Tell All Tuesday: Options Edition
As far as debt goes, nothing has changed since last week. I used every spare dollar I could scrape up to push us over the edge last week and pay off my spouse’s student loan, so I’ve had to hoard my money since then and be very frugal to make sure we make it to payday (this Friday) without raiding the emergency fund. So no debt movement until next week after we get paid, when I pay the minimums on the other two non-mortgage debts for this month.
Only two debts. It still feels a bit unreal, but in a good way.
So, this month I’ll only be paying the minimum payments on my student loan and the car loan (like I have been doing all along) but next month, I’ll have extra to put towards one of them. Even if I don’t have any snowflakes (there’s Christmas to save for as well as some dental work on my gums I’ve been having this month and will need to pay for next month after insurance gets through with it), we have a budgeted minimum of $810.41 that goes towards debt per month. Now that the credit card and spouse student loan are paid off, that leaves $437.59 to allocate to one of those debts above its actual minimum.
The car loan next month will have an outstanding balance of about $1150 at a 4% interest rate. My student loan has an outstanding balance of about $11000 at a 7% interest rate (and the interest we pay is deducted from our income for tax purposes). I ran those numbers through the snowball calculator to compare the amount extra we’d pay going balance order vs interest order on these debts. Depending on how much we pay per month to debt (I did a number of scenarios ranging from the budgeted minimum of $810.41 up to $700 extra added to that in snowflakes a month, and different numbers in between) and found that ignoring tax implications, we’d pay an extra $6-7 in interest by going balance order vs interest order. We’re in a pretty low tax bracket so the tax implications at this point are pretty negligible for the amount of interest we’re affecting.
That’s really not a whole lot to free up an extra $228.32 a month (minimum car payment) in case of emergency. Me personally, I think I would stick with the interest order and start piling extra onto the student loan, but my spouse leans the other way and wants to free up more money just in case. At this point, we’re still letting it percolate, but I think if I can gather enough snowflakes to pay off the car in full next month (about $500 above all the budgeted minimum available), that is what I’ll do. If I can’t do that, I may put the extra towards the student loan and stay the interest order course until I can pay off the car in one fell swoop. Kind of a weird hybrid strategy.
I know I might sound crazy, and I don’t deny I am. I kind of just want to write a check for the entire car loan, or just wait until I can instead of paying over a bit at a time. I have no idea why. 
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October 14th, 2008 at 3:22 pm
You are making great progress. If you pay off the car next month, then it wouldn’t take you long at all to pay off your student loan. what maybe 6 months or so and you will be debt free? It doesn’t get much better than that.
October 14th, 2008 at 4:00 pm
Just a question to ponder as you consider your options: Would paying off the lower level debt in full first (in this case the car loan of $1150 at 4%) have a positive impact on your FICO score in the long term? Is that something y’all are even thinking about? I can’t remember from reading your blog if you have a need to be watching your FICO score for any upcoming needs, but its just a thought as you weigh your payout scenarios . . . nice to have choices!
October 14th, 2008 at 4:06 pm
Due to the low balance on your car loan, it looks as if you have previously paid ahead. I’d suggest calling the car loan company and have your minimum payments recalculated based on the lower balance. I have done this on my student loans after I have paid ahead. This way in case of emergency, the minimum payment is lower and in the meantime I can use that extra money towards higher interest debts.
If you follow this, then both you and your spouse will be happy. And your money will be more effective, by saving the most interest as possible.
October 14th, 2008 at 4:13 pm
@ Marcy - The FICO score isn’t a big concern right now and both of ours are pretty high anyway since we’ve reduced our outstanding/available ratio so low. But it is a good point to consider in general.
@ Angie - our car payment isn’t paid ahead at all. The last payment is due in March 2009, which is why the balance is so low. I have the coupons that match all the way up to the end.
October 14th, 2008 at 4:25 pm
In that case I would agree to just pay off the car loan over the next two months, to have that payment free. But that is just preference after coming to that decision myself when reordering the repayment of my loans. I siimply just find it more comforting to pay off the highest monthly payment first. At least when the interest savings difference is relatively low.
October 14th, 2008 at 5:28 pm
Congrats one the excellent progress. I hope it inspires others. I particularly appreciate your lack of interest in your FICO score. I would like to see a concerted effort by all consumers to de-emphasize this ridiculous metric as an indicator of economic worth.
October 14th, 2008 at 5:29 pm
Congrats on the excellent progress. I hope it inspires others. I particularly appreciate your lack of interest in your FICO score. I would like to see a concerted effort by all consumers to de-emphasize this ridiculous metric as an indicator of economic worth.
October 14th, 2008 at 5:31 pm
Wow! I am impressed…I would want to pay the loan in full too. There is something satisfying about being able to knock it out like that. It’s motivating and liberating! I’m excited for you and your husband. You are showing great discipline!
October 14th, 2008 at 8:18 pm
I’ve been reading your blog for a while now and I just find it fascinating. Your methodical approach to paying off your debt and getting your finances in order is really inspiring. If you want my two cents, I honestly don’t think there is a wrong answer on which debt to work on next. I’m really happy for you and I can’t wait for the post where you tell us that you paid off the last debt. It’ll be great and I will probably jump up and down in excitement for you. It’s what I did when you paid off your spouse’s student loan a while ago. Good luck!!
October 14th, 2008 at 9:44 pm
I’d be going after that car payment first, it’s so small you could get rid of it before the end of the year and only have one last debt to deal with in 2009 - how good would that be!
October 14th, 2008 at 11:35 pm
I would do exactly what you’re thinking of doing: pay as planned until you get to the point where you can pay the balance on the car in one month. It will feel soooo good!!!
October 19th, 2008 at 5:58 pm
I rather agree with your hubby; I’d whack off the car loan over the next couple of months. Getting down to just one debt is a MAJOR milestone. And he’s right about the flexibility it would bring to your budget; that little dab of interest would be worth the peace of mind for me. If you hit it with the full snowball in Nove and Dec, it will be GONE.
Getting to debt free is the BEST feeling! Once your student loan is the sole snowball/flake focus, it will just melt away!
October 21st, 2008 at 3:15 pm
You should check if your Student Loan Interest is actually deductible. I don’t think you ever talked about income, but that deduction wanes as your income increases. Just a thought you needed to consider when doing your snowball math.
As always your website is a continued inspiration for me to PAY OFF MY DEBTS QUICKLY.
October 21st, 2008 at 3:17 pm
I did a whole post to the deductibility of Student Loan Interest (linked above).
October 21st, 2008 at 3:26 pm
@ My Journey - our student loan interest is all deductible. Our income is well below the limits for deductibility (if that is even a word
)