Need Advice After A Rough Patch

[LegHead1]

Hello -

I am 27 years old. I was all ready to go in life financially when I graduated college at age 23. Then in 2008, I was laid off. Luckily, I found a new job, then was laid off immediately due to overhiring, and thus I was no longer qualified for unemployment. I had an emergency fund, but drained it. I took an internship to get a start, then got a job that paid 30k/year from that. I then went to the police academy (took out a loan) but still am unable to find work as an officer. I was lucky enough to take a sales manager job for an athletic club, which pays 60k.

I am looking to get back on my feet and increase my savings. Please advise any areas I can improve, or if I should just declare bankruptcy. I feel I have too much debt and nothing saved for someone my age, and I don't know what to do.

My income and expenses are listed below, as of Sept. 1, 2010. I started the sales manager job on this day.

Rent: $1095
Gas: $34
Electric: $60
Food: $200
Gas: $50
Cable/Internet: $89
Car Insur: $85
Student Loan: $210/ @ 3.0% ($16500 ytg).
Car Loan: $240/mo. @4.0% ($6000 ytg).

Emergency Fund: $0 After moving expenses.

Roth IRA: $10,200

Income After taxes: $3500

What is the best way to go about handling my finances?

Should I start adding to my roth again? Put some in emergency savings? If so, how much? Or do I save nothing and start rapidly paying down the debt? The debt is a great percentages, and the payments aren't overwhelming...

Any advice is well appreciated, thank you.

[disneysteve]

You've listed income of $3,500 and expenses of $2,063. That should mean about $1,400/month free unless there is spending you are not accounting for, which I guarantee there is because a lot of things are missing from your list. Where is auto registration and maintenance, medical costs, entertainment, household and personal care items (unless that is lumped in with groceries), clothing, etc. Let's say $400 goes to that stuff. Still leaves you $1,000/month unaccounted for. That means that in 1 month, you could have $1,000 in your EF. Then in 6 more months, get the car paid off. That will boost your free income to $1,240. Split that and put $600/mo. in the EF and $640/mo. toward the student loan and in a couple of years, you'll be debt-free, even sooner if you get any raises or bonuses along the way and direct them toward loan repayment.

I would not be funding the Roth quite yet. Start the EF first and take a few months to get rid of the car loan.

[ea1776]

You are definitely NOT bankrupt. If I were in your shoes, I would not pay off any additional debt until I had 6 months expenses. After that I'd put 50% extra income towards debt repayment (highest interest first), 20% taxable savings (just adding into EF), 30% towards retirement-type of savings (Roth first, then 401k unless match). If your company offers a 401k match, I'd take that to the max as a higher priority than Roth. The reason I'm recommending you don't pay off debt yet, is b/c your interest rates are very low and your savings is $0.00 (and not sure how good job security is...?).

Good luck and don't worry too much. Your situation isn't that bad. Just work hard to save and pay off your debts, and don't acquire any new debt !

[ea1776]

by the way, student loan interest is tax deductable for some cases, and with a 3% interest rate, personally I would let that sit and just pay the minimums for the life of the loan. In my humble opinion, a Roth is a much smarter investment than paying off that student loan (unless it's an adjustable rate loan). Retirement investments that can grow tax-free will easily outpace the < 3% interest you'll pay on that loan in the long run, if invested properly... and you certainly have a long time horizon ahead of you.

[Kris Jarczyk]

Don't see any monthly credit card payments, so it seems like your debt is living expenses and your student loans and car payment. I don't believe you can bankrupt your student loans and you need a car to get around in and you have a job, I think you are better off than you think.

[littleroc02us]

According to my math you have $1400 disposable income unless there is something you have left out. What my wife and I do bi-monthly is sit down with an Excel budget sheet that shows my zero budgeting strategy. Basically all you do is have a category for all of your money and to only spend the money for that category and when you have you can't spend anymore. For example you could allocate $400 each month to go towards your EF and immediately move that money to an account that you cannot touch unless it's an emergency. Set a food budget and stick to it. As for entertainment you have to set a limit. The trick to this is discipline, you'll be suprised at how much money you do have when you know where it goes. Right now you don't seem to know what happened to the $1400. Good luck.

[jpg7n16]

Originally Posted by LegHead1

I am looking to get back on my feet and increase my savings. Please advise any areas I can improve, or if I should just declare bankruptcy. I feel I have too much debt and nothing saved for someone my age, and I don't know what to do.

You don't seem anywhere near bankruptcy.

How much CC debt do you have? You don't have any listed.

If your student loans and car debt are your only debts, then:
1) you're freaking out over nothing- as you don't have that much debt
2) student loans are not bankruptable, so bankruptcy would trash your credit history and do nothing for you

What is the best way to go about handling my finances?

That is a very complicated question.

Basic #1: spend less than you earn.

You should really take a comprehensive look at your whole picture to figure that out (insurance coverage, wills, family situation, investments, budget, employee benefits, retirement planning, personal financial goals). That makes the answer complicated.

Should I start adding to my roth again?

Not yet. You should build up an EF first.

Put some in emergency savings? If so, how much?

Yes. As much as you can each month. For starters, get up to about $2k-4k (1-2 months)

Then begin paying off your car.

Once the car is paid off, build up to between 3-6 months savings held in cash. For you this would be somewhere $6k-12k. (Likely $7500 if single, $10k if married)

Once you get that much in cash, you should begin investing again. Whether Roth or 401k is a discussion we can have later.

With the interest rate on the student loans being so low (plus it's tax deductible, making it lower), I think you'd do better to invest any extra, rather than pay it down.

[savelikedave]

1. Save $1000 in an emergency fund

2. Cut you budget to the minimum and pay off the car asap.

3. Use what you were using to pay of the car + the old car payment & pay off the student loan.

4. Save at least 3 -6 months expenses in your emergency fund.

5. Then put at least 15% of your income into your roth IRA & max contribute to any matching work 401K