QUESTION: Tina in Arizona says she and her husband are battling the state over owed child support. Tina isn’t sure where that debt falls in Baby Step 2. The kids involved are grown with their own children. The balance is about $15,000. Dave tells Tina how she needs to handle this.
ANSWER: You have a judgment lien against you and you’ve lost the lawsuit. You have a $15,000 debt. Just put that in your debt snowball. Pay minimums on everything but your smallest debt and list your debts smallest to largest, then pay them off in that order.
When you get down to the child support, wherever it falls in the debt snowball, you just treat it like it is credit card debt and knock it out. It’s not going away until you pay it.
If he wants to go part time, you have to do a budget and see if he can do that and you guys can still get out of debt and retire with dignity. But at some point, this has to be cleared up. So I would treat this just like it was credit card debt. Pretend that an old credit card that you didn’t pay sued you and you have a $15,000 that you are paying $50 a month on. Just put it in the debt snowball right there; treat it exactly that way.
QUESTION: Jonathan in Memphis is finishing his last semester of college and just landed his first job making $33,000 a year. He’s revising his budget, and he has $15,000 in student loans. Jonathan wants to know if he should put some fun money into this budget.
ANSWER: The faster you pay on the debt, the faster it’s gone. It’s up to you of how long you want to be in debt. I am a guy who likes to rip the bandage off. I’d rather get it over with. If I’m you, I’ll have no life. My new goal after getting this job is paying off the student loan and cleaning up the mess.
Then when I don’t have any payments, then I’ll have some money and that’s when the fun comes. That is the definition of gazelle intensity. It is no holds barred and going wide open. We are going to pour everything we’ve got into this before the debt’s gone. It means my broke friends are going to be making fun of me.
But you have to decide. The more you let your foot off the gas, the slower you’ll get out of debt, but the better lifestyle you’ll have while you’re waiting. If it were me, I’d just want to have no life. Keep living like a college student while you clean up the mess.
With the numbers you gave me and with living at home with no rent, you’ll be able to plow through this. I would look at the music equipment you have and just ask yourself what is not replaceable. That would be something like a guitar that has a lot of memories with it; something that you’ll wish you had back one day when you’re wealthy. I would put that in the same category as not selling your wedding ring.
But if it’s an old guitar and you don’t think much of it and you can get another one without a big deal, then dump everything and clean house. Let’s get out of debt. But hold onto the special things.
QUESTION: Jared owes the IRS $6,000 and is paying them monthly. Should he add a personal loan to this debt or continue the debt snowball until the IRS debt makes it to the top of the list?
ANSWER: Put the IRS at the top of the debt snowball. You pay that before you pay anybody for two reasons. First, their interest rates and penalties are so high, and the second is that they have virtually unlimited power to collect.
Put them at the top of your debt snowball and pay them first. It’s one of the few times I say to pay the debt snowball out of order, which is smallest to largest.
QUESTION: Jeremiah on Twitter asks what Dave thinks about a biweekly mortgage payment.
ANSWER: No problem with it at all. It’s awesome, and it’ll pay off a 30-year mortgage in about 22.8 years on average, depending on the interest rate, of course, so it’s helpful to pay it biweekly. You would not pay extra money, though, to pay it biweekly. You wouldn’t pay somebody a fee to set it up, like $500, because all a biweekly does—it’s not magical because it’s biweekly—is pay a half a payment every two weeks. There are 26 two-week periods in a year. That’s 13 whole payments you’re paying. The reason it’s paying off early is you’re paying an extra payment a year—not because you’re paying it biweekly. There’s no magic in the biweekly, so don’t pay someone extra to do it, but if you want to set your mortgage up that way originally, it’s certainly fine to do that. But again, do not pay a $495 fee or a $14 a month fee for a biweekly.
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