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Good afternoon all. I am a 25 year old working in my career field making about 43K before taxes. I have no credit card debt and $9500 in savings (some in a high interest savings account and some easily accessible in my regular bank savings), but I have 17K left on a car loan and ~16K in student loans. The car was wrecked and repaired to its original state, so I plan to keep it forever now because I feel it has lost its resale value. That payment is $292 a month with 5.25% interest. One of the student loans was taken out by my mom for me and is in my mom's name. I still owe about $3500 and my sister owes $5500 on that one. We were going to take turns paying for it with me going first, but she can not take over the payments right now ($107 a month). Not sure the interest rate on that. I also have a loan in my own name which has about $12,500 still left on it ($168 a month). I believe that is 4.25% interest.

As soon as I reach 10K in savings (a number I just kind of made up for my own goal, $8500 is 6 months of all my bills), I want to start paying down my other debts, maybe $300-500 a month while still putting $100-300 in savings. I am just not sure which to start paying off first. On one hand, the car is something that can always "pay for itself", even if wrecked. On the other hand, student loans can be deferred in certain cases and are expunged if I died. Both are going to take a long time to pay off with only $300-500 a month extra because the remaining balance is about the same, but its still better than just making minimum payments, I know.

Any ideas?

Thanks in advance.

Update: Thanks for all the advice! I have a lot to think about now. I have wanted for awhile to pay off the $3500 loan, but I just worry that my sister can't take on the debt. She makes great money, but is letting her husband go to school full time and not work and has a house she needs to sell, but that is a whole different topic. I guess I need to just get her to take it on because I'm wasting my own money on interest. I will let you all know what I do!

I at least bought a Honda Dr. Dean, they lose value a lot slower than other models. :) That's always one thing I've been vain about and impractical. Oops! Would anyone recommend refinancing or just go ahead and put extra money into it without bothering to refinance?

edit: I have a planner and every pay day I have a list of what bills are paid with that check and I keep track of my spending in Microsoft Money. I definitely have areas I could tighten my belt.

edited Jan 10 at 22:37

mbhunter♦♦
2,594●1●2●11

asked Jan 8 at 20:14

Abby
41●1

	Great question. Thanks for stopping by! – mbhunter Jan 10 at 5:51
	Abby: If you're wondering where your answer went, I just cut and paste your response into your question as an edit. The "Answer your question" section is more if you had an answer to your question rather than an update. (You didn't do a thing wrong, and I hope you come back with more great questions!) – mbhunter Jan 10 at 22:39

The Balanced Spreadsheet · Answer 1 · 2010-01-08 23:20:33Z UTC

Good question! It looks like you are doing a very good job saving money. Normally when paying off debt I recommend a debt snowball where you list your debts smallest to largest, then start off paying the smallest debt and working your way up to the largest. It looks like the student loans and the car are about the same (17K vs. 16K) but since the student loan is broken into two pieces I would recommend start paying down your $3,500 portion of the student your mom took out on you and your sister. By applying $500 extra a month, you will have it knocked out by the summer and I am sure not only will it give you confidence that you can knock out the other debts, but it will also make your mother very happy. :)

After that I would take on the second student loan and knock that out and be done with student loans forever. You will then have so much momentum and will take out the car in no time!

You did not ask this, but after you get to your 10K savings goal I would put any extra money I have from my budget into paying off the debt and not into extra savings. That will help you take out these debts even faster. But from all accounts you are doing an excellent job of planning ahead and trying to knock this out as soon as possible. Keep up the good work and keep us posted on your progress!

Dr Dean · Answer 2 · 2010-01-09 12:52:42Z UTC

Abby, good job with your savings. Not so great that you bought that expensive a car in the first place, with your salary-not picking on you, but I want others to realize what you now know-buying a car with 5 years of payments and investing this much of your money in a depreciating asset, is not a good financial plan.

I would recommend paying off your portion of the family student loan-immediately with some of your savings-unless you are going to have to pay your sisters portion anyway. (I don't think you should, but your question implied it-maybe she can get a deferral if she is not working now- on her part of the loan.) The idea here is get the family and money ties severed...

I would be satisfied with 3 months expenses in savings, and use the savings from not having the smaller student loan payment, added to what you were saving, to aggressively knock out that car debt.

You should also look at your spending, and make sure there are not other savings to squeeze out there. Get on a written spending plan, identifying where every dollar goes-at the beginning of the month.

I would bet, with focused intensity, you could then knock that car debt out in 18 months or so-then go after the rest of your student loans.

Great job, at your age, getting a handle on your spending, as you have already done, and good luck.

mbhunter · Answer 3 · 2010-01-10 05:58:41Z UTC

I love your nice big emergency fund. I wouldn't stop at $10,000 because a larger emergency fund buys you more time if something bad were to occur. It appears that you're not planning to stop, which is great.

However, throwing more at your debts is of course also a good thing, and with a big emergency fund in place, you can do that without much worry that you'll be caught without cash when you need it.

I'd recommend paying down the car loan first. The main reason is, again, protection if something bad happens that you can't make payments. In some cases, a car can be repossessed the day after you miss your payment. Bad things happen with missed student loan payments, but they typically take a bit longer to materialize.

Abby · Answer 4 · 2010-01-12 19:50:38Z UTC

Sorry mbhunter! I can't edit my question because I didn't register. Can you please add this to my question?

Update 2: Here is what I have decided to do. My car loan was through a credit union in San Antonio that I did not have easy access to. My interest rate was 5.1% for a 6 1/2 year loan. I refinanced today through the credit union where I grew up and still have an account with online access. I shortened the loan term to 48 months, which gave me a 4.5% interest rate and only raised the payments by $90 (not to mention the interest money I will be saving each month). I am going to make these payments, plus $200-300 extra a month on top of that and put $200-300 in savings to replace the money I am going to use to pay off the smaller student loan of my mom's. My sister will just have to get ready to take it over. Hopefully this gets me on my way to being debt free! Thanks for all the advice.

Which debt should I pay off first: Student Loans or Auto Loan?

4 Answers