My husband and I have been aggressively paying down his car loan and my graduate school loan. We had an original plan to pay an extra $1000 a month to the debt once I got a job. We did this for April, and will do it again for May, however, as we now near the home stretch of the car loan (we are down to about $800 which we intend to pay off by the end of May) we are rethinking the strategy a bit.
We are using the “snowball” plan on our loans, therefore when we pay off the car loan, we plan to apply the monthly car payment amount: 465.50 to the grad loan as an additional payment. When added to the required monthly grad loan payment of 103.60, this becomes 569.10. We were going to add the additional $1000 a month to this, but a recent meeting with our financial advisor changed our minds a bit. We have been very agressive with debt – we used the majority of my husband’s bonus plus our $7500 tax rebate to knock out the car loan. Our financial advisor, while he agreed that knocking down debt was a good plan, also pointed out that perhaps we had gotten too focused on one aspect of our financial portfolio, and that maybe it was time to step back and look at the bigger picture.
We did this, and after much debate, decided that after paying off the car loan we would adjust our financial plan. With my new job, I now have a 401K plan. Since all I’m currently only saving for retirement via my Roth IRA, I would like to take advantage of the 401K — particularly since there is a small amount of matching (up to $40 a month). Also, my husband had cut down his 401k contributions in recent years due to our financial situation (I went back to school, and then was in between jobs for quite a while). So, he wants to boost that as well.
We aren’t giving up on paying down the debt, we’ve just decided that instead of putting that extra $1000 to the debt (which after this month only consists of student loans with tax-deductible interest) we will invest that in our retirement. My husband is going to up his 401k monthly contribution from $50 to $500, and I will start mine at $500 a month (plus a $40 match). This means we will max our Roth IRA’s at $5000 each, plus an additional $6000 a year for C and $6480 for me, plus our mutual fund at $6000 a year, making our annual retirement contribution go up from 16,600 a year to over $28,000 a year!
We haven’t given up on the debt either. We were originally going to increase our monthly contribution to our emergancy fund from $300.85 to 500.85, but since it’s at about $6000 now (more than enough for one month’s expenses), we’ve decided we are comfortable just continuing to contribute $300.85/month, and allocate that $200 toward the debt until we pay off the grad loan. So, this makes for a grad loan payment of $103.60 +465.50 + 200 = 769.10. An extra $665.50 in payments each month + whatever I make in snowflakes.
We have also decided that once the grad loan is paid off (hopefully by Feb. 2010) we will look into other retirement/savings strategies for the 869.10/month, rather than our original plan of continuing to snowball it towards my undergrad loan. The main reasoning for this is that my ugrad loan, though it is over $14,000, is only at a 2.1% interest rate (and the interest is tax deductible) and the minimum payment is only $97/month. So though it’s tempting to want to rid myself of non-mortgage debt entirely, I need to accept that some debt isn’t that bad. In fact if the interest rates rally again even a little bit, I will earn more interest through saving the money than I would save by paying it off early.
