I am trying to make a financial plan with the first priority being debt reduction as I already have a budget & a few retirement accounts.
I've heard a few different methods of approaching this, but am not sure which is really the best.
I have 4K thats been collecting dust in a savings account with a .05% apy that I want to kick-start the process with. Just trying to decide where to use it to make the biggest impact. I have 4 different debts and make weekly payments on everything intentionally because I can/to help with interest:
Student loan - $3,100 @ 5% | Mo payment: $82, I pay $200
Student loan - $6,500 @ 7% | Mo payment: $110, I pay $120
Credit card - $4,800 @ 9.99% (limit is 7k) | Mo payment: $85, I pay $200
Car loan - $10,800 @ 1.75% | | Mo payment: $302, I pay $304
I know revolving accounts are often considered the "worst" debt, especially based on the interest rates, so I'd normally focus on that first. BUT I've paid it off before & then irresponsibly used the card again for unnecessary impulse buys. (I realize that's an issue & am trying to work on it!)
I'd cancel the card, but I know that's bad for your credit so I was thinking it might make more sense to cut it up but focus on something else? Maybe reduce my overall debt and then tackle that later?
Not sure what to do... Thoughts?
Mon Oct 31, 2016 1:53 am
Publius Preferred Member
Cash: $ 31.00
Joined: 12 Oct 2012
your running up debt on a cc is an entirely different matter than what you are asking about. You know it is a problem, so you need to work on that separately. Whether or not you stick to that doesn't really change the answer here. If you are going to use the 4k for tackling some of this debt, absolutely apply it to the credit card. You will realize an immediate 9.95% return on your money (the difference between your near-zero interest return and the interest rate you are paying on the card).
Leave the car loan until last, it is the largest so it will take the longest and it is the lowest interest rate. In fact, most people that are coming at this from a mathematical perspective will tell you to keep the car loan for the full term regardless of how much money you have. That is very cheap money.
Tue Nov 01, 2016 2:11 am
oldguy Senior Member
Cash: $ 715.00
Joined: 21 May 2006
With your $25,200 of debt and $4000 in cash, your are essentially borrowing $4000 at 10% (the credit card) and earning 0.05% on $4000. Ie, you are paying $400/yr for the use of $4000 and earning $2/yr for $4000.
I would cancel those two immediately - that leaves you with $21,200 in loans.
quote: financial plan with the first priority being debt reduction
Don't be in such a big hurry to prepay your loans just because they are there, do the math first.
Example: I can refi a rental house and add $50,000 to the loan, that extra $50,000 costs about $268/m ($96,480 total over 30 yrs). I place that $50,000 cash into an 11%/yr Index Fund for 30 years, that grows to $1,150,000. The point is - I'm happy to pay that extra $268/m for 30 yrs - I focus on earning the million dollars in 30 yrs.
In your case I would keep that car loan for the entire term, 1.75% is almost free use of the money. And put your own money to work for you in an Index Fund at 11%/yr. Also, I would keep the 5% loan for the full term - it's worthwhile to borrow at 5% and earn at 11%, the 6%/yr earnings is pretty good.
Pay off the remaining $800 of the 10% loan first. Then start on the $6500 7%/yr loan.
Tue Nov 01, 2016 4:59 am
Kristendahl New Poster
Cash: $ 0.45
Joined: 31 Oct 2016
Thanks (to you both)! I really appreciate the input. Credit card debt it is