This time around, I am going with the numbers approach for debt reduction and seeing how this works mentally.

As much as I want to get rid of the Sallie Mae student loan, it has a really small payment ($105 a month) and by far the lowest interest rate of all of my loans (3.25%). While it is a variable interest rate, it doesn’t look like interest rates are going to raise much if at all for the next year given the economy. Plus the interest on this loan is tax deductible.

I’m going to go with paying off the Hyundai Elantra car loan. It is a huge loan payment to begin with ($317 a month) and I am paying a lot of interest on it right now given it is only 7 months old (with 4.5 years left on it). I can just about double the payment, which should cause the loan balance to drop significantly. Combined with potential big extra payments throughout the year on-top of this doubled loan payment, this seems the right way to go. In the end, I save a ton of interest with this method and the psychological benefit of having no car payments? Priceless!

After that car loan is gone, my wife and I will just have our student loans and mortgage to pay off. Then we can really go ballistic paying those loans off without worrying about car payments.

The question is, what is next?

After some careful deliberation, I have narrowed it down to three possible options:

• Pay off one of my student loans (this one is a private loan with Sallie Mae). This loan has the smallest balance of either my wife or I”s loans and would probably take about a year to pay off if all goes right. It currently has the lowest interest rate (3.25%) of any of our loans, but it is also a variable interest rate that has gone as high as 8.5% in the past. Plus there is always the benefit of getting Sallie Mae out of my life.
• Pay off the other car loan for the new car (2009 Hyundai Elantra SE). This would probably take near 1.5 or 2 years to do, but has a higher interest rate (5.5%) and the loan is only 7 months old. This means right now I am paying a lot of interest on the loan and paying now could save significant money down the line. Plus the huge benefit of not having any car payments and this would net a significant boost to the next debt snowball.
• Take the money we would put towards payments and have it go to a savings account. Given the economy, it never hurts to have some money stashed away. If the account balance gets larger then one of the loan’s balances, I can always due one big payment and close out the loan. If an emergency comes up, then we have money readily available.

Tough choice. Still thinking it through.