Living on a Budget, Saving Money/5 year plan


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?

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

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Douglas Hayman


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.


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.

(1) "Reduce Your Monthly Budget By 20% Using Simple Budgeting Strategies" (2012) ISBN # 978-0-9081613-1-1 (2) "How to Maximize Traffic to Your Website" (2007) - ISBN # 978-0-9801613-0-4

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

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