There are a couple of things that could derail my plan, the first being unexpected expenses that will require me to re-fund my emergency fund any time money is used for emergencies. And I know they happen. Just a few months ago, we had to cough up an auto insurance deductible. I expect appliance repairs will come around at some point also. Our truck needed a new $100 plus sales tax battery unexpectedly just this month.

We’re at a point where we still don’t have the funds to fully fund any repair and maintenance categories in our budget. Frankly I’d rather not anyway. I’d rather just have a larger emergency fund for those kinds of things, but that’s just me.

I’ve been reading a book that I’m find quite eye-opening when it comes to organization and planning, and I’ve decided there’s definitely a point where we reach diminishing returns on our investment in pre-planning and over-organizing everything, including finances. A Perfect Mess is all about how some disorder and mess can benefit our lives… I agree.

Why aren’t interest rates and amounts owed the most important factors?

First, interest rates and amounts owed do exclusively determine the amount of money you’ll ultimately be paying back. Time is a factor, but not in the same sense that interest rates and money owed are.

If you want to payoff your debt in a way that saves you the most money over the long term, based on your current situation, you need to choose to pay off your debts with the highest interest rates first. A higher interest rate means you pay back more dollar for dollar on a debt. If you owe $1,000 at a 10% interest rate, your monthly interest payment (using simple interest) is about $8.33. If you owe $1,000 at an 18% interest rate, your monthly interest payment is about $15. This is a simple way to decide what comes first in your debt payoff.

If you’re more interested in the motivational aspects of paying off debts quickly, you can start with the smaller amounts first and work your way up to the larger debts. This gives you a boost every time you pay something off, inspiring you to keep at it.

However, sometimes other issues come into play when you start working on your debt payoff plan. In fact, you should always consider other factors in your decision-making.

My problem

I have several smaller debts with low interest rates. I also have a few with larger balances that have higher interest rates.

My ideal plan would have been to pay off debt in a way that saves me the most money. I like money and I especially like it when I can keep as much of it as possible in my pockets.

My debts

The thing is, I would like to pay off the camper before the American Express bill because the interest rate is so much more favorable. However, with the current state of the economy and the ever-changing nature of credit card agreements, I worry that my American Express credit card terms will change drastically and unexpectedly and I’ll lose that lovely 3.99% interest rate until the balance is paid off. Then, depending on how high the rate jumps, any savings I could have accumulated by paying on the 8% debt first would be lost in a matter of months.

I have friends who are dealing with unscrupulous credit card companies right now and I have little faith in them myself these days. My biggest fear is that before the new credit card agreement rules go into effect later in the year, many credit card companies might try to take advantage of as many loopholes in the credit card agreements as possible to keep from having customers locked in with very favorable terms long-term.

Maybe I’m overly cynical, but I don’t think so. Do you?

All the reasons I mention above are reasons in favor of taking your entire financial picture into account when you start laying out your debt repayment plan or your debt snowball.

Arrange your payoffs to suit you and your needs and don’t worry so much about following any particular person’s specific method for deciding on a debt payoff order. As long as you’re paying something down with the intention of paying it off, you’re making progress!

We traded in my car for $6,500 (which we had the cash to pay off (about $4400)). We got that trade-in credit against a $12,500 used truck that has about 39,000 miles and is in excellent condition. The reason I’m not all up in arms about the truck with my husband is because I can easily see it as something we can keep longer term, not to mention that we traded in my car for it instead of his. We’re now down to two vehicles. Since my actual gas costs for commuting to my job are reimbursed, I won’t be spending any additional money on gas even though I now drive a vehicle that gets significantly less efficient gas mileage than my previous car.

Money-wise, we ended up with an auto loan of $6,500 or so at 4.79%. There’s no prepayment penalty so we let them make the loan for the standard term they wanted to make it at which was 4 years. I don’t really care, since I’m going to pay it off early anyway, but I like that I still have the option if I want to take it, to pay off a higher interest debt first, because this payment of $148 each month is much less than what my car payment was.

I have to sit down and rework my plans for paying off my debt now, but with the lower payment related to the lower interest rate on my home and the lower auto payment (but still a payment), I will have cash available to put towards other debts.

When I do that, I’ll be sure to post here.

As for the truck, I like it. I’ve never been the primary driver for a truck before and it’s an interesting experience. 

The car I owned before was the only vehicle I had ever bought new. I wouldn’t recommend that to anyone, but I have to say, I did like the car and the whole newness of it when I got it. Buying a new car doesn’t make a lot of financial sense though. I’ve also never done a trade in for a vehicle either, because usually you can get $1000+ more for it by selling it yourself than you can by trading it in. In our case this time, we got lucky. The dealer where we got this truck was going out of business because he was having too much trouble getting loans for people wanting to buy automobiles from him. That’s something to keep in mind. Right now is a great time to buy an automobile, if you can get the money you need for it.

Back in the spring, I bought a couch. I’d like to claim I paid cash for it, but I can’t. I needed a couch quickly and I took the easy way out. I bought the couch on credit.

I did have sense enough to find a store running a “no interest until June 2009″ deal, so I haven’t paid any interest on the couch. However, the special “no payments” part of the deal almost caught me… I put off starting my monthly payments when I should have, and I’ve ended up having to pay higher monthly amounts to get me to paid off before the “no interest, no payments” period runs out.

I’ll make it in just under the wire. I owe $409.13 and have been paying regularly these days. My hope is to have a little extra left over from Christmas bonuses to pay it down faster (if I even get one with all the financial crises going on right now).

My plan is to take that $50 monthly amount I’m paying and put it toward my car payment. This will effectively start my debt snowball.

Technically, spring is probably when my debt payments are first going to snowball, but I’m thinking of it as having already started. I’ve packing my snowball and I’m getting ready to let it loose down the hill. As soon as that first payment is applied to something else, it will have officially begun to pick up speed.

I have my list of debts, in the order I want to pay them off.

Although many experts suggest either paying off higher interest debts first or debts with the lowest payments, I’ve come up with my own schedule, for my own reasons. For this to be successful, that’s what we all have to do—find something that works for each of us, giving us the most motivation. If you find that you’re more motivated by the thought of saving money you would have ended up paying as interest, by all means, you would want to list your debts in order of highest interest rate to lowest.

My choice of debt payoff order

1. JCPenney (couch) – 0% interest, but raises dramatically if the debt goes past a certain date
2. Auto Loan – 6.9%
3. Camper – 8.25%
4. American Express – 3.9%
5. Student Loan – 3.25%

I chose this schedule because it will get the snowball going the fastest. I already feel tons of motivation at the idea of paying off my car and knowing that payment amount will go toward paying off the camper. It’s exciting to dream about the day when I can actually make it happen.

Do you have a debt payoff schedule? How did you chose to rank your debts? I would love to know.