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Posts tagged with: avalanche method

Savings versus Debt

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Just to piggyback on my earlier post….

What do you guys think about this?

Screen Shot 2015-11-13 at 4.35.52 PM

Image from this article.

Apparently the image was originally from a poster on Reddit, who advocated a minimum 3-6 months of savings in an EF as well as a steady 401(k) contribution (up to employer match) prior to tackling debt.

It seems to me based on some recent conversations (occurring inside the comments sections of a few posts), that this is the approach advocated by some of our readers.

Of course, for any Ramsey followers (who, admittedly, is one of the first people to get me into personal finance, although I don’t blindly follow all his teachings; I pick and choose what works for me), this is drastically different than what is recommended. Ramsey’s Baby Steps  advocate (#1) starting with a $1,000 beginner emergency fund. His argument is that most unexpected emergencies are about $1,000 or less, so that should be an adequate fund for most people. In my own debt-reduction experience, we’ve had a handful of emergencies (e.g., emergency root canal, emergency car repairs). All of our emergencies except one have been under $1,000. And the one time we had to raid our EF for over $1,000 was this past August. It was not actually due to any large emergency expense, but due to a lack of income! I don’t get paid in August (just due to normal schedule of payment) and hubs ended up having a no-income month that month (he has a variable income). So, really, I would consider this more of a factor related to variable income rather than due to an emergency, per se.

Ramsey’s next baby step (#2) is to pay off all debt but a mortgage, followed by (#3) going back and re-stocking the EF up to 3-6 months expense.

Obviously a very different approach, right?

What other factors do you think are important?

I think for single people, people without kids, people with low monthly expenses, renters, and people with steady/predictable income a lower EF might be sufficient. I also think it depends on the size of the debt (e.g., will it take 3 months to pay off or 3 years to pay off? I’m more likely to be “ok” with a smaller EF for a short period of time rather than a long one).

I’ve also seen some arguments over what debt should be considered high versus low priority. Some people are okay with student loans and car loans hanging around for awhile, though almost everyone is in agreement that credit card debt should be tackled quickly!  I’m of the mind that I want ALL my debt gone. That being said, I’ve still prioritized my debt such that I have paid/plan to pay: (1) credit cards, (2) car, (3) student loans (4) medical bills. To me, our medical debt that has no interest is way less burdensome than my student loans (mostly at 6.5% interest), even though the overall amount of the student loan debt is significantly larger than the medical debt.

Those are just my thoughts.

How have you prioritized debt repayment savings? And, among your various forms of debt, how have you ordered or prioritized which debt to pay first? Do you do the snowball method (smallest debt first), avalanche method (highest interest first), or some other arrangement (such as the most personally satisfying)?

Personal finance is just that – personal. So I don’t think there’s one “right” or “wrong” answer and I think there are multiple different routes to the same end-goal (being DEBT FREE with a good financial security net). Just curious about your thoughts on the matter!


Insane or Crazy Like a Fox?

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Have you ever heard that the definition of insanity is doing the same thing over and over and expecting a different result?

Welllll, does it count as being insane if you are doing the same thing over again and expecting a different result, but you’ve learned something new throughout the process that hopefully changes the outcome you’re anticipating?

Does this even make sense at all?

I think so. I’ll just think of myself as crazy like a fox.

So here’s the deal (and, please, refrain from the exasperated sighs until I finish)…..

I’m changing up my debt-repayment game plan.

Again?

Yes. Again.

I’ve been calling my car loan repayment my race to 20K (because the loan balance was approximately $20,000 when I began). This was back when I was making $3,500 monthly debt payments (last summer) and thought I could reasonably expect to pay off the car within 6 or 7 months. I soooo had my eye on the prize for a March 2015 payoff.

But, alas, things have changed.

Our income went down. Our debt payments went down. We’re only a few weeks from March and nowhere near paying off the car.

That’s not to mean we haven’t made good progress. When I started the race to 20K back in July the full balance was actually $22,742. As of last month I had just dipped below $16,000 owed (averaging over $1,000/month toward the payment).

BUT….

I need some quick wins. And with a balance that high, there’s not going to be anything “quick” about paying off the car.

That, plus comments many of you have left, have made me reconsider our game plan a bit. So here’s the new debt plan of action:

We’re re-adopting a modified snowball approach (aka: attacking lowest debt first) so we can re-gain some traction and feel a good boost when a debt is conquered. Here’s what’s up on the chopping block:

  1. License Fees. I made a massive payment on the license fees this month, bringing the total owed to $1344. The goal date to have it eradicated is April 2015.
  2. Medical Debt #1. Note that I’ve always grouped our medical debts together for ease, but we are actually making 2 separate monthly payments (one for $25/month and one for $50/month). The $50/month payment will be done in 3 more payments, by May 2015. Although this isn’t a huge deal from a goal perspective (this will be gone simply from making our regular $50/month payments, no extra), it will be nice to free up that extra $50/month to apply toward other debts. Plus I still consider it a win to have the debt behind us!

Aaaaaand, that’s as far as I know now. My next smallest loan is for a federal student loan (balance = $4347), which also happens to have one of my largest interest rates (8.25%), but I just can’t let go of my desires to pay off the car. My rationale is that I can increase my student loan payments to keep the balances from growing (since my minimum payments don’t even cover the interest), but by May I could refocus back on the car as my #1 priority. If I do that, I’d have a solid 8 months to work on chipping away at the loan, with a tentative goal of having it paid in full by the end of December 2015. Remember that we bought the car (original balance $30,000) in March of 2013, so I would LOVE LOVE LOVE to have it paid in full in under 3 years from purchase date. It would be so lovely to begin 2016 consumer-debt free, with only student loans (and that one low-payment interest-free medical debt) remaining.

We’ll see. I can’t commit yet to what will be #3 on the chopping block. But I do know that it will feel oh-so-good to get those license fees and the one larger-payment medical bill behind us. Especially with the license fees, having them paid off will feel like the closing of a terrible, long-ago chapter of our lives that has been hanging around for entirely too long (over a decade, but whose counting?).

Only one other teeeeeeeny thing I need to mention that may serve as a competing interest for our debt payment funds. But that will have to wait for another post. (CLIFF HANGER!) Check back on Thursday for the juicy details.  ; )

What debt are you currently focused on? What debt(s) motivate you the most?


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