The benefits of the plan are that you will always be making higher-payments than required, but if you run into a bind with an unexpected loss of income (or increase in bills), then you can immediately switch to just making the smaller minimum required payment.

But this tactic requires real dedication and motivation on your part to stick too, and the majority of people will not follow through on the original plan.

Seeing a 7-year car note, and a 40-year mortgage really looks bad from my point of view. But as long as you entered these deals with the plan (and are following them) of actually paying the car off in 4-years and the house in 15-years (or less) then that is fine.

If you financed the car for 7, and the home for 40, because that would be the only way to afford the monthly payments, then those would be huge mistakes, and you should sell those assets and purchase alternatives more in your pay range.

I have absolutely no doubt in my current understanding of both basic and advanced PF and tax concepts (some investing….get a little confused on advanced option plays lol).

“So why then, do you think your dollar (or $25) could have been better utilized for something else, as it wouldn’t be used to its potential?”
- Regardless of whether you agree, I thought I explained at least where I was coming from?

Why wouldn’t I take the longest amortization table if I could prepay without a penalty? If I pay it off in 4 (this will be the fourth year and it is likely that I will pay it off this year or early next year – not at $25/month, but likely from side income from blogging and my side practice.

I disagree with your using wikipedia’s definition to classify an auto as a depreciating asset — you could use the same logic to classify a house as a depreciating asset, yet it is generally accepted that houses at a minimum hold their value over time. However, I do agree with you wholeheartedly that an auto is without a doubt a depreciating asset.

Evan wrote:
For example (not my example, and it is extreme on purpose): I pay down $1 of a $10K note and the car is worth $10K. The very next day (extreme example) the note is $9,999.00, but my car DEPRECIATED and can only be sold for $9,000. Putting my extra dollar which could have utilized for something else – was not used to its potential.

I’m cool with extreme examples on purpose — especially with numbers — it makes things very clear. What I was trying to get at in my previous post is that you really have two mutually independent factors here. The first is your car (which is an asset to you) and that car has some value. You likely use a third party pricing guide (like Kelley Blue Book) to determine its value. The key point here is that the current value of your car is independent of what you owe RIGHT NOW to your bank on the note.

The second is the car note (a liability) and the value of this liability was the terms under which you and the lender agreed — in this case, $12,000ish loan, 8% APR, 7 year term. (I’ll go with 12 thousand even here). According to bankrate’s auto loan calculator, a $12,000 loan with the above terms results in a monthly payment of $187.03. Over the course of the loan, you will have paid $15,710.52, or $3,710.52 on top of the $12k principal. Adding $25 each month to this payment would pay this loan off in 6 years instead of 7, and your total interest payments would be $3,115.96, or $594.56 less than what you paid before. (So by making an extra $1775 — that is, $25/mo for 71 months — you’d save yourself 13 months of $187.03 payments, or $2431.39)

So why then, do you think your dollar (or $25) could have been better utilized for something else, as it wouldn’t be used to its potential?

As for the fact it doesn’t really matter if I understand/agree because you have already made up your mind, all I can say is that until you have a better handle on some basic PF concepts, your journey to millions is going to be hampered by poor financial choices. One such choice might be the decision to finance a $12,000 car over 7 years. If you couldn’t afford a shorter amortization period, you could have bought a cheaper car. For example, you could have bought a $7,000 car, financed it over 4 years, and only paid $1202.74 in interest while having a slightly cheaper monthly payment. But instead, you chose to pay $3710.52 in FINANCE CHARGES on a DEPRECIATING asset. Was a more expensive car really worth an extra $2500 in interest payments?

It is moot, since I have already said I would go with the auto note. But your assesment of my concern of a depreciating asset is completely incorrect. Wikipedia defines a depreciating asset as,

“…depreciation is the reduction in the value of an asset due to usage, PASSAGE OF TIME, wear and tear, TECHNOLOGICAL OUTDATING or obsolescence, depletion, inadequacy, rot, rust, decay or other such factors.” emphasis added.

As such, simply the passage of time decreases the value of the automobile, not just repairs as you put it. I am fully familiar with contract law and recourse / non-recourse loans which is what you were hinting at, but that has little to nothing to do with the discussion.

My true concern, which I feel better about because I made the decision to keep the car, beyond the note, was that EVERY dollar I put into the debt repayment, if I sold the car before the note was naturally paid in full (i.e. never utilized the car beyond the ending of the note) would be worth less than said dollar the very next day because the asset was losing value by just sitting in my driveway.

For example (not my example, and it is extreme on purpose): I pay down $1 of a $10K note and the car is worth $10K. The very next day (extreme example) the note is $9,999.00, but my car DEPRECIATED and can only be sold for $9,000. Putting my extra dollar which could have utilized for something else – was not used to its potential.

Again, it doesn’t really matter if you understand/agree since I already have made the decision to keep the car beyond the time I originally thought.

Assuming you have a secured loan, you have a contractual obligation to repay the car loan, or it will get repod. Your car would get repod and sold at auction. You could then be sued for the difference of your loan and what the bank got for your vehicle at auction.

If it is unsecured, then your defaulted loan would get sold to a junk debt buyer, who would likely sue you in court for the unpaid balance of the loan. And since you do have a contractual obligation to pay that balance, the question you must answer is what’s the cheapest way to repay that balance. The less money you pay toward it, the more it costs you.

If you simply sold the car, you’d still be responsible for the note. That is, assume your car is worth $5k, and you can get that much for it in a private party sale. You’d be able to pay down your note, but you’d still owe $2k.

Your concern about a depreciating asset comes in to play when the vehicle needs repairs. Right now, your only concern is about the cheapest way to manage your debt.

And you dont have to touch the emergency fund.

just another way to skin a cat.

No one really discussed the idea of throwing money at a depreciating asset. Notwithstanding after some wondering I have decided to keep the car and pay off the note as soon as possible. I came up with this because of the discussions here and I finally asked myself, “what the hell am I doing?”

I have a car with 52K miles that will last another 50K without a real problem, and at $289/month I’ll never have a cheaper/month car.

“Are you allowed to deduct the student loan interest on your income taxes? I have a feeling no, since you are a lawyer and make above the threshold.”

NOT ONE PERSON IN THE BURSAR’S OFFICE TOLD ME ABOUT THE THREASHOLD WHEN I WAS SIGNING MY LIFE AWAY! lol
When I got married I fell under the threashold because the Wife doesn’t make as much.

http://www.myjourneytomillions.com/articles/education-loan-interest-not-always-tax-deductible/

I would also say get rid of the mortgage completely until the student loans are gone, especially such large ones. Renting is cheap, and provides flexibility if you are moving often enough to feel that prepaying a mortgage isn’t worth it. I like being debt free and socking away $20k+/yr towards my future home.

Also, in the above auto loan example you’re forgetting about the interest he’ll throw away in interest on the debt, which is way higher than anything he’ll earn in a savings account… especially now-a-days.

Investing rather than paying off debt can make sense in some situations… but this is not one of them – IMHO.

Just to offer another point of view for the discussion here…

Why pay off the debt early at all?

If we define that your debt, income, and assets are all a part of your personal economy then we can build a more perfect view of your situation.

When you pay off debt, that money is gone out of your personal economy. If you need that money later then you have to qualify for another loan, another loan = more debt. And what if you don’t qualify?

Instead of paying off debt with liquid assets (cash), why not leverage that money to make you money. There are plenty of investments out there that you can take advantage of even in a tough economy. Compound interest earned on your liquid assets (cash) can far outweigh the interest that you are going to pay on your current debt.

Let me give you an example…

If you pay all the normal payments on your current debt and instead of paying an extra say $300 toward your car payment until it is paid off, make that same $300 payment to yourself in either a savings account or some other savings vehicle. By the time your car is paid off ($12000) you will also have a savings vehicle with $12000 cash + any compound interest you have earned on that money. So if you have say 3 years left on your car loan, then at the end of that 3 years you have also build up a savings equal to 3 years worth of car payments.

Just a thought.

Take your pick Evan. Mathematically Flexo’s plan will probably order the mortgage paid off before the student loans (due to amounts) but if you want to get rid of student loan debt first, then follow the mixed method. You will pay slightly more interest over the life of the loans but you will get rid of the unsecured debt first.

Either plan is solid.

Evan – this is the second piece of budgeting advice, which I wholeheartedly agree with. You elude to a “zero-based budget”, so you must have an average amount of disposable income to put toward your debt each month correct?

1. Auto Loan
2. Law School Loan #1
3. Law School Loan #2
4. Mortgage

For me, the decision is easy. Your auto loan and first school loan are the smallest debts in amount. Also, the auto loan has the highest rate, and loan #1 is third by <1%. Having said that, you would be paying your debt via a Dave-ish/Flexo-ish mixed method.

After those two, pay off the second school loan, then mortgage. This follows my "just because" philosophy. Pay off your mortgage "just because" it's a mortgage. Pay off everything else first.

I think that after tax deductions, you'll likely find that my order is the same as Evan's.

In his goals post Evan says that both student loans may be deductible. Sam is right… it is important to figure this calculation of after tax importance when ordering your debt avalanche.

Is this true Evan?