Dying Car, Or Kill The Student Loan?

Phil has a good pile of cash, a student loan and a car that's about to die. Which should he attack first?

QUESTION: Phil has saved $12,000 in cash. He drives a beater car and has had problems with it. He wants to get another car. Should he use part of the $12,000 to buy a used car or pay off a $12,000 student loan? He makes $30,000 a year. Dave tells him which comes before which in the Baby Steps.

ANSWER: We teach the Baby Steps around here. Baby Step 1 is to get $1,000 in the bank. Baby Step 2 is to pay off all debts smallest to largest using the debt snowball. Baby Step 3 is to finish your emergency fund so it has 3-6 months of expenses in there, in cash. What that means in your situation is that I want your student loan gone.

You don’t quite have enough to do that because you have $12,000 in debt and $12,000 in cash, and you need to keep $1,000 for your baby emergency fund. I would pay off $11,000 of the school loan now and then finish paying it off as you go. Limp along in the beater for a little bit longer, then when you have no student loan debt, finish your emergency fund and then start a car fund. If you pour on the coals, then by spring you should be able to pay cash for a $5,000 car.

I talk to a lot of 38-year-olds who still have a student loan. You have the opportunity to punch its lights out right now. Be done with the student loan. If you pour on the coals, you should be able to buy another car by spring.

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