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Tons of Debt but Motivated - Please HELP!

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    Tons of Debt but Motivated - Please HELP!

    I just found this forum and am very excited about all of the wonderful advice available here. I am 38 and married. We have two children (10 and 12). I have always made poor financial decisions and am trying to right my wrongs. Here is our situation.
    Right now I have approximately $2300 to put toward paying down debt each month. This will go up about $200-300 this summer when I take on a new job. While this debt is high, please understand that I have already paid off ~$30K this year. We want to do this.
    My debts are as follows:
    CC $2600 3.9% Min $35
    CC $7000 0% for 24 months $300/mo
    Vehicle $18500 2.9% $548/month
    2nd Mortgage (debt consolidation – stupid!!) $77000 5.625% $991/month

    In a year or so, I will also have to start paying on student loans (approximately $120K). I want the other things paid off before I begin focusing on that.

    To add to this picture, I have approximately $90K that I just inherited. I really want to invest a large portion of that money to use in my retirement, but I would be open to using some of it for debt. It’s very difficult for me to have this money as I just lost my father. He didn’t get to enjoy his retirement, and I plan to. Life has given me a very big wake-up call in recent months.

    I would appreciate any advice that you have to offer regarding order of paying things off and amounts. I would LOVE to be done within two years.

    #2
    Can you provide some more info.

    Do you currently have any savings or investments?

    What is your income?

    Are you still using credit cards?

    Also, can you lay out a detailed breakdown of your monthly spending as it stands now? Try to be as detailed as possible and include everything that you spend money on in a month.
    Brian

    Comment


      #3
      More questions, in addition to Brian's:

      -what are the interest rates on the student loans?
      -you said $77k on a 2nd mortgage, what's the amount of the 1st? and interest rate?
      -does your employer offer a 401k? company match?
      -in regards to risk, would you say that you are super risk averse, moderately risk averse, moderate normal, moderately aggressive, or very comfortable with intelligent risk?

      -and you are talking to your husband about this correct?


      Just as a side note- you have until April 15th to fund a Roth for 2010 (if your income allows you to qualify), so if you're wanting to use the inheritance for retirement money - you'll need to make that decision before April.

      Comment


        #4
        Originally posted by jpg7n16 View Post
        you have until April 15th to fund a Roth for 2010
        Actually, you have a few extra days this year. The deadline is April 18, 2011.
        Steve

        * Despite the high cost of living, it remains very popular.
        * Why should I pay for my daughter's education when she already knows everything?
        * There are no shortcuts to anywhere worth going.

        Comment


          #5
          Originally posted by momofla View Post
          I have approximately $90K that I just inherited. I really want to invest a large portion of that money to use in my retirement, but I would be open to using some of it for debt.
          Your credit cards and vehicle are at fairly low interest rates. Your 2nd mortgage is right around that iffy point where paying it off may or may not be better than investing.

          Do you have any idea what the rate will be on the student loans when repayment starts? Knowing that would be very helpful in deciding how best to deploy the inheritance money.

          The standard advice with inheritance money, especially when it is tied to a lot of emotion and a recent loss, is to sit on it for 6-12 months and not make any quick decisions that you might later wish you hadn't. I know you want to get out of debt and this is a good opportunity but parking that money in a CD for 6 months really won't affect things that much one way or the other. The money will still be there and you can use it to pay the debt at that point but do so with a clearer head and not as much emotion driving the decision.

          Before giving any other advice, I'd want to know the answers to the questions already asked.
          Steve

          * Despite the high cost of living, it remains very popular.
          * Why should I pay for my daughter's education when she already knows everything?
          * There are no shortcuts to anywhere worth going.

          Comment


            #6
            Yes, I am absolutely talking to my husband; I am just the one in charge of the finances.
            The student loans are at about 4.5%. Interest is deferred until I finish my dissertation.
            My employer offers a 403b (I am in education) but there is no match.
            The first mortgage is completely off the table. It is a part of an LLC, jointly owned. We have at least $200K in equity.
            My income is $74K (4800/month), my husband's is $30K(2000/month). I have about $30K in retirement accounts plus I will get state retirement. My husband also has around $30K in retirement with no employee matching. I used savings to pay down debt; we are down to about 1000 there. We are NOT using credit cards. Here is our budget:

            mortgage/ins/taxes: $2450
            electric (budget plan) $261
            tv/phone/internet $172
            cell phone $174
            child health ins $155
            trash removal $22
            car ins $99
            gas $400
            groceries $550
            gifts/clothing $100 (to include xmas)
            haircare $25
            entertainment $50
            blow $100

            I am comfortable with intelligent risk. I am still a ways from retirement (would like to shoot for 60-62).

            Thanks so much. Please let me know if you have any other questions.

            Comment


              #7
              One more thing...

              My car is a 2006 Toyota Sequoia that I owe 18800 on. I stupidly got a lease and bought it new. I bought it (with the help of the bank) last year. I need a large vehicle as I am always hauling kids. It really doesn't get got gas mileage but only has 73000 miles on it. I thought I should pay it off and keep it but would be open to something different. Four wheel drive is also necessary due to where I live (although I've been tempted to try AWD).

              My husband drives a 2000 Toyota 4-Runner with 130K miles on it. It is in great shape.

              Comment


                #8
                Hi. I'm new here but please allow me to share my thoughts.

                First, if you are that anxious to be debt free in two years, would you be willing to change your lifestyle? You've stated that you do not (or no longer) use credit cards. That's a great start. Now, looking at your budget, what strikes me the most is your "entertainment" entry at $50. (by the way, what's "blow"?) If you look around and ask for suggestions, you'll be amazed to find out that there are forms of entertainments that cost a lot less than $50 - some are even free.

                Another entry is the "tv/phone/internet" which costs $172. You already have a cell phone subscription, so is it possible to ditch the phone? You have two cars, can't you ditch the other one and just plan your trips so you can maximize the use of the remaining one? These are just a few suggestions.

                Now, most people do not want to change their lifestyle. Or they think that they do not need to change their lifestyle. Then they'll have to deal with their debts while dealing with their high cost of living. To be safe, let's assume that you do not want to change your lifestyle. But if you do, treat these savings as additional surplus.

                Let's get to the computations:
                Assuming that the mortgage/ins/taxes entry does not include your payment for debt 2nd mortgage debt, your total monthly expenses would be $6432. That's all of your budgeted expenses plus the minimum payments of your debts. Your (and your husband's) total monthly income is $6800. You still have a surplus of $368. What's your plan for this surplus? If you allot this to the payment of your CC with the 3.9% interest, you would be able to pay off this CC in approximately 8 months. I chose this debt to be paid off first because it's interest is in the median. Further, the amount is lowest so paying it off would be a lot easier than paying off the others. It feels good if you are able to cross out one of your debts. After you've paid off your CC, move to paying off your car. Then, your 2nd mortgage. Your CC with 0% interest would be the last priority.

                Now, if you're sentimental (as I am), you might not want to part with $90k you inherited. You haven't mentioned if you have an emergency fund. I suggest putting around $20k (3 months of expenses) of your inheritance to your emergency fund. The remaining $70k should be put into a high yield account depending on your risk tolerance. This will serve as your additional retirement fund. After paying out all of your debts (the two CCs, car, and 2nd mortgage), begin building up your REAL emergency fund. Once you've built enough, transfer the $20k from your inheritance to your high yield account.

                If you follow this scheme, you would not be able to pay off your debts in 2 years. But at least your inheritance wasn't put at risk.

                On the other hand, if you are willing to part with your inheritance, I suggest setting aside $20k as emergency fund then use the remaining $70k to pay your 2nd mortgage which is $77k. If you do this, you'll be left with the following debts:
                CC $2600 3.9%
                CC $7000 0%
                car $18500 2.9%
                2nd mortgage $7000 5.63%
                Then start paying the minimum of these debts with the surplus concentrated on the debt with the highest interest rate.

                I'm not saying that my advice is a good one. But it can be a basis for a discussion.

                Good luck!

                Comment


                  #9
                  One more thing:
                  Do a lot of research first if you decide to invest your inheritance.

                  Comment


                    #10
                    I think you're better off holding onto the inheritence money in a CD or something for about 6 months. Aftewards, you should be able to make logical choices with the money. Use it to fund an emergency fund (about $15,000 to $20,000). The size of the fund should depend on what you would feel most comfortable with.

                    Next, I would pay off debts. There is really no better investment for your future than to pay off debt. I know you want to save for retirement, but imagine how much you could save if you had no payments.

                    I would take out that home equity and keep that lien off of your house. After that, aggressively pay off your other debt. Some people will tell you to pay off the CCs first, but home equity is really the worst possible kind of debt to have. Its far too risky and a lot of times ruins households. Get rid of it.

                    Go after the car loan second. What is the car worth? Could you sell it for more than you owe? I'm guessing not, but if you could, that would be a smart move to sell it and buy something cheaper yet reliable.
                    Check out my new website at www.payczech.com !

                    Comment


                      #11
                      Originally posted by momofla View Post
                      Yes, I am absolutely talking to my husband; I am just the one in charge of the finances.
                      Very good You wouldn't believe how many families try to separate it out, and think 'this is my debt, he has his own debt' - just checkin
                      The student loans are at about 4.5%. Interest is deferred until I finish my dissertation.
                      My employer offers a 403b (I am in education) but there is no match.
                      The first mortgage is completely off the table. It is a part of an LLC, jointly owned. We have at least $200K in equity.
                      Sorry what do you mean 'off the table'? Do you not pay your mortgage? Does it not charge you interest? And jointly owned with who? Does that mean there are other people who would step in and pay your mortgage if you were unable to?

                      I don't have as much info as you do about this set-up, so I don't really know what impact the mortgage has on your family. If you're the only family responsible for the LLC, and it's 'jointly owned' with your husband - then the LLC doesn't really matter for your overall picture.

                      Given the other figures you've listed, I doubt the interest rate is high at all, but it is something we have to ask.
                      My income is $74K (4800/month), my husband's is $30K(2000/month). I have about $30K in retirement accounts plus I will get state retirement. My husband also has around $30K in retirement with no employee matching. I used savings to pay down debt; we are down to about 1000 there. We are NOT using credit cards.
                      The only real concern I had about your budget was the $2450 for housing. Given your 6800/month income, we usually suggest housing costs be no more than 28% - for you, that's $1904, so you're running about $500/month too high on housing. I have a suggestion to begin fixing this below.

                      -----------------------------------------------------------------------

                      Now as far as what to do with your inheritance money. I came up with a few options.

                      1) Let it sit in cash while you gather your emotions, cause you've just been through a horrible ordeal (about 6 months as suggested above)
                      2) Put $10k into Roth IRAs -invested in money market funds (2010 contribution), and let the rest sit in cash for 6 months
                      3) Put $20k into Roth IRAs - invested in a 2035 target date fund, $5-10k into cash, and $60-65k pay down the 2nd mortgage

                      And I would personally go with #3, but I understand any of the 3 options are completely reasonable.

                      Option 1 is just good practice given that you don't want to focus on finance stuff when you just lost your father. Too many emotions can lead to decisions you'll regret.

                      Option 2 is pretty much the same as option 1, but it gets $10k into the Roth accounts for 2010, which you'd be unable to do after 6 months. (After April 18th -thanks DS- you won't be able to contribute for 2010 any more, so once April's gone, you can't go back and make up for lost time) - if later on you decide you didn't want to do the Roth, you can pull your contribution (not earnings) back out at any time tax free. If you decide you do want it in the Roth, you can switch investments from money market to a target date fund.

                      Option 3 would get you towards your retirement goal, by funding for 2010 and 2011 - would keep 1-2 months expenses in cash as a buffer (cause I think 1k in cash is too low given your monthly expenses) and paying down the 2nd mortgage would get you that much closer to meeting the 28% maximum on housing expenses - and it's also your highest interest rate (even after the tax deduction).


                      And the 2035 target date fund (I prefer Vanguard target date funds, just cause I like them) because your retirement goal of 62 would be in 2035. (https://personal.vanguard.com/us/fun...t#targetAnchor )




                      And a debt payoff order IMO would go like so:
                      1) 2nd mortgage (5.63% = 4.22% post tax deduction)
                      2) CC1 (3.90%)
                      3) Student loans - once charging interest (4.5% = 3.38% post tax deduction)
                      4) Car (2.9%)
                      5) CC2 (0%)

                      But once the 2nd mortage is paid off, I would be investing 15-20% of my income before paying down extra on your debts. Investments are expected (not guaranteed) to earn 7-11%, while these debts are at a max of 4.22%

                      Comment


                        #12
                        JPG:

                        I agree with your plan, however I may tweek it as follows:

                        Put the car payoff in slot #3 and the SL in slot #4. Even though the interest rate is lower, I would still be inclined to get the auto loan paid off, because it is a depreciating asset and it has no tax advantage.

                        I may also suggest taking a portion of the inheritance (say $10,000) and set it aside as a car fund, so that when it comes time to replace the current car the OP won't have to finance one again.
                        Brian

                        Comment


                          #13
                          Just stay focused and don't let yourself "lose" or cheat on a certain day. Be patient. I have a lot of debt myself and the little personal mantra that I'm using is...

                          Take care of today, and time will take care of the rest.

                          Comment


                            #14
                            The good part is that you have a ton of disposable income extra each month and a 90k inheritance. Since you want to enjoy retirement how does 891k tax free withdrawls sound in 30 years time and no debt? This can be done by initially putting 20k in a Roth IRA for you and your wife for 2010 and 2011 and not touching it for 30 years @ 8%. As for the debt that will take some sacrifice. Your total debt is 225k according to the stats you gave us. Why not take the remaining 70k and apply it immediately to the 225k and that will leave 155k? That eliminates the cc's, the vehicle and a good chunk off of the 2nd mortgage. So, basically you will have 2500k a month to apply towards debt. So divide 155,000 your remaining debt by what you can pay each month ($2500) and that will take 62 months give or take. That's less then 3 years. I hope you have a proper EF fund. Good luck, but very manageable!

                            You'll only miss 2012 for Roth IRA contribution, but can start up when your debt free.. Remmeber if you follow my plan it will only take 62 months +/-
                            Last edited by littleroc02us; 02-17-2011, 12:24 PM.

                            Comment


                              #15
                              How do you have $2300/month when you make $9k/month gross and have a only a surplus of $300/month? Are you not paying the mortgage?

                              Don't pay off anything. I like the advice that you should sit on the inheritance for a few months before doing anything.
                              LivingAlmostLarge Blog

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