in the form of bonuses. So they aren't actually part of our normal monthly income.

I don't understand what you mean about my hang up with the $650. I just need to pay it off by July so it doesn't jump up to having to pay all the interest. It was 0% financing for 12 months. If I don't pay it off, I would actually have to pay almost $300 in interest due to original terms.

Regarding my small student loan, I am just riding on smaller payments right now until our savings is up. It's more of mental mindset of having the money available, than not. I see it as, it's a small amount of interest to pay on the loan in exchange for having the money available in the bank.

simplyelise · April 2015

Yeah, it's hard to estimate takehome, so it just seemed a little low (we take home 5100 on a 77k gross, but we're not at 15% for retirement yet).

You just seem stuck on this idea that paying it off early would be ridiculous. You could knock that out in one month and eliminate one of your debts. It just seems a bit odd that you want to keep a $650 debt around simply because it's zero interest.

Sorry, you're clearly doing well with incomes and everything, so this little debt is really not a factor. Others might consider me as a victim of Dave Ramsey brainwashing, I just can't wrap my head around financing furniture, especially when you make six figures, and then paying it off at a pace that just barely gets you in under the 1yr 0% financing offer.

bmo88 · April 2015

simplyelise said:
Yeah, it's hard to estimate takehome, so it just seemed a little low (we take home 5100 on a 77k gross, but we're not at 15% for retirement yet).

You just seem stuck on this idea that paying it off early would be ridiculous. You could knock that out in one month and eliminate one of your debts. It just seems a bit odd that you want to keep a $650 debt around simply because it's zero interest.

Sorry, you're clearly doing well with incomes and everything, so this little debt is really not a factor. Others might consider me as a victim of Dave Ramsey brainwashing, I just can't wrap my head around financing furniture, especially when you make six figures, and then paying it off at a pace that just barely gets you in under the 1yr 0% financing offer.

We currently make a six figure income. Given what I said before with quarterly bonuses, taxes, retirement and health insurance taken out, our take home pay is around $5400. So not much more than yours given our retirement is in the mix.

When we purchased the furniture last year, we made about $30,000 less and we had just bought our home. So we had depleted our savings. We could have paid cash for the furniture, but didn't want to wipe out the remaining $3,000 cushion in savings. We saw 1 year, 0% financing as the same as cash, but with more ability to leverage our funds and have a safety cushion. We have a history of always paying our debts on time and usually paying little or no interest (with the exception of student loans and mortgage). I understand it's not a popular strategy, but it has worked well for us. It makes more sense to have liquid cash available than pay off a 0% interest debt early. We will pay it off before it's due, so it's not a problem.

I like some of Dave Ramsey's principles, but I don't like his $1,000 and then everything toward debt guidance. That seems far too risky if something were to happen (emergency or job loss). I think the snowball method is great for those who need to motivation to stay the course, but for us, the avalanche makes sense because it saves more money in the end and we don't have a problem staying the course.

simplyelise · April 2015

Yeah, we don't do the $1000 only in efund. We don't own a home and we could afford to live one either one of our salaries, so we keep it at $3000 in addition to a car repair/replacement savings.

I totally understand wanting a larger efund when you own a home or if you just need it to feel secure. That's why I suggested you guys just slow down your efund savings so you can accelerate the debt payoff.

I will say that if you follow the avalanche payoff method, go at it 100%. You guys are trying to accomplish a bunch of great goals at once, so it's easy to get discouraged when you don't feel immediate progress.

hoffse · April 2015

Well I definitely agree that the furniture needs to be paid off (and the account cleared) by the end of June at the very latest. Otherwise you are going to have to track the closing date, etc. and I just wouldn't risk it to save a couple bucks.

The furniture and student loan perplexes me because it just wouldn't take very much for them to be done. I would personally find that irritating to pay each month. Not going to lie, I have to stop myself from just paying off one of H's undergrad loans. He has one that is now under $5K, and it's piddly enough that some days I just want it done. I haven't done it yet because it's still enough money that it would be better used elsewhere, but at a certain point.... I will probably pull the trigger on that one. I wouldn't be able to stand making payments on $650 and $1300 with your income. But that's just me.

I'm not a DR follower either, and I get the need for a large-ish e-fund. But yours would be big enough for me to turn my attentions elsewhere. Again though, that's just me.

bmo88 · April 2015

I get the loans seeming small enough to just knock them out and we may do that with the furniture one next month. For my $1,300 loan, I guess I just see it as that would keep us 1 month away from my ideal e-fund amount. Maybe it's just my stubborn mindset, but I have had major anxiety for the last 8 months since our efund hasn't been where I want it to be. Once we get to that $15,000 mark, I think I will follow the suggest advice of slowing it down. It's just so hard to get over the hurdle of not having access to the funds.

bmo88 · April 2015

UPDATE

Thank you all so much for the feedback/advice. DH and I spoke last night and decided a few things:

We are going to pay off the furniture bill next month in full.
We are going to increase my student loan payment (the $1,300 loan) to $300 a month and cut the time to pay it off in half.
As a result, we will be lowering our monthly savings to $500 a month ($250 less) until we get to $15,000. We should get there by the end of June because of some upcoming bonuses. Then we will decrease our e-fund contribution to $250 and add the difference to debt repayments.

Thanks again for the ideas!

Debt vs. Savings...what would you do? Repayment plan feedback

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