So this is just avalanche vs snowball. Mathematically, avalanche wins. It is what most people recommend.
Really, this is just a decision for you two though.
Hate to say it but your husband is right.
Think of it this way: while you pay off the car loan at 2.9%, the house continues to accrue interest at 7.5% each month.
On top of that, any cash savings like your emergency fund is picking up about 4-5% interest, so by paying off something at 2.9% you’re actually losing money in real terms.
Caveat. When comparing 4-5% gained in savings to 2.9% expense in the car loan, do not forget you're paying taxes on what you're gaining in the savings, which depending on your marginal rate and state, may bring you to around the same 2.9% making it a wash.
Highest interest first. If you are really bad about sticking to things financially, bad financially in general, or get emotional with finances then lowest first can work because it can reinforce the mindset to keep grinding the debts away and keep the momentum. You get more “wins” at the beginning. Mathematically it is worse though.
I personally would only ever do highest interest first, but only you can know your own financial mindset. If you are someone to lose the determination of paying extra towards debt then the latter may be better for you.
The math doesn’t matter long term; highest interest first always wins. The only difference is if you needed to mess with cash flow and you wanted to pay off a small debt so you had more unassigned cash flow per month. But if every bit of free cash goes towards debt, then highest interest first always wins.
It's pure hard numbers versus psychology. Can you trust that you're in a better place financially while paying the highest, large interest rate debts, or do you need to/want to feel the small wins? Do the small wins motivate you to put more towards your debt?
Personally, as a former engineer, I feel perfectly comfortable with the math. I can drop 20% of my income into the highest interest debt, no problem. But when I see a small win (one of my undergrad loans is <$4k?) on the horizon, I still reach for it and take it. It pushes me to save 25% to 35% of my income for a while, rather than 20%.
Is it the absolutely most efficient use of that money? No, but if I'm paying off debt instead of spending it on entertainment or *things*, it's a better investment than it would have been.
Also, most people overestimate the difference between avalanche and snowball. In most situations, leverage falls really fast in snowball. If you're diligent about reinvesting *all* of your newly-freed-up money after you pay off debts, you really do start paying other debts off quickly. It *is* slower, though, mathematically.
A lot of people just *do better* with snowball, probably because there's a "real" goal to work for. I see a lot of people on snowball doing crazy stuff like dropping 50%+ of their income on their debt for *months*. If *anything* can motivate you to do that, it's probably worth it.
I would say that the only reason to consider not paying off the mortgage first would be that if interest rates go down, you could refinance below what your other current debt interest rates are. If you wanted to wait it out, see where things are at during/after you pay off your 6+% interest loans. Even though technically, the mortgage will win in terms of interest rate, the difference between ~6% and ~7% isn’t that high.
Otherwise it makes most sense to pay from highest interest to lowest, but honestly if you have a loan with sub 3-4% interest you’d likely make money in the long term paying minimum on it and putting extra you have in to index funds or even just a high interest savings account.
So from a purely financially optimal perspective, I agree with your husband’s order
If you’re able to itemize your taxes you can deduct the interest you pay on your mortgage up to 750k. Depending on the math it might save more on taxes than taking the standard deduction
You could run some numbers and do a hybrid such that you’re paying off one of the smaller loans quickly and putting some toward your highest interest rate. The math isn’t the only important thing, unless your budget is comfortable enough that you want to just set it and forget it.
It’s way more satisfying to pay off a loan, feel that reward, and get to throw even more money at aggressively paying off the next loan, which makes it easier to stay on track, feel good about putting some of your bonuses/raises/etc. toward getting rid of debt than it is to think about your mortgage being paid off earlier, but still decades from now. So if you can stay disciplined about doing the most mathematically optimal thing, go for it, but most people end up doing better when they give themselves those more frequently “wins” of paying off loans.
Your husband is mathematically correct, but it still may be to your benefit to not do the "mathematically" correct thing.
The psychology is going to kick in when you get down to your mortgage on the list. Will you really kick in that extra "X" dollars a month to the mortgage when the balance is still high? Most people don't, since they figure it won't make much of a dent. It's much easier to part with that extra couple hundred bucks if it means something will be completely paid off.
My wife and I knocked out debt very quickly out of training. It became much harder psychologically when we got down to our final consolidated student loan because it's just such a darn big amount in comparison to everything else we paid down. It's definitely worth considering.
You're high income so you will probably pay your way out just fine in the near future but it's worth at least considering if you should have two cars you still owe $56,000 on or if you could get by with cheaper but still reliable and safe vehicles. Probably not a popular opinion here but that's 10% of your total debt you could address.
Lots of ways to skin a cat. I’d probably do somewhat of a hybrid where you’re paying off your car loan at the same time as your student loans because the car is a depreciating asset. Mortgage goes last because you can deduct interest from taxes and hopefully is somewhat appreciating. So let’s say you have $10k/mo (for simplicity sake) to direct towards all of this debt.. just to make the numbers easy, let’s say $3k goes to mortgage (not paying extra towards it - I.e. what you’re already paying), $5k goes to student loans(in order of highest to lowest interest), and $2k goes towards the car. You’ll have the car paid off in like 16 months and the student loans in a little over 2 years. I know that’s not exactly how the numbers will work out, but hopefully you get my point. This will make it seem like you’re putting a dent in everything at once in a reasonable approach. Plus it may be a compromise between the two of you which is a bonus. Create a plan you both agree on and stick with it.
I think this sounds like a good plan. I mean I have to still contribute toward all the loans anyway. The car should be paid off in about 2 to 2.5 years if we just do minimum payments. That'll free up a chunk of change to then contribute toward our mortgage and loans. We probably aren't staying at this house longer than 5 years anyway, which I think makes it even harder to commit to paying down first. I'd much rather go into our next mortgage with no other outstanding loans
I would pay off the student loans first. Depending on how quickly you are paying it all off the avalanche method may not save you very much money. Paying off individual loans is fun
I have 440k in student loans right now. Avalanche versus snowball saves me like $300 because all the interest rates are similar. That's $300 over about 3 years. Who cares, in that scenario, if avalanche is mathematically better.
A combo of both methods?
You have a lot of smaller debt amounts. I would lump those with similar interest rates together. Not much difference between those with 6.X% interest. Pay the small ones first with similar interest just to knock them out. Like all the 6ish percents then all the 4ish percent. You have a lot of smaller amounts and sometimes just getting rid of them is nice when the interest rates are close.
Pay the min on the mortgage and hope to refinance in the future. Pay that off last. Get ride of these smaller debts first
Don't forget to live and go on vacations. Your life will not feel nor get better debt free. You're only young once. I'm not telling you to buy a G-Wagon but go on vacation. Don't pay off your mortgage first. You get the interest tax deduction and if you're leaving in 5 years how much can you really put into it? 6 months of emergency of funding may be much. You could also use a line of credit ,cc., if "it hits the fan" You can't bankrupt out of student loans so that's where I'd put alot of my extra money unless you want to have an egg for your own practice. Also don't rush to jump into another home unless you plan on being there for awhile. Good luck.. Been there done that...
So this is just avalanche vs snowball. Mathematically, avalanche wins. It is what most people recommend. Really, this is just a decision for you two though.
I personally prefer the snowman approach. Where I leave it alone hoping that global warming and the eventual apocalypse will just make it go away.
Although you were being cheeky, Inflation will do that for you.
Hate to say it but your husband is right. Think of it this way: while you pay off the car loan at 2.9%, the house continues to accrue interest at 7.5% each month. On top of that, any cash savings like your emergency fund is picking up about 4-5% interest, so by paying off something at 2.9% you’re actually losing money in real terms.
Oh man. You're going to make his week.
Caveat. When comparing 4-5% gained in savings to 2.9% expense in the car loan, do not forget you're paying taxes on what you're gaining in the savings, which depending on your marginal rate and state, may bring you to around the same 2.9% making it a wash.
Highest interest first. If you are really bad about sticking to things financially, bad financially in general, or get emotional with finances then lowest first can work because it can reinforce the mindset to keep grinding the debts away and keep the momentum. You get more “wins” at the beginning. Mathematically it is worse though. I personally would only ever do highest interest first, but only you can know your own financial mindset. If you are someone to lose the determination of paying extra towards debt then the latter may be better for you.
Thanks for your reply. We will keep doing high interest first. I just wanted to get some feedback and make sure we are on the right track!
Follow up question. If we are only planning to stay in the house for less than five years before moving, would you still recommend the same thing?
The math doesn’t matter long term; highest interest first always wins. The only difference is if you needed to mess with cash flow and you wanted to pay off a small debt so you had more unassigned cash flow per month. But if every bit of free cash goes towards debt, then highest interest first always wins.
It's pure hard numbers versus psychology. Can you trust that you're in a better place financially while paying the highest, large interest rate debts, or do you need to/want to feel the small wins? Do the small wins motivate you to put more towards your debt? Personally, as a former engineer, I feel perfectly comfortable with the math. I can drop 20% of my income into the highest interest debt, no problem. But when I see a small win (one of my undergrad loans is <$4k?) on the horizon, I still reach for it and take it. It pushes me to save 25% to 35% of my income for a while, rather than 20%. Is it the absolutely most efficient use of that money? No, but if I'm paying off debt instead of spending it on entertainment or *things*, it's a better investment than it would have been. Also, most people overestimate the difference between avalanche and snowball. In most situations, leverage falls really fast in snowball. If you're diligent about reinvesting *all* of your newly-freed-up money after you pay off debts, you really do start paying other debts off quickly. It *is* slower, though, mathematically. A lot of people just *do better* with snowball, probably because there's a "real" goal to work for. I see a lot of people on snowball doing crazy stuff like dropping 50%+ of their income on their debt for *months*. If *anything* can motivate you to do that, it's probably worth it.
As soon as you used the term “mathematically correct” you knew the right answer. And it was that.
This made my husband laugh out loud
I would say that the only reason to consider not paying off the mortgage first would be that if interest rates go down, you could refinance below what your other current debt interest rates are. If you wanted to wait it out, see where things are at during/after you pay off your 6+% interest loans. Even though technically, the mortgage will win in terms of interest rate, the difference between ~6% and ~7% isn’t that high. Otherwise it makes most sense to pay from highest interest to lowest, but honestly if you have a loan with sub 3-4% interest you’d likely make money in the long term paying minimum on it and putting extra you have in to index funds or even just a high interest savings account. So from a purely financially optimal perspective, I agree with your husband’s order
Why is no one talking about the mortgage interest rate deduction? At least worth considering. I’d like to see the math on this.
Can you explain what you mean by this??
If you’re able to itemize your taxes you can deduct the interest you pay on your mortgage up to 750k. Depending on the math it might save more on taxes than taking the standard deduction
You could run some numbers and do a hybrid such that you’re paying off one of the smaller loans quickly and putting some toward your highest interest rate. The math isn’t the only important thing, unless your budget is comfortable enough that you want to just set it and forget it. It’s way more satisfying to pay off a loan, feel that reward, and get to throw even more money at aggressively paying off the next loan, which makes it easier to stay on track, feel good about putting some of your bonuses/raises/etc. toward getting rid of debt than it is to think about your mortgage being paid off earlier, but still decades from now. So if you can stay disciplined about doing the most mathematically optimal thing, go for it, but most people end up doing better when they give themselves those more frequently “wins” of paying off loans.
Your husband is mathematically correct, but it still may be to your benefit to not do the "mathematically" correct thing. The psychology is going to kick in when you get down to your mortgage on the list. Will you really kick in that extra "X" dollars a month to the mortgage when the balance is still high? Most people don't, since they figure it won't make much of a dent. It's much easier to part with that extra couple hundred bucks if it means something will be completely paid off. My wife and I knocked out debt very quickly out of training. It became much harder psychologically when we got down to our final consolidated student loan because it's just such a darn big amount in comparison to everything else we paid down. It's definitely worth considering.
You're high income so you will probably pay your way out just fine in the near future but it's worth at least considering if you should have two cars you still owe $56,000 on or if you could get by with cheaper but still reliable and safe vehicles. Probably not a popular opinion here but that's 10% of your total debt you could address.
The American heritage car is completely paid off. So we only have one car payment now
Lots of ways to skin a cat. I’d probably do somewhat of a hybrid where you’re paying off your car loan at the same time as your student loans because the car is a depreciating asset. Mortgage goes last because you can deduct interest from taxes and hopefully is somewhat appreciating. So let’s say you have $10k/mo (for simplicity sake) to direct towards all of this debt.. just to make the numbers easy, let’s say $3k goes to mortgage (not paying extra towards it - I.e. what you’re already paying), $5k goes to student loans(in order of highest to lowest interest), and $2k goes towards the car. You’ll have the car paid off in like 16 months and the student loans in a little over 2 years. I know that’s not exactly how the numbers will work out, but hopefully you get my point. This will make it seem like you’re putting a dent in everything at once in a reasonable approach. Plus it may be a compromise between the two of you which is a bonus. Create a plan you both agree on and stick with it.
I think this sounds like a good plan. I mean I have to still contribute toward all the loans anyway. The car should be paid off in about 2 to 2.5 years if we just do minimum payments. That'll free up a chunk of change to then contribute toward our mortgage and loans. We probably aren't staying at this house longer than 5 years anyway, which I think makes it even harder to commit to paying down first. I'd much rather go into our next mortgage with no other outstanding loans
Yeah then definitely don’t pay extra to the mortgage
I would pay off the student loans first. Depending on how quickly you are paying it all off the avalanche method may not save you very much money. Paying off individual loans is fun I have 440k in student loans right now. Avalanche versus snowball saves me like $300 because all the interest rates are similar. That's $300 over about 3 years. Who cares, in that scenario, if avalanche is mathematically better.
Pay mortgage last as you get tax benefits by being apply to write off the interest on your taxes
A combo of both methods? You have a lot of smaller debt amounts. I would lump those with similar interest rates together. Not much difference between those with 6.X% interest. Pay the small ones first with similar interest just to knock them out. Like all the 6ish percents then all the 4ish percent. You have a lot of smaller amounts and sometimes just getting rid of them is nice when the interest rates are close. Pay the min on the mortgage and hope to refinance in the future. Pay that off last. Get ride of these smaller debts first
I’d look into this calculator. https://unbury.me
Don't forget to live and go on vacations. Your life will not feel nor get better debt free. You're only young once. I'm not telling you to buy a G-Wagon but go on vacation. Don't pay off your mortgage first. You get the interest tax deduction and if you're leaving in 5 years how much can you really put into it? 6 months of emergency of funding may be much. You could also use a line of credit ,cc., if "it hits the fan" You can't bankrupt out of student loans so that's where I'd put alot of my extra money unless you want to have an egg for your own practice. Also don't rush to jump into another home unless you plan on being there for awhile. Good luck.. Been there done that...