[mama2James]

Hi all, looking for some input. I'll lay out the debt we have and the minimum monthly payments and I'd love to hear your thoughts on which order to tackle them. I am very familiar with Dave Ramsey's snowball method (I listen to his podcast daily), but I have other ideas bouncing around in my head that as well.

student loans ~11,000 $175/mo
auto loan 9,370 5% $295/mo (3 years left to pay)
Discover card: ~9,000 (most is 0%, 2k is @ 20%) - $180/month
CNB card ~8,600 0%- $87/mo
medical bills ~5,500 , no interest currently paying $50/mo
capital 1 ~3,200 - unsure of new payment, just transferred balances for 0% rate
repaying employer for past insurance premiums ~1500 $100/mo

We are currently paying anywhere from $500-700 per month extra towards debt above the minimums. I am considering paying down the auto loan first for several reasons: it's secured debt and could be repo'd if we were ever unable to pay, we plan to keep it for at least 5 more years, and the interest rate is the highest we have other than the partial balance of the discover card. It also has the highest single monthly payment and if we were to pay it off quickly, it would add nearly $300 to our snowball. We are looking at approximately 32 months from now to be debt free except the house with our current income. It may be increasing soon as our children are getting older and I will be able to work more hours while they are in school.

I appreciate any insight

 

[Ayanka]

First of all, I am sorry for the situation you are in and a big hug to you. Secondly I am very glad you are willing to work to help repay the debts, because with your husbands' condition, it sounds like some kind of extra income might be welcome (see other thread).
What I would do, is to first pay off the 20% of the discovery card. Then I would consider paying the employer back (I assume this is your husbands' employer?), because if he gets laid off, the odds are pretty good they will want their money then. This of course depends on how likely it is he gets laid off. How long do the 0% offers remain?

 

[mama2James]

The $ owed for insurance premiums is to my employer, I do currently work 2 days per week and this adds approx $600 to our monthy income after childcare costs. I can call discover and find out if I am able to pay off the higher interest balance specifically..as I understand it, any $ paid goes to the 0% balance first, which certainly benefits them

 

[mndtrp]

There's typically two ways people pay off their debt:
1) Lowest amount first to build snowball payments
2) Highest interest first to save more money overall

I prefer the 2nd option, mainly because freeing up cash flow wasn't a necessity and I would rather save money on the high interest costs.

My guess is you have a balance transfer and then purchases on your Discover card. Once you go past your introductory offer, anything at 0% will jump up to the 20%.

I would pay off the Discover card first, make monthly payments to the rest of the cards in order to pay them off a month or two before the 0% rate changes to whatever the new rate would be, and then start paying down whatever has the next highest interest rate (I guess the auto loan).

 

[Scout706]

Smallest balance first. This is a proven system, you need a victory, and you need it soon. You can get Capital One out of your life FOREVER in four to six months, sooner if you get more intense. Imagine that, picture it. Crossing it off the list. The auto loan - a year or more? Smallest balance first, it's time proven.

 

[CookieLee]

I agree with you ... given your situation. Pay off the car as soon as possible, even reducing the emergency fund in order to do it quickly.

 

[mama2James]

Thank you for the input! I talked to hubby about it again, he is on board with the idea of focusing on the vehicle loan first as well. I get 0% balance transfer offers several times per month from the cards we currently have, so as the interest free periods end we will likely have options to move them. I do recognize that this is not guarenteed. We are a family of 5 with 2 still in car seats. Our vehicle is a 2006 Toyota sequoia in good condition that is perfect for our needs and could potentially last us another 7-10 years.

 

[CookieLee]

Instead of using the 0% balance transfers which dings your credit report and just costs you money, I recommend you call you credit card company and ask them about balance pay-off plans. Sometimes there are special requirements (like a job loss) but they will frequently: (1) forgive part of your balance, especially if you've carried a balance for a long time, (2) lower your interest rate dramatically, (3) put you on a fixed payment schedule that is much lower than your current monthly minimum.

Oh, and I believe I read that you wrote if you pay extra against a credit card that had a mixed interest rate (some at 0% and some at 20%) then the credit card company applies the extra payment to the lower interest rate balance first. I don't think they can do that under the new laws. I think they have to apply the extra payment toward the oldest debt first or split the payment against the two debts in the same proportion (so if you owe $2000 at 20% interest and $1000 at 0% interest than a $300 principal payment would go $200 toward the 20% debt and $100 toward the 0% debt).

 

[old guy]

It also has the highest single monthly payment and if we were to pay it off quickly, it would add nearly $300 to our snowball.

You may be looking at this backwards - all of your income stream comes from somewhere, if you prepay a $9370 loan, that means that your $9370 is GONE. And $9370 invested at 11%/yr in your 401k (or anywhere) is $206,000 in 30 years. I would rather keep the loan, pay the $295/m and maintain control of the $206,000 wealth-building.

If fact that is true of most of your loans - even that 20% segment. Ie, the $9000 loan has a 4% interest rate (20% & 0% averaged). And as you say, you won't be allowed to split & prepay the 20% segment. But I'd keep the 4% loan full term.

FYI, if you can keep control of the entire $48k and invest that at 11% for 30 yrs, that's $1,056,000. That's how fortunes are built.

 

[Giro]

FYI, if you can keep control of the entire $48k and invest that at 11% for 30 yrs, that's $1,056,000. That's how fortunes are built.

She doesn't have $48k to invest. She has $500-700 a month. This is just incorrect.

 

[mndtrp]

Yeah, that's just his standard answer to everything. It would be more appropriate if the OP was asking how to build long-term wealth, but he just tosses that into every possible thread, regardless of OP's intent.

 

[Giro]

Yeah, that's just his standard answer to everything. It would be more appropriate if the OP was asking how to build long-term wealth, but he just tosses that into every possible thread, regardless of OP's intent.

I can understand a little of his intent, but not when it's just flat out wrong. You would have to take the real number of $500-700 extra a month and invest it and subtract out the opportunity cost (interest) of that money going towards the debt re-payment. The number he threw out was just WAY incorrect and very misleading.

 

[old guy]

She doesn't have $48k to invest. She has $500-700 a month. This is just incorrect.

The number he threw out was just WAY incorrect and very misleading.

Well, I didn't throw it out, I calculated it, lol. (the schools were quite a bit better in the 1940's when I grew up, math isn't 'magic' to us old-timers).

If $700/m was put into an 11%/yr Fund for 30 years, it would be $1,855,000. (BTW, that's how I built my 401k before I retired). But that isn't what I'm talking about - again I say, money is finite. If you use $48k over the next 3 or 4 years to prepay a $48,000 debt, then that $48,000 is GONE. So it is no longer available to invest at 11%/yr and grow to $1,056,000.

 

[Giro]

Please don't insult me. I am half your age and could choose to retire today and live off of my investments for the rest of my life. They actually did teach math when I was in school and I have two master's degrees, one is in Accounting. It's cute that you try to pretend to be old and wise tho.

You very thoughtfully took out the part of the debt cost in your calculation. She has DEBT that she has to actually pay. Creditors do eventually want their money back even if it makes your numbers look better by not paying them. She has 20% interest on some of that debt as well as 5% on her car loan, her other credit cards will not always have 0% interest and you advising her to use credit cards to fund investments is just absurd, IMO, and that's exactly what you are doing.

And what would you advise her to do if she loses an income stream? The credit card companies will jack those rates up overnight on her. Back in your day, there was probably less risk of losing employment, benefits or being laid off. I don't fault you for not being familiar with the current employment climate, but giving advice without taking cost of debt or risk of losing employment into account is absolute incorrect.

 

[old guy]

Back in your day, there was probably less risk of losing employment, benefits or being laid off. I don't fault you for not being familiar with the current employment climate, but giving advice without taking cost of debt or risk of losing employment into account is absolute incorrect.

OK - to avoid messing up mama2's numbers, I'll give you a real example that I use with my rental houses. I refi a house that has equity, add $50k to the 30 yr mortgage - at 6% that costs me $300/m ($108,000). I put the $50k in the SP500 Index Fund at 11%/yr for 30 yrs, that grows to $1,145,000.

So, yes, I include the cost of the debt, it costs $58,000 for the use of that $50,000 for 30 years. But that is what it costs to earn the million with that money. As for losing my income, benefits, etc - yes, that is a risk, one of the biggest parts of building wealth is risk assessment, risk mitigation, risk management.

 

[Russ]

You do understand a lot of people here are more concerned about getting OUT of debt BEFORE beginning to invest, right? Is that a difficult concept to grasp?
Your history and investments pretty much mean the exact same thing no matter how you present it. That's great that you're wealthy using risks that YOU feel comfortable with. I'm willing to bet that most people here are not.

Most (guessing 90+% here) are afraid of another recession and would MUCH rather be out of debt if that happens.

 

[old guy]

You do understand a lot of people here are more concerned about getting OUT of debt BEFORE beginning to invest, right? Is that a difficult concept to grasp?

Ironically, it DID take me quite awhile to grasp it. I'm an engineer, made my living with math. And early on, I blindly accepted the conventional wisdom of 'debt-free'. But then I studied it, did some detailed analysis (this was back in the sliderule days) and realized that debt was a valuable tool that I needed to use, not waste. So I starting retaining my borrowed capital and investing it - & became wealthy.
So I'm often dismayed to see young people blindly following a conventional wisdom that I know is not going to work for them, they will be paycheck-to-paycheck forever as they chase "debtfree".

 

[Russ]

I stand by this.

That's great that you're wealthy using risks that YOU feel comfortable with. I'm willing to bet that most people here are not.

.

 

[mndtrp]

So I'm often dismayed to see young people blindly following a conventional wisdom that I know is not going to work for them, they will be paycheck-to-paycheck forever as they chase "debtfree".

This is not true at all, and is one of the problems with your posts. You assume that your way is the only way to go, and then never offer advice that an OP is asking for. I went debt free, I do not live paycheck to paycheck. My parents went debt free at a youngish age, they also are not paycheck to paycheck. This site is mostly centered around people who want to get out of debt, live life more frugally (hence the name), and not so much towards wealth building. Bogleheads, fatwallet, sites like that are better within their respective investing and wealth-building sections, and might be more appropriate for you.

There's something to be said about knowing your audience. It doesn't seem like most people here are an appropriate audience for you. Yet you continue with the same generic posting about how awesome your method is, it just doesn't apply to most people here. It gets even worse when you start throwing in comments about "the sliderule days" and "math isn't magic". It's condescending at the same time as being misdirecting.

 

[old guy]

It doesn't seem like most people here are an appropriate audience for you. Yet you continue with the same generic posting about how awesome your method is

Often, open-minded people like to hear from both sides to stay well-informed and build a basis for making their own decisions - or articulating/re-enforcing their own positions. (As you are doing),

As for your assertion that everyone here is debt-free and happy - take a look at your "Success" stories section and your "Hardships" section, notice which section has way more posts? My point? - there are folks who are interested in putting their money to its "highest and best use" to grow family wealth.