What debt to tackle first? We have multiple loans across different lenders

[bbgrad96]

My wife and I have around 200k of debt.

Here’s the breakdown:

1. her car: 16k at 5.35% $350 monthly
2. my loans: 120k at 2.8% $1550 a month
3. her private loans: 33k total with various rates (monthly is $200)

• $9,278 at 4.66%
• $9,897 at 6.8%
• $8,035 at 3.86%
• $3,831 at 3.4%
• $1,103 at 3.86%
• $1,091 at 6.8%

1. Her federal loans: 45k at 6.5% $400 a month

Our house hold income is roughly 170k but I also get about 10-12k per quarter in bonuses which will be for debt. Next one is in October. We aren’t putting much monthly into them other than minimums.

Option 1:

• tackle car first as it is fourth highest rate and having that $350 a month back would be nice. Could probably put 8-10k in October and then finish it off in January with next bonus.

Option 2:

• use bonus in October to pay the two 6.8% loans in her private loans which makes up almost 1/3 of that total. We did a lower payment plan if we want to put extra money towards it a month.

I am leaning towards the car as the monthly is higher and I know there is some psychological effect to “checking off” on some debt. I also am leaning toward the higher 6.8% rates as they are the highest simple as that.

What do y’all think?

TLDR: snowball method or avalanche method?

 

[chris379]

@bbgrad96 I’m a fan of the avalanche method (attack highest interest first) because you save more money in the long run. It doesn’t feel like it, but it’s a good choice.

I recommend doing that for a few months until it feels like a grind then switch to the snowball method.

Good luck! Give us an update in 6 months!

 

[%D8%A7%D9%84%D8%B9%D8%B5%D8%B1%D9%8A%D8%A9]

@bbgrad96 Are the 10-12k bonuses on top of your 170k annual HHI? If so, make sure you all are on a budget and try to make extra progress besides just the monthly minimums outside of the quarterly bonuses.

I would do a snowball and knock out the smallest ones out first. You can pay off 3 loans next month and majority of another loan.

Great job on the income side, now you all need to knock out the debts.

 

[bbgrad96]

@%D8%A7%D9%84%D8%B9%D8%B5%D8%B1%D9%8A%D8%A9 Yes.

My base is 110k and I can make an extra 40-50k depending on production plus my wife makes 60k.

We are on a budget and generally do fine but we do travel a bit as I lost 2-3 years when I was in grad school. Also, just had to rebuild a house from a tornado so spending money there too.

I just got a raise to the 110k so I can probably do an extra $500 a month towards them as well.

Either way, I know I’m in a good spot and I appreciate the kind words I just want to have the correct strategy

Wouldn’t it make sense to leave the small lower interest loans alone for now?

 

[%D8%A7%D9%84%D8%B9%D8%B5%D8%B1%D9%8A%D8%A9]

@bbgrad96 Mathematically it absolutely makes sense to do the avalanche.

The snowball is psychological. It’s about getting some small wins and creating moment which hopefully will get you and your spouse energized to keep going.

Neither one is wrong. The only wrong answer is keeping the debt around longer.

 

[lyllie]

@bbgrad96 If you have cash flow problems snowball the debt in the student loans . If you can pay your debts and pay your needs you can do avalanche highest interest to low id keep any debt under 4% and beat it in the market.

 

[bbgrad96]

@lyllie No cash flow problems as I work in medicine so pretty secure. I like that idea.

At some point I’ll have to pay it off as having debt is a bit psychological for me. It makes me extremely anxious no matter the balance or rate.

 

[lyllie]

@bbgrad96 Mathematically you will earn more money if you put the same amount towards the market so if you do that while you're paying off your debt there will be nothing to worry about. So as long as you're paying more towards the market than you're debt I wouldn't worry.

 

[bbgrad96]

@lyllie I agree. I will likely hang on to my debt for a while as that rate is so low but yes I agree. I do have an FA who is helping me balance this.

Luckily, with my income we do have the ability eventually to max Roth IRAs for both and max 401ks but you’re right either way.

 

[rageofangels]

@bbgrad96 That is why paying off the 6+% loans first is the way to go. Once you get to the 2.5% ones you would be better off investing long term than paying extra.

 

[sbschristianmedia]

@bbgrad96 Try using either the Avalanche or the Snowball method to clear your debt. There are YouTube videos that have extensive info on these two methods. Prep your own meals and refrain from going out to eat. Pause all investments including IRAs. Just invest enough of your salary to receive your company's max matching contribution for your 401K. Once you have ended your debt your options will open up immediately to invest and save aggressively for other endeavors in the future.

 

[sprtslvr1973]

@bbgrad96 I would try to pay off the car first. Then hit up your auto insurance company and see if you can modify that to get a lower premium now that it is paid off.

 

[seansy556]

@bbgrad96 Paying off her two 6.8% private loans follows the avalanche method of focusing on the highest rate PLUS they're also smaller loans than the auto loan, a factor used in the snowball method. You'd have two high interest loans paid off before you'd be able to pay off her auto loan.

As far as your peace of mind is concerned, wouldn't it feel best to have two higher interest loans paid in full than one lower interest loan which will take longer to pay off?

Higher interest loans should be prioritized unless you want to make the banks richer.

Paying off her auto loan first doesn't follow either of the two "best" strategies but your head is in the right place so I think you'll be fine as long as you're diligent about the strategy you choose.

Edit: I read your comment about how anxiety-inducing these loans are to you. I'd recommend the snowball method in this case, which will also knock out the two highest interest rate loans fairly quickly.

 

[hakjohn]

@bbgrad96 Option 3, look into velocity banking to see if it can work for you.

You need to be very diligent to make it work, but this seems like a classic case for it.

Works well with amortized loans and you have a few.

Google it up.

 

[rageofangels]

@bbgrad96 Attack the highest interest first, paying the absolute minimum on all the others.

When you get it done, attack the next. Continue until you get to the 120k.

The 45k at 6.5% is tough. See if you can get that one paid off as soon as possible.

 

[allroads]

@bbgrad96 5th grade math: tackle the highest rate debt first, work your way down. “Snowball” method (smallest debt first) is objectively illogical.