WWYD - Finance version

katiewhompus

We finally finished paying off Scott's credit card (YAY) so now we have that money that isn't currently going into a designated bill. We currently have 2 student loans, a loan for his motorcycle, and a loan for my car. We have a little bit in savings but not much, and are saving up for a kid (either for fertility tests/procedures, adoption, or just "stuff").

Would you take that money and apply it to get rid of the various loans (I'm thinking bike then car since bike is less money and high interest) or put it into a savings account instead? We have about $4,000 in student loan money between the two of us and are both looking at going back, so it might be nice to mentally get that dealt with too, although we do get a tax refund on the interest.

I'm also thinking of opening a second checking and putting the money directly into there, along with additional money such as work bonuses, gift money, etc. That way the money we use for daily living will come from one account and the money we are saving for something specific comes from another and isn't (mentally) available for daily spending.

Thoughts?

SarahPLiz

Put half in savings and apply half to your highest interest loan. That way you are paying down debt and increasing savings at the same time. Should something happen where you needed the savings immediately, it wouldn't help you to have a lower debt balance, practically speaking. You need to build up some sort of safety net in cash, while still paying down high interest debt. That's just my 2 cents.

kimmieniesink

I agree in the splitting it up! It would be a good plan to CYA that way.

katiewhompus

That's kind of where I'm leaning Sarah. Sure it would be great to be debt free, but that doesn't help us until next year when it goes away (if I pay it down faster).

kpwedkk

You didn't have an option for it, but any extras we get, we put to principle on our home mortgage... it helps pay it off faster

Night_Sprite

I vote for snowballing it.  Invest in the bill with the highest interest as most as possible.  Once that is done, you can snowball into the next loan.  It is the most effective way of dealing with those debts. 

katiewhompus

In Response to <a href="http://forums.theknot.com/Sites/theknot/Pages/Main.aspx/wedding-boards_snarky-brides_wwyd-finance-version?plckFindPostKey=Cat:Wedding BoardsForum:17Discussion:a0e7719d-7b7e-4c31-98ce-1742a1a24ae9Post:f46a73b1-0ef7-46c7-b917-2b890088e85a">Re: WWYD - Finance version</a>:
[QUOTE]You didn't have an option for it, but any extras we get, we put to principle on our home mortgage... it helps pay it off faster :)
Posted by kpwedkk[/QUOTE]

Eh, faster is in the next 27 years instead of 30 so it doesn't really help us in the near future.

kpwedkk

it helps so that you aren't paying interest all the time!

Celles

In Response to <a href="http://forums.theknot.com/Sites/theknot/Pages/Main.aspx/wedding-boards_snarky-brides_wwyd-finance-version?plckFindPostKey=Cat:Wedding BoardsForum:17Discussion:a0e7719d-7b7e-4c31-98ce-1742a1a24ae9Post:441cdaa5-f5c2-458f-8c40-8412667b85e7">Re: WWYD - Finance version</a>:
[QUOTE]I vote for snowballing it.  Invest in the bill with the highest interest as most as possible.  Once that is done, you can snowball into the next loan.  It is the most effective way of dealing with those debts. 
Posted by Night_Sprite[/QUOTE]

This.

If you want to put some of it into savings, do so -- but from a purely financial standpoint, it's in your best interests to pay off the high interest debt first.  You'll make less than 1% interest on anything you put into savings now, whereas you're almost certainly paying much more than that in interest on the bike and car loans. 

Save the student loans for last; they're considered "good debt" by most lenders and the interest is tax deductible.

Celles

kp - Paying down the principal is a good option IF you don't have any other debt and you intend to keep the house long enough to pay it off.  

If the mortgage is amortized over 30 years and you pay it off in 15, then you save a HUGE chunk of interest.  But if the mortgage is amortized over 30 years and you double up on principle, only to sell 12 years...  well, you have more equity, but you also had less cash flow throughout the 12 years that you were making payments.  It's kind of a trade-off (especially if you could have invested the cash at a higher rate of return than you earned in equity).  So you can see, you really have to look at the actual numbers to decide if this option makes sense to you.

kpwedkk

True Celles... We don't have any other debt except for the mortgage at the moment...  Refinancing might help at a lower percentage of interest as well... Like you said, it really depends..

Katie - definitely savings are good - just in case there are emergencies!

TurtlesAllTheWayDown

Bike, then car, then baby savings. Student loans, as long as your interest rate is good, actually work in your favor a lot. I'm not sure how, but FI discovered that, due to the rate of inflation, he's actually screwing his loan company out of money by not paying off his loans in advance.

vegasgroom

Depending on how much equity you have in your house, if it's enough that it would cover any emergency needs, I'd set up a home equity line of credit for as much as you can get approved for; you aren't going to actually use it and it should not cost anything to create, you just want to have it available.  Then you can put 100% of the extra money into the highest interest loan rather than setting cash aside for emergencies.

SarahPLiz

In Response to <a href="http://forums.theknot.com/Sites/theknot/Pages/Main.aspx/wedding-boards_snarky-brides_wwyd-finance-version?plckFindPostKey=Cat:Wedding%20BoardsForum:17Discussion:a0e7719d-7b7e-4c31-98ce-1742a1a24ae9Post:a4ac7abc-dcab-4dee-a154-9a7618cdbd02">Re: WWYD - Finance version</a>:
[QUOTE]Depending on how much equity you have in your house, if it's enough that it would cover any emergency needs, I'd set up a home equity line of credit for as much as you can get approved for; you aren't going to actually use it and it should not cost anything to create, you just want to have it available.  Then you can put 100% of the extra money into the highest interest loan rather than setting cash aside for emergencies.
Posted by vegasgroom[/QUOTE]<div>
</div><div>I could get behind that theory too. I think they are new to their house, though, so I'm not sure how much credit they could get. Maybe I don't know anything..

</div>

katiewhompus

We just moved in April so that's not really a way we want to go. We're doing ok financially and have a little nest egg in savings, and have the option to put on credit cards (but we're not going there again) for emergencies. I'm just trying to figure out the best options and Dh just goes "Whatever you think is best for our finances".

526SadieSadie

In Response to <a href="http://forums.theknot.com/Sites/theknot/Pages/Main.aspx/wedding-boards_snarky-brides_wwyd-finance-version?plckFindPostKey=Cat:Wedding BoardsForum:17Discussion:a0e7719d-7b7e-4c31-98ce-1742a1a24ae9Post:9f873842-acc2-4319-a496-001992920d50">Re: WWYD - Finance version</a>:
[QUOTE]<strong>Put half in savings and apply half to your highest interest loan.</strong> That way you are paying down debt and increasing savings at the same time. Should something happen where you needed the savings immediately, it wouldn't help you to have a lower debt balance, practically speaking. You need to build up some sort of safety net in cash, while still paying down high interest debt. That's just my 2 cents.
Posted by SarahPLiz[/QUOTE]

This is exactly what I would do.  BTW how AWESOME does it feel to pay off the credit card??  I paid all of mine off a year or so ago and I felt like I won the lottery. 

Birdie1483

Dave Ramsey just had a question like this on Sunday when I was listening to him in the car. I think he said what PP have said - pay on whatever has the highest interest rate, no matter the balance. Then you move down to the next. He also said it's not always helpful to put more money into a mortgage when you could put it towards savings or paying off some other type of loan.

If it were me personally, I would squirrel away maybe 25% into savings until you can eventually have around a 6 month reserve in case one of you loses a job, and then put the rest towards the bike because it has the highest interest rate. Once that is paid off, go for your car.