Debt Repayment Strategy: Prioritizing Car Loans Over Student Loans

Nick should prioritize paying off the car loan first to minimize future payments on depreciating assets.

### Prioritizing Debt Repayment: Student Loans vs. Car Loans
* 💰  Nick is currently managing **$9,000 in student loans** and **$15,000 in car loans**, both with similar interest rates, and seeks guidance on which debt to pay off first while considering his employer's **401(k) match**.
* 📊  He is following Ramsey's baby step 2 for debt repayment but is also aware of the financial order of operations, particularly the **importance of taking advantage of employer matching contributions**, which can yield a **100% return on investment**.
* 📝  To approach his debt repayment strategy, Nick can choose between two common methods: the **debt snowball**, which focuses on **paying off the smallest debt first** to build momentum, and the **debt avalanche**, which prioritizes debts by the **highest interest rate** to minimize overall interest paid.
* 🚗  The speaker emphasizes the importance of minimizing car payments due to the depreciable nature of cars, which **lose significant value—up to 40% in the first few years**—making it crucial to **pay off car loans quickly**.
* 🎓  In contrast, student loans are less likely to recur, as education is considered a **lasting asset**, so it may be wiser to focus on the **car loan first** if interest rates are similar.
* 📈  After securing the employer match and defining what constitutes high-interest debt, the speaker suggests prioritizing the **car loan over the student loan**, while also recommending a **detailed analysis if the interest rates are close**.
* 🔍  Ultimately, the decision should consider **personal preferences and the actual cost of interest**, allowing for flexibility in the repayment strategy based on **individual financial circumstances**.

[Music] Nick has a question up next. He says, I'm paying off debt, and I have 9k in student loans and 15K on a car loan with similar interest rates. Which debt do I pay off first? He says he's on Ramsey baby step 2, so he knows about Ramsay's paying off debt strategy, which is great. I struggle with not getting the 401K match though, so he thinks prefers the financial order of operations, which is fair. Like, he sees that there's an opportunity there. So, which debt should he pay off first? How should he think about this along with getting that 401k match and all those choices that are factoring in here? All right, so 9k in student loan debt, 15K in a car loan, similar interest rates. All right, so this is where um Dave, good good buddy, love him, but this is where we differentiate a little bit. We love employer match. We think that employer matching money is just like it's free money. It is free money. It is that like

Special Special Sauce that you cannot walk away from. It's why re you hold the thing up. It's why we make it step two with the financial order of operation. It is so good. There you go. Look at that, Brian. It is so good that we think you cannot walk away from it even and like earmuffs for all my Ramsey folks out there. Even if you have high-interest debt because as high-interest as your debt may be, it's probably not going to be 50% 100% levels. And that's what employer matching is. If you get a dollar Ford dooll match, that's 100% rate of return on the dollars you're putting in there. So you cannot walk away from that in my opinion. So even if you have the 9k in student loan debt and you have the 15K in car loans, I still think the employer match should be something you should do. Well then when you get to step three, that's where high-interest debt comes in and you have to define for yourself what is high-interest debt now.

Nick did, he did not tell us what the rates were on the student loan car. I mean student loan caran though, yeah. So, and if they're about this same right, so one you have to Define, is it high interest or is it not high interest, and I'm going to argue for sake of this conversation, let's assume that it is high in debt. So, we're trying to figure out which one we prioritize and how we do that. Well, when it comes to paying off debt, there are generally two methods you can go with. You can go with the debt snowball, which is where I take my lowest dollar value debt and I pay that off first because the idea is I want to get some momentum building for getting out of debt. So, in this case, that would be the $99,000 student loan. It's the lowest dollar value. The second method is the debt Avalanche. What you do is you take all of your debts and you order them by your highest interest rate to your lowest interest rate, and what you want to do is

you want to save yourself the maximum amount of interest, and so you're thinking about the marginal cost of every next dollar. So, you would pay off the highest interest rate first, and then you would go down and go down and go down. Those are the two common methods in this situation where Nick is. I have 9,000 of student loan debt, 15,000 of car loan. I'm going to tell you how I would think about it. This is the bansen personal preference, so when you're writing notes, write this one in pencil because this is not like something that has to be set in stone. I think about a car loan. The thing that troubles me about car loans is that they're depreciable assets. Like, we know that in the first three or four years of a new car, it loses something like 40% of its value just through depreciation alone. So, I have this loan there, and yet this asset that backs the loan is going down and down and down and down and down and down. And realistically, at some point throughout my life, I'm

probably going to have to replace that car. So, what I want to do is I want to minimize the amount of time that I have car payments. Because if it's inevitable that I'm going to have car payments for some season in my life, I want that to be as small of a season, as limited of a window as possible. I'm probably not going out and getting more student loans. That's probably not going to be something that replenishes and recurs and does it over and over again. So, the fact that the student loan doesn't technically depreciate. I know it's a little weird because an education is an asset that doesn't have the kind of value like a car would. I think that I would prioritize after I've gotten my employer match, after I've defined what high-interest debt is, after I've assessed where I am in the financial order of operations. I think I begin prioritizing the car loan before the student loan, assuming the interest rates are the same. Now, if they're about the same, then I do a spreadsheet because if

It's like a half a percent difference in it. Okay, well now I want to figure out how much interest is it actually costing me. Do I want to go Avalanche? I want to go snowball. How would I think through those?

Which Debt Should I Prioritize Paying Off First?

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Prioritizing Debt Repayment and Employer Matching

Nick has $9k in student loans and $15k in a car loan, both with similar interest rates.

The advisor emphasizes the importance of taking advantage of employer matching for the 401k, viewing it as free money with a significant return.

They suggest that Nick should prioritize the employer match even with high-interest debt, and then focus on paying off the student and car loans in step three of the financial order of operations.

Prioritizing Debt Repayment: Snowball vs.

Nick did not disclose the interest rates on the student loan and car loan, but for the sake of discussion, they are assumed to be high.

The two common methods for paying off debt are the debt snowball (focusing on the lowest dollar value debt first) and the debt avalanche (paying off the highest interest rate debt first).

The speaker expresses concern about car loans due to the depreciating value of the asset, suggesting that this may influence their debt repayment strategy.

The speaker aims to minimize the duration of car payments, considering them inevitable for a season.

They prioritize the car loan over the student loan, assuming similar interest rates, after addressing high-interest debt and employer match.

A spreadsheet is used for further assessment when the interest rates are about the same.

Calculating the Cost of Interest and Debt Repayment Strategies

The difference in interest rates is minimal, at half a percent.

It's important to evaluate how much interest is actually being paid.

Considering debt repayment strategies, one can choose between the Avalanche method (paying off higher interest debts first) or the Snowball method (paying off smaller debts first).