What should I do?

[gmink21]

Hello, I am looking for some advice on my current financial situation. I am 27 years old and I make $125K a year. I just barely paid off all of the personal debt that I was in, (auto, CC, student loans, etc). I got engaged to my girlfriend a couple of weeks ago. She unfortunately lost her job shortly after we got engaged. She has personal debt that totals $85k with no rate being higher than 6%. She was making $30K a year and paying off her bills and helping to chip in on our living expenses. Unfotunately my line of work prevents her from finding a new job very easily. I move every 6 months, so it has to be flexible. Our joint living expenses, including her minimum debt payments, total $65k a year.

My question is this: Should we focus our efforts on paying off her outstanding debt balances or should we just pay the minimums and start to contribute money to a savings account for retirement?

I got a large raise in Oct from making $50k to $125k and I was in some serious debt trouble myself 5 years ago that I just paid off so I dont have anything saved personally. Everywhere you look people are saying to start a 401k or roth IRA but this didnt make sense to me when I was paying off loans that carried 10% + interest rates. Now that I am making more money, and living below my means, where should I put the extra, debt payoff or retirement savings?

Thanks

[PrincessPerky]

IMO, and this is just IMO, a small savings is needed..but I belive in focusing on debt first. I don't want to be 'beholden' to anyone (old fashioned term for oweing)

Actually I would cut living expenses till I paid off the debt..not to the bone of 25K or anything, just a little this month, a little next, and you might find that question resolved with debt gone in just a year or two.

Course for the not so financial advice...you sure she wants to not work? And is committed to not racking up new debt? Is she ready to pay it off? and have you asked her what she wants to do with the money? (her opinion being slightly more important than strangers.)

Who is paying for the wedding? How soon? paying off debt first? You might want a split saving, one for an EF, one for the Wedding, and the rest to the debt....true test of commitment to debt free is a wedding.......hard to stay in budget when everyone else wants to spend the whole years salary..or more.

[gmink21]

Thanks for responding so quickly!!

To just get this straight you are saying to save up an EF first, then focus on paying off debt? So then I should wait to save for retirement until after that 85k is paid off? (I really dont like to owe anyone money either...who does?!?!)

To answer your other questions. She really does want to work. She feels terrible that she lost her job and she is desperately seeking new employment. SHe feels like a "burden" to me, (in her words) although I dont feel or make her feel that way at all. Her debt breakdown is this: $23k for a 5.5% used car loan; 40k student loans @ 8% & 4%; 12k cc debt @ 3.82%; 12k cc debt @ 0% for next 15 months. She ran up CC debt when she was 18-23 and didnt really "understand" credit. She has learned the hard way, as I did, and is ready to pay it off. She has not run up anymore debt in the last 2 years, but only has made slow progress of digging out.

As for the wedding that is scheduled for June 08. I don't want to spend more than 20k from our pockets. She wants to spend as little as possible but still have a "nice" wedding. We have tentatively agreed on 20k but we dont have any idea of what we can get for that. There will prob be 120-140 people at the wedding. I dont know how much her family is able/willing to put in but it prob wont be much. Any additional insight is greatly appreciated. Thanks again.

ps I own a 3 unit apartment building that pays for itself. I have a 47k equity line on the building that carries a 7.74% that currently has a zero balance. I have always thought of this as my emergency fund to cover expenses for a couple months. Does this work or should i have a cash reserve also?

[tinapbeana]

the 'formula' that first got me seriously saving and attempting to reduce my debt is this:

60% expenses
10% fun money
10% short term savings (i.e. wedding)
10% long term savings (i.e. house, car)
10% retirement

not saying the percents are cut in stone of course, but that i found them to be a nice jumping off point. my question is whether the 125k is gross or takehome. assuming it's gross, that leaves you with a takehome of what, an estimated 81.25k per year? with this 'formula, you would be looking at 48.75k for expenses, and 8.25k each for fun money, short term savings, lt savings, and retirement.

based on this, i agree with perky that reducing living expenses is probably the first thing you want to check out. and, especially with expenses being so high, i would recommend some sort of savings stash as an emergency fund. if you decide something like this 'formula' would work for you, i would use the fun money to help pay off debt if it were my situation.

[kv968]

Originally Posted by gmink21

Thanks for responding so quickly!!

To just get this straight you are saying to save up an EF first, then focus on paying off debt? So then I should wait to save for retirement until after that 85k is paid off? (I really dont like to owe anyone money either...who does?!?!)

To answer your other questions. She really does want to work. She feels terrible that she lost her job and she is desperately seeking new employment. SHe feels like a "burden" to me, (in her words) although I dont feel or make her feel that way at all. Her debt breakdown is this: $23k for a 5.5% used car loan; 40k student loans @ 8% & 4%; 12k cc debt @ 3.82%; 12k cc debt @ 0% for next 15 months. She ran up CC debt when she was 18-23 and didnt really "understand" credit. She has learned the hard way, as I did, and is ready to pay it off. She has not run up anymore debt in the last 2 years, but only has made slow progress of digging out.

As for the wedding that is scheduled for June 08. I don't want to spend more than 20k from our pockets. She wants to spend as little as possible but still have a "nice" wedding. We have tentatively agreed on 20k but we dont have any idea of what we can get for that. There will prob be 120-140 people at the wedding. I dont know how much her family is able/willing to put in but it prob wont be much. Any additional insight is greatly appreciated. Thanks again.

ps I own a 3 unit apartment building that pays for itself. I have a 47k equity line on the building that carries a 7.74% that currently has a zero balance. I have always thought of this as my emergency fund to cover expenses for a couple months. Does this work or should i have a cash reserve also?

Tell her she is a "burden" and she's bringing your life down.

I'm kidding, calm down
Seriously, I would say try to accumulate a small EF while paying off the debt. Sounds easier said than done but it can be accomplished. I wouldn't really consider the available loan to you as an EF. It can be used as one if in a real bind but you've got enough to pay down as it is.

What is that 0% cc interest going to go up to in 15 months? If it's something astronomical you may want to start attacking that even though it's nothing now. And can you get rid of the used car and buy something cheaper?

As far as the wedding goes, I'll let others chime in on that since I don't have a clue. Some may say I don't have a clue about anything else I write about either but I have to participate somehow

[gmink21]

Thank you both for the response. I think i should clarify my living expenses, rent food, gas, phone, power, cable, internet, electric comes to just under $2500 a month. Our debt payments (cc, student loans, car)come to $1200 month. Insurance, Xmas, Gym Memberships, birthdays, contacts, etc. come to 10k a year or $833.33 month. Our fun money is $400 a month and there is usually leftover. This comes to $5k a month. Is this too much for 125k gross salary? I feel that I have already trimmed my budget down. Where can I cut corners?

In regards to the car issue we unfortunatley need two cars. I drive a 02 frontier with 100k miles on it and she just got (in Nov) a used 06 xterra with 5k miles on it and a 100k warranty that she got for 23k. As far as cars go, we need at least one reliable 4wd car and with some size to it, hence the xterra.

Thank you all for the time and support.

[kv968]

Originally Posted by gmink21

Insurance, Xmas, Gym Memberships, birthdays, contacts, etc. come to 10k a year or $833.33 month. Our fun money is $400 a month and there is usually leftover. This comes to $5k a month. Is this too much for 125k gross salary? I feel that I have already trimmed my budget down. Where can I cut corners?

Except for maybe the insurance, there's a lot of trimming I see that could be done. Possibly not so much "fun", "Xmas", "Gyms" and "birthdays"?

[scfr]

I too am a big believer in no debt. BUT ... given that the rate on your GF's debt is so low, you have no savings, and you will be relying on just one income, here is my 2-cents:

1. If your employer matches your 401K and the investment choices are satisfactory to you, contribute to the 401K up to the employer match level. Do this while simultaneously ...
2. Build up your Emergency Fund to at least 6 months (this much because of the one-income situation)
3. Then, start paying off the debt.

On the income side, your GF may want to look in to some type of work that she could do from anywhere, so that the work could move with her when you 2 relocate. Not only would this help your financial situation, but just in my personal opinion it might be good for her self-esteem as well.

On the expense side, start reading the posts on this board and the blogs for ideas on how to cut back! And yes, $400 a month for fun money does sound like a bit much when you have so much debt and no savings.

[Ima saver]

I agree with scfr, you need to start saving for an emergency fund. About 6 months salary (net should be saved) Then you need to fund a roth ira for yourself. You are really earning enough money to save money and pay off debt both.

[disneysteve]

Originally Posted by gmink21

Insurance, Xmas, Gym Memberships, birthdays, contacts, etc. come to 10k a year or $833.33 month. Our fun money is $400 a month

Where can I cut corners?

Let's see. Just looking at that list, I'd say you can probably cut corners on insurance, xmas, gym memberships, birthdays, contacts and fun money.

Every single one of those is open to trimming.

Check all your insurance policies and shop around to make sure you are paying the best rates. Stop exchanging xmas and other presents with each other until you are debt-free and try your best to trim back spending on gifts for others. Cancel gym memberships unless you are locked into contracts. Order contacts online if you aren't already. I'm not sure what you are spending the other $400/month on, but without knowing more that sounds like an awful lot to me. You also mentioned cable TV. If you have anything beyond the most limited basic service (usually about $10/month), you can cut that. And if you live in an area where broadcast TV is available, you can cut out cable entirely.

As for saving, you should certainly be participating in your company 401K, at least contributing enough to get the full company match. Otherwise, you are passing up a guaranteed 50% return on your investment. You can also be funding Roth IRAs for one or both of you.

[terry1156]

I tend to go against the crowd here most of the time on the emergency fund issue. I feel paying off debt is more important that building an emergency savings account, but that is with the assumption that the debt is high interest credit card debt. Yours is all under 6% which, while your debt is big, is luckily at a decent rate. I would follow scfr's suggestions with a few adjustments:

1. If your employer matches your 401K and the investment choices are satisfactory to you, contribute to the 401K up to the employer match level (don't throw away this money)
2. If you have any of the debts that have the possibility of the interest rate substantially increasing, pay those off.
3. Build up your Emergency Fund that would last you in an unexpected emergency (but not if you lost your job - likely a few thousand dollars)
4. Start paying off the debt 50% and adding to emergency fund 50%

[PrincessPerky]

My 'small saving' would be about half a months expense (so if something should happen you can handle a bit, while you cancel all else) for me it was 1K, simple easy access cash, bought a washer and dryer... with it..for you with quadruple the monthly spending you might want 2k to cover the months rent or whatnot.

On Girlfriend and working, if you feel not working is cool, help her see how she can help you save now while not working, it is a full time job done well...and if you plan on kids she will need the skills well under her belt before they arrive for easiest transition...if she doesn't plan on staying home, or if you don't plan on kids scrap that...

For trimming, ditto everyone else..all your expenses can be trimmed and with that debt load some should be IMO. pick one area a month, look for better rates, or lower 'fun' by a bit each month. No need to go to a strict no fun budget, but life is good with my paltry amount, you would be amazed..and that is where the full time job is, cooking at home, finding the best rates, calling around, all work and all easiest done by one with time on their hands.

Oh and to amend my earlier pay of debt first..I would go with company match first too.

On the wedding, you have time to plan, and with that time you should spend more of it trying to figure out what is really impoirtant to the two of you, than on what the options are, the options run from a couple K for simple but done all the way up to a couple years salary for going all out. (practically free is an option too) But a wedding isn't about what you can spend, it is about celebrating a union of two people for all eternity...something that needs only the two and a witness.......

Before the invention of the wedding planner that was accomplished with a simple church, and lots of good food and drink...not terribly expensive drink or food, just apleanty of it. You can easily spend 20K or you can spend 2K, or you can spend 200K..just whatever you do, try to make sure the wedding is for you two, no one else. IMO it is a very special day, and spending it trying to please 'the family' or the joneses is a waste of time, you will never succeed in pleasing them all, so please yourself and your own ideals. let them join you if they want, and stay home if not.

[kv968]

Originally Posted by PrincessPerky

Oh and to amend my earlier pay of debt first..I would go with company match first too.

I would amend my advice of paying off debt first and going with the company match instead also, but the OP hasn't said anything about an available 401k plan. If there is one then definitely go for the match. Other than that I still say start a small EF while paying off the debt and especially that 0% cc if the adjusted rate is going to be huge.

[Hot dog]

Put the money for the 0% cc in an online savings account and put the interest you make on it towards your EF don't pay it off till you have to also it could be a cushion in case of emergency if that's all you have

[anonymous_saver]

Originally Posted by gmink21

Thank you both for the response. I think i should clarify my living expenses, rent food, gas, phone, power, cable, internet, electric comes to just under $2500 a month. Our debt payments (cc, student loans, car)come to $1200 month. Insurance, Xmas, Gym Memberships, birthdays, contacts, etc. come to 10k a year or $833.33 month. Our fun money is $400 a month and there is usually leftover. This comes to $5k a month. Is this too much for 125k gross salary? I feel that I have already trimmed my budget down. Where can I cut corners?

In regards to the car issue we unfortunatley need two cars. I drive a 02 frontier with 100k miles on it and she just got (in Nov) a used 06 xterra with 5k miles on it and a 100k warranty that she got for 23k. As far as cars go, we need at least one reliable 4wd car and with some size to it, hence the xterra.

Thank you all for the time and support.

First of all, I would suggest to your fiance that maybe she should take a temp job (even if it is only at $12/hr. for a month or two). This way she could fee like she is a contributing member to the expenses you share. Also, she could be contributing to her own debt. To be honest, even if you are engaged, it makes me quite scared when it sounds like you are paying for a lot of things for your fiance, it's kind of you, but I would really focus on some other things as well.

(1) Do you have a 401(k) at work? With a match? You should be contributing at least up to match, or to the maximum allowed ($15,500 this year).

(2) You don't qualify to put the full amount into a Roth IRA, but have you looked into whether you qualify for a Traditional IRA? The maximum allowed is $4,000 for this year.

(3) Start saving for an emergency fund ASAP. I would suggest save up to 8 months or so of bills/expenses. Yes, this may sound like a lot, and it may take you a long time, but it really is a necessary battle.

(4) Look closely at your expenses for a month or two. Figure out how much extra money you have each month. Let's say it's $3,000. I would at that time start saving for at least a month to three months of an emergency fund. Then you could start other goals like a wedding fund, or an IRA. Maybe you will choose to put $2,000 a month towards an emergency fund, $350 towards an IRA, $650 towards the wedding. This is of course an example, but my point is make a list of your priorities, and make a plan to set aside a certain amount of money every month.

(5) When your fiance does get a job, you should probably do the percentage thing towards your bills/expenses. It just wouldn't be fair to her if she had to pay half of your combined $5,000 expenses every month at $30,000 a year (or whatever she makes). Figure out something reasonable, like she pays 25% of bills, and you pay 75%. If you have a mortgage in both of your names, I would also put the % of ownership in your paperwork as well, so if you parted ways, it would be fairly shared.

[anonymous_saver]

I also see lots of money that could be shaved off of your monthly expenses, you could keep it temporary, just cutting costs for one year could be huge (as far as paying off debt) with an income of $125,000 a year.

Do you have cell phones and a land line? Get rid of one (probably the land line)! That could shave off $40 a month.

Get rid of the newspaper if you have one.

Do you have a flexible or health spending account through work? You could save money on those contacts by a lot! $833 a month on "extras" is a LOT. I know you make a great salary, but could you shave this down to $500 for a year worth of time? When you count food in this... is this for groceries or going out?

Overall, I would say if you could live on $4,000 a month for at least a year worth of time, then this would make HUGE dents in your fiances debt and your other goals. This would be an extra $12,000 a year of saving!

[Coleroo]

Originally Posted by gmink21

Thanks for responding so quickly!!

To just get this straight you are saying to save up an EF first, then focus on paying off debt? So then I should wait to save for retirement until after that 85k is paid off? (I really dont like to owe anyone money either...who does?!?!)

To answer your other questions. She really does want to work. She feels terrible that she lost her job and she is desperately seeking new employment. SHe feels like a "burden" to me, (in her words) although I dont feel or make her feel that way at all. Her debt breakdown is this: $23k for a 5.5% used car loan; 40k student loans @ 8% & 4%; 12k cc debt @ 3.82%; 12k cc debt @ 0% for next 15 months. She ran up CC debt when she was 18-23 and didnt really "understand" credit. She has learned the hard way, as I did, and is ready to pay it off. She has not run up anymore debt in the last 2 years, but only has made slow progress of digging out.

As for the wedding that is scheduled for June 08. I don't want to spend more than 20k from our pockets. She wants to spend as little as possible but still have a "nice" wedding. We have tentatively agreed on 20k but we dont have any idea of what we can get for that. There will prob be 120-140 people at the wedding. I dont know how much her family is able/willing to put in but it prob wont be much. Any additional insight is greatly appreciated. Thanks again.

ps I own a 3 unit apartment building that pays for itself. I have a 47k equity line on the building that carries a 7.74% that currently has a zero balance. I have always thought of this as my emergency fund to cover expenses for a couple months. Does this work or should i have a cash reserve also?

Wow.. thats a LOT of credit card debt - but 2 years of no debt-running is AWESOME and a great sign on her behalf! I agree with the previous poster - put money into a high rate savings account dedicated to solely paying off the 0% credit card debt (that would be about $560 a month ABOVE your minimum) and pay the remaining off immediately when the 0% term is up. You do not want to be stuck with that when the interest flies back up (usually 0% offers change into a very HIGH interest compared to other cards). Your emergency fund of the apartment is great for MAJOR emergencies like, uncovered high medical expenses, death, etc. But you also need a liquid cash reserve available for the inevitable (flat tires? hospital co pay? dog have a tumor? xterra blows a gasket? uninsured home damage?) that you do NOT want to put on credit. I'd say a small cash reserve of $2000 would suit at first because it sounds like you may be in a steady job and arent likely to have unemployment anytime soon (that would create a whole other topic!)

Also, although I understand your good intentions, I can't help but view that car payment as very high. I didnt even pay 23k for my 2004 car brand new - and its comparative to the Xterra. There are plenty of cheaper used heavy duty reliable SUV's out (carmax... ebay.. state car auctions) that could be had for less than 13k. Expenses could also also be cut back in gym memberships (can you run in the park or buy a home weight set / dvds for a year or two while focusing on debt reduction?), birthdays (just halfen the amount of a gift purchase and thats 50% savings every year.. buy online on ebay or through fatwallet to get cash back with purchases), and fun money (is that $400 each or combined? could that be "halfened" too? are all the purchases "necessary" to live a satisfied life for the next 2 years?). Better yet, dedicate one year (just one year!) to cutting out ALL unecessary purchases (play games with how long you can go without "fun money").. send home made birthday cards or "do something" for the birthday person (a "favor" is sometimes more appreciated than an oft unused pricey gift). I agree with the others too who have said trim down insurance costs (higher deductable), go to basic cable (or none at all), trim down phone lines or service costs.

As for working - there are plenty of ways to make money while traveling and moving around... Temp agencies can hook someone up with nice short term jobs (the pay wouldnt be outstanding but if its ALL put on debt reduction, your goals will be accomplished FAST FAST FAST!)... selling on the internet is a good way, designing artwork on cafepress, etc. If she feels like she is such a burden direct her towards hillbillyhousewife website, or other frugal websites where she can ease her concious in more ways than just providing "monetary" income.

Now, however, although I am an advocate for putting ALL extra money onto debt (highest rate, unsecured first), I am a stronger advocate for putting AT LEAST your company match % into a 401k at work in case its available - not only will that ease your tax burden (and provide more net income in the overall), but with your young age, that investment now can ride for many many years and provide great security when you are in your 50s / 60s.

So.. in sum... focus first on 1) freeing up more cash flow by cutting by unecessary expenses.. 2.) set a goal for debt freedom, divide by that many # of months, and make sure you have that much cash flow each month to put on debt.. 3.) contribute at least your match % to 401k at work.. 4.) have a small cash reserve to cover expenses that SHOULD NOT go on debt, and should NOT take away from debt reduction cash flow.