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Path to debt free...just starting and need advice

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  • Path to debt free...just starting and need advice

    I stumbled across this forum while googling how to cut my debt down quickly.

    A little background:
    I'm 29, married and have a newborn. Single income family with a net monthly income of $3450. Gross of $68k per year.
    The company I work for matches 401k contributions @ 50% up to 6% and I have always put in 6% or more (currently at 6% though) and my 401k is ~ $77,000. Unfortunately we do not have any savings or an Emergency Fund and this is something I want to fix.

    Our debt is as follows:
    Bill - payment - rate - term - owed amt.

    Mortgage - $1050 @ 2.875% - 15 year loan - $115,028
    Car 1 - $417 @ 2.49% - 5 year loan - $21,279
    Car 2 - $307 @ 2.99% - 3 year loan - $1,725
    Student loan - $165 @ 3.5% - ? - $16,907
    Credit card - $145 @ 8.99% - n/a - $7,356
    Utilities ~$290 per Mo.
    Car insurance - $164 (driving record ain't great but have been without a ticket for ~ 5 years)
    Cable & Internet - $145
    Cell phone x2 - $136
    Groceries and anything else - $450 - $500

    Still collecting all of the medical bills but have been putting $100 a month toward them and the total looks to be ~ $3700 still left.

    Now for the good news!
    Tax returns are just around the corner and overtime is plentiful at work.
    I took a loan against my 401k this past year to refinance the house and lock in my nice low rate shown above (previously was 6.385%) but I had to come up with principal as the adjuster failed to count our 3rd bedroom as a bedroom and therefore compared our sq footage to 2 BR homes in the area (so needless to say we looked as though we were upside down in our home and had to generate equity to refinance).
    So every paycheck has $170 taken post tax to repay the loan ($340 per Mo.)

    I have promised my loving wife that we would purchase an SUV and the one that she really likes is ~ $28 - $31k
    Now my initial plan was to bust tail at work (~ 40 hrs of OT per month) and pay off car #2 before tax time and then sell car #2 for hopefully ~ $7000 and combine this with OT and tax returns to pay off all of our medical bills and the remainder of the 401k loan (roughly $10900 by the end of April which would be when I plan on selling the car and putting the wife in a new SUV) which would allow us $340 more a month just from not having the 401k loan. This combined with not having the payment from Car #2 would be $647 extra each month (before buying the SUV)

    I normally seem to get interest rates on car loans in the 3% or less range and I believe I can get down under 2% for this one (last time I checked my credit I was somewhere north of 745) which should keep the SUV under $500 per mo.

    Now my thoughts were to tackle the CC first as it has the highest int. rate of anything and then snowball that money into car #1 until it's paid off and again roll the now freed money into the new SUV (now car #2)

    I'm sure someone is going to say "in order to get out of debt you don't buy a new car!" And they'd be very right, but my poor wife has sacrificed enough and this is one thing I'm pretty hell-bent on giving her, not to mention it will make things easier with the baby and traveling to her parents.

    So I guess my question is "what would you guys/gals do?"

  • #2
    I think you are going to get a lot of advice here :-).

    Is there any way you can put off buying a new car until you get an EF saved up (six months) and pay off some of the debt? Maybe think of it as a way to reward yourself and your wife once you have some of the other stuff cleaned up.

    As a single income family, not having an EF is a big problem.


    • #3
      Also, great job on having $77k in your 401k. We didn't have near that amount at the age of 29.


      • #4
        Originally posted by sblatner View Post
        As a single income family, not having an EF is a big problem.
        I strongly second this. I know that you titled this thread "Path to debt free", but I think your primary path should be towards that EF--especially considering the interest rates on your debts. With the possible exception of the CC, those are quite reasonable rates that don't raise the priority alarm that high. (Congrats on the refi, by the way!)

        At six months with your current expenses, you're looking at around $21k. If I did my math right, when you execute your short term plan you'll have around $278/month not going to expenses. That would take you quite a long time to build an EF based just on that. Is there any way to reduce your expenses a bit, such as cutting down on your communications or grocery bills? Do you have anything of decent value other than the car that you could sell to get started on the EF, even if it's a starter fund of around $1k?

        Finally, although your wife will undoubtedly be taking care of your newborn for the short term (congrats again!), is there any way that she could do some work later down the road, even if it's just for a few hours a week while you're not working? That supplemental income could then be solely dedicated to getting that EF built up.


        • #5
          I agree with all advice above. You don't have much left after expenses, not including your new born baby's expenses. (Or including anything else?) I would also recommend you to focus on building EF before anything.

          But I am a believer of the law of attraction... Especially sounds like you have lots extra money to looking forward to, you & your wife may be able to get her dream car a lot quicker than you could planned it (plus plenty savings!) if you set the goal and intention.

          Good luck!


          • #6
            First, great job with the retirement savings and mortgage!

            An important part of being debt-free is having the cash savings to pay cash for things you are used to charging. I agree with the comments to focus on the EF.

            "in order to get out of debt you don't buy a new car!" - These are your words. I have no idea why on earth your wife *needs* a $30k-ish SUV. ??? The math on this does not work at all.

            What would I do?

            I'd get the credit card loan and the 401k loans paid off ASAP. (Sounds like you are doing anyway in the next few months?)

            I'd immediately shop for cheaper cable/internet/cell service. (I assume you can get all the same stuff cheaper if you shop around).

            I'd snowball any freed up payments into an emergency fund

            I'd save up the cash to buy this SUV. You can buy it for about 50% as much if you wait until the SUV is a couple of years old. Of course, I'd think through the gas mileage and the true practicality of buying a SUV. But, at least this would be financially doable given your numbers. (I'd just be happy with the cars I had, but trying to throw you a bone).


            • #7
              Congratulations on new baby and your desire to cut debt quickly. It was smart to start your 401K to take full advantage of the free money from your employer and important to get your mortgage interest rate down to 2.875%. Unfortunately, the life lesson learned was YOU get to pay a lot to generate equity to re-finance when the adjuster ' failed to count our 3rd bedroom as a bedroom and therefore compared our sq footage to 2 BR homes...we looked as though we were upside down in our home.' Has all the paper work been corrected to show totally correct information? This is extremely important as taxes and future valuation will use that legal information as the base.

              I believe that you need to gently persuade DW [dear wife] to get on board with the idea of cutting debt. You both need to work together and help each other stay with that goal. The next weeks are critical to your plan. If you add to your debt during the holidays you will be further behind and in more difficulty.

              It most important to understand that gross salary is irrelevant, you can only work with Net $ 41,400.

              Like the others said, it's critical to have an emergency fund. Would you be willing to cut spending in any category like cable, cell phone, food to put into EF since spending in those categories are higher than average. Would you be willing to work some overtime to generate at least $ 1,000.? With a small amount of tweaking and a bit of patience, I'm confident you and DW can get your debt down fast.


              • #8
                Originally posted by Togeneral99 View Post
                I'm sure someone is going to say "in order to get out of debt you don't buy a new car!" And they'd be very right, but my poor wife has sacrificed enough and this is one thing I'm pretty hell-bent on giving her, not to mention it will make things easier with the baby and traveling to her parents.
                Keep in mind that this is the attitude that got you into this debt situation. Car payments don't have to be a fact of life, especially two of them on one income. I see you choose a shorter term for the mortgage, which is good, but you choose long terms on CAR #1, and I'm guessing the SUV will carry a long term also. I don't know what these vehicles really are, but can't you just trade CAR #1 for an SUV, give that to your wife and then you can drive CAR #2 which would be paid off?

                Everybody is spot on with the emergency fund. That would of helped you avoid the credit card debt and 401k loan from the beginning. If you truly want to cut down your debt, you would start saving now, for the car you are going to buy in five years and avoid the loan altogether. A little restraint will save thousands of dollars in interest payments.


                • #9
                  Ok, lots of strong sound advice and I really really REALLY appreciate it!

                  I have spoken with My DW and she is now on board with the establish an EF and put the SUV on hold.

                  Unfortunately the car that I still owe a bunch on, I believe, is upside down due to me buying an extended warranty should anything break (07 BMW). And once again an EF would probably have prevented this situation altogether as I'm realizing now

                  I am working overtime to try and get an EF started and am on track for 70+ hours of OT this month hopefully this will make a nice start.

                  I'm torn as to what to pay off first though. My thinking is as follows:

                  1- 401k loan -this will provide more income every month to work with ($340) but will be the only thing I can pay off and I won't have the money until the end of April (even with gobs of OT)

                  2- credit card and medical bills - this would alleviate some financial burden ($145 + $200 = $345 monthly) same time period as the 401k loan

                  3- refinance the car and pay off the other one, but I really don't want to stretch the loan any further just to gain a lower payment in the interim, maybe I'm wrong on this?

                  I do have another 2 vehicles, both paid for, (03 cavalier - needs a valve job and is temp. Out of commission but I can fix it and am mechanically inclined) the other is a 94 miata and now runs just fine (last august the engine needed replacing and that was when I bought the jetta - almost paid for, then my wife's previous SUV was totaled and she got the jetta and I got the BMW) I would sell the BMW in a heartbeat if I could break even but unfortunately I don't believe I can (unless the aftermarket warranty could be refunded/prorated or adds significant value to the car)

                  Maybe I can get her to drive the BMW and I can drive the miata and sell the jetta? downside is the jetta is an auto and the 335i is a 6 speed ( she can drive a stick but I'm not sure she'd like it daily) and this would leave us with only 1 baby capable car she also racks up miles quickly so this would kill the value in short order. Grr I think my head is going to explode!

                  I'm thinking I'm going to pillage through the house and see what I don't use and could sell and also look into better cell and cable/Internet service

                  Re-reading this makes me see exactly how badly I need help sorting this mess out


                  • #10
                    You can sell an upside down car. You're just going to need to cough up the difference between the selling price and the amount owed. You can borrow the money if need be. IMO, this is an excellent idea as it would be a big reduction in debt.


                    • #11
                      You sound pretty motivated! Don't give up and you will surpass all of your goals.

                      I'm also a car guy, but I recently downsized. A year ago I had 5 vehicles and now I'm down to two. I also have a newborn, so I ended up getting rid of my 2 door GTI and my wifes 2 door Civic SI, for a Jetta Wagon and an Elantra Sedan. I also sold both pick up trucks and my old project Sentra SE-R. There is so many different costs, and I've been trying to reduce all of them (depreciation, fuel, insurance, registration). Buying an SUV will raise all of the costs. Check out edmunds true cost to own, to get a better comparison on what it is really costing you.

                      I wouldn't recommend refinancing the BMW for a longer term just to get a lower payment, because that will just drag out the debt, taking longer to get back above water. Your best bet is to either get rid of it, or commit to paying it down faster.

                      If you want to reduce your cable/internet cost, just cancel cable and get netflix. You can probably get fast internet for $50 a month, netflix for $8 and an antenna to take advantage of all of the free channels.

                      As far as prioritizing your debts, I would pay off the credit card/medical debt first, the 401k loan second and the auto loans third, but don't fret those details too much. Changing your spending habits will have a much bigger impact on how quickly you are able to pay off your debts.


                      • #12
                        I really want to thank you guys for the advise, it has definitely helped me to consider new paths and prioritize how I should attack this problem.

                        Ok, I decided to attempt to sell the BMW (really hoping the warranty skews the price into a range that I can make up the difference).
                        From there I believe I can pound out enough OT to pay off the Jetta in January, so by February I could be car payment free (fingers crossed) , but I will just store away the OT to start a EF until taxes come in and I can knock out the medical bills and the credit card.
                        Even if I can't sell the BMW I should have over $325 to save every month (after bills and food, gas etc.) WITHOUT WORKING ANY OT! And I normally average ~22 hours of OT per month easily so I should be able to hold back almost 3 times that amount every month and reevaluate our situation after 6-7 months (that should get me to ~ 3-4 month EF in savings)
                        I also think I'm going to cancel the cable and keep the Internet because they aren't bundled so no savings there and the Internet is ~$59 per month.
                        We certainly need to do something about our cell phones (both smart phone plans for the wife and I). Any recommendations? (Virgin mobile, Track phone, etc.)

                        Thanks again everyone!


                        • #13
                          Take a look at Ting and Republic Wireless.




                          • #14
                            The classic advice of this forum is that until you've itemized your budget you really don't know where the money is going ie. there is no "anything else"; its gas, groceries, clothes, doctor's visits, prescriptions, restaurants, dry cleaning, cleaning products, recreation, movies, newborn necessities, lady's beauty products, Starbucks, stamps, magazines, Birch boxes and so on to the last penny in detail. Groceries and restaurants don't go in the same pile. Doing so is -not- fun. It is a chore and it is often unpleasant. If you haven't done so already you probably need to look into term life insurance (that's just an aside).

                            You're sort of a mixed bag. You're investing and working over-time, but you've also got some red flags that suggest a spending problem. I don't know whether your credit card debt is old excess being resolved or a mounting pile, but I'd consider imagining a future where you take a pair of scissors to it. The advise you've received on cars already is probably sufficient - buying them with cash is always better and if you have to borrow the term should be short (there's a rule of thumb that I don't know by heart about no longer than ..3-4 years).

                            I have no advise on the order of your payments. I suspect there's significant $$$ to be saved if you question every purchase and try and break free of others expectations. I got a lot of weird looks when I said we had cancelled our cable, but I've since made converts.


                            • #15
                              Honestly, I didn't think the OP's original plan to finance an SUV for his wife was completely unreasonable. Would a smaller car or used car be better? No doubt, as is the current solution to make do with the existing cars. However, if he could get the low interest rates that he's had for the other cars (2%-3% range), there's a decent chance that he come out better in the long run by financing the car and investing income than if he plunked down $30k in cash for a depreciating asset.

                              Once the OP gets rid of the CC & 401(k) debt & the medical bills (which he says he has a plan to do by April), I think the rest of the debt is quite manageable. Like I said, I would establish the EF before I'd focus on being debt free given the debts in question.