Should I pay off my car loans?

[disneysteve]

Total take home was $252,707 (including bonus).
I was negative cash flow until I paid off the CC's. Now at break even.

Just to be clear, when you say you are "at break even" does that mean you are spending everything that is coming in and nothing remains for saving? If so, you really need to take a hard look at your lifestyle. To most people here, not being able to save when you're bringing home 250K is inconceivable. I earn about 1/3 of what you earn and we save at least 23% of our annual gross income.

I may have missed it but how much is your mortgage?

[RoadWorkAhead]

I would get both daughters involved in finances, and see if there is someone you could all sit down with to talk finance. I would strongly encourage your oldest to consider staying home for an additional 6-12 months to work out finances. I like others' suggestions that she have to pay towards her own car, but if you wanted to and can swing your finances to do so, you might set aside what ever she pays in into an account, and when there's enough into a money market type account so that when she's done "paying off" her car, you have something for college/wedding/whatever and can show her what that money earned.

I still make bad choices despite adequate income and despite a parent who was fairly good with money, so I can only imagine what it would be like if my parent had raised me on a caviar budget and normalized debt The likelihood of your children having a gross income near that figure are small, which they really need to get used to now. For reference, my first car cost $1300. I've bought every car since, and never kept a car payment for more than 6 months until my most recent purchase (which was stupid!). I can only imagine if I'd started with a brand new car at 16, I'd have been up a creek by now.

[JoeP]

Just two pieces of advice, since this has gotten beyond just paying off 4 cars:

1. Read "The Millionaire Next Door"

2. Put together a budget. If anything, it will show you where your money is going. Then you and your wife should sit down together and ask yourself if you are happy with where it is going.

[corn18]

Just two pieces of advice, since this has gotten beyond just paying off 4 cars:

1. Read "The Millionaire Next Door"

2. Put together a budget. If anything, it will show you where your money is going. Then you and your wife should sit down together and ask yourself if you are happy with where it is going.

1. Just bought the book and will read it. Thank you.

2. I have a budget and my wife and I are not happy with where it is going. We are finally getting better, but as I have read all the replies here, we are not on the right track, yet. I need to talk to her and see what we can do to reduce our discretionary spending. As my pay went up, our spending went right up with it. With the end of debt in sight, we are likely to just expand the expenses even more to spend the new found monthly cash flow. That would be bad.

Tom

[disneysteve]

As my pay went up, our spending went right up with it.

A very common problem whether you earn 30K or 300K. It's really a great point to emphasize to all of the folks who think that all of their money problems would go away if they just earned more money. The reality is that it doesn't work that way. Most people don't have an income problem. Most have a spending problem.

What my wife and have always done is that anytime our income increased, we boosted our savings rate with most of the money while also alloting part of the increase for spending. So our lifestyle gradually increased but our savings rate increased a lot more.

In your case, it will be a little harder to fix. It is much easier to never have had something than to have it and have to give it up. It's great that you and your wife are working together on this. It's also great that you are taking a look at the spending patterns. Together, you can decide where you are willing to trim and to what extent.

What have you seen so far as being the big areas where discretionary spending is going? The usual culprits are things like dining out, entertainment, travel, and clothing I'd say.

[corn18]

A very common problem whether you earn 30K or 300K. It's really a great point to emphasize to all of the folks who think that all of their money problems would go away if they just earned more money. The reality is that it doesn't work that way. Most people don't have an income problem. Most have a spending problem.

What my wife and have always done is that anytime our income increased, we boosted our savings rate with most of the money while also alloting part of the increase for spending. So our lifestyle gradually increased but our savings rate increased a lot more.

In your case, it will be a little harder to fix. It is much easier to never have had something than to have it and have to give it up. It's great that you and your wife are working together on this. It's also great that you are taking a look at the spending patterns. Together, you can decide where you are willing to trim and to what extent.

What have you seen so far as being the big areas where discretionary spending is going? The usual culprits are things like dining out, entertainment, travel, and clothing I'd say.

I just pulled out my LES from 1988 (my first active duty year in the Navy). As an Ensign, I made $21,408 a year, gross. I somehow managed to live on that as a married man. I gross more than that a month now. The comment that has really hit home in this thread was "To most people here, not being able to save when you're bringing home 250K is inconceivable." That put things into perspective. Actually, it has thrown me for a loop. Still pondering how I reconcile that.

I'm somewhat embarrassed to post this, but here is my Dec budget. It is a typical month. The horse and horse trailer are being sold. We have dumped a metric boatload of money into that horse and it had to end. That will free up the horse expense ($1,000) and the horse trailer expense ($227.83). At least all the credit cards are zero. Yeah.

BUDGET 12/1/13
AUTO FUEL 950.00
AUTO SERVICE 100.00
CLOTHES 600.00
DAD CLOTHES 100.00
HORSE 1000.00
DOGS / CATS / PIG 100.00
KIDS ALLOWANCE 100.00
KIDS ACTIVITIES 500.00
SCHOOL 100.00
FOOD 1400.00
DINING 700.00
GIFTS 0.00
VACATION 0.00
HEALTH / BEAUTY 400.00
HOUSE 600.00
DRY CLEANING 125.00
RECREATION 50.00
ENTERTAINMENT 100.00
MEDICAL 200.00
MISC 1200.00
Total Disc 8325.00
MORTGAGE 2935.09
HOA 0.00
TELEPHONE 365.00
CABLE 180.00
ELECTRIC / GAS 340.00
WATER 120.00
RAIN SOFT 0.00
CAMPER STORAGE 0.00
LAWN 0.00
BRACES 0.00
AUTO INS 292.17
Delta AMEX 0.00
TARGET 0.00
NFCU VISA 0.00
USAA Mastercard 200.00
Nicky's LOC 0.00
Tom's LOC 0.00
KOHLS 0.00
NORDSTROM / JCP 0.00
MACY's 0.00
POTTERY BARN 0.00
APPLE 0.00
GE / BEST BUY 0.00
MDX LOAN 626.44
TRUCK LOAN 234.62
EM CAR LOAN 454.13
LU CAR LOAN 464.01
HORSE TRAILER 227.83
Z4 0.00
LIFE INSURANCE 171.58
PLAY MONEY 0.00
SAVINGS 0.00
COLLEGE 0.00
IRA 0.00
FED TAX 0.00
STATE TAX 0.00
CITY TAX 0.00

TOTAL EXP 15080.85

[JoeP]

What sometimes happens when people earn more is that they end up feeling richer than their wage allows. So things that were slightly out of reach are purchased, and things that were very much out of reach are purchased on credit. In other words, it is easy to justify, because you earn more, and feel you can absorb the costs...and you can! But you pay a pretty big price.

The price goes way beyond the purchase price and interest paid. Take a close look at some of the items and the necessary overhead: some vehicles for example require additional costs such as storage, maintenance, parts, insurance, registration, etc.

Then take a look at the time investment. If your time is money, and you end up running around servicing things, you may find yourself hating your situation.

Also, consider what is actually driving your spending habits. This is something only you can answer, and we do not expect a response here, but getting to the root of it may help you understand what needs to be addressed to get spending under control. For some, it is image, to appear successful to others and reinforce success. Others want to out-toy their friends and neighbors. Others may have repressed issues from growing up poor and then compensating later in life. Yet others may feel they owe their kids something for some reason.

I think when you get through "The Millionaire Next Door" a lot of this will ring true with you. In fact, I welcome you to give your opinions of that book when you're done reading it!

[disneysteve]

The comment that has really hit home in this thread was "To most people here, not being able to save when you're bringing home 250K is inconceivable." That put things into perspective. Actually, it has thrown me for a loop. Still pondering how I reconcile that.

You're welcome.

here is my Dec budget.

The horse and horse trailer are being sold.

That's a good start! That will free up $14,700/year just from that one change.

Some more comments...

AUTO FUEL 950.00 - Assuming 25mpg, that's about 6,800 miles/month. Divided by 4 that's 1,700/car. Really? I can't believe the 16 and 18 year old are each driving 20K miles/year.

CLOTHES 600.00
DAD CLOTHES 100.00 - $700/month on clothes is definitely an area to work on. You and your wife probably have all you need except for the occasional replacement (worn out sneakers, new underwear, etc.). The kids might need a little more, especially if still growing, but still not this much.

KIDS ACTIVITIES 500.00 - What are they doing exactly? I know none of us wants to say no or deprive our kids but sometimes saying yes to everything does more harm than good. Will any of this go away now that your older daughter is leaving home?

FOOD 1400.00
DINING 700.00 - As suspected, a big problem area. You are spending over $25,000/year on food. Keep in mind that the median US household income for a family of 4 is $65,000 gross so probably 45-50K after taxes. That's what they have to spend on everything. You're spending half that much just on food.

HOUSE 600.00 - What goes in this category?

RECREATION 50.00
ENTERTAINMENT 100.00 - These numbers are low but I'm curious what the difference is between recreation and entertainment.

MISC 1200.00 - $14,400/year is a lot of miscellaneous. I'd suggest getting a better handle on this category.

MORTGAGE 2935.09 - Very reasonable for your income. Good job.

TELEPHONE 365.00 - I'm guessing that's 4 cell phones. We have 5 cell phones (3 are iPhones) on our family plan. Our monthly bill is $190.

CABLE 180.00 - Does this include internet?

LIFE INSURANCE 171.58 - That sounds low. Are you adequately insured?

[corn18]

AUTO FUEL 950.00 - Assuming 25mpg, that's about 6,800 miles/month. Divided by 4 that's 1,700/car. Really? I can't believe the 16 and 18 year old are each driving 20K miles/year.

Average mpg for the 4 cars is 16. That's my problem.

CLOTHES 600.00
DAD CLOTHES 100.00 - $700/month on clothes is definitely an area to work on. You and your wife probably have all you need except for the occasional replacement (worn out sneakers, new underwear, etc.). The kids might need a little more, especially if still growing, but still not this much.

Concur. I do need to spend $$$ on my business clothes each year. I actually spend about $2,500 / year for my clothes. I save for the Nordstrom sale each year and spend $2k.

KIDS ACTIVITIES 500.00 - What are they doing exactly? I know none of us wants to say no or deprive our kids but sometimes saying yes to everything does more harm than good. Will any of this go away now that your older daughter is leaving home?

My youngest is taking pilot lessons. And voice lessons. That $500 is all hers. Makes this old fighter pilot proud. And I get to fly with her. Well worth it.

OOD 1400.00
DINING 700.00 - As suspected, a big problem area. You are spending over $25,000/year on food. Keep in mind that the median US household income for a family of 4 is $65,000 gross so probably 45-50K after taxes. That's what they have to spend on everything. You're spending half that much just on food.

Just talked to my wife about this tonight. This needs work for sure.

HOUSE 600.00 - What goes in this category?

Anything to maintain the house or stuff for the house like lamps or ceiling fans.

RECREATION 50.00
ENTERTAINMENT 100.00 - These numbers are low but I'm curious what the difference is between recreation and entertainment.

Movie theatre, video rental, go-kart trips. That sort of thing. This is usually underspent.

MISC 1200.00 - $14,400/year is a lot of miscellaneous. I'd suggest getting a better handle on this category.

Agree. This is my catch all for when I reconcile the budget. If it's Target, Wal-Mart or any non-specific reeipt, I just dump it in here. I need to communicate better with my wife to see where this actually goes. Fact is, it is spent money. Would be nice to cut this in half as long as it doesn't just show up in another category. That wouldn't help our situation.

TELEPHONE 365.00 - I'm guessing that's 4 cell phones. We have 5 cell phones (3 are iPhones) on our family plan. Our monthly bill is $190.

3 cell phones and an iPad for the cellular bill @ $265. The other $100 is for home phone and internet.

CABLE 180.00 - Does this include internet?

Nope, just DirecTV. And that's the downgraded plan. I used to be on the Platinum plan @ $235 / month.

LIFE INSURANCE 171.58 - That sounds low. Are you adequately insured?

That's for $1.4M term life. I have another $700k through work. So $2.1M total. I do have the military pension that my wife gets 50% for her life if I die, so that is worth another $500k. I figure I should have $3M.

I started reading The Millionaire Next Door and talked to my wife about living a more frugal lifestyle. That was met with "but I need to redecorate the bedroom." I have some work to do. As mentioned, it would have been a lot easier to live well within our means than it will be to contract our lifestyle. At least I don't own a $5k watch.

Learning a lot. Actually, I probably already knew all this but would not admit or face up to it. I hope to attack this with the same vigor as my weight loss. Although I need my wife and family to be on board as well.

Tom

[LivingAlmostLarge]

CLOTHES 600.00
-if you spend $200/month then what is the rest of it spent on?

FOOD 1400.00
DINING 700.00
-maybe cut it by 10% then go from there, don't want to kill the family.

MISC 1200.00 - $14,400/year is a lot of miscellaneous. I'd suggest getting a better handle on this category.
-maybe cut it by 10% again and then see

Health/Beauty - $400/month - what's this?

Okay so what would happen if you saved the entire pension by not spending it monthly meaning your take home would go down by around $3750 or $4k and you have to live on $11k/month? What would you cut?

$1800/month is car loans, $1k horse, $227 trailer = $3k savings, but can you tighten it up there?

What do you think about my saving suggestions? 21% retirement, 5% short, 5% long term savings? And then use bonus for college?

What are you going to do about the kids cars? Can I ask what sort of cars you bought the kids? Wife I can tell is Acura MDX, and you drive a truck. But are you sure your 18 year old won't want to trade the car in a few years for something newer and cooler?

[corn18]

CLOTHES 600.00
-if you spend $200/month then what is the rest of it spent on?

The rest is clothes for the wife and kids. That should go down when the oldest moves out.

FOOD 1400.00
DINING 700.00
-maybe cut it by 10% then go from there, don't want to kill the family.

WILCO. Again, with the oldest out of the house, it should go down, but she will likely stop by a lot to eat and save her the money.

MISC 1200.00 - $14,400/year is a lot of miscellaneous. I'd suggest getting a better handle on this category.
-maybe cut it by 10% again and then see

Health/Beauty - $400/month - what's this?

Mani/pedis, hair, laser hair removal for the wife and girls. I would love to zero this out. Except for a great clips haircut for each once a month. I spend $18 / month on health and beauty. But I'm not very beautiful. And I get a military discount.

Okay so what would happen if you saved the entire pension by not spending it monthly meaning your take home would go down by around $3750 or $4k and you have to live on $11k/month? What would you cut?

I actually ran that scenario this afternoon on my budget. If I cut the controllable categories by 10% and pay off the cars, I can squeeze out $3,500 / month, which is the take-home amount of my retirement. I'll need buy-in from the family to commit to sticking to a budget.

$1800/month is car loans, $1k horse, $227 trailer = $3k savings, but can you tighten it up there?

Not sure what you mean. The horse and trailer are being sold. I hope to have that done this month. That puts me at a positive cash flow of $1000 / month (should be +$1,227, right? Nope. Running cash negative each month right now.) I want to pay off the cars in March 2014. That would put me at +$2800 / month. Make the cuts from above and I can get to $3,500+ / month which is my retirement pay after taxes.

What do you think about my saving suggestions? 21% retirement, 5% short, 5% long term savings? And then use bonus for college?

I love it, but I'm still trying to figure out how to make it work. As I mentioned in my last post, when I mentioned frugal to my wife, she was worried about redecorating the bedroom. We have some work to do on fixing our habits that have developed over many years. I actually found a hard copy of The Millionaire Next Door that I have had for 10 years in the basement and never read. When I finish reading it, I'll ask my wife to read it. We will not make it if we don't reign in our expenses. We can kick butt if we do.

What are you going to do about the kids cars? Can I ask what sort of cars you bought the kids? Wife I can tell is Acura MDX, and you drive a truck. But are you sure your 18 year old won't want to trade the car in a few years for something newer and cooler?

18 yo has a 2011 Nissan Altima. I have no idea what she might do with it. For liability concerns, I think I want her to own it with the title in her name. This is a tough situation with no easy answer and way more complicated than a car. That is the least of my worries with her. She needs the car to work and needs to work to move out. She doesn't make enough on her current 2 jobs to buy a car. That in and of itself is a valuable lesson she has learned, but it would be ungood if I made her save enough to buy her own car before moving out. Just shoot me.

16 yo just got a new Jeep Wrangler last month. Before I stopped in here, that was perfectly normal in my mind. She's a great kid and I have her all screwed up, financially. I actually talked to her tonight about how much she knows about budgeting and saving. She was honest and said she didn't know much. She did say she wants to get a job and save money. So there is hope for her.

My wife is frugal with cars and rarely complains. She drove a minivan for 9 years and I bought her the MDX in 2011 when I nearly rammed someone when the minivan brakes failed. She had complained about them for a while but I never believed her. She'll keep the MDX for a long time. She didn't know I was buying it for her and was prepared to live with the minivan. Again, all this was perfectly normal in my mind. Then.

My truck is 6 years old and going strong. I like my truck. It only has 48,000 miles on it, so I don't drive it a lot.

I know I didn't answer the car question directly. I honestly do not see how I can change what I have started. Other than to pay them off and move on.

Lots to think about. Lots to read.

Tom

[MonkeyMama]

@tom - I just wanted to chime in with one more suggestion. Check out Money Mustache Blog (just google it). It might not be your thing, but it might blow your mind. I think where you are with thinking about things and changing habits and what to do next, it might be a good resource for you. The focus of that blog is really about changing your thinking and seeing how much you can do with an income like yours. Good Luck.

[Wino]

@tom - I just wanted to chime in with one more suggestion. Check out Money Mustache Blog (just google it). It might not be your thing, but it might blow your mind. I think where you are with thinking about things and changing habits and what to do next, it might be a good resource for you. The focus of that blog is really about changing your thinking and seeing how much you can do with an income like yours. Good Luck.

Three other good resources for cutting back are Dave Ramsey, Suze Orman, and Clark Howard. For investing, Motley Fool and bogleheads are also good. I suggest you look into opening an account with Vanguard, T Rowe Price, or Fidelity for mutual fund investing. I would suggest you start with any of the index funds. Once you've cut back your spending a bit, set up a monthly allotment from your bank to the mutual fund(s) of your choice.

You have about 20 years to retirement. Assuming 20 years, you'll have roughly $750K for each $1000 per month you invest now. That assumes an average 10% return, which is not unreasonable in the Vanguard, TRowe Price, or Fidelity S&P 500 Index funds. It can easily be higher (or lower). Historically, the S&P 500 has averaged about 11% per annum over almost any 30 year period.

Would you feel better at age 67 with $3 million in the bank? If so, then cut back until you can invest $4K per month. Basically, that's living on your present salary and bonus, and putting your entire military retirement into mutual funds. For every $1.33K per month you can average, you should have nearly $1M in 20 years. Dumping your bonus at the end of each year will yield (assuming $78K bonus) about $4.5 million at 10% per annum. The problem with this method is that if the market is down when you dump it in, you'll do great, but if it's at a temporary peak, you'll lose some. The monthly method smooths out the bumps. Google "dollar cost averaging" for an explanation of the monthly versus lump sum method. Also, your lump sum for next year is already taken, so you lose one year of returns if you rely on only the bonus for your investments.

Anyone can easily see that you have a spending problem, not an income problem. I think you might be able to cut back more easily if you say, "Do I want this more than I want money for LU's or EM's college education?" or "Is this worth more than my retirement?" Basically, you're going to have $3 at retirement for every $1 you invest in your funds today. That means everything you buy is costing you 3X what the sticker price shows.

Good luck. I can assure you that cutting back is not going to be a major impact on your standard of living. Going to the park with the kids is at least as enjoyable as a day in the mall. Foregoing half of the manicures isn't going to make the DD's any less popular or any more self-conscious. And if you look in your closets, I'm about 99.9% certain you will agree that the clothes budget might be slightly overboard.

The bedroom remodel? Is it really necessary to do it now? And let's not forget the dresses for the school dances. Does she really, really need a new gown? And do you really, really need another tie and tie clasp? Don't you already have enough watches, cuff links, and belts? You may want to put yourself on a "one in, one out" closet method. Only replace that which you'll no longer wear, which goes to charity.

There really are a lot of things to waste your money on. You just need to really think before you break out the credit card. I further suggest you stop using the credit cards and go to a debit card instead. I know that the text I get every time I spend causes me to think a bit more about what I'm buying, even if only after I bought it. The next thing I would have purchased might not be purchased, after seeing my new balance.

[corn18]

Taking actions as we speak. Baby steps, but it's a mindset change.

1. CNX pre-order for new call of duty video game. I don't need it and no one else plays xbox. ($69)
2. CNX blockbuster video subscription. No one ever watches the DVD's that show up anyway. ($15/month)
3. CNX daughter's unlimited car washes. She can wash her own car. $45 / month
4. Cut discretionary spending by 10% across the board. That part was easy. Just change the spreadsheet. Now to get us all to live within that budget every month. That's the real test. $700 / month.
5. CNX lawn care service for next year. I can live with a prematurely brown yard. ($700)
6. CNX lawn mowing next year. ($980) Guess I'll have to start mowing again.
7. Pay off all cars

Looking into:

1. Why am I paying so much for cable/telephone/internet? Geesh. $545 / month is $400k+ in retirement savings.
2. Switching to debit vs. credit cards. I lose $60 / month, but don't have a CC balance.

Take these steps and I can put my current retirement all into savings. But just the post tax amount which would be $40,500 / year. Add $17,500 for 401k and I am at $58k / year. Based on the math, that puts me at $3.6M in 20 years at 10% return? Add the annuity value of the retirement at about $900k and that puts me at an equivalent retirement savings of $4.5M. I also have $165,000 in the 401k already, so that will be $1M in 20 years @ 10%. So, $5.5M in 20 years?

I have a question: if my employer matches my 401k, is that counted as annual retirement contribution? I put in $17,500 and my employer puts in $12,500, so the total contribution is $30,000 / year. This greatly effects the retirement planners.

If that math works, and $5.5M is enough, I can take this to my wife and get her on board with a measly 10% lifestyle cut. That's not even hard, right? Imagine what we could have in 20 years if we cut 15%, or 20%? I'm getting excited.

Then I can use the bonus next year to establish a separate EF @ $75k. And starting in 2016, it can pay for college.

Tom

[Wino]

Your retirement at $40500 per year is roughly $2.5M @ 10% per annum. The $165K is about $1.2M (both in 20 years). The $17.5K is just over $1.1M. Your military retirement then becomes income, with about $4.8M in the bank for anything else.

Now for the disclaimers and warnings: None of the investment results are guaranteed. You may have more. You may have less. The worst thing you can do is to watch the market and try to guess what's going to happen next week, month, or year. The best suggestion I can make would be to leave whatever you invest wherever you invest it (assuming you are doing index funds).

You're at the starting point of a 20 year journey. The road is going to twist and turn, and there will be bumps, dips, hills, and valleys. What you need to do now is brace for all of the changes. Your portfolio is going to go up in value. It's going to go down in value. Remember, when it's down, you're buying more shares for the same money, so you're getting a good deal. When it's up, you'll feel good about it, and won't want to sell. But in neither case does the value mean anything until you withdraw some funds. It's all theoretical until you pull it out or move it elsewhere.

Keep looking for areas to cut on the spending side. How many new toys do you really need? Boats are fun, but do you really go boating enough to afford one? And that Seadoo or snowmobile is also fun, but unless you live on a lake or in Minnesota, are you really going to get a lot of use out of it? You've already cut back on the XBox, which I can commiserate with wholeheartedly. The latest video game I have is Bards Tale on a PS2, and Red Alert on my computer. I used to be a true video game junkie many years ago. Truth to tell, I don't miss the games at all.

Good luck. I hope you can stick to the plan. I really suggest the websites MM and I posted earlier.