New and Debt Free! Watching the money pile up!

[tinapbeana]

Re: New and Debt Free! Watching the money pile up!

Hypothetical Question: Say you had an extra $500 per month to put toward debt on top of minimum payments. If you had a credit card with a $2,000 balance @ 5% and a Car loan with a balance of $20,000 @ 8%, would you pay the minimum on the CC until the car is paid off, or would you pay extra on the CC until it is paid off and then attack the car payment?

what's the minimum payment for each debt?

[Aleta]

Re: New and Debt Free! Watching the money pile up!

What are your payments per month on each?

[Ima saver]

Re: New and Debt Free! Watching the money pile up!

I would pay off the credit card first, because it could be paid off in just 4 payments. (if you have $500 extra each month)

[disneysteve]

Re: New and Debt Free! Watching the money pile up!

Hypothetical Question: Say you had an extra $500 per month to put toward debt on top of minimum payments. If you had a credit card with a $2,000 balance @ 5% and a Car loan with a balance of $20,000 @ 8%, would you pay the minimum on the CC until the car is paid off, or would you pay extra on the CC until it is paid off and then attack the car payment?

In that case, one could make a good argument for paying off the CC first. The car loan payment is fixed. The CC rate can change at any time for any reason the company can think of. With that extra $500, the CC debt would be gone in 4 months and you'd be done.

What I would do next would depend on my situation. Every single one of my stock mutual funds did better than 8% this year. My best fund is up about 40%. If the market conditions were such that I expected returns like that to continue, I wouldn't be in a hurry to pay off an 8% loan. For that matter, paying off the CC at 5% wouldn't make much sense either, except I don't believe in carrying CC debt and I don't trust them to not decide to up the rate to 20% or more for some inane reason.

[humandraydel]

Re: New and Debt Free! Watching the money pile up!

please feel free to amortize the numbers yourself if you'd like

CREDITOR - CURRENT BALANCE - APY - MONTHLY MINIMUM PAYMENT
loan - $4,000.00 - 5.90% - $100.00
house - $59,641.00 - 9.25% - $493.00

extra to pay per month (above and beyond current minimum payments) = $550

paying house first = $19,770.06 total interest paid and 76 months till payoff
house ttl amt paid including interest $78,946.12
loan ttl amt paid including interest $4,464.94

paying loan first = $19,750.25 total interest paid and 73 months till payoff
house ttl amt paid including interest $79,319.21
loan ttl amt paid including interest $4,072.05

house payments saved by paying loan first = 3 * $493 each = $1479 saved in house payments

$19.81 saved in interest + $1479 saved on 3 months house payments = $1498.81 total saved paying the low rate personal loan first, not to mention the interest earned stashing the $1479 into savings over 3 months.

I hate to tell you this, but I did run the numbers myself and paying the house first will save you money. Granted, it won't be much money because your interest rates and balances are relatively low, but it would save you money.

I think you forgot to add the extra $100 bucks to your mortgage after month 45 when the personal loan is paid off. Right? If I don't add the extra $100 after the personal loan then I get debt free @ month 76 like you with ~$19,768 in interest payments. However, if you add the $100 starting at month 45 then you are debt free @ month 72 with ~$19,415 in interest. Paying the personal loan first you are debt free @ month 73 with ~$19,645 in interest. So by paying the house first you'd save ~$230 in interest. As I said, your interest rates and balances are relatively low so you won't save that much.

*Now, obviously my numbers don't match up exactly with yours because I don't have the TERM of your loan, but I did adjust the term to get a payment as close as possible to your minimum monthly payment. I guesstimate that the personal loan has 45 months to go and the house has 351 months to go. Close?

[humandraydel]

Re: New and Debt Free! Watching the money pile up!

I am a Dave Ramsey fan ,i like his answer when people start saying pay highest interest first he says something like
" if we were all doing math we never would have run up credit card debt to begin with "

Sounds to me like a quote from someone who doesn't understand math.

Mr. Ramsey would also advocate that I pay my federal student loan first which has a 3% fixed interest rate simply because it's the lowest balance. Meanwhile, I'd let my private student loan (which is almost three times as large) continue to accrue interest at the 8.25% variable rate in an environment in which interest rates are rising. I won't even get into how much money following this man's advice would cost me.

[disneysteve]

Re: New and Debt Free! Watching the money pile up!

Mr. Ramsey would also advocate that I pay my federal student loan first which has a 3% fixed interest rate simply because it's the lowest balance. Meanwhile, I'd let my private student loan (which is almost three times as large) continue to accrue interest at the 8.25% variable rate in an environment in which interest rates are rising. I won't even get into how much money following this man's advice would cost me.

I believe Dave Ramsey also preaches that you should have no credit cards. Giving up my credit cards would cost me hundreds of dollars/year in lost cash back and other rewards.

The loan "snowball" method is not a financial tip. It is a psychological tip. For folks who are really at the end of their rope and don't know where to start and have no motivation, it can be helpful to see progress, even if that short-term progress comes at a long-term cost. I don't agree with it personally, but I understand why it is helpful advice for many others.

[lrjohnson]

Re: New and Debt Free! Watching the money pile up!

Well, I hate to be anal-retentive about this, but it's anal-expulsive, not explosive. Also, notice the hyphen. But jeez.

You win. I should be more precise when I'm being picky, otherwise it's just silly and incorrect. But even if one person starts adding the retentive part I'll be happy.

[tabbycat31]

Re: New and Debt Free! Watching the money pile up!

I also know of people who both use the interest rates and snowball method at the same time. Let's say you had $500/month extra to put towards debt. THen with this method, you would put $250 towards the lowest balance acct and $250 towards the high interest acct.

[tinapbeana]

Re: New and Debt Free! Watching the money pile up!

I think you forgot to add the extra $100 bucks to your mortgage after month 45 when the personal loan is paid off. Right? If I don't add the extra $100 after the personal loan then I get debt free @ month 76 like you with ~$19,768 in interest payments. However, if you add the $100 starting at month 45 then you are debt free @ month 72 with ~$19,415 in interest. Paying the personal loan first you are debt free @ month 73 with ~$19,645 in interest. So by paying the house first you'd save ~$230 in interest. As I said, your interest rates and balances are relatively low so you won't save that much.

you're right, humdraydel, i didn't move the payment. my spreadsheet is setup so the money 'snowballs' all in one direction. with the way my balances/APYs work out, the money is actually 'funneling' towards the middle, rather than snowballing, because my highest balance (house), is about mid-range on my interest rates.

so, i redid my calculations using all my debts and made sure to funnel monthly payments back towards the house when calculating based on APY. it wasn't an issue when the debts were sorted differently, all the money rolled fowards.

APY descending - $27,235.20 - 72 months last payment to student loan of $1,439.17 leaving $171.83 left over for month 72 (27063.37)
Number X ascending- $27,337.45 - 72 months last payment to student loan of $1,555.45 leaving $55.55 for month 72 (27281.9)

it appears i will save about $220 over the course of 6 years by paying my high APYs first. however, by sorting my debts by Number X, i will have 5 debts paid by december 2008 (honda card, wamu, car, hospital, inlaws), leaving just my house and student loan. paying by APY will have only 3 debts (honda card, car, wamu) cleared.

at this point it simply becomes a question of would i rather save $220 or have fewer debts sooner... for me personally, it's worth 'spending' 220 to have 2 fewer debts sooner. that's just me...

[vsjhoc]

Re: New and Debt Free! Watching the money pile up!

I am a Dave Ramsey fan ,i like his answer when people start saying pay highest interest first he says something like
" if we were all doing math we never would have run up credit card debt to begin with "

People don't run up credit card debt because they can't do math. They run up credit card debt because they lost their job. Or got divorced. Or got disabled. Or tried to keep up with the Jones. Or have a gambling addiction. Or a million other reasons. Spending money or accumulating debt is often not part of a rational process.

[Aleta]

Re: New and Debt Free! Watching the money pile up!

I think that the vast majority of people run up debt because its just there to use. When they go out to dinner, it's easier for them to use the card. For some people it's just a way of life. You don't have to have major problems to use a credit card. All you have to do is to grow up around people using it to learn how easy it is.

[disneysteve]

Re: New and Debt Free! Watching the money pile up!

People don't run up credit card debt because they can't do math. They run up credit card debt because they lost their job. Or got divorced. Or got disabled. Or tried to keep up with the Jones. Or have a gambling addiction. Or a million other reasons. Spending money or accumulating debt is often not part of a rational process.

You are right, to an extent. But I also know of plenty of people who are in CC debt simply from overspending. These are people who have no self-control. If they see something they want, they buy it. As long as they can make the minimum payment, they think they can afford it. That's where the bad math comes in. It's just like all the people buying houses with interest-only mortgages. They don't think about the consequences of their decisions. They are borrowing from their future to finance their present. But eventually, that catches up with them.

[vsjhoc]

Re: New and Debt Free! Watching the money pile up!

You are right, to an extent. But I also know of plenty of people who are in CC debt simply from overspending. These are people who have no self-control. If they see something they want, they buy it. As long as they can make the minimum payment, they think they can afford it. That's where the bad math comes in. It's just like all the people buying houses with interest-only mortgages. They don't think about the consequences of their decisions. They are borrowing from their future to finance their present. But eventually, that catches up with them.

That's why I referred to keeping up with Mr. and Ms. Jones. They don't know if they are even in the same income bracket as the Jones or what the Jones' expenses are. I guess that's bad math too.

[disneysteve]

Re: New and Debt Free! Watching the money pile up!

That's why I referred to keeping up with Mr. and Ms. Jones. They don't know if they are even in the same income bracket as the Jones or what the Jones' expenses are. I guess that's bad math too.

Yep. And add to that all the math-impaired people who take payday loans and income tax refund loans. Yes, it might only be a $10 fee, but it often works out to an APR of 300-500% or more.