Should I pay off my car loans?

[disneysteve]

your $6K per month in credit card payments is still a red flag, as I stated. Unless you commute from Chicago to Houston once per week, that's an excessive amount of spending, even at your pay level.

Wino, why do you say that $6,000/month in spending is excessive? OP takes home $15,500/month plus a 100K annual bonus or an extra 8K/month. So spending $6,000/month is only about 25% of income. I don't think that's excessive at all, especially if that includes necessities which it probably does. For example, we pay our insurance premiums, our utility bills, gas, and other necessities with our credit card.

[TheKayla]

I agree with everyone else here, get out of that car loan debt asap, even though you an afford the payments. It's debt, and bad debt. I also agree with everyone else, that even though your monthly income is high, you spending is also incredibly high and you should cut back immediately and start saving more. With that monthly spending and income, you should have some funds saved that wouldn't force you to take out more debt to take care of things if needed. However, great job on becoming and remaining CC debt free, hopefully now you can begin putting more of that into savings, especially an emergency fund that wouldn't be putting you into debt by taking out a different loan.

Think of it as your high income as an excellent opportunity to do the right thing with your money -- you truly have more opportunity to save a lot.

I also apologize if this is too pushy, but I just have to ask -- how old are your daughters? Why aren't they paying for their own cars, and why are they given cars more on the expensive side especially if they're not paying for them? Again, sorry if it's pushy, it's just putting up a red flag for me and I'd really like to help in any way I could.

[corn18]

My comment about your finances was meant in your defense. I didn't expect you to have $2.4M in household debt, and it appears I was right. You make enough money that you can keep the cars - which I said. The general feeling on this board tends to "do the most economical thing with your money, no matter how much or how little you have or make."

The above having been said, your $6K per month in credit card payments is still a red flag, as I stated. Unless you commute from Chicago to Houston once per week, that's an excessive amount of spending, even at your pay level. If you do commute like that, then you needed to negotiate that as part of your package, which would not count as credit card spending for this forum's purposes.

You recently got a large pay raise. I will hereby warn you that your ability to earn will never exceed your ability to spend. I give you most of the NFL and NBA as my examples. Your pay level is high, but it is by no means unique. There are at least a handful of regular posters here who have incomes at your level. Those who do still don't have 4 cars with an average age of 2 years, and I think all of them would advise others not to purchase such things.

You asked for guidance, and guidance was given. When others tried to delve deeper, you shut them down. That's why I merely answered your question. Afterwards, I started to write a post that was nearly as direct as this one, but decided against it. I will give you the gist of that post here: You're looking at a slippery slope. You need to figure out where you want to be, and then set up a plan on how to get there. At your pay level, you must have some departmental or division responsibility. I suggest you approach your household in a similar manner as you would approach your area of responsibility. What would you do if you asked a department manager about next year's budget and he said, "I don't have a plan. I'm just going to wing it?"

Let me give you some questions along the lines you should be asking yourselves (your spouse should be included in this):

Where do we want to be financially in five years?
When should we target paying off the house?
What do we want to do when we retire?
When do we want to retire?
How much money will we need to retire at that age to do those things?
Will we have a hedge against inflation such as was seen in the 1970's?
Are there any large purchases we want to make?
How will we accomplish all of those things above?

I'm NOT asking you to post any of those answers here, but you really need to look at them now before your $6K credit card spending becomes $9K credit card spending, followed by the new ATVs and the RV and their payments. You just worked your way out of $130K of credit card debt. That means you spent that much more than you had once. There's nothing but yourself stopping you from doing it again, and a whole bunch of people in Manhattan, Detroit, Los Angeles, and Washington coming up with ways to help you do it again.

I'll get off my soapbox now. Please realize that I'm not trying to be critical or arrogant. I write (and speak and think) in a direct fashion, and my terseness and to-the-point style tends to set people on edge. I apologize (once again) for having come across in such a fashion.

I went down the slippery slope you describe and got into a HUGE hole. You are right to be concerned. I never thought I could ever get out of debt. EVER. Even with a high paying job. And to be honest, this is all new territory for me. I know how to juggle credit cards and finance everything and live paycheck to paycheck. I am learning how to save. I am fortunate to be able to pay off the cars and I feel like this will lead to a crossroad for me. Go back to spending stupid and get back into debt, or stay the course and save that $100k each year. I'm shooting for the latter.

I do appreciate the input. I have been in denial for a very long time. Really want to go the right direction.

Tom

[corn18]

I also apologize if this is too pushy, but I just have to ask -- how old are your daughters? Why aren't they paying for their own cars, and why are they given cars more on the expensive side especially if they're not paying for them? Again, sorry if it's pushy, it's just putting up a red flag for me and I'd really like to help in any way I could.

They are 18 and 16. I can't make a good defense for why we bought them new, expensive cars for the kids. This is something I am fully accepting of criticism. I'm sitting here trying to justify it and I cannot.

Here's how weird my state of mind is after 25 years of living under a mound of CC debt: At least I have something to show someone when they ask where that $100k went. I could never do that with the CC debt. It's a lot like gaining weight, I think. Eat a little more than you burn every day and the next thing you know you are morbidly obese. And losing 100 lbs seems impossible. The simple solution is to eat less than you burn and you will slowly get back to a healthy weight. I see this as analogous to getting into and then out of debt. Spend less than you make. Seems easy and I hope it is. I lost 80 lbs over the past 2 years, I should be able to save money, too.

Tom

[Wino]

Wino, why do you say that $6,000/month in spending is excessive?

My wording may have been excessively provocative; however the $6K level solely on credit cards is what raised my proverbial "red flag."

I wrote a much more detailed response, and deleted it. I think I can truncate it more precisely with:

I was writing to the old me as much as I was writing to tomhole. His situation had "Wino" written all over it, so I was trying to warn him before he repeated what I already did. Oh, and of course, I bought the T-shirt, too...


on a credit card.

[corn18]

What to do from here? I'd say to use the bonus to establish an emergency fund. We can go back and forth on the amount but I'd suggest one month worth of expenses to start. Use the rest to pay off all but the 0% car loan. From that point on, use excess income each month to build the EF to 3-6 months of expenses and also boost your savings rate. It is great that you're maxing your 401k but $17,500/year isn't nearly enough savings given your income level. Your goal should be at least 15% of gross annual income going to retirement. Depending on your age, it may need to be higher than that. And no, the 15% does not include the employer match.

There is some serious appeal to dumping $50k in an emergency fund and just paying off the two higher interest cars this year and then next year pay off the last 2 cars. That is probably the smartest choice. But being an habitual debtor, it may be better to pay off all the cars and not have access to $50k right now. I know that sounds stupid, but I have demonstrated stupid. If you want to lose weight, don't keep sweets in the house.

I'm glad you mentioned savings rate. I am 47, I have a $45k / year military pension for life. And $160k in a 401k. That is not nearly enough to retire on. So that is the next part of the plan that I need to figure out. I'm thinking of starting a $1k / month savings allotment and also put $75k / year in from the bonus. That would put me at around 25% of gross income savings / year. Not even sure that is enough.

Tom

[disneysteve]

I lost 80 lbs over the past 2 years, I should be able to save money, too.

This is so true. Suze Orman talks about this periodically. So does Dave Ramsey. Weight loss and personal finance are very, very similar. It is quite common for people who don't have control of their finances to also not be in control of their weight. Fix one and you fix the other.

It sounds like you are making great progress in both departments. Keep up the good work.

[dojo]

Tom, you are on the right track if you're willing to change your ways and accept the criticism. It's indeed hard to read some of the replies, but people are very nice and helpful here and everyone tries to provide the best support they can.

You have cleared a lot of debt and fortunately your paycheck is big enough to make another big push and clear some more. Just as others said, I'd be sure the EF is nicely funded and tackle the car debt like a hurricane. It shouldn't be difficult, with the money you earn each month.

Even if you lived as a 'debitor' all your life, it doesn't mean you can't change it. You'll slowly get more off your shoulders and then, in some years, become debt free, have a good pension and really sleep better at night.

Keeping our fingers crossed, don't stop, you're on the right track now

[TheKayla]

They are 18 and 16. I can't make a good defense for why we bought them new, expensive cars for the kids. This is something I am fully accepting of criticism. I'm sitting here trying to justify it and I cannot.

Here's how weird my state of mind is after 25 years of living under a mound of CC debt: At least I have something to show someone when they ask where that $100k went. I could never do that with the CC debt. It's a lot like gaining weight, I think. Eat a little more than you burn every day and the next thing you know you are morbidly obese. And losing 100 lbs seems impossible. The simple solution is to eat less than you burn and you will slowly get back to a healthy weight. I see this as analogous to getting into and then out of debt. Spend less than you make. Seems easy and I hope it is. I lost 80 lbs over the past 2 years, I should be able to save money, too.

Tom

Exactly, and that's a great background and mindset to have -- they are indeed very similar. Same concept to lose weight and debt, and exact same concept to maintain over the long term as well. I think as long as you stay on track with smarter habits, and get right back on track if you're ever to get off, you're going to be just fine. Often times, much of it is consistent improvement as well, even if you don't do everything perfectly right now.

As one final suggestion, would you consider having your daughters help in paying for their own cars? If you've had bad financial habits in the past, they may have picked them up, and if they can help at least pay for a portion of their own cars, they can start learning better financial habits and responsibility as well.

[corn18]

As one final suggestion, would you consider having your daughters help in paying for their own cars? If you've had bad financial habits in the past, they may have picked them up, and if they can help at least pay for a portion of their own cars, they can start learning better financial habits and responsibility as well.

This is the scary part of my situation. I think I can manage my way back to a healthy financial approach (that's the goal). But I have not taught my daughters a darn thing about how to do it the right way. The oldest is moving out to live on her own. I will give her the car free and clear when she does. I am teaching her how to make a budget and she has no credit cards, but who knows how she'll do growing up with me as an example.

The 16 yo doesn't have a job yet. Not sure how I could ask her to pay for her car when her older sister got a free car. I think it is the right thing to do, but how do I mend the sins of the past? I do need to start involving her now with the right way to manage money. My friend has his 17 yo daughter manage the money for his whole household. Is that something I should consider? I have a detailed budget and everything is set up to autopay, so not sure what she would learn from just having access to the cash flow. I welcome advice in this area.

Tom

[disneysteve]

The oldest is moving out to live on her own. I will give her the car free and clear when she does.

The 16 yo doesn't have a job yet. Not sure how I could ask her to pay for her car when her older sister got a free car.

Why is the older one getting a free car?

There is no reason why you can't start having her help pay for the car. She's moving out so presumably she has a job and an income. Part of the budget you are helping her set up can be paying money toward the car. Maybe not the whole cost but at least something to take ownership mentally.

As for the 16 year old, she is certainly old enough to work. My daughter (who just turned 18) has been working for a couple of years. Nothing major but she does have a steady babysitting job and she has worked at a summer camp the past couple of summers. She even already has a Roth IRA in her name. She doesn't have a car so we haven't faced this particular issue but she has certainly been required to pay for certain things out of her own money.

[TheKayla]

This is the scary part of my situation. I think I can manage my way back to a healthy financial approach (that's the goal). But I have not taught my daughters a darn thing about how to do it the right way. The oldest is moving out to live on her own. I will give her the car free and clear when she does. I am teaching her how to make a budget and she has no credit cards, but who knows how she'll do growing up with me as an example.

The 16 yo doesn't have a job yet. Not sure how I could ask her to pay for her car when her older sister got a free car. I think it is the right thing to do, but how do I mend the sins of the past? I do need to start involving her now with the right way to manage money. My friend has his 17 yo daughter manage the money for his whole household. Is that something I should consider? I have a detailed budget and everything is set up to autopay, so not sure what she would learn from just having access to the cash flow. I welcome advice in this area.

Tom

A agree with Steve, I'd make both of your daughters each pay for a portion. I understand going out on your own for the first time is very difficult and you want to help her as much as you can, but truly helping her now is going to be by helping her learn these experiences for herself. I'm sure those car payments are a lot for any 18 or 16 old, so maybe they only need to pay a portion, even if it's only $100 a month.

I'd help your younger daughter get a job as well -- even if it's only one night a week. I've been doing some sort of work since I was about 10, from delivering newspapers and babysitting, to then getting real jobs like waitressing, fast food joints, etc as I got older. It taught me so much, both about money and work ethic from a young age. If you're concerned about your daughters grades or activities, like I said maybe it can only be on the weekends or 1-2 nights a week, but I'd get her started paying some portion on her car and started paying for her own 'extras' soon.

Fairness between both your daughters is something to strive for, but it may not always be possible or practical because of their age differences. My brother got a lot more than me throughout the years, and I think part of it was that he got more when he was younger and is a bit more spoiled (sorry kid brother :/) but also just because of certain circumstances. I was never really that resentful. If I ever was, now as an adult, I greatly appreciate all the lessons I had to learn on my own. I have better financial habits than almost any of my other peers my age. Best of all, I'm independent, and feel independent and happy being 100% in charge of my own finances in my 20's.

My parents only still help me out with my cell phone and medical insurance because of my student loans (I'm 24), but I would otherwise be paying them. I'm incredibly grateful for that as well, and don't feel as though I should be privileged to have those things still paid for because of how they encouraged me to be independent early on. There are peers that still rely on their parents in their mid-20s for their cars, insurance, some food and even rent, and they're not really well functioning adults because they were and still are handed too much.

I think it'd be a great idea for your younger daughter to be more involved in the household budget, even if she doesn't run the show. In the very least, at least help her to begin making and managing more of her own finances. For example, in my family, the moment I got a job, I could purchase whatever I wanted, but I also needed to buy any new clothes, entertainment, a portion of my car, and even some food (fast food, restaurants, any additional spendy food I wanted as groceries).

Sorry I rambled on about a lot of my own experiences. It may be a battle, but I think you've got the right mindset and some great ideas for getting them more on the right track.

[LivingAlmostLarge]

Look you may not have to have them pay for the car but are they paying for car insurance and gas? Why does the 18 year old get the car? Is she going to college? Do they even allow cars?

If she is moving out on her own, I assume college, is she going to be working? If not it's time to put her on a budget. Time to teach her about money and credit cards so she doesn't fall into your trap.

$45k/year pension is good that worth $1M investable assets some would say. What is going on with that pension money? Is it being reinvested and you are living on your income solo?

So you net $15k/month? And then have $100k bonus annually? What's total income and how is it broken down into salary, bonus, pension? Are you doing a non-deductible IRA and rolling it into a ROTH ira? It might be worth doing. Are you self employed or any other tax shelters?

Assuming 6 months of expenses is $60k, what do you want to do with the excess money after paying off debt, emergency fund? Cash flow college?

[corn18]

Look you may not have to have them pay for the car but are they paying for car insurance and gas? Why does the 18 year old get the car? Is she going to college? Do they even allow cars?

If she is moving out on her own, I assume college, is she going to be working? If not it's time to put her on a budget. Time to teach her about money and credit cards so she doesn't fall into your trap.

She's just moving out on her own (no college). She's working two jobs now and saving money for deposits and savings. She's been working since she was 15 but has nothing saved up. Shows how well I taught her to manage her money.

$45k/year pension is good that worth $1M investable assets some would say. What is going on with that pension money? Is it being reinvested and you are living on your income solo?

It's just part of my monthly income. Hadn't thought any other way, but maybe it can just be invested and taken out of the monthly cash flow completely. That would take care of the EF and annual savings requirements.

So you net $15k/month? And then have $100k bonus annually? What's total income and how is it broken down into salary, bonus, pension? Are you doing a non-deductible IRA and rolling it into a ROTH ira? It might be worth doing. Are you self employed or any other tax shelters?

2013 (gross):

Pay: $216,504
Pension: $44,450
Bonus: $128,000
Total: $388,954

Total take home was $252,707 (including bonus). Bonus take home was $78,441. So my average monthly take home without the bonus was $15,355. I used all of the bonus to pay off remaining CC debt in Mar 2013. I was negative cash flow until I paid off the CC's. Now at break even.

2014 is similar for pay and pension. Bonus take home will be $100k. Thus the question of what to do with the $100k this coming March.

I like the IRA idea. I can dump $12k / year for my wife and me into them.

Not self employed. No other tax shelters. I now pay more in taxes every year than I made after 20 years in the military. That's great and sucks at the same time.

Assuming 6 months of expenses is $60k, what do you want to do with the excess money after paying off debt, emergency fund? Cash flow college?

That is the question on the table. First goal is 6 month emergency fund. I can get that in 2014 and pay off 2 cars, or pay off 4 cars now and get the EF fully funded in 2015. College is another unfunded requirement that I have to get covered by 2016.

Thanks for the help.

Tom

[LivingAlmostLarge]

What is the 18 year old planning to do with her life? It's great she's working and saving but even if she doens't go to school I'm not sure that handing her a car is a good idea. It could end up being traded in sooner rather than later for a newer, more expensive car and negative equity continually rolled. I hate tying strings to things but I wonder if you should release the car? It's a rock and a hard place. I assume would she be taking over gas and insurance? What about the 16 year old?

Pay $217k
bonus $128k
=$345k annual income

Retirement savings at 15% = $69k/year goal
Pension $45k invest all
=$24k extra need

So if max out your 401k = $17.5k + $11k non-deductible IRA (rolled to Roth) = $28.5k
=$73.5k/year saved for retirement = 21% you'd be set.

Short Term savings 5% = $17.5k/year, save monthly not using bonus
Long Term savings 5% = %17.5k/year, save monthly not using bonus

This is what I would aim for. When do you want to fully retire? How much do you need for college? Is this for daughter #2? What about daughter #1?

I think you have to not just look at the bonus as a way to save but build it into the monthly budget and cashflow.

What are your goals for retirement? How much do you owe left on the house? How much do you project for college? If you build into your monthly spending your savings the bonus could be used to pay for college since you seem to need it in 2016.

How stable is the job? Is it easy to get another one if you needed to? Are you adequately insured for disability and life?