WWYD with this money?

[Agatha_Ann]

Hi Mamas, I need some outside opinions on what we should do with the tax return (~$12,000) we are getting this year. Here's our situation, what we owe, minimum payment, and what I actually pay each month...

Student Loans- $12000 at 6% min pmt 187/mo

                       $3000 at 6%   min pmt 50/mo, I pay $100

                       $3000 at 3.8% min pmt 50/mo, I pay $100

                       $1200 at 2.5% min pmt 57/mo, I pay $100

Car- $11500 interest only min pmt 58/mo, I pay $350-500

House- $187,000 at 4.75%, min pmt 1285/mo I pay $1485

Our second car is paid off and we have zero credit card debt. We also make monthly investments to our retirement and mutual funds. We have a 4 month emergency fund as well.        

Ok, so I am looking for some insight as to where you think we should put this money. It is really tempting to pay off my car and have two cars paid off, but we have such an amazing loan on it, it is hard to think that should be off the list. Then I look at the student loans and think it would be nice to have those gone. Then I wonder if we should throw it at the principal of our house...straight to savings? Ahhhhh! I just go around and around!

Thanks!              

[mtm]

I don't think you can go wrong paying off any of them as none of them are high interest cc's. I lean towards getting rid of the three smaller student loans and taking a chunk out of the bigger student loan.

[zebra15]

The person who is trained in finance (me) says to pay off the bill with the highest interest rate first then go to the next highest interest rate until you either run out of money or bills.  (theory being you pay less interest this way)

[pbjmama]

In your position I would pay off the $3000 at 6% loan first for sure. I would consider if you need to save for a vacation, house repair or anything along those lines. If not I think it is a toss up between putting it towards the car or the 12000 student loan. If you put the 'extra' money towards paying it off it will only take a year and you will have extra cash freed up if you have an emergency.

[mamacolleen]

If you're comfortable with the amount you have in your emergency fund now and you aren't planning for anything big in the near future (vacation, renovation, etc), then I would wipe out the 3 smaller student loans (7200) and put the remaining on the larger student loan. The $300 you now have extra per month that you aren't paying on the smaller student loans, I would put on the larger student loan (so you're now paying $487) until it's paid off and then put more on the mortgage.

[momct]

What are the details on the  car loan? Interest rate? Length of loan? That information would influence my answer. As of now, I agree with Zebra to pay highest interest loans first. Pay the 3000- 6% one off for the satisfaction of saying goodbye to one.

[JesKace]

Originally Posted by mamacolleen 

If you're comfortable with the amount you have in your emergency fund now and you aren't planning for anything big in the near future (vacation, renovation, etc), then I would wipe out the 3 smaller student loans (7200) and put the remaining on the larger student loan. The $300 you now have extra per month that you aren't paying on the smaller student loans, I would put on the larger student loan (so you're now paying $487) until it's paid off and then put more on the mortgage.

This is what I would do!  Paying off the smaller loans and putting the remainder on the larger loan.  This would free up the $300/mo to pay off the remainder of the bigger student loan faster.  Normally I'd say pay off the higher interest rate first so you're paying less over-all but by paying the smaller loans off (higher monthly min payments) if money got tight you'd now have an additional $300/mo instead of $187 and would have to take less from your EF.

We had a similar situation.  We had $1000 extra last month and wanted to put it on our debt.  I would have put it on our highest interest rate credit card to save the most money but after thinking about it we decided to pay off DH's car loan.   The car loan had a pretty good interest rate but by paying the car off in its entirety we now have an additional $200/mo.  If we had paid the $1000 towards the highest rate credit card it would have only brought the balance down by half, and we would still be paying the car payment each month and not have any extra to send to the credit card.  By paying off the car we are now going to have an additional $200/mo to pay off the higher interest rate card and we'll have saved the small amount of interest we would have paid on the car loan.  I feel so much better knowing one bill is entirely paid off (yay! we own one of our cars, finally!) and if things got tight we could only pay the minimum on the credit card and have $200 instead of having to take it out of our very small emergency fund.

[mamacolleen]

Just came to add that if you do it the way I suggested (pay off the 3 small student loans plus whatever is left on the larger student loan and then had an extra 300/month to put on the larger student loan), you should be totally free of all your student loans in about a year and will have an extra almost 500/month to work with. Nice place to be!

[happysmileylady]

I am going to suggest snowballing it in order of size of the debt.  Pay off the three smaller student loans.  That would leave you with just under $5k, plus $300 a month freed up.  Throw that $5k at the car, that's going to leave you will a little over $6k on the car.  Take the $300 a month you have freed up, add it to the $500 a month you are throwing at the car, that puts you at $800 a month you can put on the car, and in 7 months, the car is paid off.  Then, take that $800, add it to the $187 you are paying on that big student loan, that puts you at just under $1k a month you can throw at that student loan, and that sucker would be gone in less than a year.  You would be totally out of debt (except the house) in less than 18 months. 

[TiredX2]

I'm a big believer in highest interest rate first.  It sounds like you are on pretty firm financial footing, so I would think you would be too.

How did you decide how much to pay each month now?  Is there a "method to your madness" or is it random?
 

Originally Posted by Agatha_Ann 

Student Loans- $12000 at 6% min pmt 187/mo

                       $3000 at 6%   min pmt 50/mo, I pay $100

                       $3000 at 3.8% min pmt 50/mo, I pay $100

                       $1200 at 2.5% min pmt 57/mo, I pay $100

Car- $11500 interest only min pmt 58/mo, I pay $350-500

House- $187,000 at 4.75%, min pmt 1285/mo I pay $1485

First, why are you getting back such a large tax refund?  Can you get back any of that sooner this year (in paychecks) or was it a one time situation?

Do you itemize your deductions?  If so, your actual tax rate for your student and home loans are lower than they appear. 

What is the interest rate on your car loan?  I didn't do a full look, but it appears to be in the range of 6% ($696/year interest on a $11500 loan).

More importantly, though, I would really change how you are going about paying these debts off.  It is just a poor financial choice to be paying off money you owe at 2.5% when you owe money at 6%.

Right now you have $1687 in monthly bills.  You are paying $2322-2472/month.  You are paying $635-785 extra a month towards these bills but not seeing as much effect as you could.

Are you comfortable with only four months of emergency savings or is increasing that a goal?  You mentioned retirement *and* mutual fund savings, which I am assuming to mean that you have savings outside of retirement accounts?  How much are you saving for retirement?  Where are you with that?:
a) getting full match in 401(k)/403(b)?

b) completely funding Roth or Traditional IRAs?

c) maxing out deductable 401(k) contributions?

d) exceeding 401(k) contributions?

Do you have a specific goal with the mutual fund savings (I'm assuming medium term)?  If not, what is the plan for that money?

I am very debt adverse, so my suggestions come from that viewpoint.  I would debt snowball your remaining debts, largest to smallest interest rate (use actual interest rate in the case of itemizing).  I'm assuming $700 available for "extra" payments a month at the beginning (conservative amount between $635 & $785).

What I would do:

Month #1: ($12,000 in tax return, $700 in "extra" payment)

$11500 towards car (car loan eliminated)

$1200 (remaining tax return plus the "extra" $700 payment) towards $3000, 6% student loan (new balance $1750ish)

Minimums on everything else.

Month #2 ($758 in "extra" payment---- $700 original plus $58 eliminated car payment)

$758 towards now $1750, 6% student loan (new balance $1000ish)

Minimums on everything else

Month #3 ($758 in "extra" payment---- $700 original plus $58 eliminated car payment)

$758 towards now $1000, 6% student loan (new balance $250ish)

Minimums on everything else

Month #4 ($758 in "extra" payment---- $700 original plus $58 eliminated car payment)

$258 towards now $250, 6% student loan (student loan eliminated)

$500 towards $12,000, 6% student loan

Minimums on everything else

Month #5 ($808 in "extra" payment--- $700 original plus $58 eliminated car payment plus $50 eliminated student loan payment)

$808 towards large, 6% student loan

Minimums on everything else

Repeat Month #5 until largest student loan is eliminated.  Then continue

After paying off the largest student loan  you will have $700 original, $58 eliminated car payment, $50 eliminated student loan payment, $187 eliminated student loan payment = $995 extra towards loans.  At that point, I would probably deviate from the largest to smallest interest rate payment and go ahead and eliminate the remaining two student loans (since you could do so in only four months).

Now, financially, I know that a lot of (financially astute) people would argue that you should not be prepaying *any* of these loans because they are all relatively low interest.  As I mentioned, though, I am really anti-debt so I would go ahead and pay them and then also start working on pre-paying the mortgage.  Well, personally, I would make sure I was at least on "c" of the retirment savings above and had a larger emergency fund and then pre-pay the mortgage.

Good luck! 

[texmati]

What's the interest rate on the car loan? If it's low... I'd def get rid of the large student loan at the high interest rate. And as a pp mentioned, I'd give some thought to organizing your prepayments with an eye to either getting rid of the small debts, or high interest debts.

[MsFortune]

Just going by math, it's always best to pay off the highest interest debt first. If you follow this, you should pay off the $3000 at 6% first. Put the remainder on the $12K loan at 6%. For the rest of the loans, stop paying more than the minimum. Put all extra money towards your highest interest debt. Not clear on your car loan rate but probably that.

That being said, there is something satisfying about paying something off and getting rid of the debt. So even though it does not make as much sense on paper, you may want to pay off the smaller loans just to get them to go away. Sometimes what is most rewarding does not make the most math sense but makes you feel better.

[MsFortune]

Also, if you are getting a refund this large, you are withholding too much in taxes. That means that you are loaning that money to the govt tax interest free. That's money that you could have had over the last year and paid off debts with already. So unless you had a one time only reason why the refund was so high, I'd investigate.

For example, our refund was about $2K. I'd love a big refund, but that means we estimated pretty well.

[happysmileylady]

Originally Posted by MsFortune 

Also, if you are getting a refund this large, you are withholding too much in taxes. That means that you are loaning that money to the govt tax interest free. That's money that you could have had over the last year and paid off debts with already. So unless you had a one time only reason why the refund was so high, I'd investigate.

For example, our refund was about $2K. I'd love a big refund, but that means we estimated pretty well.

This is not necessarily true.  There are a some of tax credits out there, especially for those who don't make a lot of money, that are refundable, even if you didn't pay in.  EIC is one of the biggest.  We had nothing withheld from our regular paychecks, and I also own a business which required me to pay some self employment taxes.   However, EIC gave us a pretty big refund. 
 

[JesKace]

Originally Posted by happysmileylady 


This is not necessarily true.  There are a some of tax credits out there, especially for those who don't make a lot of money, that are refundable, even if you didn't pay in.  EIC is one of the biggest.  We had nothing withheld from our regular paychecks, and I also own a business which required me to pay some self employment taxes.   However, EIC gave us a pretty big refund. 

We have a lot withheld and usually get a sizable return because we like to have that large amount at the beginning of the year.. But I have to agree with you, even if we didn't have a lot withheld we'd still end up with a pretty good return after getting the credits for the kids, and the interest we pay on the house.. We also had an additional $1500 because of the energy credit for installing a new boiler this year.

[Agatha_Ann]

Thanks for the replies! We have been without power off and on since I posted this, so I wasn't able to post sooner!

The refund is so high because we bought a house last year and filled it with energy efficient appliances, windows, etc. So we are getting a little over 8,000 in credits from those things. The rest is due to having 3 home based businesses. We can pretty much write off everything we buy, even our grocercies

We decided to take about 1500 and put it to an outdoor playset (500) and the surfacing required by the state (1000). Then we are going to use the rest to pay off the small loans, and roll what we used to pay on them into the big one. I already overpay my car loan by 400/mo so I'll continue doing that.

Thanks for the insight!