Debt Snowball is Reducing Our Debt But What Next?

“Dear Steve,

We owe 172,000.00 on our house and live in CA. We are in our late 4o’s with a net worth of 200,000.00 not including my pension. We both have another 20 or so years to retire. My husband is self employed as a painter therefore we have to put away extra retirement for him. We have life insurance, only 1 child 15years old; I work in education and have been at my job for 11 years with a yearly pay increase. Recently we applied for a loan to lower our interest rate on our house and were denied even though we both have credit in the 800’s due to our cars which we bought last year. Combined income is 5662.00 per month. We live on a very strict budget and have money left over every payday after all bills are paid, savings is paid, etc. We live a minimalist life aside from our cars and house payment.

Hello, I am currently working on paying down debt using the snowball technique. I have suspended retirement payments until I get things down. My question is, once I pay off my cc $4200.00 should I put more money toward my 2 cars totaling 40,000.00 at 2.93% interest or should I start funding our retirement again?

Doris”

Dear Doris,

Congratulations on your success so far.

Do You Have a Question You'd Like Help With? Contact Debt Coach Damon Day. Click here to reach Damon.

As an aside, you might find great convenience in using the automated ReadyForZero.com approach to accelerating your debt repayment it. It’s a free service and it can make the snowball approach, just easier.

As odd as this initially sound, I’m not necessarily a fan of the all or none approach in debt elimination. While the debt carries a high interest rate, the resulting end result by not continuing some contributions towards retirement can be enormously expensive in lost future gains. Especially if your employer provides matching funds for retirement participation. In that case, for ever dollar you are not putting in that they would match, you are losing 100% plus the increase in value.

My personal opinion is that I’d like to see a more balanced approach where you continue your retirement deposits up to at least the matching fund level and then use the remaining money, after setting some aside in an easy to get emergency fund each month, for debt repayment.

If you do this, once you get the cards paid off, you can ratchet up the retirement deposits and focus on paying off the cars.

Homework: Was there a specific reason the cars held you back? What did the lender tell you? Was it about your debt to income ratio with the car loans?

Please post your responses and follow-up messages to me on this in the comments section below.