Personal Finance-Lopnik: Evaluation of debts

"Dr. Zoidberg - RIP Oppo" (thetomselleck) 03/13/2016 at 18:22 • Filed to: why so serious

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I’m sitting here going through our finances, trying to to see what else I can do to get ahead in life. I’d say I’m pleased with where we stand at this stage. But I’m always analyzing ways to turn weaknesses into strengths, or rather how to mask them.

So here’s my current scenario. We have student debt. I’ve said this on the kinja-verse a few times before so I don’t feel it’s too personal considering I’ve already revealed it in other contexts. We are paying it off as scheduled, but let me be honest about its presence (here comes the car part!): “Why finance this new Lexus when you can pay off your student debt instead?”

Hyperbole!

And we’ve only recent begun paying it. It’s a bill we can afford comfortably right now, mind you. No one’s sacrificing overpriced coffee or local craft beer. But the opportunity cost is eating at me. That’s X times 12 NOT being saved annually. Or used for a myriad of other things that we value or want or need. More importantly to me, that’s money that we can’t use towards a loan for buying another house in the future.

So I sat down with a burnt cup of coffee and starting looking up all the loan details, avenues, etc. Then I came to a crazy proposition: what if we just paid off (at least) one of the loans in full right now? The risk is obvious: a substantial amount of cash (savings) *zip* gone! The household and inhabitants potentially vulnerable, etc.

But consider the arbitrary scenario as follows: suppose we said that any money allocated to student loan payments would be directly routed to savings if the payments did not exist. Now let’s say I had a debt (THESE FIGURES ARE MADE UP!) of $40,000, at 6%, as a ten year loan.

If I make payments as scheduled: Total money LOST on the debt over ten years is $53,289.83 (value of loan plus interest).

That’s over $13k left on the table by not paying it off today (Math: you spend 40k today, you save $444 times 12 months times 10 years, or rather, you save $53,289.83, spend $40,000, net $13,289.83).

Now what’s the problem? Well, with the above example, it would take about 7.5 years to recoup those lost savings initially spent the first day. So, yeah, 2.5 years of pure profit, but 7.5 of trying to breaking even. Not to mention actual real-life considerations: What if someone loses their job? What about a large medical bill? What if we have kids?

I guess it’s a matter of outlook. Do I want peace of mind and be debt free, or panic over a thin looking savings account? Do I want to flush a (fictional) $444 down the toilet every month for ten years?

This is an oversimplified example, as it does not take into account monthly savings that would have been acquired anyway, income, other expenses, etc. Still, fun to think about. It’s just that right now I don’t have children, and I don’t have a car payments, stuff like that, so this could be the best opportunity to dig into the debt I might ever have, unless something major happened like a huge pay raise.

These are the kinds of posts that happen when the weather outside is really crappy.

TheHondaBro > Dr. Zoidberg - RIP Oppo 03/13/2016 at 18:30

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I lost power when I was going #2. It was not romantic.

DrJohannVegas > Dr. Zoidberg - RIP Oppo 03/13/2016 at 18:31

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This is good Kinja, Doc.

Also, FWIW, if you can pay off a significant chunk of the debt, while still leaving some cash for potential emergencies (no sense wiping out debt just to need to borrow again if something arises), it makes good sense. But you know that already. There’s a lot more to consider (like expectations of inflation and interest rates, the particulars of your loan, etc.), so you might consider taking a big bite out of it now, but leaving some cushion. It knocks down some of the interest costs, leaves you a little more in savings, and while you are not getting the full benefit of early debt retirement, you maintain a bit of flexibility.

rockingthe2 > Dr. Zoidberg - RIP Oppo 03/13/2016 at 18:31

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No kids? Pay it off or as much as you can (SAFELY!!!!) so long as you have a stable career. My buddies wife’s student loan payment just skyrocketed and for a while there they had a hard time. Do look into wether there is a early payoff fee (these things do exist) and if it’s worth it after that.

bobbe17 > Dr. Zoidberg - RIP Oppo 03/13/2016 at 18:34

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I’ve done similar analysis for myself. The objectively best option is always to pay off as much as possible as soon as possible. I went through the trouble of making a spreadsheet to look at 2 car loans, 2 student loans, and a mortgage, then ran a solver to find out how to minimize the amount of interest/pmi paid. The answer was of course the biggest loan being the mortgage. That’d mean the minimums for student loans and have those hanging over my head for the full duration. All of it was a waste of time because of the opportunity costs and peace of mind that you mention.

The biggest help for me with student loans was putting them into Mint in the form of a goal. From there I could use the slider to see how the monthly payment would affect how much interest would be paid and when it would be paid off. I then just looked at the tradeoffs, I could pay an extra $50 a month, but it’d only save me a month and a few dollars in the long run so I’ll keep it for savings or spending money.

Dr. Zoidberg - RIP Oppo > DrJohannVegas 03/13/2016 at 18:34

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Thanks! That’s actually what I’m considering proposing: eating a large fraction of the debt this year without living in fear until the savings recover. I’ve already been down that road before when we bought the house, it wasn’t nearly as bad as I thought it would be, because I didn’t account for a raise, other factors, etc. at the time. But like I said, I’m staring at combined monthly payment, and I’m thinking about a bigger house or a Lexus (that I would probably never buy anyway, but I could!).

CB > Dr. Zoidberg - RIP Oppo 03/13/2016 at 18:38

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I’m with you on looking at my student debt. I have to start repaying, and as Doc suggested, I’m probably going to pay a large sum, then make relatively high monthly payments in order to avoid interest.

If you can manage to do that and still have floater money in case things go wrong (I think having enough to last ~four months at least is a good idea), then you’re golden.

Dr. Zoidberg - RIP Oppo > bobbe17 03/13/2016 at 18:41

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Good to know there are other people as disturbed as me out there. I feel like getting that debt paid off would just be a huge positive for the household. But when I crunched numbers, as you did (though not to the extent of the spreadsheet!), it was like, I can make it advantageous financially but basically it is just for peace of mind or opportunity cost.

Dr. Zoidberg - RIP Oppo > CB 03/13/2016 at 18:44

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Yeah, my goal (and YMMV) is to always have ~6 months laying around for a rainy day, which is fucking lot of money and I’m still working on. I’m pretty risk averse financially. I saw my father get laid off during the recession from a company he had worked out for over 30 years. His entire department actually. I’m young: there WILL be rainy days ahead.

Dr. Zoidberg - RIP Oppo > rockingthe2 03/13/2016 at 18:46

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Good tip, I will look into the penalties, which would only FURTHER disincentivize (probably not a word)a complete payoff of course... what a fucking racket.

DrJohannVegas > Dr. Zoidberg - RIP Oppo 03/13/2016 at 18:50

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Yea, I’m always a proponent of the idea that you should try to retire your debt, but not at the peril of needing debt again to recover in case of emergency.

Tom McParland > Dr. Zoidberg - RIP Oppo 03/13/2016 at 18:53

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Student debt is a killer and excellent use of of the captions BTW. If you can wipe it out now...it may be worth it.

Needmoargarage > Dr. Zoidberg - RIP Oppo 03/13/2016 at 18:57

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I lean heavily towards paying off debt first. Make sure you have a comfortable amount of emergency savings (I usually use at least 3 months of expenses worth) and go for it!

There are lots of people that argue towards investing vs paying off a loan, house, etc. but sometimes just the feeling of getting out of debt is worth it alone.

His Stigness > Tom McParland 03/13/2016 at 18:58

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Isn’t student debt the best kind of debt to have though, aka it affects your credit score the least? Or is it a mortgage and then student loans?

CB > Dr. Zoidberg - RIP Oppo 03/13/2016 at 18:59

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My dad always taught me to have a budget and not be frivolous with my purchases, which is probably why I still have plenty in the bank at the end of my university career, instead of the $0 that a lot of people I know have. Then again, I owe more than I’m currently worth, but I can make it work.

bobbe17 > Dr. Zoidberg - RIP Oppo 03/13/2016 at 19:00

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We engineers love ourselves some spreadsheets. The most annoying part which you can probably relate to, is the amount of unnecessary stress it causes. In no way does it affect day to day life, finances are completely comfortable, yet knowing the debt is there causes me to look at it a few times a weeks wondering what I can change for the better.

Spaceball-Two > Dr. Zoidberg - RIP Oppo 03/13/2016 at 19:01

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Option #3 Acquire another puppy, name it Hilux and... I got nothin. My power is out and I’m bored.

Dr. Zoidberg - RIP Oppo > His Stigness 03/13/2016 at 19:01

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It’s a killer in terms of opportunity cost, and the kind of interest rates that students were getting pre-recession (hint: not great).

Dr. Zoidberg - RIP Oppo > bobbe17 03/13/2016 at 19:04

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Exactly. I’m looking my heaps and heaps of bills that are pretty much unavoidable as a homeowner, general costs of living, and just always looking for a way to cut down, both short term and long term. Peace of mind is something that’s hard to put a price on.

Tom McParland > His Stigness 03/13/2016 at 19:05

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It all depends on how you look at it. Some people are essentially making mortgage payments for living at a college for only 4 years.

Dr. Zoidberg - RIP Oppo > Needmoargarage 03/13/2016 at 19:07

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And since I already got the house, which should be labeled as an asset, rather than strictly debt, this is the perfect time to make a decision on the loan.

Dr. Zoidberg - RIP Oppo > Spaceball-Two 03/13/2016 at 19:07

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Parking an Audi in front of your house will lead to electrical problems, I read.

AkursedX > Dr. Zoidberg - RIP Oppo 03/13/2016 at 19:14

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Don’t forget that you can write off that student loan interest on your taxes. Car payment interest, not so much (unless you own a business or something)

Spaceball-Two > Dr. Zoidberg - RIP Oppo 03/13/2016 at 19:22

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But the Toyota should cancel that out.

Dr. Zoidberg - RIP Oppo > Spaceball-Two 03/13/2016 at 19:23

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Oh, then it’s because you live in one of the few parts left in Bothell with trees.

Spaceball-Two > Dr. Zoidberg - RIP Oppo 03/13/2016 at 19:29

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I feel like it's that M. Night Shamalamadingdong movie where the trees are trying to kill me.

someassemblyrequired > Dr. Zoidberg - RIP Oppo 03/13/2016 at 19:29

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It’s not a bad plan to pay down the debt, but as others have pointed out, you do want to have a bit of a cushion in case something bad happens. IIRC, there are no prepayment penalties on student loans. So you can pay them outright, or refinance them (there’s a bunch of companies that do this, you might be able to do better than 6%). That being said, always a good idea to verify that there is no prepayment penalty.

Another trick is to pay every pay, rather than every month. If you pay every two weeks, it actually makes a pretty impressive dent in the length of the loan, and you’re only out one half of a month’s additional payment per year.

In any case you want to get ‘em pretty well knocked out by the time kids become a factor - after that the little “angels” take all your cash.

Dr. Zoidberg - RIP Oppo > Spaceball-Two 03/13/2016 at 19:31

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Oh you mean Fern Gully

Biggus Dickus (RevsBro) > Dr. Zoidberg - RIP Oppo 03/13/2016 at 19:35

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I don’t know all your personal details but it really depends on your risk tolerance as well as job security. If you are paying over 6-7% interest I would prioritize paying it down but I wouldn’t liquidate savings do so.

rockingthe2 > Dr. Zoidberg - RIP Oppo 03/13/2016 at 19:48

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That’s where im at, I really just want to be out of debt for peace of mind. But I also need a car, im trying to buy a house, and switching jobs so I don’t think there is anything I can do in the interim. At the same time, knocking out the credit card debt will open up extra each month for a better car, more savings, or a better house...

Spaceball-Two > Dr. Zoidberg - RIP Oppo 03/13/2016 at 19:52

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That got a laugh out of my wife who is none too pleased with this no power business.

Dr. Zoidberg - RIP Oppo > Spaceball-Two 03/13/2016 at 19:54

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Well my wife worked today... you can guess what happened there. And now she’s stranded because apparently 405 is hell right now.

Spaceball-Two > Dr. Zoidberg - RIP Oppo 03/13/2016 at 20:03

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Ouch!

StingrayJake > Dr. Zoidberg - RIP Oppo 03/13/2016 at 20:05

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You have savings? What’s that like?

Dr. Zoidberg - RIP Oppo > StingrayJake 03/13/2016 at 20:07

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Here today, gone tomorrow.

Funktheduck > Spaceball-Two 03/13/2016 at 20:08

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Honest trailers did one on that movie. So funny

His Stigness > Dr. Zoidberg - RIP Oppo 03/13/2016 at 20:10

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Very true. Even now though the interest rates suck. I mean I’m paying between 4.29 and 4.6. I know my mom’s are higher, but I think for a federal loan 4% is ridiculous. The fact that the government is making billions off of students who can’t afford school is just disgusting. Sure, I may be a liberal, but I think even conservative students would enjoy getting free loans from the government as it costs them nothing (or very near nothing) to administer the loans.

yamahog > CB 03/13/2016 at 20:11

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I followed a similar strategy after college and it served me well. But as I am fond of reminding Travis, I’m not particularly great with money, I’m just lucky to have enough cash (and very good credit) to cover my ass if I slip up and forget something.

His Stigness > Tom McParland 03/13/2016 at 20:13

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That’s a really good point. When I graduate in May I won’t really be proud of anything, I will just remain pissed that I spent so much money on an education that was shit compared to the free education I got from my community college. I hope law school doesn’t turn out the same way, because that be infinitely more expensive than a CSU.

BrianGriffin thinks “reliable” is just a state of mind > Dr. Zoidberg - RIP Oppo 03/13/2016 at 20:19

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Same scenario here. In my case, two of my loans have an interest rate less than 1%, so it really doesn't make sense. Would love to have that monthly money back, though.

Spaceball-Two > Funktheduck 03/13/2016 at 20:30

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I saw that it was hilarious

Funktheduck > Dr. Zoidberg - RIP Oppo 03/13/2016 at 20:33

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I did something like this not too long ago. If I continue as planned, I’ll be debt free by around the end of 2017. I’ve thought about paying off my student loans in one chunk but I stop myself in case I need the cash. Just started the house hunt today so no extra spending than necessary. (I don’t consider a mortgage a debt).

For me my biggest debt (both in size and monthly payment) has the shortest term. I think I have 14 more payments left. Once that is paid off, I’m gonna make the same size payment into my car loan (longest term left but will become largest monthly bill), once that’s done, pay off whatever remains, if any, of my student loans.

In fairness, my student loan debt is pretty small. Between the Hope scholarship and me working through school, I borrowed relatively little.

I also pay a little extra every month on all my loans. Maybe you could try that instead of dumping a big chunk of your savings into it. For example: your loan payment every month is $250, pay $350 or $400. Or, pay half (or more) every 2 weeks to cut down on how much interest you pay. And, by paying every 2 weeks, you actually get an extra months payment in versus once a month

Not sure if this helps but I thought I could offer something different than I've already read in the comments.

Funktheduck > Spaceball-Two 03/13/2016 at 20:35

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Honest trailers is one of the few things on YouTube I try to keep up to date with. I only avoid ones for movies I haven't seen but want to. I hate spoilers.

JasonStern911 > Dr. Zoidberg - RIP Oppo 03/13/2016 at 22:06

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for someone who at least implies is intelligent enough to have a job that provides the means to buy a $375k sports car, your comprehension of how money works is concerning.

first, the $40k + interest = $56k owed logic is flawed. the principle of compounding interest works both ways. if anything, it’s $40k + $16k lost opportunity + $16k interest = $72k owed.

second, locking up $375k into a depreciating asset is a horrible use of funds. if that money has to be spent on cars, let’s hypothetically look at what you could have done with that money - buy a 993TT, NSX, FD3S, Grand National, R32 GTR, plus ~$200k worth of other cars that are currently undervalued. what do you think would be cooler to own short-term and appreciate more long-term?

third, if you’re paying 6% interest in this environment, I highly encourage you to hit up some local credit unions. that rate is insanely high given the current market environment.

N51fanatic > Dr. Zoidberg - RIP Oppo 03/13/2016 at 22:34

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Whats the interest rate of the student loan debt? I’d rather have the rainy day savings account. If you fall on hard times, you can always defer payments on the student loan. If you fall on hard times after you drained your savings to pay the massive loan, then well.....

Dr. Zoidberg - RIP Oppo > N51fanatic 03/13/2016 at 22:39

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We can’t defer anymore actually.

N51fanatic > Dr. Zoidberg - RIP Oppo 03/13/2016 at 22:42

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I’d still rather have the large savings account. My philosophy is, if you can manage the student loan debt, just go with it. Save on your own, enjoy life. The peace of mind of having cash readily available is hard to beat.

Dr. Zoidberg - RIP Oppo > N51fanatic 03/13/2016 at 22:44

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Why not both though?

.... I need a raise

Luc - The Acadian Oppo > Dr. Zoidberg - RIP Oppo 03/14/2016 at 11:07

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It took me 5 years to TOTALLY fuck up my finances(note finances not credit rating) I was at one point $78,000 in debt, renting an apartment and didn’t own anything. Now 5 years later things have totally turned around and I’m the most financially stable I’ve ever been in my life.

I bought a house and put a 20k down payment in cash. paid off all student loans,credit card debts,line of credits,ect.

Now at the ripe age of 31 all I have is a Mortgage and a small car payment. I don’t owe a cent to anyone else.

Once you get out of your slump make sure you do everything in your power to stay that way. It really is the best feeling to not have to worry about money.

Now if I want something I’ll save up and buy it outright. It is way too easy to finance stuff but almost impossible to repay it afterwards.

At my lowest I was about 3 months away from bankruptcy and now I’m loving life.

I was told at a very young age that no matter what protect your credit score it is your most important asset and it will save you a whole bunch of money in the long run. so I have never EVER missed a payment on anything which is why I was able to come out on top.