Emailer: I have some extra money, which debt do I hit first?

I love getting emails from people that are working to makes themselves better financially. Check out this recent email:

Dear Pete:

I attended your class (when you spoke at my company), and also had a one to one with you.  My wife and I are moving and had a conversation last night where your name came up.  I’m hoping you can give us your quick opinion.

We are selling our house and moving into a newer house.  We will have approximately $13,000-14,000 left after the purchase that we are trying to figure out what to do with.  We did not put all of the leftovers towards the new house.  We do not have much of a savings, and we have a decent income.  We’ve been extremely focused on reducing debt for the last two years. 

Below is our debt, excluding the new house.

LOAN NAME Type BALANCE INT. RATE Fixed or Variable Monthly Payment
Medical Loan

1273.5

0.00%

F

$100.00

Sallie Mae School

1902.5

6.80%

F

$34.90*

AES School

3274.07

4.89%

V

$65.02**

Sallie Mae School

3482.51

2.39%

V

$57.17*

Baber School

3836.19

1.00%

F

$110.00

AES School

4278.63

4.89%

V

$84.98*

Sallie Mae School

7161.87

1.63%

F

$71.28*

Ford F150 Auto

7283.8

1.90%

F

$434.00

Sallie Mae School

12739.42

4.50%

F

$145.88

Ford Flex Auto

18280.99

3.29%

F

$350.00

Should we put this money in savings and just continue reducing debt as we have been lately, or should we use the majority of it to reduce the debt?  We have been using the snowball method.

Thanks,

S


Awesome question. Here’s my response to “S”.

S

Anyway, Here’s what I would do. I would take $10,500 and pay off debt. That would leave you around $3,000 for emergencies. That should take care of you for awhile, while you hammer away at your debt.
However, I would pay off the following debts, for the following reasons: Ford Truck, Torrey Pines, and the $1,900 student loan. This would eliminate $568/month in minimum debt payments. You could then use that money to superfund your debt snowball. Does that make sense? Although we didn’t pay off “the lowest balances, first”, we did free up the most money based on minimum payments. Upon paying off those debts, then continue paying minimum payments on all your debts, except for the lowest balance debt. Throw all your extra money at that debt until it’s paid off. Then do the same thing for the next lowest debt.
Pete

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