Best Course of Action for getting out of Debt?

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CJF
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Best Course of Action for getting out of Debt?

Post by CJF »

Hello all!

I have a friend who wants to figure out the best possible strategy for getting out of their debt. I explained the strategies of Snowballing and Avalanche to them. But I always like to get advice from others incase I am missing something. So the debt is as follows;

71k - 5%(Student loan)
57k - 7.2%
35k - 12.34%(credit card)
11k - 21.2%(credit card)
24k - 4.85% (Car Loan)

What would you do for tackling this? I am open to hearing all ideas, so research and math can be done to figure out the best course of action.

Thank you all.
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Brianmcg321
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Re: Best Course of Action for getting out of Debt?

Post by Brianmcg321 »

Debt snowball.
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Re: Best Course of Action for getting out of Debt?

Post by Stinky »

Two words. Dave Ramsey.

He’s excellent at setting up a thought process for getting out of debt.

On the other hand, many Bogleheads (myself included) wouldn’t take his advice on investing.
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Re: Best Course of Action for getting out of Debt?

Post by IowaFarmWife »

I agree with the debt snowball approach, but I would add getting rid of the expensive car loan and going for a less expensive, lower APR loan.
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Re: Best Course of Action for getting out of Debt?

Post by Nate79 »

Agree on Dave Ramsey and the debt snowball method. Getting out of debt is not a math problem or I terest rate. It's a motivation and hard work problem.
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Re: Best Course of Action for getting out of Debt?

Post by surfstar »

Drastically cut budget. Review and cut again - lots of "needs" aren't.
Throw all funds at the debt until it is gone. Refi/consolidate if beneficial on higher interest/principal ones.
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Re: Best Course of Action for getting out of Debt?

Post by egrets »

So I read up on the debt snowball, and I disagree. I would pay off the highest interest rate loan first, while making minimum payments on the other debts, then repeat.
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Re: Best Course of Action for getting out of Debt?

Post by DSBH »

Similar to other suggestions, if possible I would replace the car and car loan with a cheap old Toyota Corolla or something similar, seriously look at budget, and debt avalanche.
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Re: Best Course of Action for getting out of Debt?

Post by 9-5 Suited »

I’m a debt free millionaire a your friend who is deeply in credit card and student loan debt drives a more expensive car than me. That’s a good clue that there is an issue with behavior and emotional maturity, as others have mentioned. Dave Ramsey is a great recommendation, as he will get your friend to stop thinking about little things and instead get fired up about this problem and earning extra income and pouring it into debt as a lifestyle choice. If the behaviors don’t change the financial situation won’t.
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Re: Best Course of Action for getting out of Debt?

Post by Toons »

Live like a Monk.
:wink:
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CJF
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Re: Best Course of Action for getting out of Debt?

Post by CJF »

I appreciate the replies. They have already read some Dave Ramsey. They are throwing all extra income at the highest interest rates first, and paying minimum on the others.

Ultimately, I am seeking thoughts on the strategy aspect incase there is an avenue worth exploring out there that we haven't thought of(Selling a kidney was considered ;)). This individual is extremely hard working, and when committing themselves to something I have never seen them not ultimately have success. While some debt lingers from their younger days, much of their debt comes from unexpected medical bills and a messy divorce. Their budget is currently being run fairly tight.

So, what I have been looking into for them to explore is to look into a personal loan to pay off the two credit cards at least. I doubt their going to find a rate for a personal loan lower than the 7.2% on the 57k.
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Re: Best Course of Action for getting out of Debt?

Post by HomeStretch »

- Pay debt with highest rates first
- Transfer the CC debt to a no-interest card for xx months if possible
- Increase income (i.e., 2nd job)
- Decrease expenses to bare bones
- Pay cash rather than credit to keep a handle on spending
- Don’t incur new debt
- Have friend read this thread
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Re: Best Course of Action for getting out of Debt?

Post by Jack FFR1846 »

Avalanche. For these loans, you don't even have to think about it because the $11k credit card debt is the first to tackle with both avalanche method and snowball method.

Go to Dave Ramsey to get told to eat rice and beans until you pay off all the debt. No, not the debt besides the mortgage.....all the debt.
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Re: Best Course of Action for getting out of Debt?

Post by runner540 »

Jack FFR1846 wrote: Tue Oct 06, 2020 5:30 pm Go to Dave Ramsey to get told to eat rice and beans until you pay off all the debt. No, not the debt besides the mortgage.....all the debt.
That’s not correct. DR plan is “rice and beans” until all debt EXCEPT the mortgage is paid off. Then you can loosen the budget, and save for retirement, college and mortgage payoff.
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Re: Best Course of Action for getting out of Debt?

Post by DeltaWye »

Finally a topic I feel qualified to chime in on! Two words: "Laser focus". I have been there and it takes a change in mentality. I like the Dave Ramsey "Snowball" method because you feel the progress each time you wipe out a debt and move on to the next. I think about any method will work, but the more intensely you go at it, the better your chances. Watch every dollar! It requires a huge lifestyle change, but is really worth it when you pay off the last loan. Even better is going in to a car dealership and paying cash for a vehicle. To sum up my opinion, JUST DO IT! And start Today!
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arcticpineapplecorp.
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Re: Best Course of Action for getting out of Debt?

Post by arcticpineapplecorp. »

For those not familiar the avalanche vs snowball is the snowball has you pay off smallest balance loans first regardless of interest rate, whereas the avalanche has you pay off the highest interest rate regardless of amounts of loan.

The mathematically superior method will always be to pay off the highest interest rate loans first regardless of amount of debt on each. So this would be the best order of attacking/paying down or off:

11k - 21.2%(credit card)
35k - 12.34%(credit card)
57k - 7.2%
71k - 5%(Student loan)
24k - 4.85% (Car Loan)

the snowball method, will cost more because while he's paying a 4.85% loan (after paying off the 21.2%) he's still amassing interest at 12.34%, 7.2% and 5% (all of which is more than the 4.85% he'll be working to pay off). But the idea is that if you're paying off smaller loans you can get them done quicker and start building up some small victories (and assume these are motivational to keep going with the others). That's why it works better for some (but it's not financially the best option):

11k - 21.2%(credit card)
24k - 4.85% (Car Loan)
35k - 12.34%(credit card)
57k - 7.2%
71k - 5%(Student loan)
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Trader Joe
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Re: Best Course of Action for getting out of Debt?

Post by Trader Joe »

"Best Course of Action for getting out of Debt?"

This:

https://www.daveramsey.com/blog/get-out ... wball-plan
bradinsky
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Re: Best Course of Action for getting out of Debt?

Post by bradinsky »

Spend much less that you make. Take the difference and pay your bills. Deny yourself all luxuries & allow yourself only necessities. Very difficult for the younger generations to do!
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Re: Best Course of Action for getting out of Debt?

Post by FiveK »

Debt Reduction Calculator (scroll down past the the "Start Download" advertisement to reach the "EXCEL (.XLSX)" or "GOOGLE SHEETS" buttons) might be worth using. It will show "how much it matters" regarding payoff speed and strategy.
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Brianmcg321
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Re: Best Course of Action for getting out of Debt?

Post by Brianmcg321 »

Jack FFR1846 wrote: Tue Oct 06, 2020 5:30 pm

Go to Dave Ramsey to get told to eat rice and beans until you pay off all the debt. No, not the debt besides the mortgage.....all the debt.
That's not what Dave Ramsey says at all.
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Re: Best Course of Action for getting out of Debt?

Post by Rudedog »

Have a great day
Last edited by Rudedog on Tue Nov 10, 2020 5:32 pm, edited 1 time in total.
Bucho
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Re: Best Course of Action for getting out of Debt?

Post by Bucho »

I can attest that getting out of debt has an emotional component, and not just a mathematical component. That is why Dave Ramsey's debt snowball seems to work so well for many. Even if their income remains the same, it will feel like getting a raise every time a debt payment is eliminated.

If I were in their shoes, I'd do something like this:

1. Try to sell the car, if possible, and pay off the car loan. That would free up $400-500/mo. If they couldn't afford to pay cash outright for a cheap car, even buying a $5-8k car on a loan will reduce the payment and total debt.
2. Get a personal loan for $46k and pay off the two credit cards. I did a quick search and you can get that amount for 6.99% -12% depending on the term and credit. The payment would likely be higher but progress would come much faster and they'd save on interest.
3. I've never dealt with student loans but if they're struggling to meet payments now, could they qualify for a deferment? With a $70k balance, that's probably a hefty payment and could be used to clear up some of the other debt to free up cash flow.

I agree with nearly everybody else about aggressively trying to reduce expenses, increase income, and tackle it hard. It is so worth the effort and peace of paying off the debt! I wish your friends luck!
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Re: Best Course of Action for getting out of Debt?

Post by Kookaburra »

arcticpineapplecorp. wrote: Tue Oct 06, 2020 7:33 pm For those not familiar the avalanche vs snowball is the snowball has you pay off smallest balance loans first regardless of interest rate, whereas the avalanche has you pay off the highest interest rate regardless of amounts of loan.

The mathematically superior method will always be to pay off the highest interest rate loans first regardless of amount of debt on each. So this would be the best order of attacking/paying down or off:

11k - 21.2%(credit card)
35k - 12.34%(credit card)
57k - 7.2%
71k - 5%(Student loan)
24k - 4.85% (Car Loan)
Since the student loan interest is tax deductible, it should be in the bottom position (assuming they are at least in the 10% bracket).
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Re: Best Course of Action for getting out of Debt?

Post by inbox788 »

Kookaburra wrote: Tue Oct 06, 2020 10:33 pm
arcticpineapplecorp. wrote: Tue Oct 06, 2020 7:33 pm For those not familiar the avalanche vs snowball is the snowball has you pay off smallest balance loans first regardless of interest rate, whereas the avalanche has you pay off the highest interest rate regardless of amounts of loan.

The mathematically superior method will always be to pay off the highest interest rate loans first regardless of amount of debt on each. So this would be the best order of attacking/paying down or off:

11k - 21.2%(credit card)
35k - 12.34%(credit card)
57k - 7.2%
71k - 5%(Student loan)
24k - 4.85% (Car Loan)
Since the student loan interest is tax deductible, it should be in the bottom position (assuming they are at least in the 10% bracket).
Agree. The student loan is both a bigger loan balance and lower after tax interest rate, or nearly equivalent if no tax benefit. Either way, it's not that big a deal (maybe $50 to a few hundred in a year that matters).

The only real difference is where to prioritize the car loan. It's a small difference, but I vote for paying last or next to last because of the lower rate vs. 12.34% credit card, so that's over 7% savings on 24k, which is about $1700 the first year!
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Re: Best Course of Action for getting out of Debt?

Post by ivgrivchuck »

CJF wrote: Tue Oct 06, 2020 4:23 pm What would you do for tackling this? I am open to hearing all ideas, so research and math can be done to figure out the best course of action.
It depends on your personality.

- Most people who take on a lot of credit card debt have difficulties in managing money. The underlying problem is mental, debt is only a side effect. For them Dave Ramsey's debt snowball and never ever again signing up for a credit card is the right choice.

- If on the other hand you are very good at managing money, but then something really bad happened to you which threw your life off balance, but now you are back in shape, then taking the rational approach might be the right choice: taking advantage of zero interest credit cards, paying off the highest interest rate debt first etc.
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Re: Best Course of Action for getting out of Debt?

Post by Outer Marker »

Pay cash for everything. It "hurts" more pulling greenbacks out of your wallet than swiping plastic.
Write down every expense on paper, and tally it up on a weekly and monthly basis.
Resolve each week and each month to spend less than the time before.
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Re: Best Course of Action for getting out of Debt?

Post by arcticpineapplecorp. »

Kookaburra wrote: Tue Oct 06, 2020 10:33 pm
arcticpineapplecorp. wrote: Tue Oct 06, 2020 7:33 pm For those not familiar the avalanche vs snowball is the snowball has you pay off smallest balance loans first regardless of interest rate, whereas the avalanche has you pay off the highest interest rate regardless of amounts of loan.

The mathematically superior method will always be to pay off the highest interest rate loans first regardless of amount of debt on each. So this would be the best order of attacking/paying down or off:

11k - 21.2%(credit card)
35k - 12.34%(credit card)
57k - 7.2%
71k - 5%(Student loan)
24k - 4.85% (Car Loan)
Since the student loan interest is tax deductible, it should be in the bottom position (assuming they are at least in the 10% bracket).
true, and also don't know if this person qualifies for REPAYE or PSLF and if so, wouldn't accelerate payments unnecessarily.

OP, does this person qualify for REPAYE or PSLF?
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Re: Best Course of Action for getting out of Debt?

Post by ColoRetiredGirl »

I am going against the grain. I would use You Need A Budget (YNAB) as this program has better steps in getting out of debt while living a reasonable life style. I would highly recommend visiting the YNAB site on Facebook and read how excited people are in getting out of debt quickly and becoming more mindful about their spending. Dave Ramsey is against credit cards while YNAB teaches how to use them responsibly. YNAB has videos, workshops, weekly newsletters, and awesome customer service. The FB community is awesome!
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Re: Best Course of Action for getting out of Debt?

Post by Outer Marker »

Apart from the laser focus on spending, as suggested above, apply for a zero interest credit card with as long a teaser rate as possible. I’d keep the car. Should have gotten a less expensive one, but you’d lose so much on the transaction costs, I don’t think its worth it.
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Re: Best Course of Action for getting out of Debt?

Post by JustThisGuy »

You've already received much good advice from everyone, but I would also add another dimension to this: Understand how interest is charged and how payments are applied for each of these accounts. You can use this information to "hack" that to your benefit. Point of laziness -- I'm using "you" to refer to the OP's friend. I don't mean the OP.

For example, let's assume that you pay $300/mo towards one of these debts. And, let's say that the debt is based on "average daily balance". Sure, you can pay it on the last day of the interest cycle, but you can also pay $150 twice a month (assuming that's permitted). It's the same amount out of your pocket, certainly. But, a small amount more of that $300 is going to reduction of principal vs going into the creditor's pocket as interest since the "average daily balance" is just that much smaller for the second half of the month. Those little slices add up.

Yes, it's more work to understand how your creditors calculate interest and apply payments, but a little knowledge may go a long way towards saving you some interest. Please do your research. I admit that this may be too complicated/overwhelming for some people, but you asked detail-oriented people what they think, so there you are! :happy
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Re: Best Course of Action for getting out of Debt?

Post by nisiprius »

1) Make the payment process automatic. However you want to do it, but automate it.

2) Just Do It. That is more important than how you do it. If you want to figure out the best sequence or follow Dave Ramsey or what have you, OK, but do not spend much time on that, it is just stalling. Definitely do not open a lower-interest credit card and transfer the balance. It is going to be unpleasant, and you are going to need to do it for a long time. You will need to keep doing it after the initial burst of enthusiasm wears off. You will just need to keep doing it and doing it and doing it and doing it and doing it and doing it and doing it and doing it and doing it and doing it and doing it and doing it and doing it, until it is done.

Pay off something today. Before you even think about The Plan.

If you pay off something today and then you discover that according to The Plan it would have been better to pay off something else first, it doesn't matter. A step is a step, even if it's only 29 inches instead of 30.

This is a situation where, truly, the best is the enemy of the good.
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Re: Best Course of Action for getting out of Debt?

Post by willthrill81 »

HomeStretch wrote: Tue Oct 06, 2020 5:28 pm - Pay debt with highest rates first
- Transfer the CC debt to a no-interest card for xx months if possible
- Increase income (i.e., 2nd job)
- Decrease expenses to bare bones
- Pay cash rather than credit to keep a handle on spending
- Don’t incur new debt
- Have friend read this thread
:thumbsup

Getting rid of the credit card debt ASAP should be priority #1. Transferring that to a zero interest card is a great way to avoid a lot of expense, unless the OP has the means of wiping it out very quickly.
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Re: Best Course of Action for getting out of Debt?

Post by redmaw »

How much does this person make? I calculate something like 15k/yr in interest on this debt load, it doesn't seem like something than can be paid off on minimum wage. If a budget can't be made (and realistically kept) that has at least 2k/month going to debt, I don't see how it can be paid off (1300 goes straight to interest). If that's the case, it may be better to bite the bullet now, and get a debt consolidation, or bankruptcy started. I don't really know how these processes work, and wouldn't advocate them, but if you are going to end up there anyway, why waste the time trying to pay it off. Note though that student loans can't be discharged with bankruptcy. Also if the student loans are federal loans you might investigate an income based payment plan, which could reduce the payment going to that debt, and increase the amount going to whichever loan is the priority at the time. It may also discharge unpaid debt when the clock runs out, though I understand this sounds better on paper than it normally works out in real life.

If this person makes a lot of money (or could soon), then sure just plug away at it. I will note that the largest interest rate is also the smallest loan. So avalanche vs snowball starts the same way.
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Re: Best Course of Action for getting out of Debt?

Post by StormShadow »

CJF wrote: Tue Oct 06, 2020 4:23 pm 71k - 5%(Student loan)
57k - 7.2%
35k - 12.34%(credit card)
11k - 21.2%(credit card)
24k - 4.85% (Car Loan)

What would you do for tackling this?
1. “Avalanche” method for tackling loans. Eliminate the credit card debt as soon as possible.
2. Cut up the credit cards and start paying cash only.
3. Sell the car and downsize to a cheaper preowned. Use remaining spare cash to attack the debt.
4. Love like a monk until debt paid off. Ideally, continue living like a monk beyond this point too. That means eliminating all unnecessary expenses.
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Re: Best Course of Action for getting out of Debt?

Post by MathWizard »

CJF wrote: Tue Oct 06, 2020 4:23 pm Hello all!

I have a friend who wants to figure out the best possible strategy for getting out of their debt. I explained the strategies of Snowballing and Avalanche to them. But I always like to get advice from others incase I am missing something. So the debt is as follows;

71k - 5%(Student loan)
57k - 7.2%
35k - 12.34%(credit card)
11k - 21.2%(credit card)
24k - 4.85% (Car Loan)

What would you do for tackling this? I am open to hearing all ideas, so research and math can be done to figure out the best course of action.

Thank you all.
Either snowball or avalanche would focus on 21.2% interest first.

The problem with snowball is that it would focus on the 4.85% car loan before the 12.34% credit card debt.
If you just move the 4.85% car loan to the end, the two methods are the same.

I think that the huge satisfaction of getting rid of the highest percentage debt as well as the
quickest loan to pay off is sufficient for the emotional payoff that Dave feels fuels the success
with the snowball method.

The added benefit is that his credit score will rise faster by paying off CC debt.
He will keep the same credit line, so the percent of credit utilization will drop,
which increases credit score. Once the car loan is gone, the credit utilization
percentage either stays the same or goes up.
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Re: Best Course of Action for getting out of Debt?

Post by dknightd »

willthrill81 wrote: Wed Oct 07, 2020 11:22 am
HomeStretch wrote: Tue Oct 06, 2020 5:28 pm - Pay debt with highest rates first
- Transfer the CC debt to a no-interest card for xx months if possible
- Increase income (i.e., 2nd job)
- Decrease expenses to bare bones
- Pay cash rather than credit to keep a handle on spending
- Don’t incur new debt
- Have friend read this thread
:thumbsup

Getting rid of the credit card debt ASAP should be priority #1. Transferring that to a zero interest card is a great way to avoid a lot of expense, unless the OP has the means of wiping it out very quickly.
I would be very very wary of using 0% cards to get rid of debt. Unless you are absolutely sure you can pay them off during the 0% period.
Likely the OP's friend does not qualify for 0% for a year. Likely they do not qualify for personal loan.
They have to pay it off the old fashioned way. Start with the high interest loans. Or declare bankruptcy.
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Re: Best Course of Action for getting out of Debt?

Post by flyphotoguy »

Brianmcg321 wrote: Tue Oct 06, 2020 4:24 pm Debt snowball.
This. When I was young I used this method and it worked for me. I hope it works for your friend.
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Re: Best Course of Action for getting out of Debt?

Post by Hyperchicken »

Just as a math exercise, this is $1,300 in interest monthly, and $15,500 annually. Oy.
mptfan
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Re: Best Course of Action for getting out of Debt?

Post by mptfan »

Some people who are in debt think that there is a magic formula or advanced financial technique for getting out of debt. There isn't. It's simple... spend less than you make. Some people can't do that. Some people can, but those that can and are in debt need to wake up and change their mindset and their lifestyle, and until that happens there is no amount of refinancing or moving around of debt or fancy financial magic that will help them.
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Re: Best Course of Action for getting out of Debt?

Post by whereskyle »

CJF wrote: Tue Oct 06, 2020 4:23 pm Hello all!

I have a friend who wants to figure out the best possible strategy for getting out of their debt. I explained the strategies of Snowballing and Avalanche to them. But I always like to get advice from others incase I am missing something. So the debt is as follows;

71k - 5%(Student loan)
57k - 7.2%
35k - 12.34%(credit card)
11k - 21.2%(credit card)
24k - 4.85% (Car Loan)

What would you do for tackling this? I am open to hearing all ideas, so research and math can be done to figure out the best course of action.

Thank you all.
Minimum payments on all except your highest interest rate account, to which I would devote virtually all discretionary income. Rinse and repeat til it's gone.

Unlike many Bogleheads, I do contribute to my tax-advantaged, creditor-protected, retirement accounts according to my investing plan even though I still have some high-interest debt. This is because 1. Time in the market is my best friend and 2. The creditors can't access what's in my retirement accounts.

I have used balance transfers before to postpone interest but this typically just allowed me to kick the can down the road. They are also hard to come by since the recession. Better to just get it over with ASAP.
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle
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Re: Best Course of Action for getting out of Debt?

Post by delamer »

If your friend isn’t underwater on the car loan— meaning doesn’t owe more than the car would sell for — then sell the car and buy a less expensive vehicle. At a minimum, this will reduce monthly payments. And if the equity is high enough, it could be used to pay down the credit card debt (but better to have a 3% car loan than 21.2% credit card debt).
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Re: Best Course of Action for getting out of Debt?

Post by ZWorkLess »

I agree on the concept of debt snowball, BUT I would absolutely "tweak" it and pay off the highest interest rate loans first.

With a 20%+ cc bill, there's not much of a good argument for having a 5% 20k+ car loan unless the person is really, really dependent on a specific type of expensive car. (I.e., has 4 kids and so must have a 6 seat big van/car, or job really requires that expensive of a car for some reason). If possible, I'd advise getting rid of that car and getting a "junker" (a la Dave Ramsey) until at least all the double digit interest rate loans are paid off.

I know debt pretty well, and I know sometimes it's really hard to avoid and/or maybe even sensible, but that's a scary looking pile of debt and is indicative of a real need for more income and/or less spending to get a handle on it long term.

I'd suggest that person consider selling stuff (a la Dave Ramsey) to help pay down debt. Maybe get a second (or third) job if possible, or a BETTER job if feasible. Cut expenses as severely as possible. Usually, cutting expenses is the key. Some people can live well on 40k/yr. Others struggle on many multiples of that.

Might be time to consider a house mate ("house hacking") or moving to a less expensive rental if they're renting, or even downsizing if they own their own home and can downsize enough to make it worth the expenses of selling/moving.

They definitely need to learn to BUDGET and track every dollar that goes in and out. When we were tightest financially many years ago, I used cash "envelopes" to cover all my "discretionary" expenses -- ie., food/groceries/takeout/dining out/household stuff -- the area where there is/was great wiggle room for me. I went from spending $300+++/wk on groceries for a family of 5 to staying well under $100/wk by couponing and sale shopping like a fanatic. For us, that made a WORLD of difference. I just got the $100 cash each week and added it to my "shopping" envelope. If I didn't have the cash, I waited. Soon enough, I had a nice buffer of extra cash. You really start to respect money more when you are tracking every dollar and you know that whatever you spend on one thing means you can't spend it on another. "Plastic" money is really dangerous, IMHO.

And, FWIW, after a year of my crazy couponing, I literally went to IKEA and bought $1000 in new couches in cash with my "extra" grocery money. (And, we are still using those couches!!) Couponing and sale shopping like that is a real effort and time suck, and I stopped it once our financial strain eased up after a couple years, but it got us through the 2007-2008 economic slow down as young parents and fairly new, heavily indebted, business owners and employers . . . with a lot less damage than might have occurred had I not done that.

NOT SPENDING (ie, penny pinching) is better than EARNING more because every penny you pinch is an after tax penny, and we were/are in a high tax bracket, so that makes a huge difference. It's sort of like losing weight -- both dieting and exercise help, but diet control is the KEY because there's only so much you can exercise off, and you can un-do days worth of exercise calorie burn in one out of hand drive through meal . . . just like you can undo weeks of penny pinching with ONE stupid purchase. Avoiding the stupid spending is the key, IMHO.

ps. If this "friend" is a romantic interest, think long and hard before becoming financially entangled.
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celia
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Re: Best Course of Action for getting out of Debt?

Post by celia »

You can use any/all of these methods:
* Sell the car and learn to carpool, paying for gas
* Return things recently put on cc if still like new
* sell off things you can live without
* get a job that pays more
* work overtime or a side gig
* go on a ‘spending diet’ every other month (a friend can also do it as encouragement and to compare notes)
* only pay cash until the cc paid off
* if you watch a shopping channel frequently, get rid of the TV
* find a rich relative who is about to die
* marry someone who is rich (their net worth needs to be more than your debt) :)
* reduce lottery ticket buying to one ticket a week (you only need one ticket to win ‘the big one’). Of course, this path (and the one above could put you deeper in debt, so think long and hard on how to prevent that)
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peetsperk
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Re: Best Course of Action for getting out of Debt?

Post by peetsperk »

CJF wrote: Tue Oct 06, 2020 5:27 pm I appreciate the replies. They have already read some Dave Ramsey. They are throwing all extra income at the highest interest rates first, and paying minimum on the others.

Ultimately, I am seeking thoughts on the strategy aspect incase there is an avenue worth exploring out there that we haven't thought of(Selling a kidney was considered ;)). This individual is extremely hard working, and when committing themselves to something I have never seen them not ultimately have success. While some debt lingers from their younger days, much of their debt comes from unexpected medical bills and a messy divorce. Their budget is currently being run fairly tight.

So, what I have been looking into for them to explore is to look into a personal loan to pay off the two credit cards at least. I doubt their going to find a rate for a personal loan lower than the 7.2% on the 57k.
Agree with those above who recommend Dave Ramsey.

However, if they're following Dave Ramsey as you say, they wouldn't be paying the highest interest rate debt first. Dave says get gazelle intense and do the following after you have a $1,000 emergency fund and you're current on all debts:
Step 1: List your debts from smallest to largest regardless of interest rate.
Step 2: Make minimum payments on all your debts except the smallest.
Step 3: Pay as much as possible on your smallest debt.
Step 4: Repeat until each debt is paid in full.

If your "friend" follows Dave's approach, interest rates will not be as important as keeping motivated to get rid of their non-mortgage debt as fast as possible. As he says, becoming debt-free is 80% behavior and only 20% knowledge. It's hard work and requires sacrifice. And last but not least, do NOT borrow money to pay off the credit card debt. Again, this tells me they are not following what Dave Ramsey teaches and instead are just kidding themselves into believing they're making progress by borrowing more money at a lower interest rate.
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Re: Best Course of Action for getting out of Debt?

Post by inbox788 »

CJF wrote: Tue Oct 06, 2020 4:23 pm 57k - 7.2%

35k - 12.34%(credit card)
11k - 21.2%(credit card)
What kind of loan is the 57k?

How did debtor accumulate 35k + 11k = 46k in credit card debt? What expenditures? Over what period of time? If it's any significant period of time, a good amount of that debt is interest! So you paying high interest on borrowed interest. A recipe for failure. You want to EARN compounded interest, not pay it!

Sometimes student loan or car loan is necessary, but credit card loans should almost always be avoided. The best course of action is to NOT go into credit card debt. Hopefully they can get out quickly and learn to avoid this in the future.
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Re: Best Course of Action for getting out of Debt?

Post by grabiner »

Kookaburra wrote: Tue Oct 06, 2020 10:33 pm
arcticpineapplecorp. wrote: Tue Oct 06, 2020 7:33 pm For those not familiar the avalanche vs snowball is the snowball has you pay off smallest balance loans first regardless of interest rate, whereas the avalanche has you pay off the highest interest rate regardless of amounts of loan.

The mathematically superior method will always be to pay off the highest interest rate loans first regardless of amount of debt on each. So this would be the best order of attacking/paying down or off:

11k - 21.2%(credit card)
35k - 12.34%(credit card)
57k - 7.2%
71k - 5%(Student loan)
24k - 4.85% (Car Loan)
Since the student loan interest is tax deductible, it should be in the bottom position (assuming they are at least in the 10% bracket).
Paying the student loan down to $50K would eliminate non-deductible debt, as the deduction is limited to $2500 of interest.

However, if the student loan may qualify for some form of forgiveness, it should be left for last in case it can be forgiven.
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Re: Best Course of Action for getting out of Debt?

Post by lgb »

egrets wrote: Tue Oct 06, 2020 5:02 pm So I read up on the debt snowball, and I disagree. I would pay off the highest interest rate loan first, while making minimum payments on the other debts, then repeat.
I would disagree with you. That was the first thing I thought when I saw that Snowball plan, thinking what a dumb dumb, clearly he can't do math.
:sharebeer
With someone that has that amount of debt in various things - although it is a math problem, at the present moment for that person it isn't about how quickly you get to the shoreline of safety (not owing people and instead creating actual positive net worth), it is the emotional win of finding out there is a piece of wood floating in the water ahead of you that you actually can swim and get to.... the sharks lurking in the water underneath you at all times for everyone at any time are all the times you signed the papers for more loans that keep those sharks close by for when you get off path, or the use of the credit card(s) instead of your own money where you're assuming in your life you're going to just have this straight line rosy trajectory of no 'exceptions' to your great game plan (be that poorly planned for or real unexpected expenses, or the rosy thought of your income increasing by X percent year over year as opposed to being less or none for a period!). Undoubtedly your plan will get off track in your lifetime (ask anyone with 'years' under their belt).

Get the emotional win, it is actually the 'key' to keeping your motivation - step by step. The other key - is to actually focus 'everything' (of available money and other things that can be turned into money) (including stopping retirement funding (gasp!), only for as brief as possible - but also again for motivation purposes)

During this snowball phase, the big thing is to have a zero based budget - and committing or at minimum sticking as close as possible to it to give yourself the opportunity to clean it all up as fast as possible. Otherwise it lingers, and your life 'exceptions' will occur and always set you back - when you could have just had lazer focus to focus on the task at hand so you could put everything you can towards the problem. It has to become an all consuming priority to allow you to move forward and look back afterwards where it will be easy to say 'yea, not doing that ever again and what was I thinking'... You'll also realize that your income you do make is probably quite sufficient, without your debts in the picture. I did at least. The funny part is, I'm the one that signed up for the debts and credit cards. No gun to head or anything! It was me all along! :D
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Re: Best Course of Action for getting out of Debt?

Post by finite_difference »

-Debt avalanche or snowball, whichever your friend prefers except avalanche is more efficient.
-Sell the car and buy a used Corolla.
-If credit is in good standing, try to call CC companies and be ludicrously polite but insistent to request a lower rate. Every percent helps. May need to wait to have on time payments for a year or so.
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Re: Best Course of Action for getting out of Debt?

Post by Lee_WSP »

CJF wrote: Tue Oct 06, 2020 5:27 pm
Ultimately, I am seeking thoughts on the strategy aspect incase there is an avenue worth exploring out there that we haven't thought of(Selling a kidney was considered ;)).

So, what I have been looking into for them to explore is to look into a personal loan to pay off the two credit cards at least. I doubt their going to find a rate for a personal loan lower than the 7.2% on the 57k.
Paying off debt requires almost zero strategy. It's a lifestyle change, not a financial strategy.

If he can roll them over without cost, he'll save on the interest. I can't fathom how on Earth you acquire that much CC debt without having the income to pay it off each month though. So, if he can knock it out in under a few months, that's the best strategy. If it's going to take a few years, personal loan or bankruptcy.
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Re: Best Course of Action for getting out of Debt?

Post by ruralavalon »

CJF wrote: Tue Oct 06, 2020 4:23 pm Hello all!

I have a friend who wants to figure out the best possible strategy for getting out of their debt. I explained the strategies of Snowballing and Avalanche to them. But I always like to get advice from others incase I am missing something. So the debt is as follows;

71k - 5%(Student loan)
57k - 7.2%
35k - 12.34%(credit card)
11k - 21.2%(credit card)
24k - 4.85% (Car Loan)

What would you do for tackling this? I am open to hearing all ideas, so research and math can be done to figure out the best course of action.

Thank you all.
1) Cut spending ruthlessly, then cut some more.
2) Trade to a cheaper low mileage used car, and get a lower payment on a car loan.
3) Then use the improved cash flow to pay off the "11k - 21.2%(credit card)" first.
4) Then use the improved cash flow to pay off the "35k - 12.34%(credit card)" second.

What kind of debt is the "57k - 7.2%" ?
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