2nd mortgage, student loan, or save
If you didn’t already know, I am a staff writer with FiveCentNickel.com (see this link for my FCN article archives) and have articles published there every Thursday morning. This past Thursday I asked the FCN readership to help me decide whether to repay my 2nd mortgage or my student loan debt first. I received a lot of great advice but ended up deciding to save money while simultaneously accelerating debt repayment.
Let me explain…
If I had to decide to contribute all available funds toward a debt snowball one of these debts ahead of the other, I would choose the 2nd mortgage. However, rather than lock up all available monies into debt repayment, we are choosing to save a majority of available monthly money in a Debt Repayment Fund (click to contribute,) then repay the debt in lump sum payments. Yes, this strategy will cost a little more in interest, but the amounts are negligible compared to the incredible flexibility this approach affords us.
The economy and housing market are worse in Michigan than in most any other state. The Debt Repayment Fund will accumulate for the purpose of lump sum debt repayments, but will also act as a hedge emergency fund against job loss. How probable is job loss for us? Very probable. In fact, my wife’s employer has already warned that her position is likely to be eliminated for next school year. Coupling this information with the tumultuous Michigan housing market, we are choosing to save most of our extra cash flow, then decide what to do with it as time passes.
We may use the Debt Repayment Fund to pay lump sum debt payments quarterly, bi-yearly, or yearly… we’re not sure yet. What we do know is that a combination of increased principal payments and a hedge of savings is the best decision for us at this point in time.
Extra principal payments on two loans
To keep accelerated payment momentum going on our debt snowball we will still make extra principal payments on the two loans in question. In my FCN article I asked for advice on whether to repay our 2nd mortgage or my student loan first. We have an estimated excess of $1,500 each month and will disperse it like this:
- Debt Repayment Fund = $1,000 (this is an interest bearing SmartyPig Savings account)
- 2nd mortgage extra = $300 (this amount is added to our regularly scheduled monthly payments)
- Matt’s student loan = $200 (this amount is added to our regularly scheduled monthly payments)
Any extra income over and above the $1,500 will also be saved in the Debt Repayment Fund.
We will pay extra principal payments on our two highest rate loans and save all excess in our Debt Repayment Fund for future lump sum debt payments. We are doing this as a hedge against unemployment and a devastated Michigan housing market.
What do you think of this plan?
Link rally for this week
- Dollars Spent by Dave Ozment
- 3 Things To Remember About Roth IRAs by Peter
- 7 Shortcuts to Frugal Shopping With Google by CouponSherpa
- Paying Down the Mortgage: Our Family’s Plan by Elle
- Savings Accounts for Children by Frugal Dad
- How to Help Teens’ Spending and Consumerism by Craig Ford
- New Images: What Your New Credit Card Bill Will Look Like by PT
- What Is A Checking Account? by Craig/FFB
- A Financial Lesson From StarCraft by Tom @ Canadian Finance Blog
- Roth IRA Limits: Aged, Contributed, Phased Out, and Converted by Junior Boomer
- Why You Should Avoid PayDay Cash Loans by Jeff Rose
- Tight Budget or Extra Cash In Your Account? by Mike
- What is a tax-sheltered annuity (TSA) by Mike
- Best Small Business Ideas 2010 and Beyond by Wealth Pilgrim
- Should I Open a Bank Account Online? by MD
- The High Price of “Low Cost” Payday Loans by Being Frugal.net
- Immediate Annuities Explained by Kyle
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