help me decide what loans to tackle

SmrBrd2012 · August 2015

Hi all of you money saving gurus,

It's been a long time since I've frequented this board, mostly because I just had a baby a few months ago and was in lots of denial about needing to come up with a financial plan but now I could really use some help. I can't decide how to start to tackle our debt. I used to semi-follow Dave Ramsay so I know he likes to tackle the lowest debt first but I'm also a believer in tackling debt with higher interest rates when it's warranted. That being said, the two debts with the highest interest rates are also gigantic (mortgage and student loans). From the list below, how would you advise H and I to move forward? I kind of want to tackle SL2 but should the Car1 debt be the first to go? Thanks!!

DEBT	monthly	Amt left
Car1	146	7,515	2.79%
Car2	237	9,732	1.99%
SL1	277	21,809	6.55%
SL2	100	9,036	3.15%
Mortgage	1400	203,434	4.75%

als1982 · August 2015

I would tackle the car loans first, not because of Dave Ramsey's methodology, but presumably because you can likely deduct at least a portion of your interest from the student loans and mortgage on your taxes.

SmrBrd2012 · August 2015

I completely forgot about that. This is why I come here!

Thank you.

brij2006 · August 2015

I wouldn't worry about the mortgage. Put that number aside for now, and not include it in your debt snowball.

We're avid Dave Ramsey followers, and are on Baby Step #7! His plan seriously works if you follow it 100%. So I personally would list them smallest to largest, get on a strict written budget, and plug away at them.

Feel free to post your budget here to get some tips on how to cut things.

Xstatic3333 · August 2015

Welcome back and congrats on the baby!

H and I spent a LONG time figuring out our financial strategy and bouncing back and forth between priorities. What I found in that time is that the DR plan, like bri said, works best if you can commit to it 100%. We found we were better able to commit to a retirement and savings focused plan, and so that's what we've landed on. For that reason, if you're doing DR I'd focus on car 1 first. If you're more into debt leveraging I'd do the SL first, or up your retirement contributions first.

SmrBrd2012 · August 2015

Thanks all!

I do like the idea of DR's plan but I'm not good at committing 100% to things and there are parts of his plan I don't care for. I do agree with the snowballing though which is the most important part I think.

Retirement is a whole other thing I need help with...I used to put away 12% but I took a salary cut at my new job (that I enjoy MUCH more) so now I'm not contributing anything other than the 5% my employer is putting in for me. I know it should be at least 15% but...ugh...I would rather get rid of some of our debt.

Anyhoo, H thinks we should tackle the mortgage first until we get rid of our PMI at 20% equity, if I remember correctly. We just bought last year and only had a 10% DP so that could take a little while.

I may post a budget within the next few weeks. Now that I'm back from maternity leave my paycheck is all wonky and I'm waiting for it to be updated.

AprilZ81 · August 2015

Here is what I would do.

1) Keep contributing to retirement to get the company match.

2) Don't focus on the mortgage for now, but if you go that route make sure that your loan is eligible to have the PMI drop off. New FHA loans require that PMI be paid the full length of the loan, so be sure you know what kind of loan you have and what the requirements are for getting rid of PMI.

3) I would get rid of Car 1 first (higher interest), then Car 2, then SL 1 (higher rate and higher balance), then SL 2. At that point up your retirement and then work on your mortgage if you want to pay that off early.

brij2006 · August 2015

If you would rather pay off the debt than put money into retirement, then do exactly that. But you have to be diligent and precise in paying off the debt. It means no more borrowing, living on a budget, and having a plan for your money. That's the only way it makes sense to go crazy on paying off the debt. If you're just going to borrow again someday, then it isn't worth it.

CuriousKiddosMama · August 2015

I would go after the car loan first. A couple reasons, it is the smallest so it will be achieved easier. But also your monthly payment on it is more than the monthly payment on the student loan, so paying it off will add more free money in your budget to throw at the other loans each month.

hoffse · August 2015

You rates aren't very high on any of them, so I would absolutely prioritize retirement. The most valuable thing you have there is time. Please - play with some retirement calculators and see what the difference of 5 years makes in terms of compounding interest. It's crazy. Don't put this off.

PMI isn't the greatest, but it's also deductible from your taxes if you itemize - so you could get some of that back. @Als makes a good point about the tax benefits, because it has the effect of lowering your rates on some of these loans in real terms. I don't know about your mortgage, but the tax perks of my mortgage mean that we're actually paying less for a 4 bed/3 bath house than we were paying in rent for a 2 bed/2 bath apartment. Don't discount this when figuring out which order to tackle them.

The other thing to remind yourself - mortgage rates have been at historical lows for the last 8 years or so. That gravy train isn't going to last forever, and odds are all of us are going to be paying significantly higher rates on our mortgages the next time we buy a house. I, for one, will not pay a penny of our mortgage early, because I want to ride the full benefit of that fixed rate until we decide it's time to sell. I'm into debt leveraging to build wealth, and the mortgage rates being this low while we are young has presented incredible opportunities for our generation, if only people would take advantage of it. Still - even if you don't share my philosophies on that (not everybody on this board does), the mortgage is not the low-hanging fruit here. Tell your H he needs to think of your mortgage like a rent payment. It's going to be there for a long long long time. Set it on autopay and don't worry about it until everything else in your financial life is squared away.

Other than retirement, I would focus my efforts on the car loan since that's a depreciating asset. You also have two car loans at once, and I would try to get in the habit of always having at least one vehicle paid off.

vlagrl29 · August 2015

car loans for sure! then student loans - I would worry about the mortgage lastly.

SmrBrd2012 · August 2015

Thanks all!!

I'm still trying to get H on board with the small car loan. He won't let the PMI thing go. We didn't have enough in property taxes and interest to itemize last year so I don't think we will this year either, which is one of his arguments.

I agree that I'm definitely falling behind on retirement. I'm going to look into it this week. Thanks for the push @hoffse!

help me decide what loans to tackle

Re: help me decide what loans to tackle

Choose Another Board

Search Boards