What would you do? - Debt Reduction Question

[movingonup23]

So this is hypothetical for now but hopefully a realistic question I have to answer in February of 2016.  My wife and I have a goal of saving $1500-$2000 per month starting in June and having a lump sum of $25k-$40k to pay off some debt.  The goal is realistic and we saved $2k in June.  Our starting savings balance as of end of may was $7500.  The reason for the $15k range in our total savings by February 2017 is that I get a bonus on January 31st and I won't know how much it is until the end of the year.

Our debt:

My student loans total $22k and range from 6.55% to 2.08% with a total monthly payment of $228.

Auto loan - $30k balance with a $500/month payment at 2.55%.

Wife's private student loan has a $5k balance at 10% with a $58/month payment.

Wife's fed student loans are in deferrment until she finishes school next May.  Total amount is about $30k.

Home mortgage is $144k, $1087/month at 4.25%.

We have no credit card debt.  We pay them off each month.

For argument's sake, let say I have $35k saved by February and I want to keep $5k in my savings account for emergencies.  What should I pay off with the 30K?  I'm torn between two options:  1.  Pay off wifes private student loan and all of my federal student loans.  That will free up an addtional $286, so when her payments start on her student loans our payments will remain about the same.  2.  Pay off the car and have an additional $500/month to save/put towards the student loans.  The car's interest rate is lower, but if I plan to pay off the student loans within a year (private loan first), does the years worth of extra interest really matter?

Thanks for the advice!

[youdontkillmoney]

Pay off the student loans first at the higher rate, plus student loans are not forgiven in case of bankruptcy (not that you will, just FYI), so you have options with the car should it come to that as it can be included in a bankruptcy.

Also which will make you FEEL better, if paying the car first makes you feel better and then student loans, do that, the power of feeling good is a good motivator to get the rest of the job done; I find being aggressive like you are and intent goes a long way to making what you want to happen.

[movingonup23]

It will be a tough decision. We paid off our first car off 3 years early (we still have it) and something about paying this car off in less than a year would make me feel good. I'm hoping the bankruptcy thing is irrelevant but being a banker I've seen strange things happen! We are also planning on trying for our first child in a year so not having the $500/month payment would be nice.

[Anonymous]

I agree that you have to way the emotional aspect of paying off certain things (whether for the one-less-bill feeling of knocking off small ones or I-don't-owe-on-X feeling) vs. the one that makes the most financial sense. But I'd not take that tack with DW's 10% SL. I'd knock that sucker out in a month or two or three first, then tackle the rest. Depending on where you are in the life of the loan, you're could paying $40 interest with your $58 payment. I'd check into that. 

I applaud you for not wanting to throw every penny at debt ASAP and building up savings. But for my personal taste I wouldn't amass a big pile of cash and then dole it out. I'd split it and build cash reserves WHILE paying things off. But I know that's a personal decision and to each his own. 

[movingonup23]

It looks like building up for savings but it's earmarked for debt. The main reason I was amassing a lump sum was to see what options I have by feb 2016, although it is costing me interest to do so.

My student loans are 9 individual notes ranging from 3600 to 700 balances so I could pick them off as I go instead of waiting. The 5k note definitely needs to go. If I were to wait and payoff the car then the 5k note would be paid off in April 2016.

[movingonup23]

My savings should be around $12k by the end of this month. The smart thing to do may be to pay off the $5k note leaving $7k in savings and start rebuilding again.

[Anonymous]

You could put your savings into an online savings account like Ing direct.

http://www.ingdirect.com.au/savings.html

This high interest savings account would give you more financial mileage.

I'd pay off the car first since the money it frees up is larger than the student loans and they're somewhat close in price.

Then go after the loans with $500 a month extra you can throw at it and they'll be gone in no time.

Have some emergency money saved and time flies by fast, you'll be in a financially great place in no time.

You've got a good head on your shoulders. Keep up the good work.

Cheers,
Romulus

[Anonymous]

ING Direct USA went away a few years ago. It's Capital One now after the acquisition. The concept is still the same though. Online savings accounts, like Barclays US, have higher yields than traditional savings accounts. It still won't be as high as your debts but pays pretty well for liquid savings accounts.