Making a Plan

[patrick79]

Greetings. So, I'm in that age-old debate of savings vs debt repayment. I do understand that it's not an either-or proposition, but sometimes my impatience gets the best of me in the urge to "do" something tangible. What I suppose I'm looking for here is a range of sensible opinions.

I'm self-employed and my gross income each month ranges from 2,500 to 3,000. I am working to increase that number.

My debt is as follows:

Total CC debt: $7975 @ 0% interest, total min. payment $150 -- I have 10 cards (!) but only carry balances on five of them, and I'm playing that shell game where I move money around taking advantage of zero interest offers. I've paid that down from a high of over $12,000.

Student Loans: ~$80,000 -- $45/month on ICR plan.

Car Loan: $8,000 -- $175/month, 3+ years left to pay.

Credit score: 748; I've never missed a payment, never bankrupt, never maxed a card, etc.

All of my living expenses, bills and debt service amount to roughly $1,200 month. The remainder I split between savings and taxes.

Here's the deal: I want to save for a house but I also want to pay down my debt, and I wonder how I might do both as fast as possible. The student loans, in my mind, don't count. Here's my plan on the student loans: stay on ICR for the 25 years. I am fairly certain that would be less expensive than a standard repayment plan, and to me that's all that matters. The number is so large that it has an unreal quality.

Part of me wants to forgo savings for the next 8-10 months, during which I could totally eliminate the CC debt, then in another year probably axe the car loan. But not saving at all scares me. Plus, the way I'v managed the CC debt, I could pay it off in 8 months or 3 years and still manage to pay the same absolute amount of money. So there's sense to that, no?

And how does this factor into a possible mortgage? I know about the 28/36 ratio and the %20 downpayment--wouldn't my ratio look better without the CC debt? On the other hand, I'm thinking of an FHA loan wherein I would only need 3.5% down. Perfectly good houses in my area can be had for ~$50,000. By the way, I'm a single person, so I don't need much.

Well, that was long-winded.

[snafu]

sorry, more questions than answers. Do you have an Emergency Fund? I'd start with $ 1,000. , ideal 3 months basic expenses to keep you from racing to CC as soon as something goes wrong. What interest rates on car loan, any of 10, active CC, and SL? H ow do you categorize $ 7,800. CC balance? What percentage for transportation [gas, maintenance] what % resulted from restaurant/tavern costs, % for entertainment...for example?

House: I'm sure you understand you will be required to buy expensive mortgage insurance if you lack the 20% DP. While the mortgage payments are reasonable at current rates, that is only the beginning of homeowner costs. It starts with Home appraiser, mortgage insurance, home insurance, security deposits for heat and electricity, closing costs, property tax, furniture, appliances, basic kitchen pots, pans, dishes, cutlery, paint, basic tools, outdoor landscaping equipment [lawnmower, shovel, rake, weed whacker, fertilizer spreader, spade, tree loper etc]. It helps to have a maintenance slush fund as things go awry].

[patrick79]

Re: Snafu;

Yes, I do have an emergency fund, $500 right now but looking to build up to a few thousand.

0% interest on all CC, and with the ability to slide money around when 0% periods run out. Like I said, if I did nothing else I could have them all paid off in 8 months.

The bulk of that CC debt came from when I first started my business--I wasn't generating a profit for the first year, so CC helped me to survive, but now I'm doing fairly well, lots of happy, long-term clients, good credibility within my niche, etc. Today, the only CC I use is a Discover for gas, which I then pay off at the end of each month. Seeing as I have a home office, I buy gas once a month on average.

Car loan is at 4.29%.

Student Loans: Honestly, I don't care about the student loans. The total debt is so large, that at my current ICR repayment of $42, it's not even covering the interest that accrues. I'm just going to stay on ICR for the allotted 25 years and call it a day. I see no financial incentive to trying to pay it off.

I do understand about the added expenses of home ownership. Part of my plan right now is to, little by little, pick up the non-durable consumer goods when I see an irresistible deal--pots/pans, cutlery, towels, decor, all that good stuff.

[patrick79]

I promise I've used message boards before; this one's interface is somewhat strange.

[disneysteve]

I have 10 cards (!) but only carry balances on five of them
The student loans, in my mind, don't count.
The number is so large that it has an unreal quality.
the way I'v managed the CC debt, I could pay it off in 8 months or 3 years and still manage to pay the same absolute amount of money. So there's sense to that, no?
I'm thinking of an FHA loan wherein I would only need 3.5% down.

I think you have a toxic mindset about the mess you're in.

You earn $3,000/month (or less) and have $96,000 in debt but you don't seem to be particularly bothered by that. You bought a car you couldn't afford. You seem perfectly content to take 25 years to repay your student loans. And now you're thinking of buying a house with almost nothing down.

You need to change your attitude and start dealing with this. I can't comprehend why the student loans aren't an issue in your mind since they are by far your largest debt. They are going to be a drag on you for a long time unless you attack them.

I would definitely be focusing on getting the income up. $2,500-$3,000/month is pretty minimal for someone with a college degree (and 80K in student loan debt). What field are you in? Is the low income because you are new in business? Do you anticipate your income going up significantly within the next couple of years? If not, could you make more if you went to work for someone else rather than being on your own?

As for the house, you need a 6-month EF and a 20% down payment. Forget the 3.5% deal. That's a disaster waiting to happen.

[patrick79]

Hi,

I'm a professional writer and editor. I have a BA and MA in English literature and an MLS. I do anticipate the income continuing to go up because I am always replacing my bottom 10% clients with a different 10% who pay better. I live in an area where even $20k is considered a pretty fair living.

Here's what I think about the student loan situation, and I know I'm probably not articulating this well, but I'll try again. On the ICR plan, even assuming my payment bumps up to say, $150 a month, that would still only be a total repayment of $45,000. Why pay $80,000 (actually would probably end up closer to a full $100k, no?) when I can pay $45,000?***

***Now of course, if some truly fantastiche, brick-and-mortar copywriting job came along paying me north of $50,000, that would change everything. But as it stands, there's just no realistic, practical way for me to pay down $80k in student loans on my income.***

I didn't mean to give the impression that I'm not serious about dealing with my debt: I am generally quite frugal. Car-free just doesn't really work in rural eastern Kentucky. I got a very good, only slightly used car at a good price, well below book. I waited until a cold day at the end of the month, and that exact car had been on the lot for a while.

Getting back to the student loans: You've piqued my curiosity about something. You say they will be a "drag" on me. In what specific sense will they be a drag? My credit score is 750. My revolving credit utilization is about 15%. I've never in my life missed a payment, maxed a card out, or had a negative mark on my report of any kind. The average age of my cards is close to 10 years. So I really feel that, big picture, I have a pretty good situation.

[patrick79]

@disneysteve

I have to admit, your response made me feel a little prickly and defensive, which is often a sign that you're hearing something true that you don't want to hear.

[disneysteve]

@disneysteve

I have to admit, your response made me feel a little prickly and defensive, which is often a sign that you're hearing something true that you don't want to hear.

Forgive me for jumping on you quite as much as I did. There were just several things in your post that are classic (and very common) financial mistakes that people make despite every expert telling them to do otherwise. We've had several threads here over the years asking folks to list a few basic financial rules that everyone should follow and you've already broken several of them.

I do anticipate the income continuing to go up

That's good to hear. I wish you luck in continuing to attract new, more lucrative clients.

I live in an area where even $20k is considered a pretty fair living.

That's great if you aren't nearly 100K in debt. In your case, however, you can't afford to have the life you want to have making what you make and given how much debt you've acquired.

Why pay $80,000 (actually would probably end up closer to a full $100k, no?) when I can pay $45,000?

BECAUSE YOU BORROWED $80,000, NOT $45,000! The promissory note you signed didn't say, "We'll give you 80K if you promise to pay us back 45K." I'm guessing that at least some of that student loan debt is government loans. You are asking me and the rest of your fellow taxpayers to cover the other $35,000 that you borrowed. I'm not okay with that. I borrowed $102,000 for school. I paid back every penny plus interest, and I did it in 12 years, not 25.

Now of course, if some truly fantastiche, brick-and-mortar copywriting job came along paying me north of $50,000, that would change everything.

Are you actively searching for that job? It most likely isn't going to come find you.

And in the meantime, are you working a 2nd job to bring in extra money to use to attack your debt? I'm sure there are plenty of things you are qualified to do both in and not in your field. Maybe you could do some tutoring. Perhaps you could do freelance work for the local paper or magazine. Maybe some local businesses would pay you to write press releases, write copy for their websites, etc. Or maybe you just get a plain old job like delivering pizzas or newspapers or walking dogs or whatever it takes to pay the bills.

Car-free just doesn't really work in rural eastern Kentucky.

I never suggested you should be car-free. I said you bought a car you couldn't afford. How do I know that? You said that you still have over 3 years remaining, which means your initial loan term was 4+ years. That breaks one of those basic rules I referenced earlier. Your car loan shouldn't exceed 10% of income (you're good there) for no more than 36 months (that's where you went overboard).

I really feel that, big picture, I have a pretty good situation.

If you feel that having 80K of debt that you don't ever see yourself repaying is a "pretty good situation" then I'm afraid we'll have to agree to disagree on that point.

[patrick79]

BECAUSE YOU BORROWED $80,000, NOT $45,000! The promissory note you signed didn't say, "We'll give you 80K if you promise to pay us back 45K." I'm guessing that at least some of that student loan debt is government loans. You are asking me and the rest of your fellow taxpayers to cover the other $35,000 that you borrowed. I'm not okay with that. I borrowed $102,000 for school. I paid back every penny plus interest, and I did it in 12 years, not 25.

All my loans are government. I get what you're saying, but the ICR and IBR are legitimate repayment plans. I don't feel like I'm "taking advantage" of the system. Now if I were fudging on my taxes, refusing to pay anything, or if I had used my loans to fund a pill habit (see: half of my generation in eastern KY), then I am with you. But I got an actual education, and I'm paying back what Uncle Sam is asking me to pay back.

And in the meantime, are you working a 2nd job to bring in extra money to use to attack your debt? I'm sure there are plenty of things you are qualified to do both in and not in your field. Maybe you could do some tutoring. Perhaps you could do freelance work for the local paper or magazine. Maybe some local businesses would pay you to write press releases, write copy for their websites, etc. Or maybe you just get a plain old job like delivering pizzas or newspapers or walking dogs or whatever it takes to pay the bills.

One of my goals for 2014 is to extend my business more into the real world. I have some pretty debilitating social anxiety, and I have never done really well in traditional workplace. Client-Professional relationships, conducted via phone/skype/email are much easier for me. I had a counselor recently tell me he was sure that had I been seen by someone as I child that I would probably be put somewhere on the spectrum, i.e. close but not quite neurotypical. I don't know if that's true or not. But it is true I've had a hard time doing a lot of things that my peers seem to do very easily.

I never suggested you should be car-free. I said you bought a car you couldn't afford. How do I know that? You said that you still have over 3 years remaining, which means your initial loan term was 4+ years. That breaks one of those basic rules I referenced earlier. Your car loan shouldn't exceed 10% of income (you're good there) for no more than 36 months (that's where you went overboard).

Most months, I'll be making double payments, so I will have it paid off in less than 3 years; if I did it in less than 2 a penalty would kick in, and it would only make sense to absorb that penalty if I could pay it off in like 6-9 months, which I can't. So I'm aiming at ~26 months. My normal payment plus insurance plus gas is right at 10% of my income.

If you feel that having 80K of debt that you don't ever see yourself repaying is a "pretty good situation" then I'm afraid we'll have to agree to disagree on that point.

I suppose I come to that conclusion because I don't really see into the future very well (is that a symptom of depression?). I'm still just on the lee side of a fairly bitter, amicable divorce (ha). I can see about a month ahead, when the air is clear. All of my monthly bills and expenses, including paying significantly more than the minimum on my cards, only totals about 50% of my income. So I guess that's the real question--what to do with the 25% that doesn't go to the IRS.

[patrick79]

By the way, I have absolutely stopped thinking about a house. You have given me a lot to chew on and I think in the morning I will take long, hard look at my student loan sitch.

Also, I think I have this notion that if I know what all the numbers are, and keep track of everything in an elegant spreadsheet, then half the battle's won and I can relax. Sort of like how making a to-do list can feel like you're "halfway" there.

[disneysteve]

Lots of good info in your follow up post. I commend you for laying things out in the open and being open to hearing what others have to say.

the ICR and IBR are legitimate repayment plans. I don't feel like I'm "taking advantage" of the system.

I think the student loan system is broken, which certainly isn't your fault. You are correct that you are just using an option you've been offered, but that doesn't make it the "right" thing to do. If you have the ability to earn more and pay more, I don't think it's okay not to do so. I don't think it's okay to sit back and be content making 30K and not repaying the loans that enabled you to get your education in the first place. I think the right thing to do is work as hard as you can and live as lean as you can and pay back what you borrowed to the best of your ability.

One of my goals for 2014 is to extend my business more into the real world. I have some pretty debilitating social anxiety, and I have never done really well in traditional workplace. Client-Professional relationships, conducted via phone/skype/email are much easier for me.

I think it's great that you are working on overcoming those issues and putting yourself out there more. Good luck with that. I wish you much success both personally and professionally. I hope you'll hang around and update us.

Most months, I'll be making double payments, so I will have it paid off in less than 3 years; if I did it in less than 2 a penalty would kick in

That sounds good. If there is a pre-payment penalty, I'd certainly agree with not doing whatever will trigger it, but beyond that, if you can pay it off early, go for it.

I'm still just on the lee side of a fairly bitter, amicable divorce

Enough said. That certainly explains a lot right there.

All of my monthly bills and expenses, including paying significantly more than the minimum on my cards, only totals about 50% of my income.

That's great!

So I guess that's the real question--what to do with the 25% that doesn't go to the IRS.

So how much are we actually talking about? How much do you have free every month that can go to savings and debt repayment? Are you currently funding any retirement account (Roth IRA or SEP-IRA for example)?

[patrick79]

I think the student loan system is broken, which certainly isn't your fault. You are correct that you are just using an option you've been offered, but that doesn't make it the "right" thing to do. If you have the ability to earn more and pay more, I don't think it's okay not to do so. I don't think it's okay to sit back and be content making 30K and not repaying the loans that enabled you to get your education in the first place. I think the right thing to do is work as hard as you can and live as lean as you can and pay back what you borrowed to the best of your ability.

Yes, I have to agree with you. You're the first person who has really spelled it out to me in such a way. Most of my peers, many of whom have even more SL debt than me, have adopted the kind of attitude that I was expressing earlier--even taken it as a badge of honor, or as a way to stick it to the man. It's useful to hear another perspective.

Each month, my loans accrue anywhere from $150 to $200 in interest, all of which becomes capitalized in September. I think I can get in front of that this year and really start going after the principal. However, I may stay on IBR as it gives me a cushion against unforeseen disaster.

So how much are we actually talking about? How much do you have free every month that can go to savings and debt repayment? Are you currently funding any retirement account (Roth IRA or SEP-IRA for example)?

I had an SEP with my credit union before I realized that credit unions handle money with kid gloves by design. I have talked with a local guy about an IRA. I could realistically put $300/month in that for now and then maybe $500 for SL. My target for an EF is about $5000, which I could build up by midsummer.

[disneysteve]

I have talked with a local guy about an IRA.

What do you mean by "talked with a local guy"? Is this some type of financial advisor with whom you would be investing? If so, I would seriously reconsider that. Do it yourself. Hook up with one of the big 3 mutual fund companies - Vanguard, T. Rowe Price, or Fidelity. It is very easy to do and will cost you far less in fees and expenses. Lots of folks here will be happy to help walk you through what to do and help you select the investments.

[patrick79]

What do you mean by "talked with a local guy"? Is this some type of financial advisor with whom you would be investing? If so, I would seriously reconsider that. Do it yourself. Hook up with one of the big 3 mutual fund companies - Vanguard, T. Rowe Price, or Fidelity. It is very easy to do and will cost you far less in fees and expenses. Lots of folks here will be happy to help walk you through what to do and help you select the investments.

He's an agent of Edward Jones Investing. Apparently it's free when the value is below $100k. But doing it online and completely myself appeals to me too.