What would you do? I need help!

[coreys]

Hi Everyone,
Here is my family's situation-I would like to hear from you to see what you would do in my shoes.
Income $250,000 + $25,000 bonus (annually)
Mortgage (1st) 6.25% owe 233,000 on 240,000
Mortgage (2nd) 8.5% owe 56,000 on 60,000
Credit Cards 6000 balance 0%--will be paid off in 1.5 months down from $35,000
Student Loans $110,000 balance 5.75 % $ 1200 min. payment
IRA $55,000 (old 401k's--can't contribute b/c of income level)
401k $22,000 6% employer matches 3%
529 (2 year old) $700 contribute about $70/per month
Car loan $15,000 5.25 % on 30,000
Savings 4,000
Life Insurance $250,000 on me 20 yr term,
$1.5 mil on hubbie 20 yr term

What should our priorites be? For example, accumulate more savings, pay down 2nd mortgage, pay down student loan debt?? Start investing in brokerage account? I am lost. It is nice to finally have a larger income but I don't know how to maximize it. Thanks in advance for your advice.

[maat55]

I suggest you do this:

Take all extra funds and payoff CC
Next, payoff car
Then build EF at 4k to 6 months expenses
Max out 401k
Then establish car-misc. fund

[coreys]

Thanks for your response. After the car and EF is set should I pay down the 2nd mortgage or school loans?

[maat55]

Originally Posted by coreys

Thanks for your response. After the car and EF is set should I pay down the 2nd mortgage or school loans?

Good plan, don't ignor saving for things you would borrow for on credit.

[JinCO]

I am in a very similar situation as you and we chose to prioritize our emergency fund. If I was in your shoes, I would build up my emergency fund to at least 3 months of expenses before working on the other debt.

[disneysteve]

I'd want to know why someone earning $275,000 only has $4,000 in savings.

I think you are majorly underinsured. How does the income break down between each of you? Since your DH is insured for 6 times more than you, I'm guessing he is earning the bulk of the income. You currently have $420,000 in debt so if he were to die tomorrow, you'd only end up with $1,080,000 after repaying everything. I know that sounds like a lot, but would it be enough for you to maintain your current lifestyle, and if so, for how long?

To answer your question, you have essentially nothing in savings. One major home repair (heater, AC, roof, etc.) would wipe out 4K in a flash. You need to get that up significantly. You are only contributing 6% to retirement. That isn't enough. Get it up to at least 10% and preferably 15%.

What would I do from there? To answer that, I'd want to see the other side of the spreadsheet. List your expenses for us. Show us where all of the money is currently being spent and why so little is going to savings.

[PetMom]

I would keep putting in money to an ef and other savings.

You have to get where you do not need to ever need a
second mortgage again.

Also: priority should always be to pay down a secured debt -
your second mortgage has the security of your home - meaning
you are out of it if you cannot pay.

Maybe a stricter spending plan - having that much money coming
in must make for spending habits that might be a bit less disciplined.

[jIM_Ohio]

Broad plan

save some for cash
pay down debt some
save more for retirement
look for tax savings as well- 401k-HSA and similar

What are your total monthly expenses?
What is your total monthly gross income?
What is your total monthly take home income?
What is your normal tax return?
How much home equity do you have?

[creditcardfree]

If it were me:

Pay off credit card
Increase savings...3 mos of expenses
Pay off car loan
Up 401K to 10%
Pay off 2nd mortgage
Pay off Student Loans
Increase savings...6 mos of expenses
Up 401K to 15%

I would do them one at a time in that order. Keep paying minimums on all debt of course. I chose to pay off 2nd mortgage before student loans because of the interest rate and the fact that student loan interest can offset income for tax purposes.

Make a plan and work it. Good luck

[jIM_Ohio]

Originally Posted by creditcardfree

If it were me:

Pay off credit card
Increase savings...3 mos of expenses
Pay off car loan
Up 401K to 10%
Pay off 2nd mortgage
Pay off Student Loans
Increase savings...6 mos of expenses
Up 401K to 15%

I would do them one at a time in that order. Keep paying minimums on all debt of course. I chose to pay off 2nd mortgage before student loans because of the interest rate and the fact that student loan interest can offset income for tax purposes.

Make a plan and work it. Good luck

A decent outline...
why SL after 2nd mortgage?
I would reverse the two...

[creditcardfree]

Originally Posted by jIM_Ohio

why SL after 2nd mortgage?
I would reverse the two...

Second mortgage has much higher interest rate and is only deductible and if I remember right student loan interest lowers your adjustable income dollar for dollar...so better at tax time, right?

This person also has much more student loan debt than 2nd mortgage.

[pearlieq]

Originally Posted by creditcardfree

Second mortgage has much higher interest rate and is only deductible and if I remember right student loan interest lowers your adjustable income dollar for dollar...so better at tax time, right?

Unfortunately, there's an income limit for deducting SL interest. The last I remember it was around $130k, so these folks likely don't qualify.

Still, I still think the 2nd mortgage interest rate is higher, even when adjusted for being deductable.

[Snave]

There is an income limit b/c when my wife got married and we filed jointly for the first time, I thought we would be able to deduct the SL interest and we couldn't b/c of the limit. Don't know it, but I know it is well below 250K b/c I we couldn't write it off and are well below 250K.

[coreys]

Originally Posted by disneysteve

I'd want to know why someone earning $275,000 only has $4,000 in savings.

I think you are majorly underinsured. How does the income break down between each of you? Since your DH is insured for 6 times more than you, I'm guessing he is earning the bulk of the income. You currently have $420,000 in debt so if he were to die tomorrow, you'd only end up with $1,080,000 after repaying everything. I know that sounds like a lot, but would it be enough for you to maintain your current lifestyle, and if so, for how long?

To answer your question, you have essentially nothing in savings. One major home repair (heater, AC, roof, etc.) would wipe out 4K in a flash. You need to get that up significantly. You are only contributing 6% to retirement. That isn't enough. Get it up to at least 10% and preferably 15%.

What would I do from there? To answer that, I'd want to see the other side of the spreadsheet. List your expenses for us. Show us where all of the money is currently being spent and why so little is going to savings.

First--yes 4000 in savings is pathetic but if you read my earlier post we have only be making this kind of money for 6 months now. During that 6 month period I have managed to eliminate 35,000 in credit card debt. So if it was not for the credit card balances I would have chosen to put money in savings.

As far as 401k --we are contributing the max that my dh employer will match--currently 6%, they match 3%. My concern is the 401k annual contribution limits, which will be $16,500 for 2009. What happens to the amount over that?? I don't know but I don't want to be paying some kind of tax penalty for this.

Life insurance--I am looking to increase this-again, policies were purchased prior to my husbands new job. He was previously a medical resident and we were living on 45,000 a year. I am now a stay at home mom. No real income for me-just all the work.

Take home pay is roughly 14,000 a month
Mortgages 2600/month (includes taxes and property insurance)
Car payment 571/mo
Car Insurance 120/mo
Home phone/internet 75/mo
Dish 58/mo
Student Loan Min 1200/mo
Utilities 300/mo (gas, water, electric)
Credit Card Payments 3500/mo (trying to pay off by Mar 1)
529 contribution 70/mo
Pre-school 185/mo
Cell phones 120/mo
Life Insurance 90/mo
Total 8889/mo

That does not include food, incidentals, gas, vacations, entertainment, etc which I am currently not charting/tracking.

Hope that answers some questions.

[coreys]

Originally Posted by Snave

There is an income limit b/c when my wife got married and we filed jointly for the first time, I thought we would be able to deduct the SL interest and we couldn't b/c of the limit. Don't know it, but I know it is well below 250K b/c I we couldn't write it off and are well below 250K.

No more deductions for paying down student loan debt (I think you are right on with the minit being around 130k income! No grants or scholarships for medical students either to help lessen the burden.

[coreys]

Originally Posted by pearlieq

Unfortunately, there's an income limit for deducting SL interest. The last I remember it was around $130k, so these folks likely don't qualify.

Still, I still think the 2nd mortgage interest rate is higher, even when adjusted for being deductable.

Thanks pearlieq. Right on.

[coreys]

Originally Posted by jIM_Ohio

Broad plan

save some for cash
pay down debt some
save more for retirement
look for tax savings as well- 401k-HSA and similar

What are your total monthly expenses?
What is your total monthly gross income?
What is your total monthly take home income?
What is your normal tax return?
How much home equity do you have?

Thanks for your reply Jim. Check out my response to Disney Steve regarding income and expenses. As far as normal tax return, I can't answer that since we are only 6 months in to making this level of income.
Equity in house 7000 owned for 1.5 yrs

We have a bonus of 25,000 gross coming to us in March that we were planning on placing into an emergency fund. Although it will probably be more the in the ballpark of 13,000 after taxes. That should get us started for savings-plus our credit card debt will be gone by then as well according to my plan.

What are your thoughts on the 401k situation regarding limits to contributing??

[skydivingchic]

Check with your DH's 401(k) administration people. At my workplace, contributions above the limit are automatically cut off. So for your situation, your husband could designate 7% of his income go to 401(k). Sometime at the end of the year, he would hit the $16500 limit and the deductions would automatically be cut off. So the last paycheck or two at the end of the year would be larger. Not all plans work like that, though. If his workplace does not provide that, you guys would have to keep an eye on the total amount contributed and cut off contributions yourself. How you do that again depends on the plan. I can easily change my contributions at any time online, but not all plans offer that type of setup.

[jIM_Ohio]

Originally Posted by coreys

Thanks for your reply Jim. Check out my response to Disney Steve regarding income and expenses. As far as normal tax return, I can't answer that since we are only 6 months in to making this level of income.
Equity in house 7000 owned for 1.5 yrs

We have a bonus of 25,000 gross coming to us in March that we were planning on placing into an emergency fund. Although it will probably be more the in the ballpark of 13,000 after taxes. That should get us started for savings-plus our credit card debt will be gone by then as well according to my plan.

What are your thoughts on the 401k situation regarding limits to contributing??

Is the high income likely to continue for forseeable future?
I did not see you add the expenses in your response to Steve- what are the budgeted monthly expenses?

Pay off SL before Home equity- at this income you want every deduction possible.
Max the 401k
Make sure you SAVE 20-30 percent of your new income. If you save 30 percent (83k per year), it would be OK to spend 20k or so (10 percent) on vacations or other short term wants.

Once you are saving the 30 percent... then pay down debts. You probably want to find someone to do your taxes and give you specific tax advice- keeping the mortgage will lower your tax bill.

It might cost you 400k in interest, but it could save you 600k in taxes. Have an accountant or tax professional run the numbers for you.

[disneysteve]

Originally Posted by jIM_Ohio

I did not see you add the expenses in your response to Steve- what are the budgeted monthly expenses?

See post #14. It isn't complete but it's a good start.