Living on a Budget, Saving Money/5 year plan

Advertisement


Question
I'm 24 and have started working on paying off debt in order to buy a house in 5 years. My question is I have 2 car payments one I owe $3500 @ 2.99% 2 years the other I owe $7500 @ 3.99% 4 years.  I recently came into some extra money from Uncle Sam, $4500 and wanted to know if it was better to pay off loan 1 or cut loan 2 down by 1/2?

Answer
Hi, it is always best to minimize debt, when you are looking to procure a mortgage, since the existing debt will factor in against you, when applying for the mortgage.  That said, although these loans are historically low rate-wise (2.99% and 3.99%), what you have to ask yourself, is can I get a better rate of return with the freed-up money, if I were to pay these loans off?

With CD's/Treasuries (guaranteed) you may be able to get 3%+, but only if you move money to a 10-year (or higher) time frame, which is a dangerous proposition, given that rates may rise substantially in the future, due to the recent FED monetary policies (if you believe that).  With Risk-on investments (stocks), you may be able to achieve that or not (crap-shoot).  

By paying these loans off with the extra money you have, you can effectively save (which translates to "earn") 2.99% and 3.99%, which is money in the bank.  If you expect rates to rise precipitously in the coming years, then you may choose to keep the loans, and invest the $4,500 in higher yielding investments.  

IMO, and my opinion only, rates will remain low in the near-term (next couple of years), due to crafted FED policies, so you may be best applying the $ 4,500 (or part of it) towards your higher 3.99% loan, which will give you the biggest bang for the buck.

A lot of assumptions here, but something for you to chew on.  Best of Luck!

As an aside, I always coach my kids (I have one your age), to avoid going into debt in any form (except for a possible mortgage, that can easily be afforded).  I know this is easier said than done, but it is important to cultivate this mindset early on in your adult years.

Living on a Budget, Saving Money

All Answers


Answers by Expert:


Ask Experts

Volunteer


Douglas Hayman

Expertise

I will gladly answer any and all questions relating to family, home, or household budgeting. I consider myself a pioneer and expert in the area of disciplined budgeting.

Experience

I routinely manage my home budget using my home-grown system. Additionally, in corporate America, I managed a multi-million dollar budget for a technical Fortune 100 Financial Services company for many years.

Publications
(1) "Reduce Your Monthly Budget By 20% Using Simple Budgeting Strategies" (2012) ISBN # 978-0-9081613-1-1 http://www.BudgetSurgeon.com (2) "How to Maximize Traffic to Your Website" (2007) - ISBN # 978-0-9801613-0-4 http://www.expss.com/ebooks/WebsiteTraffic.htm

Education/Credentials
B.A., Economics, Stony Brook University, Stony Brook, NY M.S., Computer Science, Stony Brook University, Stony Brook, NY

Awards and Honors
B.A. with Honors, Economics, Stony Brook University, Stony Brook, NY

©2016 About.com. All rights reserved.