Suggestions welcome: debt reduction vs. saving/investing

[ceejay74]

Hi there,

I think I'm on a good track but I'm interested to see what others think. People are very supportive commenting on my blog; I feel the forums are a place to get unvarnished critical viewpoints.

I make the financial decisions for my household (3 working adults).
We have a ton of debt: mortgage, student loan and personal/credit.
We have no savings except our 401(k)s; net worth (calculating retirement + house values - debt) of $63,000.
We are aged 33, 34 and 28.

Now that we're focused on getting on track, I feel my main goal is to pay off credit/personal debt, then start saving and investing in addition to 401(k)s.

I have $1500 extra that I'm putting toward debt (in addition to the minimum payments). I reckon I can pay it all off in 2 years.

But should I be paying a little slower and investing/saving a little bit now? If I pay off the debt, I'll have more like $3000/month because I will have eliminated payments.

thanks!
CJ

[jIM_Ohio]

What are the interest rates on the debts? List each debt and it's interest rate and it's minimum payment. List in order of highest interest to lowest is easiest way to figure it out.

[bishop]

I'm of the opinion (and it's just my personal opinion, not saying it is the best way) is to make sure you have an emergency fund, and then pay off your debt as fast as possible. If something happens, say you get injured or lose income), and you are debt free, you just cut back on your spending, investing and saving. If your still saddled with debt, and the same thing happens, you still have all those obligations to meet, and things can get sour very fast.

[ceejay74]

Hi Jim,

Here it is--sorry if it's a bit wordy/confusing, but about 1/3 our debt resides in England. Exchange rate calculated as $2=1 pound, which is a bit generous at times. Also keep in mind that, for the honor of transferring our US income into the UK bank account to pay off the English debt, we pay $50 per transaction, plus a nominal fee on the other end, which kind of blows the nice interest rate we have on some of the cards. For that reason I've been tackling the UK debt first to eliminate the need for wire transfers.

19.9% on 1904 pounds ($3808), min. pymnt. 38 ($76)
19.5% on 51 pounds ($102), min. pymnt. 11 ($22--may be much less as I just paid off 500 pounds/$1000)
8.99% on $27,120, min. pymnt. $623
3.99% on $16,442, min. pymnt. $341
1.17% on 110 pounds ($220), min. pymnt. 5 ($10)
1.24% on 4665 pounds ($9330), min. pymnt. 143 ($286)
0% (until May -- goes to 8.99% thereafter) on $2770, min. pymnt. $58
0% (until Aug. -- goes quite high after that) on $950, no min. pymnts. (til Aug.)
0% on $7000 (personal loan from Dad), no min. pymnts.
0% on $950 (projected: we have a planned & booked trip to England where we're going to have some expenses. I'm saving for spending money, but plan to put about 425 pounds ($950) on a card for rental car and other expenses, then pay it off before it incurs any finance charges. Since the car will have to go on a CC and some charges are variable, I thought this was the best way to go--plus I can keep paying off interest-bearing cards in the meantime.)
Total: $68,692
Total min. pymnts: $1466 (including $50 intl wire transfer fee)
To principal each month: About $1070 plus whatever I pay extra
Additional pymnts: now able to do $1450-$1500, will go up as I snowball

Let me know if you want me to simplify by eliminating some info so it's more readable.

thanks!
CJ

[ceejay74]

Bishop,

I have thought about doing an EF since I joined this site, definitely. The one thing that stops me is that we have 3 incomes, and we put almost an entire one toward debt, plus some niceties we could do without if we had to (spending money, groceries--we don't skimp on the fresh fruit & veg & organics, etc.), so I feel if we lost one of our three incomes, we could tighten our belts and still make it. If we get through the next 2 years with no calamities, we could put that paycheck completely toward saving and investing.

However, a lot of smart people here swear by the EF, so it's not like I've dismissed the idea; I do consider it from time to time.

thanks!
CJ

[disneysteve]

I don't mean to get overly personal, but can you clarify what the relationship is between the 3 of you. It is fairly normal for a husband and wife, or life partners, to look at their joint holdings and debt when budgeting and planning for the future, but I'm not sure how that applies here or where the 3rd adult fits into the picture. I think the answer to that question could impact the advice I'd give.

[jIM_Ohio]

Originally Posted by ceejay74

Hi Jim,

Here it is--sorry if it's a bit wordy/confusing, but about 1/3 our debt resides in England. Exchange rate calculated as $2=1 pound, which is a bit generous at times. Also keep in mind that, for the honor of transferring our US income into the UK bank account to pay off the English debt, we pay $50 per transaction, plus a nominal fee on the other end, which kind of blows the nice interest rate we have on some of the cards. For that reason I've been tackling the UK debt first to eliminate the need for wire transfers.

19.9% on 1904 pounds ($3808), min. pymnt. 38 ($76)
19.5% on 51 pounds ($102), min. pymnt. 11 ($22--may be much less as I just paid off 500 pounds/$1000)
8.99% on $27,120, min. pymnt. $623
3.99% on $16,442, min. pymnt. $341
1.17% on 110 pounds ($220), min. pymnt. 5 ($10)
1.24% on 4665 pounds ($9330), min. pymnt. 143 ($286)
0% (until May -- goes to 8.99% thereafter) on $2770, min. pymnt. $58
0% (until Aug. -- goes quite high after that) on $950, no min. pymnts. (til Aug.)
0% on $7000 (personal loan from Dad), no min. pymnts.
0% on $950 (projected: we have a planned & booked trip to England where we're going to have some expenses. I'm saving for spending money, but plan to put about 425 pounds ($950) on a card for rental car and other expenses, then pay it off before it incurs any finance charges. Since the car will have to go on a CC and some charges are variable, I thought this was the best way to go--plus I can keep paying off interest-bearing cards in the meantime.)
Total: $68,692
Total min. pymnts: $1466 (including $50 intl wire transfer fee)
To principal each month: About $1070 plus whatever I pay extra
Additional pymnts: now able to do $1450-$1500, will go up as I snowball

Let me know if you want me to simplify by eliminating some info so it's more readable.

thanks!
CJ

$1500 should eliminate the top 2 debts in 2 months- make sure the 19.5% payment is the next one sent (get that paid off).

19.9% on 1904 pounds ($3808), min. pymnt. 38 ($76)
19.5% on 51 pounds ($102), min. pymnt. 11 ($22--may be much less as I just paid off 500 pounds/$1000)

What types of debt is this?

8.99% on $27,120, min. pymnt. $623
3.99% on $16,442, min. pymnt. $341
1.17% on 110 pounds ($220), min. pymnt. 5 ($10)
1.24% on 4665 pounds ($9330), min. pymnt. 143 ($286)
0% (until May -- goes to 8.99% thereafter) on $2770, min. pymnt. $58
0% (until Aug. -- goes quite high after that) on $950, no min. pymnts. (til Aug.)
0% on $7000 (personal loan from Dad), no min. pymnts.

student loans, mortgage, car...

mortgage interest is tax deductable- are you aware of how to do this?
student loan interest might be tax deductable- are you aware of this?

I would tackle these after the top two

1.17% on 110 pounds ($220), min. pymnt. 5 ($10)
1.24% on 4665 pounds ($9330), min. pymnt. 143 ($286)

[ceejay74]

Steve: That's our relationship too; we are all 3 life partners. All our paychecks go into one account, and I'm responsible for how it's allocated.

Jim: I am sorry to say this is just our credit card/personal debt. I didn't list our mortgage/student loan debts. I'm trying to decide whether to tackle it at full speed before saving/investing, or if I should slow down a bit and put at least some toward savings or investments.

I believe I can get all this debt paid off in 2 years, but it would take longer if I take some of my extra money and save/invest it instead.

[jIM_Ohio]

I would pay down anything above 8% before investing. A good investor can get 7-8% returns investing.

In addition I would get the balance transfer cards to a fixed rate.
Do you have home equity to secure a HELOC or similar to transfer the debt to?

I might even consider the 0% card with a 2770 balance to be paid off before the big one (27k at 8.99%) just to free up the cash flow.

[ceejay74]

So basically, I should pay everything off as fast as I can until I only have the 3.99% and the loan from my dad, and then I can slow down a little and start investing some of the extra funds.

Thanks for the advice. I can see the logic in that!

CJ

[Seeker]

Originally Posted by disneysteve

I don't mean to get overly personal, but can you clarify what the relationship is between the 3 of you. It is fairly normal for a husband and wife, or life partners, to look at their joint holdings and debt when budgeting and planning for the future, but I'm not sure how that applies here or where the 3rd adult fits into the picture. I think the answer to that question could impact the advice I'd give.

It's rather strange to me too and not how all of us think of partners.

"Life Partners" (in one sense of the words) are people who are committed to each other; in today's times, this is any combination of genders and any number of people.

When people call themselves life partners, it's a conscious and deliberate choice on each of these persons, to support each other as fully as a traditional partnership would.

These three operate as TINKs (three income no kids ) and feel as "connected" -- or possibly more connected -- than some of the tradional husband/wife partners relationships that I've seen.

You can think of them as close triplets (the loving supportive kind of triplets and not the competitive kind of triplets), though they are probably not related by blood.

I believe that's how they think of themselves.

Financially they seem to be operating as a team.... but I have no idea how they would handle taxes!

[bjl584]

I'm not sure what the legal aspects of your relationship may be. I know that a husband-wife relationship is considered a partnership and there will basically be an even split of the assets. I don't know where you live or what the laws may be there, but you may run into problems should one of you "drop out" of your relationship, especially if you have money tired up in joint accounts. You may want to keep your accounts seperate. i.e., seperate checking, savings, IRA, 401K, etc. Also, you may need to set up some kind of a contract for paying down debt. It would be a shame if you paid down someone elses credit cards only to have them leave you without repaying. Just something to consider.

[ceejay74]

Thanks Seeker, that definition works very well. :-)

As for the financial concern, it is interesting. Of course I'm like everyone in the world and think my relationship will last forever. I hope I'm right.

I've heard of people with more than two in the relationship who set up an LLC, but we haven't gone in that direction. As for separate accounts, they would never take care of theirs, so I'd just end up logging in and taking care of it for them. :-)

The one thing that makes me not feel naive is that I'm not just living with people I met out of nowhere. We have networks. I know their histories. I know neither of them has ever screwed anyone over, financially or otherwise. I know that even when they're really mad or get hurt by someone, they never lash out in a vengeful or vindictive way. I know how we all act through breakups. I know how we treat friends and enemies. We share morals, which means that even if we stopped loving each other (don't know how that could happen), we'd give one another the basic respect we give all humans, even the ones we hate.

Anyway, if we can manage to stay together for just two more years :-), we'll all be free of credit card debt entirely. And yes, when we start saving and investing, I'll put some in each of our names.

[disneysteve]

Originally Posted by ceejay74

As for separate accounts, they would never take care of theirs, so I'd just end up logging in and taking care of it for them.

I still think that would be the safer way to go all around. Forget breakups. What happens if one of you dies or becomes disabled? What happens if one of you is involved in a costly lawsuit? All 3 of you could have your assets threatened.

[jIM_Ohio]

CYA in all cases.

Cover your A$$. Disney Steve has good advice in that you want to cover liability if one of you were to

a) die
b) become disabled and need nursing care
c) leave the relationship
d) become super rich from winning the lottery or something

some of those cases are better than others... a lawyer might be worth the time for an hour or so when you are investing to learn what happens (can 3 people share community property?). Can a nursing home come after assets in 30 years (they can go after a married couple's assets). Learn how to protect yourself.

[ceejay74]

Thanks guys, those are all great suggestions. Right now our assets are pretty evenly divided because we haven't been together (in this way) that long, but as we become more intertwined we'll need to make sure we're all protected. In a certain sense, since we exist in a structure outside of legal definitions, it will just be luck of the draw, legally, should anything happen. That's another great motivator to dig out of this debt, so we can afford legal assistance.

[disneysteve]

Originally Posted by ceejay74

as we become more intertwined we'll need to make sure we're all protected

it will just be luck of the draw, legally, should anything happen.

I think you need to make sure you are all protected BEFORE you become more intertwined. It can be much more difficult to separate things once they have been merged. Far easier to keep them apart from day one.

And I don't think "luck of the draw" is the way to go either. It is exactly because your situation is somewhat unique that you need to address these issues.

[ceejay74]

I meant spiritually and lifewise intertwined. I already agreed on the financial front, remember?

I agree, you just misread. It is luck of the draw until we get everything straightened out. There are other things we need to focus on first, but that is high on our list.

[disneysteve]

Originally Posted by ceejay74

I meant spiritually and lifewise intertwined. I already agreed on the financial front, remember?

I agree, you just misread. It is luck of the draw until we get everything straightened out. There are other things we need to focus on first, but that is high on our list.

Gotcha. Sorry for misreading that.

[RedHotLama]

I found a good snowball spread sheet. Although it may be difficult to calculate the extra charges for sending money.

But basically pay off the highest interest first. You may also want to pay off those 0% ones before the time is up if you can, because if you dont they may tack on the interest once the time is up since you don't pay it all off.

Heres snowball worksheet. need to remove spaces in w w w

w w w .geocities.com/schizeckinosy/Snowball.html