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We Make a Great Living, Why Are We Still in Debt?

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    We Make a Great Living, Why Are We Still in Debt?

    Hi everyone! New around here and looking for some advice/resources on how to improve our financial situation. My husband and I make a great living. Our annual gross income is around $242,000. We live in the SE U.S. and don't have a crazy expensive home - our mortgage is about 20% of our net income. We've managed to accumulate a decent amount of consumer debt over the past three years. We're up to about $26K at this point. Yes, it's a lot.

    Let me explain. In the last three years we've had two children. Medical costs (births cost $2500 and $6000), day care costs ($1800/month) and necessities (diapers, formula, clothes) have eaten into the budget more than I thought it would.

    Frankly, about 50% of our debt is due to poor habits. The other 50% came from emergencies that we couldn't fund at the time they happened - $1800 in car repairs here, $1100 in rental property repairs there, you get the picture. Okay, it's probably all due to bad habits.

    At this point, we need to formulate a plan, and fast. We're 35 and 37. We have $200K put away for retirement (money we cannot touch), and we make too much money to be living month to month. We're obviously smart people, but are too cavalier with money. Frankly, we've been so tired with the babies and FT work that we often just buy what we need when we need it and don't price compare. We are obviously not financial whizzes.

    We have about $14000 in liquid savings right now. A sad emergency fund, but that's where we are. Am I best to liquidate this fund to pay off the debt? One card is $12K and is a 0%. The other is our Amex and that's up to $14K - we're obviously paying a higher rate on this card. Our credit is good - both above 725.

    I don't have my bills spreadsheet with me now, but I believe we have about $2K-$3K left each month to throw at debt or add to savings. I'd like to get our ship righted in a year. Any additonal info needed to help with a plan?

    Debt List:
    $26K Consumer Credit Debt
    $8K Car Loan
    $50K Student Loans (Int Rate is low - around 1.5%)
    ~$400K on Primary Home
    ~$180K on Rental Property (rented at $1300/month)

    Net Monthly Income: ~$13K month

    I'd love to hear people's thoughts on liquidating our savings to pay down debt.

    #2
    I would not liquidate savings to pay down debt. That could lead to more debt. If you liquidate savings and then have an emergency you will be forced to rack up more credit card debt to pay for it.

    I agree that you make way too much to be living month to month.

    You will need to post up a detailed budget so we can help.

    Two things that jump out without knowing anything else:

    1) You have no reason to have a car loan. Get it paid off or sell the car.

    2) I would consider selling the rental. It sounds like it is costing you more than it is making.
    Brian

    Comment


      #3
      I'll post more detail during lunch, when I can access my budget in detail.

      RE: the rental, we'd love to sell it. Unfortunately, we are upside down. We purchased it as our starter home (it's a townhome), then rented it out when we moved up to our current home. We are about $300/month out of pocket on it, but we'd take a $30K-$40K loss if we sold right now. We live outside Atlanta, and our real estate market has been hit, hard.

      Comment


        #4
        Originally posted by Alw1977 View Post
        Net Monthly Income: ~$13K month

        our mortgage is about 20% of our net income.

        ~$180K on Rental Property (rented at $1300/month)

        I believe we have about $2K-$3K left each month to throw at debt or add to savings
        Income: 13000

        Expenses:
        Primary $13,000 * .2 = $2600
        Rental +1300
        Total -- 3900

        Savings: 2500

        Unaccounted for yet, $6,600/month
        Frankly, about 50% of our debt is due to poor habits... Okay, it's probably all due to bad habits.
        I agree. But when you say "bad habits" what are you referring to? What habits specifically?
        We have $200K put away for retirement
        Is that good for your situation? Are you on pace to retire the way you want to?

        AARP Retirement Calculator - How to Retire, Plan for Retirement
        Frankly, we've been so tired with the babies and FT work that we often just buy what we need when we need it and don't price compare. We are obviously not financial whizzes.
        An extra $5-20 here or there by not comparison shopping is important, but I doubt this is your main issue. There's gotta be more going on.

        I'd love to hear people's thoughts on liquidating our savings to pay down debt.
        Which one are you more concerned about:
        - 15% interest/year on $14k of debt ($2,100/year)? or
        - properly handling the remaining $6,600 of your budget each month ($79,200/year)?

        I'm of the opinion that we could help you solve much more than just your debt issue.

        If you want my answer anyways, I'd reduce your cash on hand to $10k, and keep it there until you're out of CC debt. Any extra funds pay down the highest interest rate loan.

        Any additonal info needed to help with a plan?
        -What is the interest rate on your mortgage?
        -What is the interest rate on your car loan?
        -What are you doing with the remaining $6k each month?
        -What percentage of your income are you putting away for retirement? What is your employer match?

        Comment


          #5
          If the issue is largely poor spending habbits, then we can tell you all sorts of plans, but the hard part is going to be sticking to whatever budget you put in place. As much as I hate carrying around cash, you might actually benefit from a sort of envelope system that has been discussed on some of the other threads in this forum. maybe agree to use your bank card for needs only, like diapers, formula, groceries (that should be planned out in advance so you're not buying stuff you don't need). Then keep a set cash amount aside each week to limit all your other spending. When you're not paying attention, it's amazing how much you can spend on eating out, starbucks, that random kitchen or home-good stuff that looked cool but you'll only ever use twice a year, some cute outfit you found for your kid even if they already have plenty of clothes, etc.

          Just training yourself to really think "do I NEED to buy this or is it an impulse buy" would probably cut out more of your spending than you might think.

          Comment


            #6
            Breathmusic: I think you hit the nail on the head.

            At any rate, I will post our detailed budget in an hour or so (I go home for lunch and can access my info at that point). I'd love to get ideas on where to cut and how to reduce overall debt.

            Comment


              #7
              Okay, for those who asked and offered to help (thanks Btw) here is a summary of our finances. I had a few numbers wrong:

              Monthly Net Income (including $1300 rent from tenant): $14K
              Expenses:
              Mortgage 1 - Primary: $2200 (4.25%, just re-fi'd)
              Mortgage 2 - Primary: $500 (high rate, 8%)
              Mortgage 1 - Rental: $1275 (6.5%)
              Mortgage 2 - Rental: $400 (low rate, 4%) (currently over paying - base is $150)
              HOA dues - Rental: $200
              Health Insurance: $520 (self-employed, premium for husband + 2 kids)
              Car: $442
              Child Care: $1850
              Student Loans: $550
              529 Plans for Kids: $400
              Maid: $190
              Electric: ~$100
              Home Security: $20
              DirecTV: $90
              Husband's Disability Insurance: $71 (again, he's self employed)
              Life Ins/both: $70
              Car Insurance: $140
              Water/Natural Gas: $100
              AT&T - Cell and home phone: $250
              Home Insurance: $45

              Total Committed: $9,413
              Total Left Over: $4,587

              A few things:
              - It would cost over $800/month to add my family to my company health ins plan
              - cannot sell rental currently. very underwater due to terrible market. tough to re-fi because it is an investment property AND underwater
              - Have about 8K left on car loan
              - Child care is what it is. I am not switching my kids to a different school. It's an average cost for a good place in my area.
              - Maid and lawn care are definite "cuts"
              - After a two year hiatus (had to wait to start contributing), I've just started 401(k) contribs again. Maxing out at $17K. NO MATCHING.
              - Husband has solo 401(k) - $17k/year

              I think we're decent on retirement but I'd like a whole lot more. There is a good chance my inheritance (only one parent living, in 70s) will someday be north of $500K, but I don't want to rely on that.

              I want to pay down but also learn how to better manage what we have. Spending is very tough. We'll be doing okay and then have a car repair, or flights to visit family, etc. We've been spinning our wheels since we've had kids.

              Comment


                #8
                What are you spending on food? Separate groceries and eating out into their own categories. This tends to be a place people spend a lot more than they think they do.

                Are you including your 401k contributions in your "committed" category?

                Even so, you have a lot of budget leakage. Do you have a financial tracking program setup (Quicken/mint.com/etc)? If not, get that going and track everything you spend for the next couple months. You won't make progress if you don't monitor where you started and where you are going.

                Comment


                  #9
                  Considering your income, the expenses that you listed don't seem unreasonable to me. Could you cut out some of those things? Trade the car in for something cheaper? Get rid of the maid service? Sure. Is that where your problem is? No way. In fact, if you have several kids and are really busy, I'd lean toward keeping the maid and lawn service. As you already said, you're busy and you get tired and worn out. The little bit of free time that you probably get is valuable and worth the price of paying someone to clean and mow the grass.

                  I think what you should do is pull the past few months of credit card and bank statements and tally up where that extra $4.5k is going. Because it's clearly going somewhere. In fact, you might be able to get all that info easily from your online accounts. Many credit cards and banks have nifty tools that will show you pie charts and graphs for where your money is going. You just need to consolidate it all into one pot. Once you know exactly what you're spending the extra money on, you can figure out what to cut. You'll end up thinking "OMG, we really spend that much money on dining out each month?!?!!" And then you can set a more reasonable budget for dining out. You can set a budget for clothing, figure out what you normally spend on gas, etc.

                  You can even use an online tool like mint.com that will pull data from all of your accounts and if you go over your monthly budget for any one category, it will send you a notice.

                  The way that most people spend all their spare money every month is by not closely monitoring their accounts, which is a pain. So having a tool that gives you warning when you start spending outside of your budget before all the money is gone would help.

                  Comment


                    #10
                    The first thing that came to mind for me was: SIMPLIFY.

                    It seems to me that you have a lot of balls in the air, and that in and of itself can add a lot of stress. Add financial concerns on that and the stress level can have a negative impact on the family.

                    Car insurance: Seems on the high side
                    Car payment: High, can you sell and buy something used for cash?
                    Maid: Can the kids help out cleaning? Maybe set aside some time where everyone pitches in?
                    Cell/home phone: Can you change plans to a pay-as-you-go? Look into NetTalk Duo to replace your landline

                    Comment


                      #11
                      Originally posted by Alw1977 View Post
                      Okay, for those who asked and offered to help (thanks Btw) here is a summary of our finances. I had a few numbers wrong:

                      Monthly Net Income (including $1300 rent from tenant): $14K
                      Expenses:
                      Mortgage 1 - Primary: $2200 (4.25%, just re-fi'd)
                      Mortgage 2 - Primary: $500 (high rate, 8%)
                      Mortgage 1 - Rental: $1275 (6.5%)
                      Mortgage 2 - Rental: $400 (low rate, 4%) (currently over paying - base is $150)
                      Why are you paying extra on the lowest rate debt here? I would stop paying extra here, and move that money to pay extra on your CC that is charging interest.

                      <just a note $250 'savings'>

                      529 Plans for Kids: $400

                      Total Left Over: $4,587

                      - After a two year hiatus (had to wait to start contributing), I've just started 401(k) contribs again. Maxing out at $17K. NO MATCHING.
                      - Husband has solo 401(k) - $17k/year
                      So including the discretionary extra money to your rental, you guys are able to save (17k+17k+12*(250+400+4587)=) $96,844/year

                      What is your concern about not having enough again??

                      At $4500/month, your debt should be gone in no time.
                      I think we're decent on retirement but I'd like a whole lot more.
                      Does your husband have any employees in his company? There are probably other self-employed retirement savings options to increase the amount he can put away.

                      Comment


                        #12
                        The answer like most people are saying, is simple. A budget. Make one, be realistic, stick to it. Then take what is left over and apply that to debt. If you need motivation to keep on going, start with your smallest debts. Pay them off and roll over your excess cash to the next smallest. It works for us, and we make less than half of what you make and our debt was the same amount. Within a year we paid off 20k.

                        Comment


                          #13
                          Stop using the credit cards. Pay them down. Do this for at least a couple of months, then see where you stand. It's going to take a while to change your habits and pay down the debt.

                          Comment


                            #14
                            You should certainly be able to wipe out the CC debt and then some in a year. First thing you need to do is spend some time reviewing your CC and bank statements to figure out where all the money is going. Your budget is missing stuff: groceries, clothes, gifts, car maintenance, gas, etc. Once you have a handle on where money is going, you can start to look at places to cut. You need to put together a realistic and complete budget. Your budget should include money you set aside each and every month for irregular or periodic expenses. Things like car maintenance, medical bills, car registration, gifts, vacations, etc. You know your car will need oil changes, new tires, and other repairs at some point. Save for it. You know when your children's birthdays are and when other major holidays fall. Save for that stuff. These types of things shouldn't be surprises or big money emergencies that go on CCs.

                            If you take $4k from your liquid savings, you can have the CCs and car loan gone in ~1 year if you dedicate $2,500 per month to the task. Your list shows over $4,500 left over per month. You should be able to fit in the stuff that is missing from the budget and still meet this goal.

                            Comment


                              #15
                              IMO, you need to make 2 budget lists. The first one would include only necessities(house payments, utilities, insurances, basic foods, transportation expenses, minimual phones).

                              The second would include a realitic current expenses, including those not mentioned.

                              IMO, 529's, maids, direct tv and variable expenses not mention for eating out etc., would not make the necessities list. You also pay too much for cells and auto insurance(check into higher deductables and maybe liability insurance on older cars).

                              I did not see balances or minimum payments for CC's.

                              I'm guessing you should have roughly 5k to throw at debt. Where this money goes depends on information not provided. Without it, I would recommend you pay the minimums then attack the smallest to largest approach.

                              Establishing your minimal necessities budget and attacking your debts vigorously will change your financial habits in a way you will not believe. It will be like beating a drug habit. Trust me, giving up some luxuries and even 529's in the shorterm will payoff huge longterm.

                              Good luck.

                              Comment

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