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Rethinking My Payoff Plan

March 26th, 2014 at 08:19 am

I have lots and lots of debt, but I'm on track to have it all paid off within 10-11 years, assuming minimal commissions on S's job and 1-2% annual pay increases only for the next 3 years. (S's income fluctuates; he does have a base and generally gets 3% COLA, but commissions vary by tens of thousands of dollars each year.)

Basically, I have the following types of debt:

Credit Cards and Lending Club Loan
401(k) Loans
Personal (Family) Loans
Real Estate Backed Loans

My plan has been to pay them off in that order, in essentially a snowball (or avalanche, I guess they're called now, since I'm paying the highest interest rates off first), and then I'll have nearly $5,000 a month freed up for savings, investing, etc.

After reading a bit here, and thinking about it, I may change that a bit. I'll still tackle the credit cards/LC loan aggressively (on schedule to be paid off 5/16, unless I'm able do a consolidation at a lower interest rate), and then the 401(k) loans (on schedule to be paid off 8/17, unless of course the credit cards get paid off sooner and then they'll be paid off sooner, too). Then I think I'll step back a bit, and build the emergency fund up to $15,000 and set up a $5,000 slush fund. That should take less than a year. Next I'll look at setting up Roth IRAs for S and me and get on a plan to fully fund those every year. Once that's done, I'll increase our 401(k) contributions back to the maximum (we're currently both only contributing what the company matches).

Ideally I'll still have some extra money at the end of the month once this all shakes out, and I'll start tackling the family loans. Unless the family gets impatient, which is conceivable, or the interest rates get too high. Interest is renegotiated annually, kind of a compromise between what the lender could get in a high-yield CD and what I would pay on a bank loan at the average interest rate. Right now it varies from 2-3% on a few different loans. Some of those will be paid off in the next couple of years, just from the regular payments, and that money goes to the next loan. It's basically a separate snowball/avalanche plan; the income from the rental is paid directly to the family so I never even see it, and it gets disbursed among the loans as we agree each year at the "Family Financial Summit" (FFS).

Once the family is taken care of, I can then tackle the real estate loans. (I should add, at this point S has a company car and we don't really see that changing, unless he takes a promotion -- knock wood, of course!! My car will be paid off by 2/17 (part of the family loan) and I expect to have it for several more years; if not, we have the option to buy S's company car when he gets a new one (that's how we got the car I'm driving now), which is about every two years, at a decent price.) First in line would be the rental, which may be sold by then. (They're on a 'lease to own' agreement, which actually was supposed to happen last year, but they've had some setbacks and aren't in a position to buy, and quite honestly I'm not in a hurry. The value is still below what I paid for it, though I think I'm just starting to tread water on the mortgage amount, and it's about half what it was when they started renting at the peak of the bubble.) If any money comes out of that sale, it would go toward the family loan.

By that point all of the unsecured debt will be off of my shoulders, we'll have a solid emergency fund, we'll be aggressively saving for retirement, and our only debt will be the mortgages. Which, frankly, sounds like both heaven and the impossible dream! I'll look at interest rates then, see about refinancing if it would be helpful (though my current rates aren't too horrible, 4.25-5.375%), and decide at that time which balance to pay off first or if I should pay extra on both. Excel is my best friend so I'll run the numbers and see what makes the most sense. I've got a little time to get there yet!

I've tried to not be too aggressive in planning these payoffs, and to not count on variable things like commissions and raises. Right now I still feel like I'm teetering on the edge -- a significant expense would be tough but probably manageable (>$5,000), but a major expense would be difficult, and of course a job loss would be catastrophic. Once I get these credit cards paid off, I'll breathe a lot easier. I'll actually have five paid off within a year, which will shave about $14,000 off my total cc debt and $450 off the minimum payment amounts. (Not that I plan on only paying the minimums, but it's nice to know that in the event of a catastrophe my obligations will be that much lower. It's still a lot to pay every month, don't get me wrong!)

It's kind of hard to believe, after all these years of debt hanging over me, that I might actually be free of it!

4 Responses to “Rethinking My Payoff Plan”

  1. ceejay74 Says:

    I think that sounds like a good plan. There are some debts that are just outright "bad debts," and having too many of them just ties up your cash flow and sends too much of your money toward interest every month. But if you're in a long debt journey, you do want to address your emergency fund and retirement at some point, probably before you finish paying off everything.

    In my case I paid off all my credit cards, family debt and unsecured loans, then tackled the EF (I have $15K in an EF and plan to get $5K in a medical fund; it needs rebuilding). Then I started Roths (still not contributing the max each year, but hoping to start that in a couple years). Now working on student loans and saving up for a home/move. After that it will be all about fully funding the Roths, paying down mortgage debt, and saving up for the kids' futures.

  2. doingitallwrong Says:

    Thanks for the input, it's good to know others are on the same type of path. Smile I am flexible about the family debt, if it needs to be paid off before I build up the emergency and slush funds so be it, but for now it's more advantageous for the family to be getting 2-3% on the loan interest compared to what that money would be getting in the bank.

  3. ceejay74 Says:

    Makes sense! My loan from my dad was 0% interest, no minimum payments -- so I was afraid if I didn't take care of it soon, it would be too easy to keep ignoring.

  4. Looking Forward Says:

    I am excited to see your plan progress! Smile

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