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I currently am in debt with a vehicle loan about 18,900$ and with 12k student loan debt. I currently have 3300$ that I have in my savings account not being used at all. I currently have a 1k emergency plan too. I am looking to take out that vehicle loan as fast as I can, since my 12k student loans are from the government. Would it make sense for me to put that 3300$ towards that vehicle loan right away? Or would it be better off for me to sit on it for a while until I get closer to having that vehicle loan paid off? I currently am going to be putting 1000$ towards the vehicle loan each month since I want to get rid of it by next year. The vehicle loan is a 4 year 3.725% interest rate. I have been reading dave ramsey and realize I am still young (21 years old) and thought I might as well take out that debt first since I still have many years to save for my retirement. Plus I graduated from college a year early so I personally think I will be okay.

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    Since you mention Dave, his plan is pretty structured and you pay off SMALLEST to LARGEST debt first. Also, I bet student loan interest rate is at or above the personal loan. – AbraCadaver Jul 19 '18 at 18:43
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    What's the interest rate on your student loans? How many months of expenses would the $1k emergency fund cover? – Hart CO Jul 19 '18 at 18:44
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    "would it be better off", better off in terms of what? Mathematically, psychologically, something else? – mikeazo Jul 19 '18 at 18:45
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    @HartCO They are higher around 4.20% but they are all in deferment and I feel more comfortable taking out the personal loan first. – MountaindewKing Jul 19 '18 at 18:45
  • You're young and strong. You should immediately use every penny to pay down debt. Get a whole-weekend weekend job and within a few short months you'll eliminate the horrible personal loan. – Fattie Jul 20 '18 at 1:32
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With the small interest rate on your loans, I don't think it matters.

I personally would keep the cash on hand and consider the interest a 'convenience fee'.

My reasoning for that is explicitly because you've managed to get an interest rate that's remarkably low for a personal loan.

I think you should re-check the interest rate on your personal loan, because in the US, personal loan rates are usually between 8-30+% per year.

At 3.75% per year interest, you're effectively only paying (0.0375 * 3300 = $123.75) per year for the loaned balance that you might have paid off.

The issue you may run into, is what happens if you pay off your loan, and then end up needing more cash for something else that comes up?

In this instance, it may make sense to pay ~$10/mo for the interest that is accruing from that $3300 that you would have otherwise paid off, than to deplete your $3300 in savings and end up needing to take out more credit if something comes up.

However, if your interest rate were 10% or more per year, it would make much, much more sense to pay it off vehemently.

While you always lose money to interest, you must focus on what your interest rates are. Your interest rates should determine the amount of INTEREST / Urgency you have in paying them back. 30% interest rates should have you much more interested in paying back faster, than a 3% interest rate.

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While paying off debt is good, you also want to keep some cash reserve for emergencies. What if your car needs some major repair? You have a big medical bill? Or for that matter, you lose your job and need to keep paying the bills until you get a new one?

"Financial experts" often say that you should have 6 months pay in ready cash for emergencies. I don't know what planet these people live on: I've never in my life been able to accumulate that much spare cash, and most Americans think they're doing well if they if they have enough cash to pay the bills as they come in. But it's good to have some emergency reserve. And treat it as an emergency reserve: it's for EMERGENCIES, not, hey, I saw an ad for this cool toy that I just have to have.

I'd think $3,000 is a very modest emergency fund. I'd hold onto it.

If you had $20,000 in the bank and you have debts, I would certainly urge paying them off.

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    Typically the recommendation is not months of pay, but months of expenses. – Hart CO Jul 19 '18 at 19:26
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    I'd like to add - If you can't accumulate that in savings, getting a personal line of credit (which allows you to withdraw cash for things like rent) is a nearly indispensible alternative, as they usually have interest rates lower than personal loans / credit cards, and can usually allow you to quickly access cash if you're in an emergency. It's the same as going into debt if you rely on it, but at least you have it available if you don't have savings. – schizoid04 Jul 19 '18 at 19:45
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Loans in deferment typically still accrue interest, so the student loan is costing you more money, but the difference between 3.725% and 4.2% isn't incredibly significant on a short time period, so if you're more comfortable paying the personal loan off first then go for it.

Whether or not you throw that extra $3,300 at the loans immediately really just depends on how comfortable you are with a $1k cushion vs a larger cushion. At current balances, the combined interest is ~$100/month. So paying that $3,300 now saves you a decent chunk in interest. That sounds nice, but many emergencies can cost well over $1,000. If you'd feel more comfortable having a bigger cushion, then you could put that into a high interest savings account and drop the cost to carry the debt down a bit. The 6-month's worth of expenses emergency fund is a good goal, and many people prioritize that emergency fund ahead of relatively low-interest debt.

For some people, it's hard not to spend more when they have more, they might be best off putting the extra towards the loans immediately. It sounds like you've learned the importance of tackling debt early on, which puts you far ahead of many.

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You mentioned Dave Ramsey in the question. Following his Baby Steps plan is a great idea and will lead you to wealth over the next few decades. You are smart to be considering personal finance at a young age.

Before you spend your cash on hand, you should consider any upcoming expenses. Are you moving soon for example? Are you considering a master's degree? Is you car on its last miles? The first step in getting out of debt is to stop getting more debt so live your life with cash. Sounds like you are doing that already, if so, great move.

Also before you spend your cash, is your income stable and reasonably secure in the coming months? You mentioned putting 1000.00 per month towards your debt so I assume that you have a steady job.

If you do indeed have extra cash on hand then the Baby Step's plan recommends this order.

  1. Save $1000.00 as a modest emergency fund. Done!
  2. Pay off your debts smallest to largest. The idea is to get some traction and prove to yourself that you have the financial discipline to get out of debt. In your case, the student loan would be first. It is not a disaster to pay the personal loan first however. The key here is to get intense. You mentioned a $1000.00 per month, get serious an make it $1500.00 or more. Cut your lifestyle, cancel the cable, stop eating out, get intense! The faster you are out of debt, the faster you can build wealth for security and charity.
  3. Build a 3-6 month emergency fund 3b. Save for a house
  4. Now start investing for your retirement. 15% of your income is the number Dave uses.
  5. Kids college
  6. Pay off house early
  7. Build wealth and give generously

Starting at your age, if you follow this plan then your financial future is bright indeed.

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I'm kinda-semi-Ramsey, and thus I'd:

  1. Keep that $1K e-fund.
  2. Put the $3300 against the loan with the highest rate.
  3. Make a reasonable budget. Have some fun, but mostly essentials and debt.
  4. First pay as much as possible on the loan with the highest rate. That's anti-Ramsey, but mathematically better.
  5. Naturally, keep paying off the minimum on the other loan.
  6. If you ever have an emergency, use up the e-fund and then fill it back up.
  7. After paying off the highest rate loan, pay off the other loan using the money you've been paying it with, plus the money you've been using for the first loan.
  8. After they're both paid off... use a bit more money each month for fun!
  9. Keep using a budget!
  10. Save for a car, house, etc, etc in addition to retirement.

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