Staying in check after tackling Debt, 1 year later

[familyof4]

I am posting my situation again to get a feel for what avenue I should take. Any advice?

Bill Payment Balance
Mortgage $1,514.92 $156250 Rate 6.5% fixed
Vehicle Lease $398 12 months left
home eq $196 $17200 7.5%
Vehicle 2 Loan $317.2 $16650 7%
Children Acct $40
401 repay $163.85 $1900 6.5% (12 months left)
auto Ins $183
snowmobile Ins $24
Life Ins $53.05
Student Loan $47.74 $9400 (5%?, can't remember off hand)
power $90
TV $48.74
Cell $53
Phone line to house $27
Garbage $17
Heat $100
Food and Misc spending $800
MMA/Car Fund $600 +$5200
Mortgage Payoff Act $0
emergency Savings $100 +1100

Total Monthly debt including savings and car fund is 4,773.50. We bring home 4832.22 which leaves an extra 58.72 that I auto draft into my Billing acct to cover any possible incidentals. at the end of the year we will take that extra lump (if any) and add it to the MMA acct.

I think since last June we are doing well, no credit cards, watching our spending. Now is the time we need to make our new found knowledge work for us. As we continue to build up the emergency fund. We have placed many loans on auto pay. Some bi-weekly and I want to add more to that list including the mortgage.

We are 32 years old with two children. I have 17,500 in my 401 and my wife has about 10,000 in her retirement fund.

My question now is what to tackle next. Some of my thoughts are:

#1 I have set my sites on paying cash for my wife’s next vehicle. She has 12 months on the lease and I would like to have all if not most of the payment to replace it next May 2010.

#2 adding more to my student loan, possibly the extra 50.00 per month that I have been letting hit the bill acct.

#3 Once the vehicle is paid for next year, place that fund money $600.00 onto the mortgage principle and use the car payment $398.00 to pay down my vehicle.

Would it be best to take out of the 5k in MMA savings to pay the 1900 loan with my 401k. With my credit union 5k is the limit before we drop down the MMA interest. Right now it is not much 1.25%

Thanks

[wincrasher]

You need to pay off that 401k loan. If you lose your job, it becomes due right away.

You don't have enough savings. Add to that as a priority.

Sell your snomobile and then cancel the insurance. It's a luxury you can't afford.

When the lease is up, buy a beater car for the wife - budget no more than $3000. Put the balance in your EF. When you are in better shape in a few years, then you could buy her a new(er) car. Or you could drive the beater and give her your car. You need to position yourself so that you have one "good" car for the family and one beat up (cheap) car for just driving to work.

Look for savings in the food & misc category. Cut coupons and shop sales, bulks if you are not already.

[Merch]

Do you have enough equity in your house to refi? You might be able to roll the home equity and mortgage together and reduce the interest down to 5%. That could save you $200 a month and you could use that to clean up some of your other debts.

After the refi, I agree on getting rid of your 401(k) loan.

[familyof4]

Yes we have equity in the house. I would estimate about 60k. We owe 18 years left on it and I do not think a refi is the answer, the closing costs alone would not be worth it. if anything I want to pay more monthly on that to reduce the term.

The snowmobiles although in my monthly budget are covered by side work I do through the year. I make at least an additional 1500.00 to put towards the sport in the winter. It is a family thing that we do in those months when we can not be outside doing things we normally do in the summer. The snowmobiles are paid for, it is just the insurance and 40 per two year reg. They stay.

I am not sure I need to cut my lifestyle to the bone, Misc spending yes.. I can see savings there. I can pay the 1900 on the 401k and that will free up another 163 per month.

I am saving now to not have a car payment for my wifes vehicle in 12 months.

[LivingAlmostLarge]

How much are you planning on spending on your wife's car? 12 months you only have $50/extra a month. Are you planning on financing a car? Reality check I mean.

It might be time to sell the snowmobiles and buy your wife a car with the cash from the snowmobiles.

[familyof4]

Originally Posted by LivingAlmostLarge

How much are you planning on spending on your wife's car? 12 months you only have $50/extra a month. Are you planning on financing a car? Reality check I mean.

It might be time to sell the snowmobiles and buy your wife a car with the cash from the snowmobiles.

If you look at the money market savings/Car fund I am putting 600 per month in there. Currently there is a 5200.00 balance in the acct. So I should have roughly 8 to 10k to put on a car next May 2010 and not wipe the balance out toally. Once there is no lease payment next may.. that MMA fund will jump from 600 per month to 998 (the 600 currently and the current lease payment) and we will own her vehicle.

[creditcardfree]

Originally Posted by wincrasher

You need to pay off that 401k loan. If you lose your job, it becomes due right away.

You don't have enough savings. Add to that as a priority.

I agree with this. Pay that 401k loan off and NEVER borrow from it again.

Keep saving. When you go to buy wife's car in 12 mos, leave enough in the account for an emergency fund. Don't wipe it all out for a car purchase.

[wincrasher]

Your side work should be going to savings, not fun stuff.

I don't think you realize how bad off you are, at least from the picture you've painted here.

You have no-where near the savings you need to provide for your family should something happen.

Your EF alone should have a minimum of 6 months of your expenses - many say 9 months is appropiate these days. That is money you don't touch to buy cars. Life insurance should be 10 years salary.

No to mention college savings for your kids - how much do you have there? How about your retirement?

[familyof4]

I have a small account started for the kids college.. about 1200 cash and almost 2k in bonds.

My retirement is 9% 401k bi-weekly (6% me 3% employer match). I am working on a EF and plan to use some of the total money saved for the car purchase in a year. That will eliminate the 398 payment. maybe it would make you feel better to see it broken out in the list as EF fund 300, car fund 300?

How bad off I am? Am I really do that bad? I mean I don't have collectors calling, no credit cards.. what we need we pay cash for, my home has equity and is desirable in my area. I have about 14k in liquid assets if i needed to sell them to get out of trouble.

We have 350k life insurance policies each, plus 1.5x salary life ins with my work. At least that would pay off all debt if god forbid something happened to one of us.

What I am doing wrong? We don't take dinners out, bar hop or travel much. Our vacations are reserved to a couple weekends a summer and a couple in the winter to snowmobile (besides what we can snowmobile locally out of our yard).

We need two vehicles as we live in the country, both work and can not car pool.

[LivingAlmostLarge]

What does your wife save for retirement? How much are you buying a car for? $17k and $10k for retirement, how long have you been saving?

[familyof4]

Originally Posted by LivingAlmostLarge

What does your wife save for retirement? How much are you buying a car for? $17k and $10k for retirement, how long have you been saving?

My wife saves 7% into a state retirement fund. She and I are both vested and I have only been putting into my 401k for 3 years now. I beleive she has been putting into it for 5 years.. but makes much less than me.

The car we are looking at will be around 10k.. hopefully less, we will need to see what thesituation looks like after 12 months.

[creditcardfree]

I do think it is great that you want to pay for a car with cash. Nothing wrong with that. In your case, it seems that this will be a need in the future because of the lease.

Did you know that if you keep paying the minimum on your student loan, it will take you 34 years to pay it off? You will have almost paid $10K in interest. Yuck!

It is important to minimize debt of any kind in order to have cash available to invest and create wealth.

If I were in your situation, I decide now to buy a less expensive car. Maybe $5K. Once I had the car money saved I would start attacking some debt. I would pick the student because it is the smallest debt.

Right now you have $650 to save each month.
Once you pay off the 401K loan you add another $163.
With these two amounts you have $813...save for 6 months and you have your $5K car funded.

Until the car lease is up: Pay $813 plus your regular payment for 6 months to bring your student loan to about $4660. Now you are at this time next year.

Once the car lease is up you have $398 to put towards debt. Now you have $1259 to put to your student loan. Guess what? With that payment it will be paid off in 4 more months. That is approx Sept 2010!

Then, if it were me, I'd put all that money towards your car loan. At this point your car balance is about $13K. You could pay it off in about 8.5 months!!

So, two years from now you could have paid a car with cash, and paid off 3 loans. Wow! How would that feel? Maybe then you could save another $5K and help your wife move up to a nicer vehicle. She will have only driven the "new" one for 1 year, so it's value would not be significantly different.

Just some food for thought! Best wishes.

[ceejay74]

Originally Posted by creditcardfree

Did you know that if you keep paying the minimum on your student loan, it will take you 34 years to pay it off? You will have almost paid $10K in interest. Yuck!

I'm guessing the student loan has a fixed term, such as 15 years, and that the amount of principal goes up each month, so it's probably not as bad as it looks.

I have a calculation on my debt spreadsheet of how long it would take to pay off my debts if I continue to pay the current minimum, and calculating it like that, it looks like it will take me 53 years to pay off my mortgage, but I'm actually 5.5 years into a 30-year mortgage, so I know that's not accurate.

But maybe it's a different sort of student loan, who knows...

[creditcardfree]

Originally Posted by ceejay74

I'm guessing the student loan has a fixed term, such as 15 years, and that the amount of principal goes up each month, so it's probably not as bad as it looks.

Good point! I hope that is the case!

[familyof4]

Originally Posted by creditcardfree

I do think it is great that you want to pay for a car with cash. Nothing wrong with that. In your case, it seems that this will be a need in the future because of the lease.

Did you know that if you keep paying the minimum on your student loan, it will take you 34 years to pay it off? You will have almost paid $10K in interest. Yuck!

It is important to minimize debt of any kind in order to have cash available to invest and create wealth.

If I were in your situation, I decide now to buy a less expensive car. Maybe $5K. Once I had the car money saved I would start attacking some debt. I would pick the student because it is the smallest debt.

Right now you have $650 to save each month.
Once you pay off the 401K loan you add another $163.
With these two amounts you have $813...save for 6 months and you have your $5K car funded.

Until the car lease is up: Pay $813 plus your regular payment for 6 months to bring your student loan to about $4660. Now you are at this time next year.

Once the car lease is up you have $398 to put towards debt. Now you have $1259 to put to your student loan. Guess what? With that payment it will be paid off in 4 more months. That is approx Sept 2010!

Then, if it were me, I'd put all that money towards your car loan. At this point your car balance is about $13K. You could pay it off in about 8.5 months!!

So, two years from now you could have paid a car with cash, and paid off 3 loans. Wow! How would that feel? Maybe then you could save another $5K and help your wife move up to a nicer vehicle. She will have only driven the "new" one for 1 year, so it's value would not be significantly different.

Just some food for thought! Best wishes.

This is exactly what I am looking for.. a nice easy break down of what steps to take next. If my wife wants more expensive vehicle maybe we can sell something else we own to make up the difference.

I am starting this month with my mortgage on bi-weekly auto pay, then I will up the student loan payment. I will also discuss with my wife about paying the 401k loan in full with cash we have.

[RS3RS]

Gotta agree with the 401k thing.

As far as savings goes, it's definitely nice to have an emergency-fund on hand, but I'd only try to save about 1 month's worth of living expenses. After that, I'd put every cent I could towards the debt.

Great work so far, debt is a lot to take on, and kudos for staying on course.

[Runaway Finances]

Familyof4,

You asked "what am I doing wrong". You aren't doing anything most of America has been doing. You borrowed for things you wanted that you couldn't afford at the time. BUT, that was yesterday. You seem to have made some changes and it appears you are on the right track. It looks like you have organized things well.

By the way, one post said to pay off the 401K loan because it comes due immediately if you lose your job, but that is not necessarily the case. I used to own a pension administration company that I sold in 2006. Most likely, there is an option to continue paying on the loan if your balance is more than $5000 in your account.

Saving for the next car is huge, but after you buy that car, you need to keep putting money into a car fund for your next car. Essentially, you should always be paying into a car fund as you will have repairs and/or you will need to alway buy cars.

You really don't have a lot in savings, so I would focus on that while you are also paying down debts. I would recommend you come up with a "spending plan". This just formalizes where your money is going to go. Try to structure the plan so that all your debts (except mortage) is paid off within 4 years.

Never again buy anything on debt unless it can return you more money than you are paying in interest. Pay cash for discretionary expenses. If you don't have the cash, you can't afford it. This means cars too.

You have about $46,000 of discretionary debt (I'm assuming the home equity loan was taken out to buy something discretionary). That is close to one times your annual take home pay. That's a lot of debt proportionately.

I would NOT take out another home equity loan. While it can easily be argued that financially it would make sense because the interest is deductible. I've learned you need to change the behaviors that got you in this position before doing any loan consolidations. I've said this in other posts, but most people will go right back to borrowing on credit cards, etc. within 12 months of a loan consolidation. Change your behaviors for a couple of years first, then you can make the consolidation loans if necessary.

Hope that helps!

[wnlbutterfly]

If you lose your job and have a loan against your 401k, you will receive a 1099-R for that amount showing that you received it and it is taxable on your income taxes. You have to pay a 10% penalty for early withdrawal, and it increases your income (thus paying more taxes).

[Runaway Finances]

wnlbutterfly,

That is not necessarily correct. It depends on the plan document. If you have at least $5,000 in the plan, the law gives the participant the right to leave the money in the plan. Loan payments can continue to be made. A "deemed distribution" only occurs when you default on the loan, which would trigger a 1099. I sold my pension company in 2006 so I'm rusty on some of the rules, but the plan document would detail what happens.

[Granite]

Have you thought about turning the lease vehicle in early and buying a mileage car in lieu of such a high payment?