Ask Money

Targeting debt payments

Chris Farrell Nov 15, 2010

Question: Hi, after our recent marriage my wife and I received a nice sum of money from generous friends and relatives ($5,000). With help from our parents and the sale of a 3rd vehicle we didn’t have to take on any new debt from the wedding (and got in a nice honeymoon). So what would be a wise decision for the money? Both of us pay off our credit cards monthly. We have 2 vehicles with total payments of 350$. We have a home energy conservation loan that we used for an upgraded furnace and water heater ($6000 @4% for 10years) through the local utility company. We live in northern MN so the money savings is significant during the winter months. My wife has about 10K in student loan debt. We also have a HELOC loan from a home refinance at approx 20K. For savings we have approx 14K. Stocks 3K. I’m guessing we should put the money towards one of these debts but which one? Thanks, Dan, Duluth MN

Answer: You do have very generous friends and relatives. I love it. I think you’re right to use the money toward debt repayment. Your finances are in good shape but the money does offer you an opportunity to boost your financial safety net.

I have two reactions to your list. I would either target the home equity loan or the cars. At the moment, I imagine the rate on the home equity loan is low. The risk is that over the next several years rates will rise and the loan will absorb more and more of your income. The reason for going after the car loans is that an automobile is a depreciating asset worth less every year. You can’t go wrong attacking either debt.

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