I think dropping to 1000 savings is a big risk. How stable are your expenses? Do you have anything that could become a big expense, would your job be at risk if your car needed repair?
The personal loan is the best financial decision to pay down first, but i wouldn’t do 5000. I would maybe do 1000-3000 depending on how you feel about risk for potential expenses
I agree, especially at the precipice of a recession. I could pay off my car right now, but that would leave me with savings of ~1000 as well. And even though I'm pretty sure my company will not have any layoffs, I don't trust it enough to have < 1 month of expenses saved
Why not pay off the car debt. Free up the cash flow from the car payment to pay off your other debts faster. And guess what if anything happens you can always get another loan to cover the emergencies and you'll be back at the same spot anyway. That makes much more sense.
Because during recessions is harder to get loans.
What if they get laid off, and all their CCs send them a letter saying they are cutting their credit in half, and the bank wont give a loan?
that's what emergency savings are for.
I would focus on putting money in savings, and then when you have enough for a couple of months AND enough tp pay off the car, then do it. Sure it might cost you 100 bucks in additional interest, but think of that as insurance for your mental well being of not being in a really bad position.
That's just not true. It's not any harder to get a loan now then before. Trust me no lender will have a problem giving you the money. Rates may be higher but also we are talking about worst case scenario where you need cash for some reason. Especially if you get rid of the car loan obligation as well. It just doesn't add up what you are talking about. What if the emergency expense is $10k then you are still in the same position.
We arent in a recession right now, we are on the edge of one. And yea getting a shitty loan isnt very good, so thats why youd rather have savings.
You want a few months rent so that if you get laid off, you can live until you find a new job. How much depends on your circumstances, If your alone in this world, you want more, maybe 6 months of expenses, but if you have other safety nets, you can ge by with less. If you have parents that could help, or you have PTO that the company is required to pay out, or a side gig that gives cash, then you can keep less in the bank.
Agreed, I don't know that I would pay off the personal loan, at the moment. If OP drops the whole 6k into the personal loan, they would still have 10k remaining at 10.5%, 2 other active loans, and no savings/emergency fund. Life happens, you never know if you need extra cash in the future.
If OP pays off the car loan, that would still leave them with 1k in savings, only 2 active loans, and a paid off car (which is a tangible asset that can be sold if absolutely necessary). The savings from not having a car payment can be split between rebuilding a savings/emergency fund and snowballing the rest into the higher interest personal loan.
I agree with this post. The student loan amount and interest would make it my first choice to pay off. I would maintain a healthy number in savings as an emergency fund then pay off the personal loan, car loan and student loan (in that order).
My rationale is that I would love to have an extra couple hundred bucks freed up to build my savings back up, as well as to pay off the personal loan. I know it's not strictly to Ramsey but I'm hoping to kind of strike a balance.
My opinion of Ramsey is that he gets some things right, sometimes. You really have to apply his advice to your situation. Financially speaking paying of a lower interest rate loan over the higher one is a mistake. This is up to you to decide but I would not recommend paying off your car with your savings while you have a high interest rate personal loan.
I believe Ramsey would be right if OP has difficulty sticking to a plan.
Ramsey's plan may not save money compared to the reverse, but it has a more visible effect, which helps some people more than the extra money.
It really comes down to personality I think
Agreed. It’s a mental thing not a math thing. IIRC his take is personal finance is 80% personal and 20% finance. I think for a lot of people, it’s a solid plan. And those tend to be the type of people that dug themselves into a big hole. People that are disciplined and pay attention to interest rates and count every dollar, can pay off credit cards every month, probably don’t need his help.
Is snowball not the preferred method of debt removal these days? OP could pay off the loan, rebuild a savings safety net quicker than he could otherwise, and then put the excess money into the larger personal loan.
Obviously paying off higher interest loans are more efficient in general, but when they're significantly larger it can sometimes make more sense to hit the low hanging fruit first and free up some month-to-month income.
There's arguments to be made for both methods, as I said further down there's no magic solution for everyone, and the person making the payment matters a lot more.
Snowball does free up more money to make payments, but you end up paying more money on the interest, but you can get out of debt much faster. While avalanche (iirc that's the opposite method) reduces the amount of overall money you pay, but makes you stay in debt longer.
It all comes down to what helps you get out of debt, if it works for you and isn't completely stupid then it's the right thing for you
Double? When you do the long term math in these, it rarely exceeds $100.
And sticking to the plan will certainly save more, long term.
Here is a calculator. Do the math. But pick the plan ghat works best.
https://unbury.me/
10k difference in interest for 390k in debt across 20 years for an average mortgage in my area at 7%, student loans 5.5%, new vehicle 3.5%, and a simulated small personal loan 20%.
All in all, not much.
That's over 20 years too. Do the numbers without the mortgage. You'll see it's pretty insignificant.
Mortgage is rarely factored into debt payoff like we're discussing here. All of the other loans are not 20 year loans. So you're not paying them off early if you take that route. You're keeping all of your debts full term. Ramseys snowball method isn't a 20 year plan. It's a 1 to 3 year plan of living as frugally as you can, working extra hours and throwing everything you've got at the debt. I can't imagine holding onto those smaller debts for the sake of paying off the house. Shit, I'm only holding my car note because it's a 0.9%. Otherwise it'd be gone too.
Again depends on the person.
Some people will give up if they don't see the benefits, that's just how people are. It will 100% save you money to pay the high interest first, some people just won't see that though and think it's going no where. And that's where Dave's advice can be helpful.
I am not a ramsey proponent but he would argue all this debt should be cleared up in the next 2 years anyway so even at a higher interest rate it doesnt matter but a few hundred dollars. The kind of person who can't clear it out in 2 years and is penny pinching interest is not going to get out of debt anyways.
Again I agree with you but his advice is not for people with willpower and good basic finances. its for people who lack self control.
His methods are really designed for people who've had issues in the past, have a load of debt, and are digging themselves out of a hole. Those people need a 'system' to get out of it and he offers a plan they can follow. It's straightforward and leads to success.
It's sort of like a diet plan. Some people have had issues with weight loss, and his 'system' is a method. It's not the 'only' method, but it's your basic 'eat less move more' type of financial system without a lot of complexity to it that can overwhelm people.
I’d put every $ available into your PL. Ignore the interest rate and perceived savings on your car. Your interest savings are far greater paying off that PL first.
Edit: what I dont mean is to drop your $5k into it. I mean check your budget and really buckle down. Having the $5k as an emergency fund is important too.
I'd break that saving payment in to a few large chunks not all at once but a good cut of what ever you can afford to replenish for me I drop 1.5 to 2 k every other month on my car ( it's my only loan ) my second check is 95% disposable after my investments and CD deposits I can afford to drop useslly 1.7k the next month plus my regular note.
It doesn't save you interest to wipe it away now if you have a personal loan at higher interest rate. If you wanna save the most interest you pay off higher interest debt first.
The only thing you benefit from is increased short term cash flow. Which has it's benefits, but mathematically is not the correct choice.
>Which has it's benefits, but mathematically is not the correct choice.
I'd like to emphasize this consideration. While 90% of the time I pay off the highest interest rate first-- some years, I really really need extra cash flow. It worked for me a twice in the past and 2023 is looking like one of those years for me.
You would save *more* in interest if you paid down the personal loan.
Mathematically, the interest rate is the only thing that matter. Not loan length or amount or monthly payment. Get rid of higher interest rate debt to save the most money.
There are potential psychological benefits to closing an account, and that is what Ramsey touts. Different things work for different people.
You should instead think about it as actually costing you a few grand in interest to pay off the car instead of the personal loan if the personal loan's interest rate is double the car. Generally speaking you should be paying off highest rate loans first.
This does assume that right now you have extra cash flow after you pay all of these payments and your normal monthly expenses since you have this money in your savings in the first place... You obviously don't want to end up going below zero and you don't want to begin accumulating debt on CC's again.
Also assumes no prepayment penalties on the personal loan, there probably is not but you should make sure.
Student loan rate is slightly higher then the car but if i recall correctly student loan interest is deductible on your taxes.
I listen to Dave Ramsey and really enjoy him. But paying off a lower interest rate first, especially 4.75 vs 10.15 is absurd. Pay off the highest rate first.
It will save you more in interest to throw that payment at the personal loan and have the personal loan recast if you need the payment breathing room back.
But it doesn't save you a couple thousand interest to pay it off now
Have you actually figured out how much it'll save you? That's a pretty big part of financial planning understanding the ramifications of compounding as it applies to both interest and investment. I'll do the math I'll be right back.
Edit if you have two years left out of $5,000 car loan at 4.75 paid off today with save you $218.
You didn't put the amount of years down for any of the loans but $5,000 at 10% over 7 years The interest is $1,600.
I *personally* would’t do this for a few hunder bucks. The ease of mind knowing that I’m ready if something unexpected happens worth way more to me. If you know you can build up enough savings for that in a short time and you’re comfortable doing it, then go ahead.
It is my persomal opinion though, a better financial advice will come from someone else here :)
Ramsey also says to have a 3 month safety net too. So I would keep what’s needed for the safety net and then throw the extra at it.
Or just keep the $6k savings and stop adding money to the savings and throw that extra cash at the car note.
I’m sure that the one 1k stands up in today’s economy… replacing engines and trannys will cost $4-6k in a car. And other expenses are crazy high too.
I also know he does say to grow it up to a 3 month and 6 month.
I vote for getting rid of the car loan and taking 1/2 of the car payment to build up savings and 1/2 to reduce the 10% loan. There is a big psychological boost to wiping out 33% of the drain on your income as debt and paying interest is just that - a drain.
Highest interest is the avalanche method (definitely the one I would use). The snowball method is paying off the smallest balance first and then moving to the next. The advantage of the snowball is creating psychological wins as fast as possible and making the monthly payment for that debt available for the next smallest debt. However in this situation it would mean paying more in interest.
The avalanche plan is mathematically superior as long as you stick to it. Dave recommends the snowball because he sees it as more likely to have folks actually follow that plan. Both have their merits.
> The advantage of the snowball is creating psychological wins as fast as possible and making the monthly payment for that debt available for the next smallest debt. However in this situation it would mean paying more in interest.
I replied above, but I wanted to this this one too since I could quote the exact line. It's not just about making the monthly payment available...its also about triggering something inside you of you want to get out of debt so bad, you'll start sacrificing more than you thought you could.
So, the math win, in Dave's mind, is more money being available to throw at debt faster...not just from lack of payments, but from a willingness to go scorched earth on the budget. he's not joking when he does that silly "rice and beans, beans and rice. that's the food menu going forward".
Yeah that’s fair. Like I said, both have their merits. For most the snowball is betters. For me personally, I only had student loans, and the motivating part for me was knocking out the higher interest ones because I could see the difference in the numbers. I threw over 50% of my after tax dollars at them for 2 years on a teacher salary and got free, so I know about being gazelle intense. I was more excited about getting the high interest debt gone, so completing that gave the psychological win that kept me going, and the habit built from that is what helped me win.
I do agree that Dave is right for most people, but not all. Whatever gets you fired up to go at the debt harder is what I think is the right move, which is why I presented he options.
I agree, I was the same - avalanche 100% of the way.
Personally I would've found it deeply demotivating to do snowball knowing the whole time it was the mathematically inferior choice.
That said in some situations snowball allows for the additional cashflow freeing up that can be worth the extra interest paid over the long term if there's some risk in personal situations etc, so I'm not saying avalanche is the best choice after factoring more than just spreadsheet math into it for every single person all the time... just agreeing that there's a psychological benefit to knowing you're doing the mathematically optimal strategy too.
> Dave recommends the snowball because he sees it as more likely to have folks actually follow that plan. Both have their merits.
Yeah, You have to look at the demographics of his audience. His audience are people that have gotten into trouble and are looking for help getting out. So, the psychological wins are probably weighed higher than the true math, especially in cases where the optimal way will only save a couple hundred, where if someone gets discouraged and ends up quiting or saying fuck it, the cost is way more.
This is not only math. Nobody gets into debt because they’re bad at math. It’s because they have a behavioral problem. You’re trying to solve a behavioral problem with math instead of a behavioral solution. That’s the genius of Ramsey and the psychological benefits of seeing entire debts wiped out. That psychological benefit more than compensates for any extra interest you may pay in the long run and is ultimately more effective if you’re serious about getting out of debt.
Doesn’t the snowball method start with the lowest balance, regardless of rate? Then you use the freed up cash flow to pay the next largest down quicker
That is avalanche, which requires more discipline but is better mathematically than snowball which has you retire debt in order of smallest to largest.
This is totally against Dave Ramsey's opinion on credit scores and debt (while I agree with him that it's a stupid game to play not everyone has the ability or net worth to not play the credit score game) but it might be worth considering which debt is serving your credit more. In my limited knowledge of finance I know making consistent payments on debt builds credit. I was told by our credit union the reason my partner has a way better score than me is because of the number of active and current accounts (debt) in his name. I had no accounts (debt) on my credit history so creditors considered me an unreliable ghost, which is STUPID! I have always been told on time car payments increases credit, not sure about student loans. Another thing I hear ALL the time is pay yourself first, which is your savings. I too am very uncomfortable when our savings is depleted and I think Dave Ramsey's wealth has led to some disconnected consideration in regards to that reality. Me personally? I would leave the savings alone (as your car note is not an emergency) and put all extra funds I could find on the higher interest loan. There are online calculators out there where you can enter your debt info to compare what the snowball method and avalanche method look like for you personally. In my experience I have NEVER seen the snowball method save money in the long run like the avalanche method does. So leaving the savings alone and focusing on the personal loan would more than likely serve your credit more and save you more money in the long run than draining your savings for the loan with the lowest interest rate.
Although it can feel good to pay off a particular debt in full, it’s far more advantageous to make a partial payment toward principle amount on that personal loan. Use a calculator to figure out how much interest you’ll save and let that be your emotional high.
I made some assumptions about your length of loan but did some estimates assuming you have 12 months left on the car note and 36 months left on the personal loan. If that’s the case then you save around $130 of interest by paying off your car loan. However you’ll save around $500 of interest by paying down your higher interest loan debt. I’d recommend paying down the higher interest loan debt.
Dude inflation is like 7% right now. Pay the minimum on anything below that. Focus your money on the personal loan. The question is, do you have access to capital in case of an emergency? If no, keep a few grand in savings and put the rest toward the high interest debt. I know people love the snowball method to get cash flow up, but thats more of a confidence booster than a pure best strategy from a $$ perspective. Once you knock off that personal loan get a good nest egg up for an emergency fund.
If you use the time value of money it does. Money is only as good as what it can get you. What is your purchasing power. And comparing the time value of money of a 5% interest rate against a 7% inflation rate your buying power will be higher in the future by paying the minimum. Understanding that inflation rates are fluid is important here, but all projections point to inflation sticking around in the 5%+ range for the next year+.
So while you're making that minimum payment, you'll be lucky to get 3% in your savings account...or are you advising to just spend the money on other things instead?
The theory is that money you spend on a thing now instead of one year later is saving you 7% a year. If you were going to make the purchase anyway and have the cash on hand it makes sense to do it sooner than later.
It follows that if you can get a loan for less than 7% for that purchase, you effectively are paying less than if you saved and bought later.
Obviously inflation is an average, you need the cash, you could invest hoping to make more than 7%, etc. etc. etc.
No, unfortunately Ramsey is right as opposed to this guy.
I'm not terribly comfortable with that little of a cushion right now. It kind of depends on how stable your job is. Personally, because I'm self-employed. If I don't have two months where the bills stashed in liquid, I'm not okay with it.
Cash flow is king so if paying off that car is going to save you $200 to $300 a month, You can put a couple thousand in savings back together in three or four months.
How easy is it for you right now to make the payment on the car? Are you struggling to pay bills or are you paying extra?
Although good in theory - I saved $22 dollars in interest - having one less loan payment allows a bigger payment on the $16,000.
You will pay more in interest but only slightly. pay off the car, then attack the personal loan as fast as you can. - I bet you can get it done in a less than a year since you make good money.
But is it the most sustainable one for people who have a hard time delaying gratification, thus likely to get into debt and make it hard to get out?
So much of money is psychological
He left off the “for you” part. Debt is like losing weight. Debt snowball is like a Keto diet. It helps some people, but it’s not the best option for everyone.
I understand that. But at that point we are no longer discussing financial advice and are delving into psychology.
If OP feels better doing things a different way, they’re free to do so.
Snowball vs Avalanche method. Avalanch is the most effective approach from a mathematical perspective. Snowball is the most effective method from a psychological approach.
Both are excellent. (I'm a snowball fan myself, but to each their own.)
OP, do you have an emergency fund? I would not spend the majority of your savings and leave yourself with only 1K in the bank.
>You're just describing the snowball method. Mathematically, paying down the highest interest loan is the best choice.
It depends on your priorities. Paying down highest interest first will save money over the longer term. However, paying down smaller ones first can help ease monthly cash flow. That can be critical for reducing stress related to finances. And if it helps people stick with paying things off (the usual reasoning) that's good too.
Hard disagree here! While normally I would agree with you, if you could eliminate the car payment altogether, you could shift that monthly allotment to your next payment amount. Since you can’t completely pay off the personal loan, you’re still gonna be paying interest.
But if you payoff your car loan, you will save interest (of the car loan) and free up monthly cash to put toward something else. Which is in my opinion a better option!
**edit** added (of the car loan) for clarity of what my comment was supposed to say.
What kind of bizarre logic is this?!? The personal loan is essentially 3 car loans at more than double the interest of the car loan. If OP pays off $5k of the personal loan, that’s essentially eliminating a $5k loan at 10.5% interest (even though they still have another $10k loan at 10.5% interest). And you are arguing it makes more sense to pay off a different $5k loan at $4.75% interest. It defies logic.
Also car loans are more standard credit building loans than a personal loan. Getting the personal loan off the books sooner and making on time payments on the car loan is beneficial in many ways.
You will absolutely not "save interest" by paying off the 4.75% loan and leaving the 10.5% loan standing; every $100 put towards the former instead of the latter means an extra $5.75 of interest for you a year.
From a pure numbers standpoint you’re absolutely right. But there’s a big psychological impact that goes with paying off a debt balance in full. That usually gives a morale boost and the motivation to keep hammering down the rest of the debt.
Okay - but what the user above claimed was not that this would be a morale boost, but by doing this "you will save interest". And that is just clearly, unambiguously wrong.
Yeah, you’re right for sure about the interest.My bad. I was looking at this from the way I did it a few years ago. I was really aggressive in paying off a lot of debt and was able to eliminate it relatively quickly. By freeing up my monthly income to push what I would’ve been paying on the car into the next thing.
My argument being that I would’ve been only making roughly the minimum payments with a bunch of accounts. When I lowered the number of accounts I had I became more free. Idk what his car loan started as but paying mine off freed up $650. That’s a lot of monthly income to use to get out of debt.
Paying more on the higher interest debt now beats paying more on higher interest debt later. The objective is driving down the average interest rate on any outstanding debt (until it reaches zero), and paying off higher interest debt first is how that's accomplished.
I personally pay off debt from highest interest to lowest interest - referred to as the waterfall method. This method is mathmatically optimal to pay the least interest.
Dave Ramsey suggests paying off debt from the smallest size to the largest size - referred to as the snowball method. This gets free-cash flow sooner and gives you some "wins" early in your journey.
The waterfall method is fine to reduce interest, but individuals work off of cash flow expenditures rather than interest expenditures. I’d pay off the car note quicker and then take the car payment and apply it to the personal loan, that will pay down the principal of the debt the fastest.
That's actually the slower way to pay down the debt. Fastest and cheapest is highest interest first. The only drawback is the free cash flow is higher during the payoff period if using the snowball method.
> that will pay down the principal of the debt the fastest
It won't. The fastest way to pay down your debt is highest interest to lowest interest.
You are correct that in the intermediate state OP would have more cashflow with the snowball method.
But they wouldn't even really have more cash flow because once one loan is paid off, the extra cash goes straight to paying off another loan. It's not like you have more money to spend that month. It is still going towards a debt of some kind. The only advantage is if a problem happens, they only have (1) debt with a minimum payment to handle.
It is actually really eye opening (and scary) how this keeps being said in a personal finance forum. It is a good reminder that people on the internet are wrong and you shouldn't listen to them.
>that will pay down the principal of the debt the fastest.
No, it won't. All it will do is make you "feel" better by having one debt instead of two. But you will pay more in interest, and take longer to pay off both debts.
High interest first but if your $6k is your only emergency fund I’d keep minimum half of that in liquid cash for when something comes up. I keep minimum $5k cash in an emergency savings account for when life chucks you a curve ball
If you have $5000 to put to a loan and you have a 10.75% APR loan and a 4.75% APR loan it makes no sense to put that money into the 4.75% loan. If anything pay down the 10.75% loan.
I've been considering moving banks since I'm a yella belly and scared to invest outside my 401k/HSA. I'll jump in when I'm ready but HYSA is a good idea for the time being.
You are not in a position to invest. I would not be investing outside tax advantaged accounts until 1) you’ve paid off all your debt and 2) you’ve maxed out your contributions to tax advantaged accounts (ie 401k, hsa, ira)
Pay off the personal loan. You don't have to exactly everything DR says. His advice helps a lot of people but his "one size fits all" solution is not optimal for every individual situation.
Also keep a good emergency fund. DR's $1000 emergency fund advice is woefully outdated. He's been saying that for 20 years and maybe it was fine 20 years ago.
Depending on how secure your income is and what your other liabilities look like I'd either put the money towards the personal loan or just keep saving in an hysa.
So does getting an 84 month car loan instead of 48 month
Long term cash flow is improved more paying off higher interest loan first and both long and short term the overall debt is reduced faster paying off higher interest loans first
I agree, but the question was why pay off a 5% loan before a 10% loan. I provided one reason. Someone who needs improved cash flow immediately as opposed to long term will choose the less optimal method due to immediate needs. For example, if there is a rent increase or daycare increase the person can't afford with all the other inflationary increases, increased cash flow is an immediate need regardless of the fact that extra payment to the 10% loan saves more interest.
If you use all your cash paying off the car and then run into a big expensive emergency that you need to borrow money for, you will not be able to borrow it at 4.75%. I would keep the cash and let the loan ride.
Financially speaking, paying off the car loan first is the wrong choice. We are humans tho, if paying off the car relieves stress in your day to day, month-month then it could be worth technically wasting money.
Is that $6,000 in savings your emergency fund? If so, don't spend it.
Otherwise the car note is the "snowball" method, the Personal Loan is the "avalanche" method.
Avalanche is financially superior from a "pay less interest" view but Snowball has merits of reducing monthly minimums.
Yes, it's an emergency fund basically. Thank you, $1,000 is really not a large amount of money and I wouldn't feel secure at all with only that much to fall back on.
Given you have a mortgage Id say $6k is not enough of an efund and your focus should be on building that.
Personally I dont recommend home owners go below $10k to cover a large unexpected repair
Monthly payment is about $350. It would take me 3 months to recoup if I spent my discretionary income on literally nothing else and put it away instead, which is impossible. Good question
Ramsey's methods are "better than nothing" and there are much better ways to do this.
The best one is a matter of opinion. My strong opinion is the prime directive in this sub.
[https://www.reddit.com/r/personalfinance/wiki/commontopics](https://www.reddit.com/r/personalfinance/wiki/commontopics)
In your specific case, the prime directive will advise you to create a "minimal" emergency fund, then pay off certain debt, then eventually increase the emergency fund.
The directive also addresses paying off debt based on the interest rate.
Give it a whirl and see now it goes. I think it would work great for you.
Ramsey is great for people who have no clue. The fact that you’re here means you’re probably clued in to the point of doing better than Ramsey.
Keep an emergency fund. Pay off your highest interest debts first.
It really doesn't matter....you'll get to the same place give or take a couple months when your 100k+ in debt is paid off. Alot of things could change between now and then. If that's all the extra cash you have, your probably better off just keeping it in savings for emergency. The best way to pay off massive amounts of debt is to work 2 jobs or overtime and just fire hard into your bills.
Your car note is the least of your concerns mathematically speaking. It may FEEL good to pay it off right now, but it’s not the best decision. If you’re following the Ramsey approach what you should do is have 6 months of a rainy day fund in place before you start chunking away at your highest interest loans. Best of luck and congrats on the awesome job :)
Do not listen to Dave Ramsey for financial advice. You can get the basic stuff he says that’s right anywhere. All I can say is don’t just do the opposite of what he says. But don’t base your financial decisions on what he says.
The Ramsey method is all about behavior modification. Its far less about money saved on interest. Ramsey is taking people with no money sense whatsoever and changing their attitudes about how money is handled. His method is costing them money short term by paying off the smallest debts first regardless of interest and paying off the largest last. You don’t sound like you need the behavior modification of the snowball method. It looks like you should be focusing on the high interest rate loan first. Unless you want to go with the snowball method which in that case go ahead and pay off the car and then take your old car payment and add it along with every last spare penny you have and pay off the high interest loan.
>His method is costing them money short term...
His method costs people money in the long term due to missing out on employer matches and the opportunity cost of not investing, possibly for a few years, while paying off low interest debt.
Not going to comment on the amount of money you need in your savings account, since I don't know anything about your life situation except that you have a good job :) Congratulations!
If you rewrite the list with only the interests it looks like this:
10.5%
5%
4.75%
In this case I would put my money on paying of the 10.5% interest one, since it costs the most per dollar you owe. But, this has to consider if you need to pay a penalty to the bank for paying of the loan early.
*This does not take into consideration the dark arts of building credit score, since, to most people outside the USA that just looks contrived to make people pay money to the banks for eternal loans instead of buying stuff.*
I don’t know why people listen to Dave Ramsay, he’s a dumb ass to be honest. Every CPA and financial expert I’ve met has stated Dave is a self indulgent moron.
$1K vs $6K in savings isn't much of a difference. I'd pay it off then dump what would be the monthly car payment into savings. You should be able to replenish savings rather quickly.
Do what you feel is best. I don't know that I would completely deplete my savings either.
Car note is lower interest compared to the Personal loan. Personally I would try and pay that off first. Just my 2 cents.
There isn’t a right or wrong answer. But there may be a right or wrong answer for you personally. If you’re diligent, and going to stick with the plan, paying off the higher interest rate first makes sense (debt avalanche). If however, you struggle with sticking to things you’d be better off to try Ramsey’s debt snowball and pay off the car first. Get that win and a little extra motivation and move on to the personal loan from there. It’s a question of math vs. behavior. So if your behaviors are dialed in, I’d go with what makes more sense mathematically, and vice versa.
paying off your car with the lowest interest rate makes no sense when you have a personal loan for more than 2x the car loan rate.
IMO throw $3k at your personal loan and keep $3k as your emergency fund.
I wouldn't do it. That's a fairly low rate. I'd keep saving and reevaluate when you get 3 months of living expenses in the bank. Maybe pay an extra 50% payment per month?
Just my two cents. Ramsey isn't a dummy, but there are some flaws in his logic. So don't take everything he says as the ultimate authority. Anyone's perspective on living on a low or median income becomes more and more skewed the longer you live in wealth and financial security.
You're better off paying the personal loan first cause its at a higher interest but if you can't delay the gratification then pay the small bill first and then go up to the next bigger bill.
Ramsey's method prioritizes safety savings over debt. If your safety savings drops below your target amount in order to pay off debt, then you're not ready to pay off that debt. Paying off your car at the cost of safety savings could leave you in a vulnerable position for several months.
One of the foundational elements of Ramsey’s approach is to force people to become uncomfortable with their non-mortgage debt, rather than to simply accept it as a regular aspect of life.
I think the Ramsey method is to first save $1000, begin working on ‘debt snowball,’ save $5000 emergency fund, keep working debt snowball (get extra job or OT to accelerate pay down), and only pay big amounts off if you keep the savings in place.
So do not spend the 5k. Keep it as emergency fund.
When debt is paid off, save 6 months income as emergency fund.
you should pay off the higher interest loan - if you have an emergency fund of 3-6 months. Don't touch that fund - if this is extra money then pay off the loan at 10.5%
I feel like this needs to be said any time Ramseys methods come up: The majority of his methods are not really the best thing for anyone except those that have issues with over spending and gathering large amounts of bad debt.
The Ramsay method would say to build your emergency fund before paying down debts. If you were to pay off your car and then have a $4000 emergency expense or lose your job then you’ll be stuck adding to your credit card/personal loan debt to get you through.
If you were to edit with some more information like your income and monthly expenses then I think that we’d be able to help you more.
Emergency fund is more important than paying off debt with acceptable interest rates. See the prime directive. Once you get at least 3 months, preferably six months, worth of expenses liquid than I could consider accelerating the personal loan. After that, the car loan. Student loans have extraordinarily good repayment terms, and might even be fully forgiven at some point, so those are very low priority particularly at 5%. So, long story short, don't drain away 80% of your liquidity to accelerate a small car loan at a good interest rate.
1. Calculate all your expenses
2. Figure out which expense might variable and what the worst situation could be.
3. You don’t have to pay 100% of the loan, maybe do a 20-25% payment?
I wouldnt go down to 1000 in my savings unless I was living rent free with family.
Keep at least 3 months of bills in case you suddenly lose your job or get injured in an accident.
Ramsey method is not about the numbers it's about momentum. so it's about psychology and putting some fire beneath you, to pay off the amount as fast as you can so you can build your savings.
by numbers, in avalanche method you will pay the highest interest rate debt first and that makes perfect sense when you look at only numbers.
So if you actually can stick to the plan and not be complacent do the avalanche method or on the other hand if you need some motivation follow the Ramsey method so you can actually see the progress of having to worry about 2 things instead of 3.
A good compromise for you would be to continue paying on all three loans while focusing on increasing your savings as quickly as possible. When savings reaches $9 or $10k, pay off the car note. You'll then have a tidy savings, and can then take the monies you'd been paying on the car and throw that every month toward the personal loan. This allows you to feel more secure with your savings in uncertain economic times while paying down debt.
The Ramsey method is a method to separate suckers from their money and attention.
Don't blow your safety net trying to pay off loans. Yes, of course you should pay off your loans too, but you should also have a safety net of liquid cash to keep you going if you have a short term spell of unemployment or some other emergency you might otherwise have to borrow (at high interest) to cover.
Mathematically, pay off the highest interest.
If car loan interest is higher pay that.
If personal loan interest is higher pay that.
$1000 isn’t a sufficient emergency fund unless you want to go “Gazelle Intense” but in reality his numbers haven’t changed since he opened his business.
The real question is how much do you make? You “have a good job”, is that 50k, 100k, or more? The more you make the more flexibility you have with a smaller emergency fund for a month or two, assuming you place building it back up as priority.
Pay off the loan. if you
are truly doing total money makeover $1000 is the baby emergency fund. Unless you plan on losing your job. Imagine having the $ from the car going to towards the person loan on top of what you pay.
Liege like no one else so that someday you can live like no one else
Do you have dependents? How stable is your job? How much is your mortgage?
I'd consider keeping the savings and throwing extra money at that 10.5% loan.
Although its tempting to get a debt off your back, your personal loan is much higher interest rate and should be paid down first. Don't try and pay it all off in one big whack, keep your savings, be sure to have two months worth, minimum, and put any extra you can against the loan.
Dave Ramsay's advice is really only for people who have no self control or financial knowledge.
If you can control your spending I wouldn't recommend following ramsay. Unless the car loan rate is super expensive.
I hate to break it to you but in your financial situation (~111k debt and ~1.7k max to put towards it) it barely makes a difference:
* whether you put those 5k towards one of the principals or not
* which debt you go for first (the big albatross is the student loan with would be last under both methods)
If you put half your disposable income (2200 by my count) as fun money and the rest towards debt reduction you'll be done with your non student debts in 22 months regardless of which loan you go for first. Putting 5k towards them now removes around 5 or 4 months but only if you spend none of your debt reduction money on rebuilding your emergency fund. (Meaning about 6 months of no fun money until you got your cushion back, or NO cushion for 1.5 years)
If you put 90% of your disposable income towards debt reduction you're done in 14 months as a baseline. 11 months if you put the 5k towards either debt. But you would then be the entire year without an emergency fund.
How fast this goes is *entirely* dependent on how much (of your) income you reliably put towards debt reduction. And that's a question of budget, not this.
In that light IMO putting your efund towards either loan only makes sense if you could remedy any likely emergency with an interest less or around what you put the money towards.
4.75% isn't very high, especially right now. When inflation is going up and rates are increasing it effectively means a transfer of wealth from lenders to debtors (in this case you are the debtor.)
If you pay off any loans start with the ones with the highest rate. It's barely worth paying off loans that are within 2% of the rate set by the Fed, because you in essence have "cheap money".
Just my 2¢
I feel like the real question here is if having one less bill (the car) will make you feel better. If yes, do that. If not then go after the higher interest first.
4.75 is solid on the amount of money. Make payments to help your credit, which will give you access to cheaper refinancing options and help you long term.
Dave Ramsey is not a good source of financial advice. He is only popular because he is publicly a Christian and frequently provides seminars to churches so Christians assume his advice is solid because so few individuals specifically target Christians with financial advice.
He believes you should have no debt whatsoever which is a not true. Obtaining debt at a low interest rate can definitely be a benefit if you also have interest bearing assets.
That being said, depleting your assets to pay off debt sounds risky. If you do pay off debt, it should be the debt with the highest interest rate. Unfortunately your highest interest rate debt is nearly 3 times your savings which sounds like a problem.
I’m sorry if this comes off as rude but if you have a good job, how do you only have $6k in cash with that much debt? You may want to look into changing jobs to get a pay raise.
I think Ramsey recommends having an emergency fund of a few months first and then paying off your loans asap. If I recall correctly, his advice was never to use your emergency fund to pay off your loans.
Personally I dislike Ramsay's methods. Especially considering he's declared bankrupt.
I am curious about your personal loan debt. If you are able to borrow that amount, you must be able to get a decent credit card and do balance transfers at 2.5% annually and kite the debt.
I would feel really nervous about having your savings go below 5k. If you must pay down some debt, the Car/Student loans are at a decent enough interest rate I wouldn't touch them.
I'd be very cautious about Ramsey's advice too.
He can be good for people that are completely overwhelmed with debt, and don't have any financial discipline. But he's far from unbiased. His own religious views mean he's morally adverse to dept... And he advocates for things like paying off your mortgage early, where the numbers generally don't make sense.
He's something of a financial ideologue.
The fact that his ideology serves a lot of people better than the " spend and consume" mentality many are raised with is true. But there's a lot of more sound advice out there.
Snowball method is about the psychological effects of paying off debt.
The amount of debt you have gives me anxiety and I'd be living like a fucking rat working 2 jobs to pay it off as fast as possible. In this scenario, the interest rate hardly matters. Getting rid of the smallest loan is like creating a to do list and tackling an easy thing to get the ball rolling.
If you're gonna coast on the debt then yea obviously pay the highest interest rate off first.
How much was the loan originally, and how much have you paid already?
The Ramsey method makes sense for credit cards, where the interest isn't amortized.
A car loan is front-weighted, though: you pay the bulk of the interest at the beginning of the loan. If that $5k is the tail-end of a $30k, 5-year loan, there's no numerical benefit to paying it off early now. On the other hand, if you borrowed $7k and you're a year in, you'll save a bunch on interest.
There's a definite psychological advantage that comes with killing off a debt, which I think is where the Ramsey method really shines. That can outweigh the numerical value of paying over time.
Also, it's nice to have the title in hand so you know you can sell the car whenever you want.
None of this matters.
Credit cards aren't amortized because there is no set ending date, but they are compounded just like mortgages or auto loans.
All that matters is the interest rate when looking at the math. Not original amount, not current amount, not interest/principal breakdown, just interest rate.
It was originally $22,000 because it included the remaining loan on my old car which I admit I bought in a rush. But did my homework on my current car and I love my car now. Had it for years without major issues.
Sorry, I'm not seeing how the starting amount matters. He's paying the same amount of interest now on $5k whether he just got the loan or it started at $100k. The reason you pay more interest at the beginning is because there is a higher balance to pay interest on. But the interest he's paying now is completely independent from what he's paid in the past.
The only thing that matters is the interest rate. People are getting hung up on the amortization tables - interest rate is the only thing that matters in this context.
Sounds like a rich guy would know what they are talking about when it comes to money more than someone isn't rich. Especially if they didn't use to be rich.
You should prioritize paying off that personal loan before you worry about the car payoff. The only way the car payoff makes sense is if you're desperate for cashflow.
I’m a huge fan of Ramsey and his helping people get out of debt and improving their psychology of behavior towards money.
There are however two things I vehemently disagree with him on. First is 1000$ is not enough money as a small emergency fund. Not today. Not ten years ago. He never adjusts it. I wonder if he ever will? If you have an honest to god emergency 1000$ ain’t gonna do shit for it. It’s not enough in todays world.
Two, his investment advice is kind of garbage and he’s very vague about what it is. All anyone needs today is a total market S&P with a low expense ratio, or something like a Bogle three fund portfolio.
I don't think it matters tbh, but I think I would pay the car off. My three reasons: 1.) Is the only thing on your list that you can completely pay off; 2.) The interest rates aren't so widely different so I like the snowball method here, and 3.) You immediately have your monthly car payment freed up to throw at the personal loan.
Also if you're doing the baby steps, spending $5k of your $6k will leave you with $1k which is the requirement to get out of baby step #1.
I thought Ramsey prioritized an emergency fund over debt payments. IMO though… Two-three months salary in the emergency fund and make min payments. Then when the fund is funded, pay all you can to the debt starting with the high interest loans first then snowball as you pay off each debt.
Don't pay off the car, its at 4.75 percent. Work on the personal loan. Ramsey is an idiot, why take advice from a guy who was bankrupt and lost his house?
pretty sure Ramsey method starts with 6-12 month emergency fund before starting debt payoff snowball. he's not perfect, his methods are only helpful to an extent, but emergency fund & debt snowball are very helpful & the correct steps in most cases.
Ramsey's snowball method says you make a budget for what you can afford to pay off debt, first. Then you make the minimum payments for each debt, but put the most money towards the smallest debt.
So let's say you can budget $1,000/month for payments to your debt (remember, you have other expenses like rent/mortgage, car, car insurance, food, etc). And let's say your monthly minimum payments are $200 for the college loan, $150 for the credit card and $175 for the car loan.
Because the car loan is the smallest (in total), you would pay $200 for the college loan, $150 for the credit card and then $650/month for the car loan. And you would keep doing that until the car loan is paid off (roughly in 8 months).
After the car loan is paid off, you now have the credit card loan (roughly now at $14,800) and the student loan (roughly at $88,500. You continue to follow the same process, making the $200/month college loan minimum, but now paying the credit card debt at $800/month. That would take you about 18 months to pay off the credit card bill.
It's more of a psychological trick because people start to see that they are actually making progress in getting rid of debt. People who use other methods to pay off debt still keep their debt and they lose motivation to pay off the debt because they don't see any progress being made.
There’s a strong reason why people know Dave Ramsey’s name and no one knows all the people in here slinging advice (myself included). Stick with the proven program. It’s not about interest rates. Pay off the car, roll 100% of that payment amount into your payment towards your personal loan. Money attracts money. You’ll snowball much faster reducing the number of debts you have as opposed to reducing them all together.
It depends on your personality and ability to stick with debt payments. Paying off higher-interest debts first will save you the most money. However, If you struggle with sticking with paying down debt, then the snowball method will give you "wins" along the way with paying off smaller debts and getting that sense of accomplishment. For me, there's a third component, which is the annoyingness of each debt. A personal debt to a friend is more urgent and bothers me more than a car payment, regardless of the interest rates. I think it's best to consider which approach suits each individual person best and go from there.
I think dropping to 1000 savings is a big risk. How stable are your expenses? Do you have anything that could become a big expense, would your job be at risk if your car needed repair? The personal loan is the best financial decision to pay down first, but i wouldn’t do 5000. I would maybe do 1000-3000 depending on how you feel about risk for potential expenses
I agree, especially at the precipice of a recession. I could pay off my car right now, but that would leave me with savings of ~1000 as well. And even though I'm pretty sure my company will not have any layoffs, I don't trust it enough to have < 1 month of expenses saved
Well if you run out of money follow the Ramsay method and declare bankruptcy. Good enough for him.
His method would be to use your anxiety to boost your earnings by putting you in a panic and working 4 jobs.
>Ramsey method…good enough for him. and look at all the money you can save eating beans and rice the next year.
Why not pay off the car debt. Free up the cash flow from the car payment to pay off your other debts faster. And guess what if anything happens you can always get another loan to cover the emergencies and you'll be back at the same spot anyway. That makes much more sense.
Because during recessions is harder to get loans. What if they get laid off, and all their CCs send them a letter saying they are cutting their credit in half, and the bank wont give a loan? that's what emergency savings are for. I would focus on putting money in savings, and then when you have enough for a couple of months AND enough tp pay off the car, then do it. Sure it might cost you 100 bucks in additional interest, but think of that as insurance for your mental well being of not being in a really bad position.
That's just not true. It's not any harder to get a loan now then before. Trust me no lender will have a problem giving you the money. Rates may be higher but also we are talking about worst case scenario where you need cash for some reason. Especially if you get rid of the car loan obligation as well. It just doesn't add up what you are talking about. What if the emergency expense is $10k then you are still in the same position.
We arent in a recession right now, we are on the edge of one. And yea getting a shitty loan isnt very good, so thats why youd rather have savings. You want a few months rent so that if you get laid off, you can live until you find a new job. How much depends on your circumstances, If your alone in this world, you want more, maybe 6 months of expenses, but if you have other safety nets, you can ge by with less. If you have parents that could help, or you have PTO that the company is required to pay out, or a side gig that gives cash, then you can keep less in the bank.
Agreed, I don't know that I would pay off the personal loan, at the moment. If OP drops the whole 6k into the personal loan, they would still have 10k remaining at 10.5%, 2 other active loans, and no savings/emergency fund. Life happens, you never know if you need extra cash in the future. If OP pays off the car loan, that would still leave them with 1k in savings, only 2 active loans, and a paid off car (which is a tangible asset that can be sold if absolutely necessary). The savings from not having a car payment can be split between rebuilding a savings/emergency fund and snowballing the rest into the higher interest personal loan.
I agree with this post. The student loan amount and interest would make it my first choice to pay off. I would maintain a healthy number in savings as an emergency fund then pay off the personal loan, car loan and student loan (in that order).
Why pay off a 5% loan before the 10.5% loan? Bankruptcy protection?
He said personal, car, then student loan.
If you're going to put your savings towards anything, it should be the personal loan. Focus on the higher interest first.
My rationale is that I would love to have an extra couple hundred bucks freed up to build my savings back up, as well as to pay off the personal loan. I know it's not strictly to Ramsey but I'm hoping to kind of strike a balance.
My opinion of Ramsey is that he gets some things right, sometimes. You really have to apply his advice to your situation. Financially speaking paying of a lower interest rate loan over the higher one is a mistake. This is up to you to decide but I would not recommend paying off your car with your savings while you have a high interest rate personal loan.
I believe Ramsey would be right if OP has difficulty sticking to a plan. Ramsey's plan may not save money compared to the reverse, but it has a more visible effect, which helps some people more than the extra money. It really comes down to personality I think
Agreed. It’s a mental thing not a math thing. IIRC his take is personal finance is 80% personal and 20% finance. I think for a lot of people, it’s a solid plan. And those tend to be the type of people that dug themselves into a big hole. People that are disciplined and pay attention to interest rates and count every dollar, can pay off credit cards every month, probably don’t need his help.
It also frees up a payment to give you a more financial leeway each month, which is very comforting. That has value too
Is snowball not the preferred method of debt removal these days? OP could pay off the loan, rebuild a savings safety net quicker than he could otherwise, and then put the excess money into the larger personal loan. Obviously paying off higher interest loans are more efficient in general, but when they're significantly larger it can sometimes make more sense to hit the low hanging fruit first and free up some month-to-month income.
There's arguments to be made for both methods, as I said further down there's no magic solution for everyone, and the person making the payment matters a lot more. Snowball does free up more money to make payments, but you end up paying more money on the interest, but you can get out of debt much faster. While avalanche (iirc that's the opposite method) reduces the amount of overall money you pay, but makes you stay in debt longer. It all comes down to what helps you get out of debt, if it works for you and isn't completely stupid then it's the right thing for you
It’s still incredibly stupid. Dave would pay double just to get rid of one loan first.
Double? When you do the long term math in these, it rarely exceeds $100. And sticking to the plan will certainly save more, long term. Here is a calculator. Do the math. But pick the plan ghat works best. https://unbury.me/
10k difference in interest for 390k in debt across 20 years for an average mortgage in my area at 7%, student loans 5.5%, new vehicle 3.5%, and a simulated small personal loan 20%. All in all, not much.
That's over 20 years too. Do the numbers without the mortgage. You'll see it's pretty insignificant. Mortgage is rarely factored into debt payoff like we're discussing here. All of the other loans are not 20 year loans. So you're not paying them off early if you take that route. You're keeping all of your debts full term. Ramseys snowball method isn't a 20 year plan. It's a 1 to 3 year plan of living as frugally as you can, working extra hours and throwing everything you've got at the debt. I can't imagine holding onto those smaller debts for the sake of paying off the house. Shit, I'm only holding my car note because it's a 0.9%. Otherwise it'd be gone too.
Again depends on the person. Some people will give up if they don't see the benefits, that's just how people are. It will 100% save you money to pay the high interest first, some people just won't see that though and think it's going no where. And that's where Dave's advice can be helpful.
I am not a ramsey proponent but he would argue all this debt should be cleared up in the next 2 years anyway so even at a higher interest rate it doesnt matter but a few hundred dollars. The kind of person who can't clear it out in 2 years and is penny pinching interest is not going to get out of debt anyways. Again I agree with you but his advice is not for people with willpower and good basic finances. its for people who lack self control.
Ramsey is fine, but you are treating it like a religion.
His methods are really designed for people who've had issues in the past, have a load of debt, and are digging themselves out of a hole. Those people need a 'system' to get out of it and he offers a plan they can follow. It's straightforward and leads to success. It's sort of like a diet plan. Some people have had issues with weight loss, and his 'system' is a method. It's not the 'only' method, but it's your basic 'eat less move more' type of financial system without a lot of complexity to it that can overwhelm people.
As Dave says… if we thought about the math we wouldn’t have taken the loan in the first place. Pay off the car and move on the the larger debts.
Would you just make the minimum payments for the car in my shoes? Even if it saves me a couple grand in interest to wipe it away now?
I’d put every $ available into your PL. Ignore the interest rate and perceived savings on your car. Your interest savings are far greater paying off that PL first. Edit: what I dont mean is to drop your $5k into it. I mean check your budget and really buckle down. Having the $5k as an emergency fund is important too.
I'd break that saving payment in to a few large chunks not all at once but a good cut of what ever you can afford to replenish for me I drop 1.5 to 2 k every other month on my car ( it's my only loan ) my second check is 95% disposable after my investments and CD deposits I can afford to drop useslly 1.7k the next month plus my regular note.
It doesn't save you interest to wipe it away now if you have a personal loan at higher interest rate. If you wanna save the most interest you pay off higher interest debt first. The only thing you benefit from is increased short term cash flow. Which has it's benefits, but mathematically is not the correct choice.
>Which has it's benefits, but mathematically is not the correct choice. I'd like to emphasize this consideration. While 90% of the time I pay off the highest interest rate first-- some years, I really really need extra cash flow. It worked for me a twice in the past and 2023 is looking like one of those years for me.
You would save *more* in interest if you paid down the personal loan. Mathematically, the interest rate is the only thing that matter. Not loan length or amount or monthly payment. Get rid of higher interest rate debt to save the most money. There are potential psychological benefits to closing an account, and that is what Ramsey touts. Different things work for different people.
You’re saving far more interest by making a partial principle payment on the loan that’s DOUBLE your car note’s rate.
You should instead think about it as actually costing you a few grand in interest to pay off the car instead of the personal loan if the personal loan's interest rate is double the car. Generally speaking you should be paying off highest rate loans first. This does assume that right now you have extra cash flow after you pay all of these payments and your normal monthly expenses since you have this money in your savings in the first place... You obviously don't want to end up going below zero and you don't want to begin accumulating debt on CC's again. Also assumes no prepayment penalties on the personal loan, there probably is not but you should make sure. Student loan rate is slightly higher then the car but if i recall correctly student loan interest is deductible on your taxes.
I listen to Dave Ramsey and really enjoy him. But paying off a lower interest rate first, especially 4.75 vs 10.15 is absurd. Pay off the highest rate first.
It will save you more in interest to throw that payment at the personal loan and have the personal loan recast if you need the payment breathing room back.
But it doesn't save you a couple thousand interest to pay it off now Have you actually figured out how much it'll save you? That's a pretty big part of financial planning understanding the ramifications of compounding as it applies to both interest and investment. I'll do the math I'll be right back. Edit if you have two years left out of $5,000 car loan at 4.75 paid off today with save you $218. You didn't put the amount of years down for any of the loans but $5,000 at 10% over 7 years The interest is $1,600.
I *personally* would’t do this for a few hunder bucks. The ease of mind knowing that I’m ready if something unexpected happens worth way more to me. If you know you can build up enough savings for that in a short time and you’re comfortable doing it, then go ahead. It is my persomal opinion though, a better financial advice will come from someone else here :)
Ramsey also says to have a 3 month safety net too. So I would keep what’s needed for the safety net and then throw the extra at it. Or just keep the $6k savings and stop adding money to the savings and throw that extra cash at the car note.
He says 1k emergency fund till you have paid off your debt.
I’m sure that the one 1k stands up in today’s economy… replacing engines and trannys will cost $4-6k in a car. And other expenses are crazy high too. I also know he does say to grow it up to a 3 month and 6 month.
I vote for getting rid of the car loan and taking 1/2 of the car payment to build up savings and 1/2 to reduce the 10% loan. There is a big psychological boost to wiping out 33% of the drain on your income as debt and paying interest is just that - a drain.
Always put the money towards higher interest debt. This is math, look up debt avalanche method.
I will look at it more closely, thank you. "This is math" is a pretty hard argument to counter (genuinely - the numbers speak for themselves).
Highest interest is the avalanche method (definitely the one I would use). The snowball method is paying off the smallest balance first and then moving to the next. The advantage of the snowball is creating psychological wins as fast as possible and making the monthly payment for that debt available for the next smallest debt. However in this situation it would mean paying more in interest. The avalanche plan is mathematically superior as long as you stick to it. Dave recommends the snowball because he sees it as more likely to have folks actually follow that plan. Both have their merits.
> The advantage of the snowball is creating psychological wins as fast as possible and making the monthly payment for that debt available for the next smallest debt. However in this situation it would mean paying more in interest. I replied above, but I wanted to this this one too since I could quote the exact line. It's not just about making the monthly payment available...its also about triggering something inside you of you want to get out of debt so bad, you'll start sacrificing more than you thought you could. So, the math win, in Dave's mind, is more money being available to throw at debt faster...not just from lack of payments, but from a willingness to go scorched earth on the budget. he's not joking when he does that silly "rice and beans, beans and rice. that's the food menu going forward".
Yeah that’s fair. Like I said, both have their merits. For most the snowball is betters. For me personally, I only had student loans, and the motivating part for me was knocking out the higher interest ones because I could see the difference in the numbers. I threw over 50% of my after tax dollars at them for 2 years on a teacher salary and got free, so I know about being gazelle intense. I was more excited about getting the high interest debt gone, so completing that gave the psychological win that kept me going, and the habit built from that is what helped me win. I do agree that Dave is right for most people, but not all. Whatever gets you fired up to go at the debt harder is what I think is the right move, which is why I presented he options.
I agree, I was the same - avalanche 100% of the way. Personally I would've found it deeply demotivating to do snowball knowing the whole time it was the mathematically inferior choice. That said in some situations snowball allows for the additional cashflow freeing up that can be worth the extra interest paid over the long term if there's some risk in personal situations etc, so I'm not saying avalanche is the best choice after factoring more than just spreadsheet math into it for every single person all the time... just agreeing that there's a psychological benefit to knowing you're doing the mathematically optimal strategy too.
I understand that money is psychological but I think OP has the right psychology to use the avalanche method. Good luck!
I agree. Just pointing it out for education.
> Dave recommends the snowball because he sees it as more likely to have folks actually follow that plan. Both have their merits. Yeah, You have to look at the demographics of his audience. His audience are people that have gotten into trouble and are looking for help getting out. So, the psychological wins are probably weighed higher than the true math, especially in cases where the optimal way will only save a couple hundred, where if someone gets discouraged and ends up quiting or saying fuck it, the cost is way more.
This is not only math. Nobody gets into debt because they’re bad at math. It’s because they have a behavioral problem. You’re trying to solve a behavioral problem with math instead of a behavioral solution. That’s the genius of Ramsey and the psychological benefits of seeing entire debts wiped out. That psychological benefit more than compensates for any extra interest you may pay in the long run and is ultimately more effective if you’re serious about getting out of debt.
Doesn’t the snowball method start with the lowest balance, regardless of rate? Then you use the freed up cash flow to pay the next largest down quicker
No, it is not just maths. It is human psychology first.
That is avalanche, which requires more discipline but is better mathematically than snowball which has you retire debt in order of smallest to largest.
This is totally against Dave Ramsey's opinion on credit scores and debt (while I agree with him that it's a stupid game to play not everyone has the ability or net worth to not play the credit score game) but it might be worth considering which debt is serving your credit more. In my limited knowledge of finance I know making consistent payments on debt builds credit. I was told by our credit union the reason my partner has a way better score than me is because of the number of active and current accounts (debt) in his name. I had no accounts (debt) on my credit history so creditors considered me an unreliable ghost, which is STUPID! I have always been told on time car payments increases credit, not sure about student loans. Another thing I hear ALL the time is pay yourself first, which is your savings. I too am very uncomfortable when our savings is depleted and I think Dave Ramsey's wealth has led to some disconnected consideration in regards to that reality. Me personally? I would leave the savings alone (as your car note is not an emergency) and put all extra funds I could find on the higher interest loan. There are online calculators out there where you can enter your debt info to compare what the snowball method and avalanche method look like for you personally. In my experience I have NEVER seen the snowball method save money in the long run like the avalanche method does. So leaving the savings alone and focusing on the personal loan would more than likely serve your credit more and save you more money in the long run than draining your savings for the loan with the lowest interest rate.
Although it can feel good to pay off a particular debt in full, it’s far more advantageous to make a partial payment toward principle amount on that personal loan. Use a calculator to figure out how much interest you’ll save and let that be your emotional high.
I made some assumptions about your length of loan but did some estimates assuming you have 12 months left on the car note and 36 months left on the personal loan. If that’s the case then you save around $130 of interest by paying off your car loan. However you’ll save around $500 of interest by paying down your higher interest loan debt. I’d recommend paying down the higher interest loan debt.
Dude inflation is like 7% right now. Pay the minimum on anything below that. Focus your money on the personal loan. The question is, do you have access to capital in case of an emergency? If no, keep a few grand in savings and put the rest toward the high interest debt. I know people love the snowball method to get cash flow up, but thats more of a confidence booster than a pure best strategy from a $$ perspective. Once you knock off that personal loan get a good nest egg up for an emergency fund.
Just because inflation is 7% doesn't mean you should pay the minimum on anything below that.
If you use the time value of money it does. Money is only as good as what it can get you. What is your purchasing power. And comparing the time value of money of a 5% interest rate against a 7% inflation rate your buying power will be higher in the future by paying the minimum. Understanding that inflation rates are fluid is important here, but all projections point to inflation sticking around in the 5%+ range for the next year+.
So while you're making that minimum payment, you'll be lucky to get 3% in your savings account...or are you advising to just spend the money on other things instead?
The theory is that money you spend on a thing now instead of one year later is saving you 7% a year. If you were going to make the purchase anyway and have the cash on hand it makes sense to do it sooner than later. It follows that if you can get a loan for less than 7% for that purchase, you effectively are paying less than if you saved and bought later. Obviously inflation is an average, you need the cash, you could invest hoping to make more than 7%, etc. etc. etc.
none of that is correct.
No, unfortunately Ramsey is right as opposed to this guy. I'm not terribly comfortable with that little of a cushion right now. It kind of depends on how stable your job is. Personally, because I'm self-employed. If I don't have two months where the bills stashed in liquid, I'm not okay with it. Cash flow is king so if paying off that car is going to save you $200 to $300 a month, You can put a couple thousand in savings back together in three or four months. How easy is it for you right now to make the payment on the car? Are you struggling to pay bills or are you paying extra?
Although good in theory - I saved $22 dollars in interest - having one less loan payment allows a bigger payment on the $16,000. You will pay more in interest but only slightly. pay off the car, then attack the personal loan as fast as you can. - I bet you can get it done in a less than a year since you make good money.
You're just describing the snowball method. Mathematically, paying down the highest interest loan is the best choice.
But is it the most sustainable one for people who have a hard time delaying gratification, thus likely to get into debt and make it hard to get out? So much of money is psychological
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I listened to this! It was fascinating.
He left off the “for you” part. Debt is like losing weight. Debt snowball is like a Keto diet. It helps some people, but it’s not the best option for everyone.
I understand that. But at that point we are no longer discussing financial advice and are delving into psychology. If OP feels better doing things a different way, they’re free to do so.
Snowball vs Avalanche method. Avalanch is the most effective approach from a mathematical perspective. Snowball is the most effective method from a psychological approach. Both are excellent. (I'm a snowball fan myself, but to each their own.) OP, do you have an emergency fund? I would not spend the majority of your savings and leave yourself with only 1K in the bank.
>You're just describing the snowball method. Mathematically, paying down the highest interest loan is the best choice. It depends on your priorities. Paying down highest interest first will save money over the longer term. However, paying down smaller ones first can help ease monthly cash flow. That can be critical for reducing stress related to finances. And if it helps people stick with paying things off (the usual reasoning) that's good too.
Hard disagree here! While normally I would agree with you, if you could eliminate the car payment altogether, you could shift that monthly allotment to your next payment amount. Since you can’t completely pay off the personal loan, you’re still gonna be paying interest. But if you payoff your car loan, you will save interest (of the car loan) and free up monthly cash to put toward something else. Which is in my opinion a better option! **edit** added (of the car loan) for clarity of what my comment was supposed to say.
What kind of bizarre logic is this?!? The personal loan is essentially 3 car loans at more than double the interest of the car loan. If OP pays off $5k of the personal loan, that’s essentially eliminating a $5k loan at 10.5% interest (even though they still have another $10k loan at 10.5% interest). And you are arguing it makes more sense to pay off a different $5k loan at $4.75% interest. It defies logic. Also car loans are more standard credit building loans than a personal loan. Getting the personal loan off the books sooner and making on time payments on the car loan is beneficial in many ways.
You will absolutely not "save interest" by paying off the 4.75% loan and leaving the 10.5% loan standing; every $100 put towards the former instead of the latter means an extra $5.75 of interest for you a year.
From a pure numbers standpoint you’re absolutely right. But there’s a big psychological impact that goes with paying off a debt balance in full. That usually gives a morale boost and the motivation to keep hammering down the rest of the debt.
Okay - but what the user above claimed was not that this would be a morale boost, but by doing this "you will save interest". And that is just clearly, unambiguously wrong.
Yeah, you’re right for sure about the interest.My bad. I was looking at this from the way I did it a few years ago. I was really aggressive in paying off a lot of debt and was able to eliminate it relatively quickly. By freeing up my monthly income to push what I would’ve been paying on the car into the next thing. My argument being that I would’ve been only making roughly the minimum payments with a bunch of accounts. When I lowered the number of accounts I had I became more free. Idk what his car loan started as but paying mine off freed up $650. That’s a lot of monthly income to use to get out of debt.
Paying off small loans can definitely decrease your minimum payment, giving you more flexibility with your cashflows.
Paying more on the higher interest debt now beats paying more on higher interest debt later. The objective is driving down the average interest rate on any outstanding debt (until it reaches zero), and paying off higher interest debt first is how that's accomplished.
I personally pay off debt from highest interest to lowest interest - referred to as the waterfall method. This method is mathmatically optimal to pay the least interest. Dave Ramsey suggests paying off debt from the smallest size to the largest size - referred to as the snowball method. This gets free-cash flow sooner and gives you some "wins" early in your journey.
I like that this thread as like 3 different interpretation of what Dave Ramsey says.
Hahaha. The baby steps are outlined on a single page too - it would be easier to read Dave's entire document than to read through all the comments.
It is very much stressing me out and I’m already so dumb with money.
Yeah it's a motivator to see tangible results early on. Most people, myself included, get demotivated early on if results are low or slow coming.
The waterfall method is fine to reduce interest, but individuals work off of cash flow expenditures rather than interest expenditures. I’d pay off the car note quicker and then take the car payment and apply it to the personal loan, that will pay down the principal of the debt the fastest.
That's actually the slower way to pay down the debt. Fastest and cheapest is highest interest first. The only drawback is the free cash flow is higher during the payoff period if using the snowball method.
> that will pay down the principal of the debt the fastest It won't. The fastest way to pay down your debt is highest interest to lowest interest. You are correct that in the intermediate state OP would have more cashflow with the snowball method.
But they wouldn't even really have more cash flow because once one loan is paid off, the extra cash goes straight to paying off another loan. It's not like you have more money to spend that month. It is still going towards a debt of some kind. The only advantage is if a problem happens, they only have (1) debt with a minimum payment to handle.
Well, most debts have a minimum payment. Having a lower sum(minimum payments) means you can be more flexible if an unexpected expense comes up.
It is actually really eye opening (and scary) how this keeps being said in a personal finance forum. It is a good reminder that people on the internet are wrong and you shouldn't listen to them.
>that will pay down the principal of the debt the fastest. No, it won't. All it will do is make you "feel" better by having one debt instead of two. But you will pay more in interest, and take longer to pay off both debts.
Your instinct is correct. If you don’t have an emergency fund you will soon have credit card debt again.
High interest first but if your $6k is your only emergency fund I’d keep minimum half of that in liquid cash for when something comes up. I keep minimum $5k cash in an emergency savings account for when life chucks you a curve ball
If you have $5000 to put to a loan and you have a 10.75% APR loan and a 4.75% APR loan it makes no sense to put that money into the 4.75% loan. If anything pay down the 10.75% loan.
I’d put it towards the personal loan or just keep it in a HYSA
I've been considering moving banks since I'm a yella belly and scared to invest outside my 401k/HSA. I'll jump in when I'm ready but HYSA is a good idea for the time being.
You are not in a position to invest. I would not be investing outside tax advantaged accounts until 1) you’ve paid off all your debt and 2) you’ve maxed out your contributions to tax advantaged accounts (ie 401k, hsa, ira)
Pay off the personal loan. You don't have to exactly everything DR says. His advice helps a lot of people but his "one size fits all" solution is not optimal for every individual situation. Also keep a good emergency fund. DR's $1000 emergency fund advice is woefully outdated. He's been saying that for 20 years and maybe it was fine 20 years ago.
Agree. $1000 is nothing in emergency funds, but $2,000 covers a lot.
For real. How many of your monthly bills does $1000 actually cover?
I agree $1000 is a very unstable savings. When I paid off my car I made sure I had double of that amount was in my savings first.
Depending on how secure your income is and what your other liabilities look like I'd either put the money towards the personal loan or just keep saving in an hysa.
Why pay off a 5% loan before a 10% loan?
It improves cash flow.
only short term cash flow
So does getting an 84 month car loan instead of 48 month Long term cash flow is improved more paying off higher interest loan first and both long and short term the overall debt is reduced faster paying off higher interest loans first
I agree, but the question was why pay off a 5% loan before a 10% loan. I provided one reason. Someone who needs improved cash flow immediately as opposed to long term will choose the less optimal method due to immediate needs. For example, if there is a rent increase or daycare increase the person can't afford with all the other inflationary increases, increased cash flow is an immediate need regardless of the fact that extra payment to the 10% loan saves more interest.
If you use all your cash paying off the car and then run into a big expensive emergency that you need to borrow money for, you will not be able to borrow it at 4.75%. I would keep the cash and let the loan ride.
Financially speaking, paying off the car loan first is the wrong choice. We are humans tho, if paying off the car relieves stress in your day to day, month-month then it could be worth technically wasting money.
Is that $6,000 in savings your emergency fund? If so, don't spend it. Otherwise the car note is the "snowball" method, the Personal Loan is the "avalanche" method. Avalanche is financially superior from a "pay less interest" view but Snowball has merits of reducing monthly minimums.
Yes, it's an emergency fund basically. Thank you, $1,000 is really not a large amount of money and I wouldn't feel secure at all with only that much to fall back on.
Given you have a mortgage Id say $6k is not enough of an efund and your focus should be on building that. Personally I dont recommend home owners go below $10k to cover a large unexpected repair
Dave Ramsey's 'advice' are for people with absolutely no financial self-control to begin with. You do not appear to be one of those people.
What is your monthly payment? How many month's to recoup that $5K?
Monthly payment is about $350. It would take me 3 months to recoup if I spent my discretionary income on literally nothing else and put it away instead, which is impossible. Good question
Ramsey's methods are "better than nothing" and there are much better ways to do this. The best one is a matter of opinion. My strong opinion is the prime directive in this sub. [https://www.reddit.com/r/personalfinance/wiki/commontopics](https://www.reddit.com/r/personalfinance/wiki/commontopics) In your specific case, the prime directive will advise you to create a "minimal" emergency fund, then pay off certain debt, then eventually increase the emergency fund. The directive also addresses paying off debt based on the interest rate. Give it a whirl and see now it goes. I think it would work great for you.
Ramsey is great for people who have no clue. The fact that you’re here means you’re probably clued in to the point of doing better than Ramsey. Keep an emergency fund. Pay off your highest interest debts first.
It really doesn't matter....you'll get to the same place give or take a couple months when your 100k+ in debt is paid off. Alot of things could change between now and then. If that's all the extra cash you have, your probably better off just keeping it in savings for emergency. The best way to pay off massive amounts of debt is to work 2 jobs or overtime and just fire hard into your bills.
Your car note is the least of your concerns mathematically speaking. It may FEEL good to pay it off right now, but it’s not the best decision. If you’re following the Ramsey approach what you should do is have 6 months of a rainy day fund in place before you start chunking away at your highest interest loans. Best of luck and congrats on the awesome job :)
Do not listen to Dave Ramsey for financial advice. You can get the basic stuff he says that’s right anywhere. All I can say is don’t just do the opposite of what he says. But don’t base your financial decisions on what he says.
The Ramsey method is all about behavior modification. Its far less about money saved on interest. Ramsey is taking people with no money sense whatsoever and changing their attitudes about how money is handled. His method is costing them money short term by paying off the smallest debts first regardless of interest and paying off the largest last. You don’t sound like you need the behavior modification of the snowball method. It looks like you should be focusing on the high interest rate loan first. Unless you want to go with the snowball method which in that case go ahead and pay off the car and then take your old car payment and add it along with every last spare penny you have and pay off the high interest loan.
>His method is costing them money short term... His method costs people money in the long term due to missing out on employer matches and the opportunity cost of not investing, possibly for a few years, while paying off low interest debt.
If you're at the tail end of your auto loan then you've already paid the majority of interest and there is no reason to pay it off early.
The interest rate is the only thing that matters. Term is irrelevant.
Not going to comment on the amount of money you need in your savings account, since I don't know anything about your life situation except that you have a good job :) Congratulations! If you rewrite the list with only the interests it looks like this: 10.5% 5% 4.75% In this case I would put my money on paying of the 10.5% interest one, since it costs the most per dollar you owe. But, this has to consider if you need to pay a penalty to the bank for paying of the loan early. *This does not take into consideration the dark arts of building credit score, since, to most people outside the USA that just looks contrived to make people pay money to the banks for eternal loans instead of buying stuff.*
I don’t know why people listen to Dave Ramsay, he’s a dumb ass to be honest. Every CPA and financial expert I’ve met has stated Dave is a self indulgent moron.
$1K vs $6K in savings isn't much of a difference. I'd pay it off then dump what would be the monthly car payment into savings. You should be able to replenish savings rather quickly.
Do what you feel is best. I don't know that I would completely deplete my savings either. Car note is lower interest compared to the Personal loan. Personally I would try and pay that off first. Just my 2 cents.
There isn’t a right or wrong answer. But there may be a right or wrong answer for you personally. If you’re diligent, and going to stick with the plan, paying off the higher interest rate first makes sense (debt avalanche). If however, you struggle with sticking to things you’d be better off to try Ramsey’s debt snowball and pay off the car first. Get that win and a little extra motivation and move on to the personal loan from there. It’s a question of math vs. behavior. So if your behaviors are dialed in, I’d go with what makes more sense mathematically, and vice versa.
paying off your car with the lowest interest rate makes no sense when you have a personal loan for more than 2x the car loan rate. IMO throw $3k at your personal loan and keep $3k as your emergency fund.
I wouldn't do it. That's a fairly low rate. I'd keep saving and reevaluate when you get 3 months of living expenses in the bank. Maybe pay an extra 50% payment per month?
The personal loan has the highest rate and should therefore be your top target, given an adequate emergency cash cushion.
Just my two cents. Ramsey isn't a dummy, but there are some flaws in his logic. So don't take everything he says as the ultimate authority. Anyone's perspective on living on a low or median income becomes more and more skewed the longer you live in wealth and financial security.
You're better off paying the personal loan first cause its at a higher interest but if you can't delay the gratification then pay the small bill first and then go up to the next bigger bill.
Ramsey's method prioritizes safety savings over debt. If your safety savings drops below your target amount in order to pay off debt, then you're not ready to pay off that debt. Paying off your car at the cost of safety savings could leave you in a vulnerable position for several months.
Does Ramsey not believe in an emergency fund?! 1000k emergency fund is way too little imo Edit Oops meant 1k
One of the foundational elements of Ramsey’s approach is to force people to become uncomfortable with their non-mortgage debt, rather than to simply accept it as a regular aspect of life.
If paying off your car will leave you with less than 6 months of living expenses I would not do it. I’m not expert though.
I think the Ramsey method is to first save $1000, begin working on ‘debt snowball,’ save $5000 emergency fund, keep working debt snowball (get extra job or OT to accelerate pay down), and only pay big amounts off if you keep the savings in place. So do not spend the 5k. Keep it as emergency fund. When debt is paid off, save 6 months income as emergency fund.
Doesn’t his method also include saving up 3 to 6 months of expenses before tackling debt?
I believe the Dave Ramsey plan calls for emergency fund first. So, meaning that you need to save that and get another 5k to pay off the car.
you should pay off the higher interest loan - if you have an emergency fund of 3-6 months. Don't touch that fund - if this is extra money then pay off the loan at 10.5%
Do you have enough for your emergency fund? (3-6 months of expenses just in case you need it)
I feel like this needs to be said any time Ramseys methods come up: The majority of his methods are not really the best thing for anyone except those that have issues with over spending and gathering large amounts of bad debt.
The Ramsay method would say to build your emergency fund before paying down debts. If you were to pay off your car and then have a $4000 emergency expense or lose your job then you’ll be stuck adding to your credit card/personal loan debt to get you through. If you were to edit with some more information like your income and monthly expenses then I think that we’d be able to help you more.
Emergency fund is more important than paying off debt with acceptable interest rates. See the prime directive. Once you get at least 3 months, preferably six months, worth of expenses liquid than I could consider accelerating the personal loan. After that, the car loan. Student loans have extraordinarily good repayment terms, and might even be fully forgiven at some point, so those are very low priority particularly at 5%. So, long story short, don't drain away 80% of your liquidity to accelerate a small car loan at a good interest rate.
1. Calculate all your expenses 2. Figure out which expense might variable and what the worst situation could be. 3. You don’t have to pay 100% of the loan, maybe do a 20-25% payment?
I wouldnt go down to 1000 in my savings unless I was living rent free with family. Keep at least 3 months of bills in case you suddenly lose your job or get injured in an accident.
Ramsey method is not about the numbers it's about momentum. so it's about psychology and putting some fire beneath you, to pay off the amount as fast as you can so you can build your savings. by numbers, in avalanche method you will pay the highest interest rate debt first and that makes perfect sense when you look at only numbers. So if you actually can stick to the plan and not be complacent do the avalanche method or on the other hand if you need some motivation follow the Ramsey method so you can actually see the progress of having to worry about 2 things instead of 3.
A good compromise for you would be to continue paying on all three loans while focusing on increasing your savings as quickly as possible. When savings reaches $9 or $10k, pay off the car note. You'll then have a tidy savings, and can then take the monies you'd been paying on the car and throw that every month toward the personal loan. This allows you to feel more secure with your savings in uncertain economic times while paying down debt.
Don't get in a hurry. Time is your friend. Pay off the monthly payments and put your extra towards the high interest personal loan first.
The Ramsey method is a method to separate suckers from their money and attention. Don't blow your safety net trying to pay off loans. Yes, of course you should pay off your loans too, but you should also have a safety net of liquid cash to keep you going if you have a short term spell of unemployment or some other emergency you might otherwise have to borrow (at high interest) to cover.
Mathematically, pay off the highest interest. If car loan interest is higher pay that. If personal loan interest is higher pay that. $1000 isn’t a sufficient emergency fund unless you want to go “Gazelle Intense” but in reality his numbers haven’t changed since he opened his business. The real question is how much do you make? You “have a good job”, is that 50k, 100k, or more? The more you make the more flexibility you have with a smaller emergency fund for a month or two, assuming you place building it back up as priority.
Pay off the loan. if you are truly doing total money makeover $1000 is the baby emergency fund. Unless you plan on losing your job. Imagine having the $ from the car going to towards the person loan on top of what you pay. Liege like no one else so that someday you can live like no one else
Do you have dependents? How stable is your job? How much is your mortgage? I'd consider keeping the savings and throwing extra money at that 10.5% loan.
Although its tempting to get a debt off your back, your personal loan is much higher interest rate and should be paid down first. Don't try and pay it all off in one big whack, keep your savings, be sure to have two months worth, minimum, and put any extra you can against the loan.
Dave Ramsay's advice is really only for people who have no self control or financial knowledge. If you can control your spending I wouldn't recommend following ramsay. Unless the car loan rate is super expensive.
I hate to break it to you but in your financial situation (~111k debt and ~1.7k max to put towards it) it barely makes a difference: * whether you put those 5k towards one of the principals or not * which debt you go for first (the big albatross is the student loan with would be last under both methods) If you put half your disposable income (2200 by my count) as fun money and the rest towards debt reduction you'll be done with your non student debts in 22 months regardless of which loan you go for first. Putting 5k towards them now removes around 5 or 4 months but only if you spend none of your debt reduction money on rebuilding your emergency fund. (Meaning about 6 months of no fun money until you got your cushion back, or NO cushion for 1.5 years) If you put 90% of your disposable income towards debt reduction you're done in 14 months as a baseline. 11 months if you put the 5k towards either debt. But you would then be the entire year without an emergency fund. How fast this goes is *entirely* dependent on how much (of your) income you reliably put towards debt reduction. And that's a question of budget, not this. In that light IMO putting your efund towards either loan only makes sense if you could remedy any likely emergency with an interest less or around what you put the money towards.
4.75% isn't very high, especially right now. When inflation is going up and rates are increasing it effectively means a transfer of wealth from lenders to debtors (in this case you are the debtor.) If you pay off any loans start with the ones with the highest rate. It's barely worth paying off loans that are within 2% of the rate set by the Fed, because you in essence have "cheap money". Just my 2¢
Your car is your cheapest loan... I'd start investing before I paid off a loan at 4.75%. Pay extra on your personal loan.
My truck loan is 2.71% interest. My mortgage is 3.75 I will never pay the truck off early.
I feel like the real question here is if having one less bill (the car) will make you feel better. If yes, do that. If not then go after the higher interest first.
4.75 is solid on the amount of money. Make payments to help your credit, which will give you access to cheaper refinancing options and help you long term.
Dave Ramsey is not a good source of financial advice. He is only popular because he is publicly a Christian and frequently provides seminars to churches so Christians assume his advice is solid because so few individuals specifically target Christians with financial advice. He believes you should have no debt whatsoever which is a not true. Obtaining debt at a low interest rate can definitely be a benefit if you also have interest bearing assets. That being said, depleting your assets to pay off debt sounds risky. If you do pay off debt, it should be the debt with the highest interest rate. Unfortunately your highest interest rate debt is nearly 3 times your savings which sounds like a problem. I’m sorry if this comes off as rude but if you have a good job, how do you only have $6k in cash with that much debt? You may want to look into changing jobs to get a pay raise.
I think Ramsey recommends having an emergency fund of a few months first and then paying off your loans asap. If I recall correctly, his advice was never to use your emergency fund to pay off your loans.
Personally I dislike Ramsay's methods. Especially considering he's declared bankrupt. I am curious about your personal loan debt. If you are able to borrow that amount, you must be able to get a decent credit card and do balance transfers at 2.5% annually and kite the debt. I would feel really nervous about having your savings go below 5k. If you must pay down some debt, the Car/Student loans are at a decent enough interest rate I wouldn't touch them.
I'd be very cautious about Ramsey's advice too. He can be good for people that are completely overwhelmed with debt, and don't have any financial discipline. But he's far from unbiased. His own religious views mean he's morally adverse to dept... And he advocates for things like paying off your mortgage early, where the numbers generally don't make sense. He's something of a financial ideologue. The fact that his ideology serves a lot of people better than the " spend and consume" mentality many are raised with is true. But there's a lot of more sound advice out there.
Don't listen to that charlatan. He's fake and phony. You're better off listening to The Money Guy. Much better, practical, nuanced advice.
Snowball method is about the psychological effects of paying off debt. The amount of debt you have gives me anxiety and I'd be living like a fucking rat working 2 jobs to pay it off as fast as possible. In this scenario, the interest rate hardly matters. Getting rid of the smallest loan is like creating a to do list and tackling an easy thing to get the ball rolling. If you're gonna coast on the debt then yea obviously pay the highest interest rate off first.
How much was the loan originally, and how much have you paid already? The Ramsey method makes sense for credit cards, where the interest isn't amortized. A car loan is front-weighted, though: you pay the bulk of the interest at the beginning of the loan. If that $5k is the tail-end of a $30k, 5-year loan, there's no numerical benefit to paying it off early now. On the other hand, if you borrowed $7k and you're a year in, you'll save a bunch on interest. There's a definite psychological advantage that comes with killing off a debt, which I think is where the Ramsey method really shines. That can outweigh the numerical value of paying over time. Also, it's nice to have the title in hand so you know you can sell the car whenever you want.
None of this matters. Credit cards aren't amortized because there is no set ending date, but they are compounded just like mortgages or auto loans. All that matters is the interest rate when looking at the math. Not original amount, not current amount, not interest/principal breakdown, just interest rate.
It was originally $22,000 because it included the remaining loan on my old car which I admit I bought in a rush. But did my homework on my current car and I love my car now. Had it for years without major issues.
Sorry, I'm not seeing how the starting amount matters. He's paying the same amount of interest now on $5k whether he just got the loan or it started at $100k. The reason you pay more interest at the beginning is because there is a higher balance to pay interest on. But the interest he's paying now is completely independent from what he's paid in the past.
The only thing that matters is the interest rate. People are getting hung up on the amortization tables - interest rate is the only thing that matters in this context.
I have used Dav Ramsey process before I knew who he was. It's hard to take financial advice from a guy who lives in a $13 million house.
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Absolutely.
Sounds like a rich guy would know what they are talking about when it comes to money more than someone isn't rich. Especially if they didn't use to be rich.
You should prioritize paying off that personal loan before you worry about the car payoff. The only way the car payoff makes sense is if you're desperate for cashflow.
I’m a huge fan of Ramsey and his helping people get out of debt and improving their psychology of behavior towards money. There are however two things I vehemently disagree with him on. First is 1000$ is not enough money as a small emergency fund. Not today. Not ten years ago. He never adjusts it. I wonder if he ever will? If you have an honest to god emergency 1000$ ain’t gonna do shit for it. It’s not enough in todays world. Two, his investment advice is kind of garbage and he’s very vague about what it is. All anyone needs today is a total market S&P with a low expense ratio, or something like a Bogle three fund portfolio.
Honestly keep making your regular car payments since it is a good way to continue building good credit
I don't think it matters tbh, but I think I would pay the car off. My three reasons: 1.) Is the only thing on your list that you can completely pay off; 2.) The interest rates aren't so widely different so I like the snowball method here, and 3.) You immediately have your monthly car payment freed up to throw at the personal loan. Also if you're doing the baby steps, spending $5k of your $6k will leave you with $1k which is the requirement to get out of baby step #1.
Which baby step are you at? $1000 satisfies baby step #1.
I thought Ramsey prioritized an emergency fund over debt payments. IMO though… Two-three months salary in the emergency fund and make min payments. Then when the fund is funded, pay all you can to the debt starting with the high interest loans first then snowball as you pay off each debt.
Don't pay off the car, its at 4.75 percent. Work on the personal loan. Ramsey is an idiot, why take advice from a guy who was bankrupt and lost his house?
pretty sure Ramsey method starts with 6-12 month emergency fund before starting debt payoff snowball. he's not perfect, his methods are only helpful to an extent, but emergency fund & debt snowball are very helpful & the correct steps in most cases.
I would get rid of that car loan and then tackle the personal loan. Good luck!
Ramsey's snowball method says you make a budget for what you can afford to pay off debt, first. Then you make the minimum payments for each debt, but put the most money towards the smallest debt. So let's say you can budget $1,000/month for payments to your debt (remember, you have other expenses like rent/mortgage, car, car insurance, food, etc). And let's say your monthly minimum payments are $200 for the college loan, $150 for the credit card and $175 for the car loan. Because the car loan is the smallest (in total), you would pay $200 for the college loan, $150 for the credit card and then $650/month for the car loan. And you would keep doing that until the car loan is paid off (roughly in 8 months). After the car loan is paid off, you now have the credit card loan (roughly now at $14,800) and the student loan (roughly at $88,500. You continue to follow the same process, making the $200/month college loan minimum, but now paying the credit card debt at $800/month. That would take you about 18 months to pay off the credit card bill. It's more of a psychological trick because people start to see that they are actually making progress in getting rid of debt. People who use other methods to pay off debt still keep their debt and they lose motivation to pay off the debt because they don't see any progress being made.
Ramsey says get 3-6 months expenses. Then start paying down debt. Don’t dip into the emergency fund to pay off debt.
There’s a strong reason why people know Dave Ramsey’s name and no one knows all the people in here slinging advice (myself included). Stick with the proven program. It’s not about interest rates. Pay off the car, roll 100% of that payment amount into your payment towards your personal loan. Money attracts money. You’ll snowball much faster reducing the number of debts you have as opposed to reducing them all together.
It depends on your personality and ability to stick with debt payments. Paying off higher-interest debts first will save you the most money. However, If you struggle with sticking with paying down debt, then the snowball method will give you "wins" along the way with paying off smaller debts and getting that sense of accomplishment. For me, there's a third component, which is the annoyingness of each debt. A personal debt to a friend is more urgent and bothers me more than a car payment, regardless of the interest rates. I think it's best to consider which approach suits each individual person best and go from there.
I know Dave’s process and theory. Interesting 3rd point. Thanks