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    Default What would you do?

    Hello everyone,

    I have been a lurker for a bit of time now. I wanted to create this thread to introduce my self, but mostly seeking support from fellow villagers in this journey.

    My wife and I are both 26 years old and we are following the Dave Ramsey plan for the most part. Why for the most part? Well, we know the budget snowball but we wanted to get a different perspectives or suggestion from all of you. The goal is to be out of debt and save money almost simultaneously. We do two budgets every month and we have 100 dollar allowances every two weeks. We are trying to gain more traction.

    The breakdown on the major debts:

    Student Loan FAFSA: 465.00 (39, 750.00)
    Personal Loan: 286.00 (10,400.00)
    Car Loan: 465.00 (14,906.00)

    Monthly bills and major loans combined:3,694.00

    Current Savings: 25,058.01
    We both started new jobs this month and we will be earning 7,400 monthly after taxes.

    Debt paid off so far:
    Credit Card: 5,500
    Personal Loan: 9,870.00


    We will like to keep 10k for savings/emergencies. Therefore, what would you do? What major debt would you tackle first and why? Thank you for reading this far. I been wanting to knock the car note out of the way so it feels that we are making progress by getting rid of that 465 car payment. Any further questions or concerns that I can clarify please feel free to ask.

    Thank you Villagers.

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    Super Moderator josantoro's Avatar
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    what are the interest rates on the loans?

    And welcome to the Frugal Village!!!
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    This personal loan...is from a family or friends? If so I would focus on that first of all. I hate owing friends money. It would of course also be keeping with Dave's advice of paying the smallest first.

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    Personally, I would pay the car off first, for the "feel good" impact. That will then allow you to have an additional $465.00 to snow ball. The sense of satisfaction will give you momentum to keep up the debt resolution plan.
    If you ever really need it, you could later borrow against your paid off car, often at a cheaper % rate than other loans.

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    Liabilities -
    $65,000

    Assets -
    $25,058
    $12,000 car

    Your net worth: $37k - $65k = a minus $28k

    That's pretty darn good for an educated young couple, only age 26, earning about $140,000 gross.

    Consider your far-future. If you put about $800/m into your 401k's, and do that for 34 years (age 60) that will be about $3,300,000 (assuming the generic US market index).

    So, whenever you divert your income stream to other things, such as prepaying small debt you are cutting into that $3.3M. (Eg, if you derailed $15,006 to prepay the car loan, the future value of the loss will be about $520,000.)

    BTW, when you analyze your budget think in terms of your GROSS income, not just the take-home, you have some control on how you spend. Eg, if you invest $10,000/yr into your 401k's, your tax bill will be lowered by about $3200/yr (that increases your monthly $7400 to about $7700.)

    Disclosure: I never prepay fixed rate low interest collateralized loans, I keep car loans for the full 60 months. We have a 2017 Van, about $35,000. The loan is at 2.5% - and our own $35000 remains invested in the 11%/yr SP500 Index, I expect it to approx double in 6 years to $70,000. (The Rule of 72). I'm in my late 70's, retired, wealthy - and I haven't paid cash for a new car since the 1980's when rates were touching 15%.

    What are the rates and terms of your 3 loans? You need to sort the "keeper loans" from the toxic loans. (You did exactly the right thing by getting rid of the revolving high rate consumer loans, they probably had 12% and 15% rates.)

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    Thank you all for your responses.

    Quote Originally Posted by josantoro View Post
    what are the interest rates on the loans?

    And welcome to the Frugal Village!!!
    Thank you for the welcoming. Interest rates for loans are
    FAFSA: 6%
    Personal Loan: 6.5%
    Car Loan: 1.9%

    Quote Originally Posted by electro-wiz View Post
    This personal loan...is from a family or friends? If so I would focus on that first of all. I hate owing friends money. It would of course also be keeping with Dave's advice of paying the smallest first.
    Sorry, personal loan is from schools first. I used it to pay my Masters Program. I was on the pay as you go for the most part and that is what I owe for my Masters. The FAFSA loan is my wife Masters. So we will began tackling that one together. Yes, if it was a friends loan I would of gotten rid of it in a heartbeat.

    Quote Originally Posted by Winkie View Post
    Personally, I would pay the car off first, for the "feel good" impact. That will then allow you to have an additional $465.00 to snow ball. The sense of satisfaction will give you momentum to keep up the debt resolution plan.
    If you ever really need it, you could later borrow against your paid off car, often at a cheaper % rate than other loans.
    Thank you. I feel the same way. I could pay off the loan and be over with it but I would still feel that I am in big debt with the car and the other loan. Maybe just knowing that we have a paid of car that is not really old will motivate us more. The only downside is that we are thinking of buying a new car for me. I really do not want to be back in debt but I also cannot take my chances in buying a used one and have it leave me stranded. I commute a bit and reliability is a must.

    Quote Originally Posted by old guy View Post
    Liabilities -
    $65,000

    Assets -
    $25,058
    $12,000 car

    Your net worth: $37k - $65k = a minus $28k

    That's pretty darn good for an educated young couple, only age 26, earning about $140,000 gross.

    Consider your far-future. If you put about $800/m into your 401k's, and do that for 34 years (age 60) that will be about $3,300,000 (assuming the generic US market index).

    So, whenever you divert your income stream to other things, such as prepaying small debt you are cutting into that $3.3M. (Eg, if you derailed $15,006 to prepay the car loan, the future value of the loss will be about $520,000.)

    BTW, when you analyze your budget think in terms of your GROSS income, not just the take-home, you have some control on how you spend. Eg, if you invest $10,000/yr into your 401k's, your tax bill will be lowered by about $3200/yr (that increases your monthly $7400 to about $7700.)

    Disclosure: I never prepay fixed rate low interest collateralized loans, I keep car loans for the full 60 months. We have a 2017 Van, about $35,000. The loan is at 2.5% - and our own $35000 remains invested in the 11%/yr SP500 Index, I expect it to approx double in 6 years to $70,000. (The Rule of 72). I'm in my late 70's, retired, wealthy - and I haven't paid cash for a new car since the 1980's when rates were touching 15%.

    What are the rates and terms of your 3 loans? You need to sort the "keeper loans" from the toxic loans. (You did exactly the right thing by getting rid of the revolving high rate consumer loans, they probably had 12% and 15% rates.)
    I mentioned the loans interest above. We have 3 more years in both loans. I do not want to wait three years to pay them off. Only the fiefs one keeps accruing credit. The other loans are fixed rates.
    The credit card was at 7% and the other loan was at 6%

    Thank you for sharing all the important information and calculations. We definitely want to learn more about investing and retirement. But, at the moment we are focused on paying off debt and saving for a big downpayment for a house. It may not be the nicest thing to say but we are hoping that house prices decline like they did back in '09 in order for us to be in a good position to purchase. We apologize to whoever is reading this and was affected by the real estate crash back in those years. I understand it was a hard time. We do not mean it in a joking way.

    Lastly, we calculate on our take home pay because in reality that is all we see. Yes, on paper it looks nice that we both bring nice paychecks but what good is it if we are taxed a lot. On top of that we will be paying IRS at the end of the year. At the end our yearly 128k combined salary translates into the high 80s. We are both thankful though.

    In the future we will be posting what we decide to do with our next new car purchase and paying of the debt.

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    We definitely want to learn more about investing and retirement. But, at the moment we are focused on paying off debt and saving for a big downpayment for a house.
    (1) Paying debt, (2) saving for a house DP, (3)investing & retirement, are highly interdependent, to optimize your outcome you need to look at the entire package. Eg, if you delay starting the 34yr investment by 10 yr, it will be only $1.1M , not $3.2M at age 60.
    1. It is important to direct your income stream to its highest and best use. Eg, the car loan is 1.9%, never ever prepay 1.9% capital, retain the use of that money for its full term.
    2. And a large DP on a house is backwards - you can probably get a 4%, fixed rate 30 yr loan - so maximize it. Mortgage loans provide some of the lowest cost capital in the world, 4% fixed rate, locked in for 30 yrs, is an important life opportunity for you.
    3. IMO it is counterproductive for people to think of 'retirement', it always seems abstract and far far away, family 'wealth-building" is a better concept. Most of us are given about 30 yrs for wealth-build - followed by many yrs (hopefully) of wealth-preservation. Law of investing - risk and return are directly proportional. So you need to learn risk management and mitigation at the outset - because your highest risk investing is at the front end.

    our next new car purchase and paying of the debt
    It might be good to rethink your goals/focus of prepaying debt. Ie, you might be prepaying debt just because it's there, not because it makes financial/mathematical sense?

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    I agree with old guy.
    Make America Kind Again.

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    It may not be the nicest thing to say but we are hoping that house prices decline like they did back in '09 in order for us to be in a good position to purchase. We apologize to whoever is reading this and was affected by the real estate crash back in those years. I understand it was a hard time. We do not mean it in a joking way.
    lol, no apology needed. And 2009 wasn't actually that bad (recency distorts it), the real estate crashes of the 1970s and '80s were worse - 15% mortgages, carry-back loans, reverse-amortization, etc.
    As for trying to time the real estate market - when DW and I were buying rental houses, every time that I "waited for prices to decline" we ended up buying a year or two later at a higher price. So I quickly learned that, when we were ready to add another house into our plan, buy it. However I did apply my management skills to the 15% mortgage issue. Bought most of our houses earlier, 7% and 8% mortgages, then waited out the 15% yrs, then refinanced the houses as the rates dropped into the 6% and 5% range a decade later. And then refi'd again in the 4% era.

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    I definitely agree with building savings while paying down debt. When I look at debt I'm always looking at what happens if you cannot pay both long and short term. Right now you have good income, but what if one of you gets sick or loses a job? If you don't or can't pay student loans, they don't go away even in a bankruptcy. They'll still be waiting to ambush you when you draw social security so to me they would be a priority.

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    [QUOTE
    It might be good to rethink your goals/focus of prepaying debt. Ie, you might be prepaying debt just because it's there, not because it makes financial/mathematical sense?[/QUOTE]

    Thank you for your concerns. I can say that I agree with your perspective but we cannot say we fully understand IRS, 401s etc.. Thank you for providing me that information, but as many threads you fail to understand that we often are asking simple questions and desire simple answers. We really thank you for providing me with the bigger picture though. However, yes we want to be out of DEBT before thinking about houses or other aspects of my life. I do not want to have a car payment for three yrs just because the contract is on a fix low interest rate. It feels nice to go to bed without having someone own you in some shape or form. But, by all means we appreciate your time and patience to provide very important information that at the moment we may not be thinking to the full extent.
    Thank you Experience Guy.
    Quote Originally Posted by josantoro View Post
    I agree with old guy.
    Thank you for the support.

    Quote Originally Posted by Anna43 View Post
    I definitely agree with building savings while paying down debt. When I look at debt I'm always looking at what happens if you cannot pay both long and short term. Right now you have good income, but what if one of you gets sick or loses a job? If you don't or can't pay student loans, they don't go away even in a bankruptcy. They'll still be waiting to ambush you when you draw social security so to me they would be a priority.
    You honestly hit it right on the dot. That is how we feel. What good is it to have 25k on the bank if we owe 60? Sure, it is nice to have money in the bank but in case of an emergency or layoffs I want to reduced my debt as well as have some rainy fund money. The 1k baby step for Dave Ramsey is something i do not fully agree with. Good luck getting out of a pickle with 1k in the bank and a clunker leaving you stranded. That said, thank you for your opinion. The FAFSA is the big one and the most risky one out of the other two. It is just the biggest one and the one we probably would have the hardest time keeping motivated, but we will keep you all updated. By the end of the month we will have another budget and we know we will know what areas we want to knock out of the way. Keep the comments coming. We truly appreciate them.

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    I want to give you some encouragement in your quest for paying off your debt. For the record I do not agree with Old Guy, that you are better off keeping the debt and investing your income. I feel the security of knowing that you do not owe anybody is worth more than the interest rate spread. I am not so completely a Dave Ramsey fan that I would never borrow money to invest, but it would have to be an investment opportunity that cannot wait. For example the property right beside where I live will probably come up for sale sometime in the near future. I would really like to have it, so I would be willing to get a mortgage to purchase it. However I would be looking to get pay off that mortgage as soon as I can.

    The only downside is that we are thinking of buying a new car for me. I really do not want to be back in debt but I also cannot take my chances in buying a used one and have it leave me stranded. I commute a bit and reliability is a must.
    By "new car" are you saying a brand new car? If so I would challenge you to rethink whether reliability is a good reason to buy new. I think you will be hard pressed to find evidence that a brand new car is more reliable than a 3 year old model.

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    I agree, a new car will lose value as soon as you drive it off the lot. My last car was 2 years old and still under warranty. Got it for about $10K less than a new one. Still going strong 2.5 years later.

    OP, please educate yourself and your wife about IRA's, 401K, etc. Your future depends on it. You are in your most valuable years to start investing for retirement. Do you want to retire with $400K, or with $300K and the memory of how you were debt free so much faster? Something to think about (from someone who is enjoying the fruits of great retirement planning).
    Make America Kind Again.

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    Quote Originally Posted by electro-wiz View Post
    I want to give you some encouragement in your quest for paying off your debt. For the record I do not agree with Old Guy, that you are better off keeping the debt and investing your income. I feel the security of knowing that you do not owe anybody is worth more than the interest rate spread. I am not so completely a Dave Ramsey fan that I would never borrow money to invest, but it would have to be an investment opportunity that cannot wait. For example the property right beside where I live will probably come up for sale sometime in the near future. I would really like to have it, so I would be willing to get a mortgage to purchase it. However I would be looking to get pay off that mortgage as soon as I can.
    By "new car" are you saying a brand new car? If so I would challenge you to rethink whether reliability is a good reason to buy new. I think you will be hard pressed to find evidence that a brand new car is more reliable than a 3 year old model.
    Thank you for your responses and encouragement. We will not lie and say that we were not looking at a brand new car. However,we have been looking mostly at a 2014-2017 used cars. We currently have a 04 Dodge Stratus that still kicking and we will wait until that car says "no more." We like to plan for the worse and hope for the best. Yes, it is not ideal to pay off a car and get another one the next week. I completely understand in that regard how ludicrous those actions will look.

    I hope you are able to get the home you are waiting for. Even if I had 100k to give downpayment for a home we know we would not. We would want to have some money for mortgage in case something goes wrong along the way. We would want to pay off mortgage fast. One of the adult decisions we will be making is moving closer to where I work in order to be able to purchase at a much reasonable range 300-500k as opposed to where we currently live 550-1mil The weather is different but job security will be there for the most part.


    Quote Originally Posted by josantoro View Post
    I agree, a new car will lose value as soon as you drive it off the lot. My last car was 2 years old and still under warranty. Got it for about $10K less than a new one. Still going strong 2.5 years later.

    OP, please educate yourself and your wife about IRA's, 401K, etc. Your future depends on it. You are in your most valuable years to start investing for retirement. Do you want to retire with $400K, or with $300K and the memory of how you were debt free so much faster? Something to think about (from someone who is enjoying the fruits of great retirement planning).
    We agree with you 100 percent. Thank you for reminding us that a 2yr old car is reliable and that we do not have to have the brand new car smell. Thank you. We are constantly reminding ourselves to continue to "sacrifice" or wants from our needs. We are well off and we have our health and in reality we do not NEED any luxuries. I am a huge petrol head and want my "race cars" and what not, however, I also listen to Dave and read stories in frugal village and know that we do not want to be in challenging situations. Kiddos are in the plans for the next 3yrs and we want to be able to put them in a much better position than we had. Thank you for your response.

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    Not everyone is the same, nor do they have the same experiences. For my DH & I, we have done better buying a brand new car & driving it forever. We have tried buying used with dismal failure. He does not have any mechanical skills so any repairs have to be done at a shop. We each have owned 3 brand new cars in our lifetime & if we ever buy another, it will be new. We have however gotten really good deals, buying after model year end, or buying through a discount plan provided by our work. I envy those folks that can make good in the used car game, but I am not one of them.
    We do not have the wealth that old guy has, but we do live comfortably in a paid off home. We both contributed to 401 plans all our working years & have a nice savings built up. We each took our retirement early, But continue to hold part time jobs because we want to. As I write this, we are on our 5th trip this year, enjoying a beach vacation.

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