Car loans, student loans, where to start?
A lot of people have suggested that we should use any extra money we have to pay off my students loans and car loan.
How much is the debt, you ask? At this point—student loans are about $24,000 and my car loan is at $8,000, with a scheduled pay-off date of August 2012 and a 4.9% interest rate. Combined, the payments make up 13% of our budget, resulting in several hundred dollars we could have in our pockets if they simply disappeared.
I agree that just using extra money for “spending” money is not working out for us. January’s over spending is a great indicator of that. I must allocate every penny—or else it goes toward “stuff.” February’s budget should reflect a change…
However, I’m more inclined to contribute extra money toward savings right now rather than paying off loans that come with bills that we can comfortably afford.
The reason being—Eric will be taking a leave of absence from work from August to December to attend the fire academy. That’s five months on my salary alone. We will manage, but I know we will need to dip into savings at times, especially with Christmas at the end.
It’s also not guaranteed that his job will be waiting for him when he gets back. His company could decide on a whim to hire someone else.
There’s also the possibility that Eric may decide to go to paramedic school after the academy. Paramedic school would result in another several months of unemployment and come with a $10,000 bill attached to it.
Obviously, with all this uncertainty, I’d feel more comfortable upping our savings.
HOWEVER—and this is the important part—I do plan on being extremely budget conscious the five months Eric is in the academy. So that when he finishes—and we figure out what we’re going to do next—I can take out a chunk from our savings account, and pay off the car loan.
I may even decide to pay off the car loan before Eric goes to the fire academy, depending on how much money we have in savings. SO for February, my goal is to up our savings contributions. If I can pay off our car loan a whole year early, that would give us an extra boost in income to work with.
So I’ve updated our New Year’s resolutions…and now hope to save $10,000 by August 1st. We’re already 17% there!
What do you think of our plan? How aggressive are you about paying off all your loans?
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12 comments
Geez, it’s like every post applies exactly to my life situation! it is so hard to balance competing goals. I looked at this a few days ago – I could use our non-retirement savings to pay off our loans early, but it will also take a few years to save that amount again, setting home ownership back even further, and odds are one of our cars will break down before then (13 and 9 years old), or we could have kids. As you pointed out, you never know. This is one of the few times that “a bird in the hand is worth two in the bush” might actually make sense for once? Or…maybe not 😉
I think paying off debt and building up savings are both super important, but you have to determine for yourself which one to focus on at a given time. You guys have a great mindset, and I think your choices are wise! Right now, we’re focused on getting my school loans paid off this year, but I’m also slowly building up my savings (10% of each paycheck) for big-ticket or unexpected expenses. Once the loans are paid off, I can start stocking away even more toward savings! 😛
Thought-provoking post! I always thought it was better to pay off loans, until my dad explained it to me. If you can earn more in a savings account than the interest you pay on your loans, then it’s not worth paying them off at this time.
Everyone ALWAYS tells us to buy a house before we pay off our federal student loans as I’ll be in deferment (but not taking out new loans!) until I finish my PhD. Those silly people don’t realize that our federal student loans come at 5-6.5% while you can get a house at 4% and savings account are barely paying 1%.
I think this is an EXTREMELY personal choice that you two need to make. We can’t rationalize saving tons of money at 1% while my hubby’s loans are currently racking 6% interest!
Oh and for car payments – Cars are depreciating assets. (Honestly, asset is not always the best term here!) Unless you have very good, full coverage insurance it might be smart to pay it off quickly. Not only would you save yourselves A LOT of money (as someone here said – extra money goes towards principle) but if something would happen you wouldn’t be without a car and in debt.
I made a promise to my husband to be credit card and car loan free when we got married and I had about $6K to pay in the 6 months leading up. I used Ramsey’s debt snowball method and I was astonished on what a young professional like me could pay off so quickly!
Hmmm. I myself can’t personally see paying off student loans early. That’s just me. I will probably be kicking myself when it’s time to pay them back and a good chunk of my income ends up being sent to them.
On the second thought, I can see the point in paying off a car payment early. I hate my car payment and I’m so excited to have this almost gone by the end of this year along with other goals I have for myself.
But, considering the circumstances, I would honestly just be stashing money away for when your hubby is going to be in school. I understand it’s do able to be the sole breadwinner but it would be so much easier with some wiggle room in the budget.
Just my opinion!
Serendipity
Increasing your savings makes the most sense to me – especially since you indicate that Eric may want to go to additional training after the FF training.
If you do decide to pay off loans, the car loan should be the first one to work on — student loan interest is tax deductible so I’ve always read it as being the last one to pay off…
I just finished paying off one small loan and now can make a faster dent in my credit card… Can’t wait for my credit card to be back at zero… I just feel so much better that way
I WISH my car loan and student loans were gone. The mortgage I can handle, but not with everything else. Sometimes I feel like I am drowning. I think your plan makes perfect sense for your situation.
I paid off my car this month and I am ECSTATIC that I will have that extra couple of hundred dollars to put toward savings in the months to come. Your plan seems sound to me, I think you guys are doing a great job of budgeting and prioritizing 🙂
I’d look at the interest rates. If low, just pay a little extra each month to knock them down, but if one is really high, pay it off, if you can…that’s probably what I would do or just pay it down more aggressively. I love how focused you are on this, and you REALLY need to help me! Seriously, next trip out 🙂
My two cents – and take it for what it’s worth, which is about $0.02….
Given the definate facts as of right now (being on your income alone for at least 5 months, with different scenarios after that point), here’s what I would do.
Continue making payments on the loan, but put a huge chunk of cash into savings. The great thing about loans is that any amount you pay AFTER your minimum amount (Principle + Interest) will go directly towards your principle. So while I wouldn’t take all the cash and pay off the loans at once, I would recommend saving and paying off just enough to make it “pinch,” to make it feel like you’re keeping it tight. That will mentally force you to rethink all decisions on expenditures, plus get you saving better.
As far as the loans, hypothetically, this is what I would do – if the minimum payment is $100.00 (a nice, round even number), I would pay $120.00. Or $150.00. By paying a bit extra, it’s chipping away at that remaining principle, which is lowering the amount you’re paying. But it’s such a small amount that it might not be a big deal. When you’re in the mindset of paying the minimum “and the rest of the money is mine to spend on what I want,” that’s when you’ll be paying forever.
Sorry, long rant, but I believe very strongly in that principle.