Total debt blues

[ibanez19]

I recently totaled up all my debt, car loan, student loans, credit cards, and i am roughly 45,000$ in debt... YIKES!

Student loans and car account for 41,000 of it, but my question is, what is the best way to make a plan for that wonderful 0 debt number? I have credit card debt about 4,000$ that i want to get rid of which i know i should get rid of first. But after CC what is more important to pay down? Car or Loans? how aggressive should i be to pay down those large loans vs savings and investing? So another question...

what is the best way to see which cards i should pay down first? The ones with high balances? low balances? High interest rates? Low? Any help would be much appreciated. Thanks!!

[disneysteve]

Debt should generally be repaid from highest interest rate to lowest interest rate since the higher the rate, the more it is costing you to have that loan.

Some exceptions: If you have any 0% or very low rate loans, be sure to repay them before the promotional period ends and the interest skyrockets.

If you have any low rates that are fixed for the life of the loan, it might be better to invest your money rather than prepaying those loans since you could earn more than you would save by prepaying. For example, if you have a loan at 0% but your employer matches your 401k contributions 50 cents on the dollar, it makes more sense to contribute to the 401k for that 50% return.

For any more specific advice, we'd need to know more about your situation such as your income and regular expenses.

[ibanez19]

Most of my CC interest rates are around the same, so i guess the answer would be higher balances first since those will have more interest on them. I am afraid of 0% offers to be quite honest

[disneysteve]

Most of my CC interest rates are around the same, so i guess the answer would be higher balances first since those will have more interest on them.

If the interest rates are the same, it doesn't matter which one you pay off first as far as saving on paying interest is concerned. Let's say you owe $4,000 at 10%. If it is all on one card, you'd pay $400 interest in a year. If it is split $1,000 on one card and $3,000 on another card, you'd pay $100 on one and $300 on the other. The total is the same.

In that situation, I'd pay the smaller balance first to get rid of it and then add that payment to what you are paying on the higher one. If nothing else, it gives you one less bill to pay.

[jIM_Ohio]

List your gross salary
I suggest setting aside 20% of this amount for financial independance (both short and long term).
Live on 80% of gross which is probably close to 60% of net. Student loans come out of the 80%- this was an investment in your earning, not a debt per se.

Take the 20% and break it down
-make sure you are putting enough to 401k to get match (maybe 6% or 10%). Do not pass up the match- you are not in a bad spot.
-put 5% towards the cc debt
in general I recomend 15% towards retirement and 5% towards short term goals (like pay down the cc debt).

If your cc interest rates are high, then anything not involved in 401k match goes to debt. If cc has a 18 month or less repayment plan (meaning you are sending ~$250/month), then I think retirement accounts should be getting as close to 15% as possible.
Student loans are not bad- once the cc are paid off, take the 5% and apply to student loans.

Summary-
15% to retirement if cc repayment is 18 months or less
company match amount to retirement if cc payoff is longer than 18 months.
Maintain student loans until cc are paid off, then 15% to retirement and 5% towards student loans. When the loans are paid off or paid down, reallocate 5% to another financial goal which makes becoming financially independant a closer reality.

[ceejay74]

If your CC interest rates are about the same, you could pay the smaller ones first and then once those are out of the way you'll have more to put toward the bigger ones.

After that, if you're able to get a tax deduction on student loan interest, I'd work on the car loan first so you can at least get that tax break for a while. If not, work on whichever one has a higher interest rate.

And I agree with the others--make sure you're getting the maximum 401k match from your employers before you put anything toward debt--nothing beats that free money!

[ibanez19]

Thank you all very much for your help. I could provide more info on cards and interest rates if that helps... Unfortunately my company has the 'option' to match and that is if we have a good year, but assuming they do match i am putting enough in to qualify for it.

After takes and 401k i net about 3300 a month.
450 Rent
380 Car
200 Insurance
100 Phone
100 utilities

hard part for me to budget is food and other spending.. but i try to put about 600-700 a month onto my CC's which if i do well i should be out of CC debt in a few months.

[jIM_Ohio]

Thank you all very much for your help. I could provide more info on cards and interest rates if that helps... Unfortunately my company has the 'option' to match and that is if we have a good year, but assuming they do match i am putting enough in to qualify for it.

After takes and 401k i net about 3300 a month.
450 Rent
380 Car
200 Insurance
100 Phone
100 utilities

hard part for me to budget is food and other spending.. but i try to put about 600-700 a month onto my CC's which if i do well i should be out of CC debt in a few months.

You are on the right track.

Pay off the CC in 6 months- that needs to be the goal, not a hope. Make sure $700 is going to cc each month. If you need help with this each time you get paid, set aside $350 and put it in another bank account until the cc bill comes. Do the same thing when you get paid 2 weeks later.

Once the cc is paid off, have that $350 automatically deposited from checking account into another investment account. Could be money market, maybe a muni bond fund.

If you list gross income and 401k contribution amounts, I can offer more specific advice.

[ibanez19]

sure thing

I gross 2375 a paycheck (1634 after taxes 401k etc)
It breaks down with

-118.75 a paycheck from 401k (about 5% i believe)

[jIM_Ohio]

$2375 (is this 57k annual?)
20% is $475 ($950 per month)

You are putting $118 into the 401k ($336 per month)
you suggested another $300-350 per check ($600-700 per month) goes to debt.

So you are meeting my 20% guideline. 20% is $475, $118+$350=$468. I will let the $7 slide FOR NOW

Keep putting the $600-$700/month to the cc debt

Then up the 401k to 15% ($357 per check)
send 5% ($118 per check) into short term savings or to the student loans.
This is $475, slightly higher than the $468 you are using per check right now- check that math, but I added $118+$357 to this- the difference is the $357 is pre-tax, so you will have more money working for you relative to cc debt payoff mode.

I would probably allocate the $118 as follows once the cc is paid off.
1) round the student loan payment up to nearest $100 and send that
2) send around $25/check to mid term savings ($600/year)
3) if there is another financial goal short term (new toaster, new dishes) use the balance of the $118 for that.

You did not list your age in first post- what is your current 401k balance and when do you plan to retire.

I always bias advice to fund the longest term goal (retirement) first- especially if debts are close to zero. Funding goal should be 15% of gross pay.

What is the payoff terms of the student loans?
40k
interest rate is ??
payoff time is ??

Most student loans I have experience with had a repayment term of 10 years. If that is the case, how many years into your payment cycle are you?

[disneysteve]

Most student loans I have experience with had a repayment term of 10 years.

Mine had a 25-year term, but those were professional school loans so those may work differently.

[ibanez19]

Yes i make 57k a year, and sorry for not mentioning before but i am 27 years old. I have 1600 in my 401k as YTD.

I owe 16,839.34 at 3.610% on my loans

Rest of the debt is my car, i can get fine details of that if need be, i just looked up all my cc balances and interest rates again to make sure and here is that info if that helps to be more exact:
1 $1,842.93 25.99%
2 $1,790.43 29.99%
3 $711.00 19.99%
4 $506.34 19.08%
5 $1,525.73 19.80%

would it be best to pay off #2 an #1 rather than the lower interest rates?

[disneysteve]

Most of my CC interest rates are around the same

1 $1,842.93 25.99%
2 $1,790.43 29.99%
3 $711.00 19.99%
4 $506.34 19.08%
5 $1,525.73 19.80%

They aren't "around the same" at all. There is nearly an 11-point difference between the highest and lowest rates. Definitely pay in order: 2, 1, 3, 5, 4.

[ibanez19]

Sorry for the lack of detail in my earlier posts, i didn't think i would get such great advice and people so willing to get dirty with the numbers and help. I've been browsing around the forums a bunch today and i feel fortunate i was able to find such a plethora of people in the same boat as myself and even more people willing to help.

[jIM_Ohio]

Yes i make 57k a year, and sorry for not mentioning before but i am 27 years old. I have 1600 in my 401k as YTD.

I owe 16,839.34 at 3.610% on my loans

Rest of the debt is my car, i can get fine details of that if need be, i just looked up all my cc balances and interest rates again to make sure and here is that info if that helps to be more exact:
1 $1,842.93 25.99%
2 $1,790.43 29.99%
3 $711.00 19.99%
4 $506.34 19.08%
5 $1,525.73 19.80%

would it be best to pay off #2 an #1 rather than the lower interest rates?

If you truly can pay $700/month, then

3) 4) 2) 1) 5)

Logic being that you save a significant payment within 2 months then apply to largest interest loans.

If 3) takes you two payments, the order is 4) 2) 1) 3) 5)

Those interest rates are quite high- set a 6 month goal to pay them off and make sure this doesn't happen again.