Not sure where to throw our money! Help please!

[cherryblossom]

Out debt totals $36,000. We have 2 credit cards at 0% interest with a total balance of $5,000 a car at 0% interest with a balance of $11,000, student loans at 1% interest with a balance of $13,000, and a second car with 4.25% interest with a $7000 balance. We are planning to sell this second car and be free of this payment.

Our income varies month to month but it is generally around $5500-$6000 take home. We have no savings other than $6200 in stocks which serves as an emergency or retirement fund. We have no 401ks or IRAs.

Right now we are putting all our money towards paying down our credit card debt (we have already paid off $7000 and have less than $5000 more to go!) And after we sell the car at 4.25%, we are left with 2 high balances with very low interest rates (0% and 1%). I am not sure what to do after the credit cards are paid off though.

Our priorities are to open and fully fund retirement accounts (We are 32 and 35 and we have no retirement savings. As a business owner I can put away as much as 20% of my income into a SEP-IRA), save a 6 month emergency fund, and save $50k as a downpayment for a house. We are just not sure which is the most important to begin first and when. Should we begin a retirement account after the credit cards are paid off? After the car is paid off? After all debt is paid off? Or (dave ramsey style) after all debts are paid off and we and have a 6 mo. emergency fund, etc.?

While I realize it is important to be debt free, the monthly car payment totals $350 and the student loan totals $135, so I am not incredibly concerned about these payments in the grand scheme of things. If it would make more sense to sock away 20% each year into retirement or to save for a downpayment, I would rather do that. Input greatly appreciated!!!

[lorraineb]

two quick thoughts:

My first choice would be to build a liquid emergency fund. having your current emergency fund in stocks isn't a good place as it can take time to get that money and you can be forced to sell at inopportune times. Building a cash liquid emergency fund of a few thousand should be a top priority.

I would hold off on buying a house until you feel that you have a complete handle on your finances. Once you do, you will be in a much better position to decide how much house you need and a budget for the house so you don't overbuy and find yourself in another financial mess.

[snafu]

Good on you for taking the 1st giant step towards clearing debt. I suggest you post your spending averages from the past 3 months so that we have some tangible information to base suggestions. How stable is your business? How important is buying a house and at what price range in your community? You seem willing to relinquish the 2nd car, are you amiable to other short term reductions/restrictions?

We all have different values and experiences. I too believe it's important to have about 3 months of expenses in a liquid a/c like linked savings or Money Market for those nasty challenges that life sometimes throws our way. It's critical to devise a plan for retirement investment and allocation as the compounding over the years is more important than the waves of the stock and bond market.

[jpg7n16]

Out debt totals $36,000. We have 2 credit cards at 0% interest with a total balance of $5,000 a car at 0% interest with a balance of $11,000, student loans at 1% interest with a balance of $13,000, and a second car with 4.25% interest with a $7000 balance. We are planning to sell this second car and be free of this payment.

Once you sell the 2nd car and pay off that loan, your top charging debt will be at 1%. Accelerating debt repayment would not be a priority at those rates.

Debt: not a major problem

Our income varies month to month but it is generally around $5500-$6000 take home. We have no savings other than $6200 in stocks which serves as an emergency or retirement fund. We have no 401ks or IRAs.

How long have you been earning that level of income?
Where does it all go?

EF: 1-2 months

Right now we are putting all our money towards paying down our credit card debt (we have already paid off $7000 and have less than $5000 more to go!)

Well stop that. Your debt is charging incredibly low rates, some is even free.

You are taking your monthly income and using it to save max 1% of interest, as opposed to making it earn 7-11% for your retirement.

Our priorities are to open and fully fund retirement accounts (We are 32 and 35 and we have no retirement savings.

Just to give you an idea of where you should be - by age 35 a good target is to have between 1.5-2x your salary saved away for retirement. Based on the income figures listed above, that indicates by now you should have somewhere $100-140k. You currently have $0. (You should not count your EF as retirement savings.)

Retirement: serious problem

As a business owner I can put away as much as 20% of my income into a SEP-IRA)

You can do even more than that with a Self Employed 401k. Employee contribution limit in 2013 is 17,500. Plus employer contributions.

Total, you can probably do around $30k max. Give or take few thousand based on your actual income.

Should we begin a retirement account after the credit cards are paid off? After the car is paid off? After all debt is paid off? Or (dave ramsey style) after all debts are paid off and we and have a 6 mo. emergency fund, etc.?

Well let's look at your picture:

Debt: no major issue (all at 0-1%, no major portion subject to increasing rates)
EF: small at somewhere 1-2 months (should be 3-6)
Retirement: Major issue (over $100k behind target)
Home savings: IMO, should have average-strong in all the above before starting on home savings

I would get your EF up to at least 3 months, then start on retirement savings ASAP. Once you're on track for retirement, move your savings rate back to a more reasonable level and then worry about starting home savings.

[kork13]

Overall, you're doing alright for yourselves..... but with a few tweaks, you could be doing great.

First, take a month or three to record every single little expense you have, from the morning latte to your electric bill. Keeping track of your expenses will give you alot of insight into how you use your money, and potentially how you can use it better, or use less of it. Right now, you have a great income, and yet somehow you only have a few thousand dollars saved. That indicates a spending problem.

Second, you need to build up your cash savings for a REAL emergency fund. An EF should be kept in a cash savings account, not in investments, so that it's readily available and 100% safe if you should ever need it. Build up at least 3-6 months' expenses, or potentially even more (given that you're self-employed).

Once you eliminate the second car & loan, as JPG stated, your interest rates are great... you should probably just pay the minimums on them (at least for now), because they're costing you almost nothing. The notable exception is this: how long are those credit cards going to stay at 0% interest? Normally, they will be 0% for a certain number of months, then jump up to 10%-20% interest. So you need to do whatever necessary to make sure they will be paid off before the end of the 0% interest period. So if that means continuing your current aggressive payoff on the credit cards, keep at it.

Last, and probably most important, you're way behind on retirement right now. It's totally salvageable for you, however. You'll want to take full advantage of the retirement savings options available to you as much as possible. Whether you use SEP-IRA, Roth IRA, Solo 401k, or other accounts, save whatever you can here to get yourself caught up.

Once you have a handle on your expenses, your EF is in place, the car loan & credit cards are taken care of, and retirement savings are on track, you're pretty much set on a good path. At that point, you can take any extra money to invest in non-retirement savings & investments, for stuff like a home downpayment, vacations, replacement cars, home repairs, and so on. Take some time and do some smart planning for yourselves, and you can do great.

[cherryblossom]

Thank you all! What great advice.

The last poster is correct. Our 0% APR on our credit cards will be expiring soon and that is why we are working to pay them off aggressively. We are also having second thougts on selling the car with a now $6800 balance. The reason being that my husband will still need a car and this one has been very reliable.

We did work out a budget, but this is our round-about monthly expenses making between $5000-$6000 a month.

Rent $875
Utilities $280
Car Payment $350
Car Payment $250
Cell Phones $90
Health Insurance (2 People) $530
Dental Insurance COBRA (2 People) $155
Pet Insurance (2 dogs) $85
Car Insurance $100
Gas Expenses $300
Food Costs $800
Pet Costs $150
Entertainment $100
Medical Expenses $150
Student Loan Payment $135
Internet $53

Total = $4403
Our actual budget indicated we should have around $1300 a month left over to put towards debt. But our income can vary as much as $2000 a month.


We have had a number of unexpected expenses this past year including a 6 month job loss (which resulted in the credit card debt where we hadn't had any) and we also had a few already paid for vacations that we had to take which further threw us off budget.
Trying our best to stay on track, but we're not very good with sticking to budgets and keeping tracks of expenses unforunately. Our health costs are also a big expense obviously but I was recently diagnosed with a health condition that makes me ineligible for other coverage and results in other monthly healh care costs. We realize our food expenses are very high and have been working on trying to keep that down to at least $600...but are still struggling with that since we consider eating healthy an important part of our lifestyle and will scrimp in other areas (including entertainment). We are not willing to get rid of pet insurance because both our dogs have had emergencies that were fully covered beyond our premium costs. I don't believe we're left with too many other areas to cut other than the second car.