Now that I have a sizable chunk in emergency savings, I’m looking at other places I can put my extra money each month. I’ve been trying to analyze my debt and decide whether to put that extra money toward paying some of it off early or if I should just put the money away and invest it. Usually the advice goes something like “if you can make a higher return on the money than your debt interest rate, invest the money.” The problem is that right now I’m not really sure what kind of return I can make on anything in the stock market since it’s been so volatile. Thus, I’m thinking that paying off some excess debt might be a good option. The question now is where should I put it?
The first thing I noticed when I was gathering all my debt info is that we’ve actually in pretty good shape when it comes to paying interest. Our highest interest debt is 7.22%, and that’s on my wife’s student loan which doesn’t have very much balance left to it anyway. After that our next highest is my student loans at 6.875%. Student loans are generally looked at as “good debt”, but the fact that they’re our highest interest rates means that we’ve done pretty decent elsewhere. Here’s our debt data so you can see what I’ve been looking at.
| Debt | Rate | Balance | Payment | Payments Remaining |
|---|---|---|---|---|
| Wife’s Student Loan | 7.22% | $1,580 | $50 | 35 |
| My Student Loan | 6.875% | $25,538 | $198 | 239 |
| Mortgage | 6.25% | $178,400 | $1109 | 350 |
| Wife’s car | 6.15% | $23,290 | $424 | 65 |
| My car | 5.25% | $15,500 | $344 | 50 |
| Furniture account | 0% | $5,818 | $130 | 45 |
| Appliances account | 0% | $842 | $115 | 8 |
As you can see, there are two accounts that I’m not going to touch since they are 0% rates. Those are the accounts we took out to furnish our house and our current payment plans are in place to where we won’t pay any interest on the purchase. Those obviously stay put. The loan terms on my car are pretty good, and since it’s a Honda Civic it will hold it’s valuable well after I pay off the loan. Our mortgage interest rate isn’t the best, but it’s not the worst either. I would like to pay more down on our house to build equity, especially since the housing market is down, but I think our money is better spent on non-mortgage debt at this point.
One issue that we do have though is that our loan terms in some cases aren’t very favorable. For instance we decided to do the 72 month loan on my wife’s car, which I would usually never do, but since we had just bought our first house and my new car I was a little concerned about our monthly outflow. Plus we had no plans of paying for the full 72 months anyway, deciding to pay it off early somewhere down the line. But should that sometime be now?
I think the obvious choice is to quickly get my wife’s student loan out of the way since it’s the highest rate and there’s really not much left to it, so we’ll probably do that. At that point I’m torn whether I should start paying off my student loans or my wife’s car? The student loans have the higher interest rate and the longest term, so you would think they’d make the obvious choice, but I’m thinking that consumer debt might be a better place to start.
What do you guys think?
March 24th, 2008 at 8:23 am
Is there any tax advantage to the student loans? Assuming not, I’d tackle the students loans first, followed by your wife’s car, followed by yours. Only then would I start going after the mortgage - you have a decent rate *and* the interest is tax deductible (assuming you itemize).
As long as the furniture and appliances will never trigger an interest payment, I’d leave those on the back burner, and pay them down as required. Just be careful that there isn’t some hidden clause that makes you pay back interest for the life of the loan if you’re late on a payment, or something like that.
March 24th, 2008 at 11:13 am
Yes, you can deduct the interest paid on student loans which is something that I didn’t even think about when writing this. Thanks for bringing that up.
The furniture and appliances do have those clauses (actually not sure about the appliances, but the furniture does), so I’m extra careful about paying those on time every month.
But now that you mention the interest on the student loans, we actually might just pay down her car first.