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I want to be free of debt by end of 2013
Old 08-09-2012, 02:52 PM   #1
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I want to be free of debt by end of 2013

I HATE owing money and knowing that interest on my student loans is compounding daily. I am fortunate enough to only have $4,000 in loans in my name but I have also permanently taken over a big chunk of money of a Parent Plus loan that my mom took out for me.

Here's the breakdown of my loans:
$19,444.25 at 8.25% monthly due = $302, paying $500

$1,674.81 at 6% paying $100

$2,2,43.03 at 4.5% paying $50

Total = 23,362.09

I have been working for only 1.5 years. Living in New York City is not cheap so I have not been able to build up my savings too much.

Here's what I currently have in the bank:

Checking/saving - $14,500

Investements - $4,717.52 (includes investment/life insurance, 401k, and 1.5k in LendingClub semi liquid)

Given my income and expense budget, I am left with about +$900 per month.

At the momet my net worth is negative $4,000. I use my credit cards lightly but pay them off every month and don't plan on ever owing interest on them.

Should I just take a big chunk of what I currently have and bring down my loan amount by a few thousand? My instict tells me to pay off my smallest loan($1,674.81) but since it is not the one with the highest interest rate I know it's not the right move.

Given my breakdown, what is a good amount to put towards paying off my mom's Parent Plus Loan right now? Is something like $5,000 a reasonable amount and then continue to make monthly payments to bring it down steadily? I can only hope that I get a nice bonus end of this year + tax return to pay off another big chunk.

As you can see, I am really in a hurry to pay it all off! Please help figure out the smartest way to do this.

-C
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Old 08-09-2012, 03:29 PM   #2
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Generally speaking, you want to pay down as aggressively as possible the loan with the highest interest rate, which is the Parent Plus loan. Once it's completely paid off, start paying down aggressively the loan at 6%, and finally the one at 4.5%.

While wanting to get out of debt as quickly as possible is commendable, you do not want to deplete your emergency fund to do so. So make sure to keep about 6 months worth of living expenses in your checking/savings account. Once you are there, any extra money left over at the end of the month can be used to repay the loans.
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Old 08-09-2012, 03:40 PM   #3
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What are your expenses?
I'm asking because your emergency fund should reflect what you spend.
In the "old days" the rule of thumb was an emergency fund of 3 months worth of expenses. Nowadays a lot of people recommend 6 months or more.
After establishing a healthy emergency fund I would pay the loan with highest APR (8.25% in your case). Also, if you can deduct the interest on your other loans and can't on Parent Plus loan it would be an additional advantage to pay the 8.25% loan.
You already said that you contribute to 401k up to the match maximum - good job - that's "free money" for you, even if 401k choices are not stellar.

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Investements - $4,717.52 (includes investment/life insurance, 401k, and 1.5k in LendingClub semi liquid)
The "investment/life insurance" raises a flag. Do you have Variable Universal Life insurance by any chance? Most of of investment/insurance products are very bad investments with high fees.
If you need insurance you should look for insurance (Term Life for example).
If you need/want investments you should look for straight investment options - since you are on ER track - (after paying your loans ) open ROTH IRA, brokerage account or up your 401k contribution.
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Old 08-09-2012, 04:13 PM   #4
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The rule of thumb I used to get out of credit card debt in my late 20's was to take the allotment you have to pay extra and put it towards the highest interest rate... until that's paid off then roll that minimum payment and extra and apply it towards the next one. This snowballs the debt down to nothing at the end.

I didn't explain it well - but using your numbers.

#1 - min payment = 302
#2 - min payment = 100
#3 - min payment = 50.

You have $900 a month to pay down this debt.

So you'd start off paying
#1 = 302+ 448 = 750
#2 = 100
#3 = 50

then when you've paid off # 1 it becomes:
#2 = 850
#3 = 50

I had about $30k in consumer debt (cc's and car loan). I paid it down fairly quickly once I committed to the plan. It's really exciting to see how quickly the lower interest loans get paid down once you knock off the more expensive ones.
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Old 08-09-2012, 04:45 PM   #5
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My monthly expenses are $2,500 including $650 loan payment. This leaves me with +$900

I don't think I made it too clear, my minimum payment on the Parent Plus Loan is $302 and the minimum payment on each of the other 2 loans is $50. I guess I am not optimally allocating my payments at this time.

Regarding the Life Insurance thing, I am currently making $150 monthly payments to an investment option [mod edit].

It sounded like a legit supplementary income plan after 30 years I will begin getting my returns and I can get loans from my own investment if necessary in a very short time. A little more flexible than 401k I believe. I don't like the idea of Term Life insurance that would soon expire and leave me with $0.
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Old 08-09-2012, 05:30 PM   #6
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Regarding the Life Insurance thing, I am currently making $150 monthly payments to an investment option [mod edit].
.
Oops, sorry about that I posted a link there to the specific investment which is frowned upon for new members.

To answer the original question, yes I am investing in a variable life insurance option that looked pretty good to me. I can't say I fully did my research so just a bit worried. Certainly, it must be better than term life insurance?
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Old 08-09-2012, 05:36 PM   #7
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To answer the original question, yes I am investing in a variable life insurance option that looked pretty good to me. I can't say I fully did my research so just a bit worried. Certainly, it must be better than term life insurance?
Life offers an ongoing opportunity for learning. You are about to get a very good lesson on the folly of listening to insurance sales professionals...
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Old 08-09-2012, 05:43 PM   #8
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To answer the original question, yes I am investing in a variable life insurance option that looked pretty good to me. I can't say I fully did my research so just a bit worried. Certainly, it must be better than term life insurance?
I'm sure there might be a few specific situations where this might be true, but the vast majority of opinions I see (from people who don't sell variable life, whole life or annuities for a living) suggest buying term and investing the premium difference independently outside of insurance or annuities.

I come back to a quote from the late financial huckster Charles J. Givens. Even though much of what he wrote was financial quackery if not downright pushing the limits of what is legal or ethical, he was spot-on when he said this: "Insurance and investing, both necessary components for an overall sound financial plan, have little in common and one should not be used to accomplish the other."
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Old 08-09-2012, 05:55 PM   #9
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I'm sure there might be a few specific situations where this might be true, but the vast majority of opinions I see (from people who don't sell variable life, whole life or annuities for a living) suggest buying term and investing the premium difference independently outside of insurance or annuities.
That assumes you have dependents and need insurance in the first place.
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Old 08-09-2012, 06:25 PM   #10
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That assumes you have dependents and need insurance in the first place.
True. That's a given. I'm referring to people who need life insurance, I assumed that was implied. And single people with no dependents who don't need life insurance still need to make sure they have liability insurance, at least if they are still dependent on an earned income stream.
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Old 08-09-2012, 06:31 PM   #11
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I wouldn't recommend this to faint hearted or cannot keep their financial discipline together, but if that debt was mine, I would roll that money into a 15 month 0% 3% access fee charge CC. Even though I haven't used them in a few years, I still get them from Citi 2 times a week. That is a heckuva lot better rate than 8.25%. Throw your extra monthly money at it, and it would be paid off in less than 2 years and you would save over $1000 easily in interest. Outside of my home loan, I haven't used anything but credit cards to borrow the last 15 years and have saved major $ over the years.
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Old 08-09-2012, 06:33 PM   #12
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Chase slate card offers 0% for 15 months and $0 balance transfer fee.
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Old 08-09-2012, 07:05 PM   #13
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Oops, sorry about that I posted a link there to the specific investment which is frowned upon for new members.

To answer the original question, yes I am investing in a variable life insurance option that looked pretty good to me. I can't say I fully did my research so just a bit worried. Certainly, it must be better than term life insurance?
I think you can easily free up another $150 monthly by no longer paying into this product. Products are usually used to target either fear or greed. I assume this product targets both in terms of tax-free loans against the policy and future tax rate arguments. If you have no dependents you most likely have no need for a permanent life insurance product. Insurance agents make major commissions on selling you these unnecessary policies.

I assume you're also overfunding the policy. The cost of insurance for you is probably only something like $30/month. Where does the other $120 go?Think of it this way, you're pre-paying your death benefit, another win for the insurance company. Insurance should only be used to protect against major financial ruin, not in the manner you're currently using it.

You would get a much better return on investment by throwing that extra $150 monthly at the 8% debt and subsequently maxing out a 401k.
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Old 08-09-2012, 07:12 PM   #14
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I would follow the Dave Ramsey approach to paying these off. Site here-http://www.daveramsey.com/new/baby-steps/

I'd pay the small ones with your existing cash to get them out of the way and make life more simple, even though their rate isn't as high. It's an immediate win. That still leaves you with $10k emergency money if you just paid them off and were done with them.

You might want to look into the credit card option others suggested with the remaining loan.
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Old 08-09-2012, 07:18 PM   #15
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True. That's a given. I'm referring to people who need life insurance, I assumed that was implied.
CoffeeMoney says he's 22. While not impossible, dependents are unlikely.
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Old 08-09-2012, 07:45 PM   #16
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Congrats - you are doing well.

The 8.25% that you would "earn" risk free buy making payments on your highest interest rate loan is your best bet. Then the 6% loan and then the 4.25% loan.

I would keep $4,500 in savings and use $10,000 to pay down the 8.25% loan and take any excess cash flow and pay off the highest rate loans first.

Like others, unless you have a legitimate need for life insurance, I would re-evaluate that "investment" and the $150/month that you are putting into it. I would rather see the $150 go towards paying down debt or to the 401k or into a Roth IRA. Life insurance only makes sense if you have people who rely on you and would need money in the event of your death.

Also, just keep in mind that not all debt is bad. If you incur a reasonable amount of debt to buy a flat that debt is not necessarily bad debt. Just like the debt relating to you investment in your education that now allows you to earn a good income is not necessarily bad debt either (but at those interest rates paying it down is a good investment in today's low interest rate environment).
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Old 08-09-2012, 08:17 PM   #17
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I think you can easily free up another $150 monthly by no longer paying into this product. Products are usually used to target either fear or greed. I assume this product targets both in terms of tax-free loans against the policy and future tax rate arguments. If you have no dependents you most likely have no need for a permanent life insurance product. Insurance agents make major commissions on selling you these unnecessary policies.

I assume you're also overfunding the policy. The cost of insurance for you is probably only something like $30/month. Where does the other $120 go?Think of it this way, you're pre-paying your death benefit, another win for the insurance company. Insurance should only be used to protect against major financial ruin, not in the manner you're currently using it.

You would get a much better return on investment by throwing that extra $150 monthly at the 8% debt and subsequently maxing out a 401k.

I don't know if all variable universal life insurance investment options are alike but right now I have $X face amount immediately valid, out of the $150, a little more than $100 goes toward investment account and the other $50 is fees/actual life insurance payment. After 30 years of payment, I will stop paying and begin to see returns on this investment while still having life insurance along with other options in between.

Also, probably something very critical to your views,you assume that I am young and do not have any dependents, but my family is not well off at all...That is part of my motivation to be as financially responsible as possible. If anything were to happen to me, I would want them to have a better life, and for them, my policy would pretty much set them up for life.

Directly related and going back to my student debt, once I have $650 less to pay in loans every month, I am likely to give that back to my parents and be able to help them tremendously. Right now I can't do that. Technically, my mom would be paying that lump sum of 19k so I am helping them out in some way. On the other hand, it was my schooling thus my debt.

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CoffeeMoney says he's 22. While not impossible, dependents are unlikely.
He --> she actually. Dependents = yes, pretty much 3 of them at this time but I do expect the situation to improve. Forget the 6 month EF, the major reason why I am not jumping the gun and paying off as much as possible is that I need to have money to spare for them.
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Old 08-09-2012, 08:27 PM   #18
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I think your arguments about life insurance make it even more reasonable to get a term policy instead of the permanent one. Go to term4sale.com and plug in your age/numbers and compare what you get for your money. A 22 year old female in average health can get a $1,000,000 30 year policy for about $50 a month.
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Old 08-09-2012, 08:41 PM   #19
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If you are eleigble for an employee match into a retirement plan, I would make the priorities:

1. get the match
2. maintain an adequate emergency fund
3. extra payments towards the most expensive debt first

As others have said, take a long hard look at that life insurance policy - as a general rule "life insurance" and "investment" do not go together.
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Old 08-09-2012, 08:52 PM   #20
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He --> she actually.
My apologies.
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Dependents = yes, pretty much 3 of them at this time but I do expect the situation to improve. Forget the 6 month EF, the major reason why I am not jumping the gun and paying off as much as possible is that I need to have money to spare for them.
In that case, I agree with those who advise buying term life and using the rest of the money to either invest or pay down debt.
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