Home     Forum     401k     401k Rollovers
    Register   Login   Members   Search   FAQs     Recent Posts    




Paying off debt questions

Reply to topic
Money Talk > Credit & Loans

Author Thread
dmderringer10
First Time Poster


Cash: $ 0.25

Posts: 1
Joined: 16 Sep 2012

Paying off debt questions  Reply with quote  

So I just got married and we may be looking to pay down of our debt and wanted advice on what to do.

I make 30,900 per year and my wife is working part time right now while still looking for a full time job.

Debt:

53,430 in student loans (most between 5-6.8%)

Right now we're paying 123/month. In october another 130/month kicks in. Then in April about 240/month kicks in. And finally in August another 94/month kicks in. And in April 2015 100/month will kick in (I previously paid that ahead)

6,100 left on one car (3.9%) 200/month
10,000 left on another car (about 3.5%) 237/month

Assets:

1,993 in a checking account
16,800 in a savings account (.5%)
19,148 in the stock market (it's up 11% since February)
5,900 in a CD (it will have about 6,200 when it matures at the end of next year)
About 2,700 in silver if I sold it
About another 4,000 in savings if we need it

So my questions...should we pay some of it down? If so, what should we pay down?

We may be looking into buying a house sometime next year if my wife is able to find a full time job.

I've thought about paying off the cars because that would free up close to 430/month to put towards the loans. Good idea/Bad idea? Should we put some of it towards loans?

Any advice would be helpful.
Post Sun Sep 16, 2012 6:24 pm
 View user's profile Send private message
coaster
Senior Advisor


Cash: $ 1626.30

Posts: 7990
Joined: 11 Oct 2005
Location: Wisconsin
 Reply with quote  

The general rule of thumb is to put any extra money toward the highest interest rates. That would be the student loans, no? Especially when you figure in the "kickins" you mentioned. And if it's a question of which assets to use, you have rather more in savings than you really need, and that's getting you the lowest return, so that's the best place to take it from.

~Tim~
Post Mon Sep 17, 2012 6:09 am
 View user's profile Send private message
littleroc02us
Moderator


Cash: $ 383.50

Posts: 1887
Joined: 09 Feb 2009

 Reply with quote  

I like your idea of paying off the cars asap which frees up $430 a month. If you can somehow bump up your payments to $800 a month on the school loans for 5 years you could have them paid off. Her full time job could help with that. If you decide to get a home before their paid off then the likelyhood that their paid off in the next 10 years is slim to none, because all of your money will go to interest on a house.

Risk comes from not knowing what you're doing. (Warren Buffet)
Post Mon Sep 17, 2012 1:58 pm
 View user's profile Send private message
soybean
Full Member


Cash: $ 14.65

Posts: 83
Joined: 29 Jun 2011
Location: Ohio
 Reply with quote  

blank ...

Last edited by soybean on Fri Sep 21, 2012 6:18 pm; edited 1 time in total
Post Fri Sep 21, 2012 6:06 pm
 View user's profile Send private message
soybean
Full Member


Cash: $ 14.65

Posts: 83
Joined: 29 Jun 2011
Location: Ohio
 Reply with quote  

quote:
Originally posted by soybean
quote:
Originally posted by littleroc02us
If you decide to get a home before their paid off then the likelyhood that their paid off in the next 10 years is slim to none, because all of your money will go to interest on a house.
Without some additional facts, your statement may be inaccurate. We don't know how much they are paying for rent and we don't know what they might pay for a house. And, the tax deduction for mortgage interest and property tax on a home might reduce their tax liability. But, keep in mind interest rates on mortgage loans is very low now, so that benefits home buyers.

I would be very much inclined to apply all that savings that's only earning 0.5% interest toward student loan debt and/or paying off the car loan.
Post Fri Sep 21, 2012 6:07 pm
 View user's profile Send private message
Wino
Senior Member


Cash: $ 113.80

Posts: 560
Joined: 03 Aug 2012
Location: Dubai
 Reply with quote  

quote:
Originally posted by coaster
The general rule of thumb is to put any extra money toward the highest interest rates.


There are two general rules for this (edit: Three rules. There was one more I was not aware of; also, found an article listing 9 ways to pay off debt while looking for my reference link). The rule cited above by coaster is called the "debt avalanche." Mathematically, it is the best way to go.

The second general rule is to pay off the smallest debt amount first. This rule is called the "debt snowball." This method has been proven to work best, as people tend to "See progress earlier," and therefore stick with the plan.

http://www.marketingpower.com/AboutAMA/Pages/AMA%20Publications/AMA%20Journals/Journal%20of%20Marketing%20Research/TOCs/SUM_2012.4/can-small-victories-help.aspx

There is also a third method I found while looking for the link above. It is called the "debt tsunami." It has you list the loans you hate the most or want to pay off the most first, and then put all of your extra money into payments for that debt, followed by the second one you want to pay off first.

In general, it doesn't matter which method you use. What you need is the discipline to dedicate your extra money toward paying down debt while at the same time NOT acquiring more debt. So, in your case, you need to make a significant dent in your debts before you save for a house.

I suggest you pay off the cars with your savings. First do the larger car loan balance. After that, put all but maybe $2000 of your savings toward the smaller car loan. Use the full amount of both loan payments toward the second car until it is paid off. From there, use any of the three methods above to pay off the other debts. Once again, I'll point out that the Snowball method popularized by Dave Ramsey (lowest balance first) has been shown to be the most effective, but that is not what I just suggested. What I suggested is close to the method I used.

If you have discipline to stick to the plan, then you should go after the largest-interest-rate loan first. But if you had the discipline already, you wouldn't have this debt problem. Develop the discipline by paying more and borrowing less. Once you do this without effort, you'll be able to organize your debts in any order you like.

For full disclosure, I used none of the methods above. I paid off "loans than can't come back" without a visit to the bank first, then revolving debt (credit cards) afterwards. This hurt my credit rating, as I had very little balance remaining on my credit cards - I had over $50K in CC debt - but the loans, once paid off could not be run up again without a visit to the bank. My credit rating has since recovered mostly. I still have an use my credit cards, as I travel, and having the plastic at hand is very much more convenient. I have no plans to run up the balances again, though, and pay them off monthly.
Post Sat Sep 22, 2012 3:58 am
 View user's profile Send private message
soybean
Full Member


Cash: $ 14.65

Posts: 83
Joined: 29 Jun 2011
Location: Ohio
Re: Paying off debt questions  Reply with quote  

quote:
Originally posted by dmderringer10

I make 30,900 per year and my wife is working part time right now while still looking for a full time job.

Debt:

53,430 in student loans (most between 5-6.8%)

Right now we're paying 123/month. In october another 130/month kicks in. Then in April about 240/month kicks in. And finally in August another 94/month kicks in. And in April 2015 100/month will kick in (I previously paid that ahead)

6,100 left on one car (3.9%) 200/month
10,000 left on another car (about 3.5%) 237/month

Assets:

1,993 in a checking account
16,800 in a savings account (.5%)
19,148 in the stock market (it's up 11% since February)
5,900 in a CD (it will have about 6,200 when it matures at the end of next year)
About 2,700 in silver if I sold it
About another 4,000 in savings if we need it

So my questions...should we pay some of it down? If so, what should we pay down?

We may be looking into buying a house sometime next year if my wife is able to find a full time job.

Your finances portray a strange mix of debt and assets. How and why someone accumulates as much as you have in savings while simultaneously accumulating a large amount of student debt seems quite odd. Aren't student loans generally need-based? If so, then how did you quality for all those student loans while you had substantial savings? I know I'm going off in a tangent here but your situation seems so odd that it makes me wonder whether this is all true or whether we don't have the whole picture.

As mentioned by Wino, there are two or three conceptual approaches to paying down debt. I have always paid high-interest debt off first because it's simply the smartest way to do it, looking at the debt alone. Paying off the high-interest debt first reduces to total amount paid for interest on all the debt and, therefore, reduces to total amount paid out during the whole process of paying off the debt.

However, in your case, you may be entitled to a tax deduction for student loan interest. This will somewhat offset the higher interest paid on the student loans and should be taken in to consideration in deciding how to structure your debt reduction. A tax reference: http://www.irs.gov/taxtopics/tc456.html

In addition to taking money out of low-interest savings to payoff debt which has a higher interest rate, I would be also thinking about taking some money out of the stock market. The gain you've seen there since February will not continue for long. Indeed, a correction/downturn is always a risk. So, taking some money out now to apply toward debt pay down might be a smart move.
Post Sat Sep 22, 2012 3:05 pm
 View user's profile Send private message
littleroc02us
Moderator


Cash: $ 383.50

Posts: 1887
Joined: 09 Feb 2009

 Reply with quote  

quote:
Originally posted by soybean
quote:
Originally posted by soybean
quote:
Originally posted by littleroc02us

Without some additional facts, your statement may be inaccurate. We don't know how much they are paying for rent and we don't know what they might pay for a house. And, the tax deduction for mortgage interest and property tax on a home might reduce their tax liability. But, keep in mind interest rates on mortgage loans is very low now, so that benefits home buyers.





My post was more of a warning that if this person decides not to pay off their debt before buying a home that they may be getting themselves deeper in the hole where being able to make more then just interest payments with minimal principle on a mortgage isn't a very sound investment idea. HOmes are only a blessing when you have no debt and you aren't living paycheck to paycheck.

Risk comes from not knowing what you're doing. (Warren Buffet)
Post Mon Sep 24, 2012 7:35 pm
 View user's profile Send private message
littleroc02us
Moderator


Cash: $ 383.50

Posts: 1887
Joined: 09 Feb 2009

Re: Paying off debt questions  Reply with quote  

quote:


However, in your case, you may be entitled to a tax deduction for student loan interest. This will somewhat offset the higher interest paid on the student loans and should be taken in to consideration in deciding how to structure your debt reduction. A tax reference: http://www.irs.gov/taxtopics/tc456.html




So twice in this post I've seen you mention a mortgage deduction and a student loan interest deduction and how they are a wonderful benefit. While paying down your debts (student loans and mortgage) they are a nice added benefit yes, but mathematically I'm sure you know they don't calculate out as a positive thing as an end result. Let me explain. Both are deductions, not credits. So if I pay the bank 10k in interest for my mortgage and I'm in the 25% tax bracket I get $2500 back from the gov't. So explain to me why it's better to send the bank 10k instead of paying the IRS $2500. Same is true with the student loan deduction.

Risk comes from not knowing what you're doing. (Warren Buffet)
Post Mon Sep 24, 2012 7:46 pm
 View user's profile Send private message
Wino
Senior Member


Cash: $ 113.80

Posts: 560
Joined: 03 Aug 2012
Location: Dubai
Re: Paying off debt questions  Reply with quote  

quote:
Originally posted by littleroc02us
So explain to me why it's better to send the bank 10k instead of paying the IRS $2500. Same is true with the student loan deduction.


Although Soybean can answer for himself, he merely suggested that tax deductions for some types of debt be taken in to consideration when determining which debt to pay first. Using your example, and not bothering about compounding, effectively, the house loan is at a 25% lower interest rate when determining which debt to pay first.

I don't think he advocated taking out debt merely for the deduction. He was advocating paying the highest interest rate first, but making sure one considers all details of the debt and not just the interest rate written on paper.
Post Tue Sep 25, 2012 1:27 am
 View user's profile Send private message
soybean
Full Member


Cash: $ 14.65

Posts: 83
Joined: 29 Jun 2011
Location: Ohio
Re: Paying off debt questions  Reply with quote  

quote:
Originally posted by Wino
quote:
Originally posted by littleroc02us
So explain to me why it's better to send the bank 10k instead of paying the IRS $2500. Same is true with the student loan deduction.


Although Soybean can answer for himself, he merely suggested that tax deductions for some types of debt be taken in to consideration when determining which debt to pay first. Using your example, and not bothering about compounding, effectively, the house loan is at a 25% lower interest rate when determining which debt to pay first.

I don't think he advocated taking out debt merely for the deduction. He was advocating paying the highest interest rate first, but making sure one considers all details of the debt and not just the interest rate written on paper.
Exactly. Thanks, Wino.
Post Wed Sep 26, 2012 7:20 pm
 View user's profile Send private message
littleroc02us
Moderator


Cash: $ 383.50

Posts: 1887
Joined: 09 Feb 2009

 Reply with quote  

Personally I would rarely advocate paying off the highest interest rate first, I always sugget and have paid off the smallest debt first which although not mathematically correct, is more productive in paying off debt because you stay motivated because you have more wins.

Risk comes from not knowing what you're doing. (Warren Buffet)
Post Wed Sep 26, 2012 7:29 pm
 View user's profile Send private message
soybean
Full Member


Cash: $ 14.65

Posts: 83
Joined: 29 Jun 2011
Location: Ohio
 Reply with quote  

quote:
Originally posted by littleroc02us
Personally I would rarely advocate paying off the highest interest rate first, I always sugget and have paid off the smallest debt first which although not mathematically correct, is more productive in paying off debt because you stay motivated because you have more wins.
Well, for all those folks who can't discipline themselves to take the mathematically correct approach - and I would agree that may be substantial percentage of debtors - your approach most likely does work better. So, this points to a non-mathematical issue, to an issue of psychology, and I have a hard time understanding how many people lack the discipline to take the mathematically better approach of paying off high-interest debt ahead of low-interest debt. It's like we're dealing with kids, not intelligent adults. This is perhaps also an indication of a low level of financial literacy, in my opinion. People aren't doing the analysis and budgeting they should be doing to minimize interest expense during their debt payoff strategy.
Post Wed Sep 26, 2012 7:56 pm
 View user's profile Send private message
littleroc02us
Moderator


Cash: $ 383.50

Posts: 1887
Joined: 09 Feb 2009

 Reply with quote  

quote:
Well, for all those folks who can't discipline themselves to take the mathematically correct approach - and I would agree that may be substantial percentage of debtors - your approach most likely does work better. So, this points to a non-mathematical issue, to an issue of psychology, and I have a hard time understanding how many people lack the discipline to take the mathematically better approach of paying off high-interest debt ahead of low-interest debt. It's like we're dealing with kids, not intelligent adults. This is perhaps also an indication of a low level of financial literacy, in my opinion. People aren't doing the analysis and budgeting they should be doing to minimize interest expense during their debt payoff strategy.


I believe that I have a good financial head on my shoulders do to the facts that I have no debt except my home and invest 15% of my income and I used the snowball method and it was very successful for me, so no I don't agree with your statement. It isn't so much discipline as it is motivation and the psychology of winning because you feel like your accomplising more. What happens with paying off the highest interest rate debts is that when the balance of a particular debt is high sometimes it may takes years to pay down and that may frustrate even the most disciplined of us. I believe that on average more people quit with this method. As an example of lose who lacked patience just look at all the home buyers in the housing crisis that were so eager to get a home that they signed these no downpayment loans, took adjustable rate mortgages and spent more then they could afford.

Risk comes from not knowing what you're doing. (Warren Buffet)
Post Wed Sep 26, 2012 8:45 pm
 View user's profile Send private message
Wino
Senior Member


Cash: $ 113.80

Posts: 560
Joined: 03 Aug 2012
Location: Dubai
 Reply with quote  

Falling back on Dave Ramsey's sayings, and I can only paraphrase:

If you did the mathematically smart thing, then you wouldn't be in debt. Your problem is your spending, not your debt.
Post Thu Sep 27, 2012 2:20 am
 View user's profile Send private message

Goto page 1, 2  Next
Reply to topic
Forum Jump:
Jump to:  
  Display posts from previous:      





Money Talk © 2003-2016