Post # 1
I am pretty good with finances, but I am contemplating what is the best decision for my unexpected holiday bonus. After taxes, it comes out to $2,800. My current plan is to put $2,000 into our savings because we are trying to build our savings back up (we bought a home 6 months ago). That leaves about $800 left that I am undecided on what to do.
Our current debt situation is the following:
- $1,500 0% interest revolving line from our furniture purchase, it is 0% interest until August 2015 and we are on track to pay it off by May
- $1,800 5.6% student loans (from my education)–I currently pay $150 a month on it and it will be paid off in 12 months
- $22,000 5.8% student loans (from DH’s master’s degree)–we currently pay $600 a month on it
- $25,000 5.7% 2nd mortgage loan–we currently pay $325 a month on it (that includes an extra $200 above the minimum toward the principal)
- $210,000 4.25% 1st mortgage loan–we currently pay $1,458 a month on it (that includes an extra $100 toward the principal)
Our current savings situation:
- $7,000 in emergency savings (almost 3 months worth of expenses, including the $2,000 listed above)
- We fund our retirements at 18% (me) and 8% (DH)
The good thing is our normal income allows us to over pay on each of our loans. So we pay extra $1,000 a month toward our debts above the minimum required payments. I am trying to figure out which would result in the best financial benefit from an extra $800 this month.
Should I spread the $800 out across a few loans?
Should I pay all of it toward one loan (if so, which one)?
Or should I put it in savings since we already over pay our loan payments?
Any feedback/ideas would be appreciated!
ETA: There are no pre-payment penalties on any of these accounts.
Post # 2
annonbee857: Do you have IRAs? Or any other retirement accts? Everyone will tell you differently, but my husband and I aggressively pay off any debt with >6% interest. Any other debt we pay the minimum and invest any additional money. We figure with average return (being conservative) of 7-8%, we are coming out ahead by investing our money.
This works for us especially well because the money we are investing is for our retirement, so over the next 25 years, there is a good chance it will average an 8-10% gain.
Post # 3
In terms of paying back loans, you should always target the one with the highest interest rate, regardless of principle or your monthly payment. In your case, I’d put the $800 toward your loan that’s at 5.8% interest.
(This knowledge is hard-earned from having finally paid off over $100k of student debt, loan by terrible loan…)
edit: forgot to mention that I would work toward paying off your loans before putting more in your retirement fund at this point (not saying not to invest in that, I’d just put the extra $800 toward that loan).
Post # 4
stillme: That’s what I was leaning toward. 5.8% is the highest interest rate and a sizeable about of loan ($22,000). I don’t prioritize my student loan very high even though it is close in interest rate (5.6%) because the balance is so low ($1,800) relative to the rest. Even if I take a full year to pay it off, I will only pay about $70 in interest.
Post # 5
LindyLu: We do not have IRA’s at the moment. Darling Husband contributes via his PERA account at 8% (he works for the government) and doesn’t do anything additional at the moment. I contribute via PERA as well at 8% and then have a 401k that I contribute 10% to. Neither of our employers offer a retirement match. We would like to start TTC in 2-3 years and so we are focusing on freeing up income. At our current rate, with the debt snowball method, we will be able to pay off all our student loans and second mortgage within the next 3 years. That would free up about $1,000 a month that could go toward child expenses.
Yes, funding for our retirement at a higher rate is one option that we have considered, but freeing up the income at this time is our current focus.
Post # 6
I agree about focusing on thr larger student loan. You can up retirement savings later when the debt is paid down.
Post # 7
annonbee857: I would not pay back the 0% loan early. That’s free money / liquidity.
I’d put the extra money in a brokerage account because you should beat your fairly cheap money (per LindyLu:)– it’s not worth the opportunity cost if you are thinking long term.
If that makes you feel uncomfortable, apply the extra funds to the principle of the 5.8% loan, as long as there’s no penalty.
Post # 8
Put it towards the one with the highest interest and largest amount, so the 22k one. You can invest it, but you have to think about interest paid vs. interest gained. Unless you can find an investment vehicle that will beat 5.8% interest, you are best off paying off the debt of that level.
And you might get 5.8% interest in a mutual fund, but you might not. The best thing to do is diversify, so get different types of savings vehicles, some that are lower risk and immediately available (emergency fund, higher interest savings accounts like Barclays), and higher risk but longer term, like mutual funds or brokerage accounts. So that’s my general advice.
But for the immediate question of what to do with the $800, I would put it towards the 22k loan.
Post # 9
honeybee2014: Thanks for the advice! Currently, our general/emergency savings is in a high yielding Sallie Mae account (but it’s only .8%). Our retirement accounts are target retirement funds (so a mix of mostly stocks and some bonds). It rebalances itself the closer we get to retirement, going from more risky, to less risky.
Our hope/plan is once we have paid off our student loans, we can start doing slightly more risky investements in the stock market. It wouldn’t be a ton (we are fairly risk adverse), but I would like us to invests in some mutual funds or brokerage accounts at some point.
Post # 10
annonbee857: Sounds like everything is going well! I think of those other investment (mutual funds) as extras, something to do when everything else is taken care of. And the Sallie Mae account sounds good. 0.8% isn’t super high but it’s hard to find something a lot higher right now. We have our accounts at Barclays, which was .9% and just got bumped up to a whole 1%!
And congratulations on the bonus!
Post # 11
I’ve always been told by many financial advisors to put any extra money I have towards my loan with the highest interest rate (including credit cards).
It might only be a few hundred right now but it could mean thousands down the line.
Post # 12
annonbee857: I would put it to the furnature purchase and when you pay off that, start paying off the student loans. Consumer debt < education debt < house debt.
Post # 13
Unless you’re getting more than 5.8% return on your investment (in which case, sign me up) it makes more sense to pay down the loans.
Post # 14
Just going to echo PPs to say that unless you can gain more in interest from your investments you should pay off the highest interest rate loan first (ie, your DH’s student loans).
Post # 15
Pollywog: I understand prioritizing consumer debt for pay down methods, but in this case, it is 0% interest. Given we will pay it off well before the 0% interest promotion ends, it doesn’t seem like the best use of the funds.