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Getting out of debt scenario - Seeking advice

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    Getting out of debt scenario - Seeking advice

    Good day everyone,

    Here's my synopsis...
    -Savings: $13k (built up to payoff debt + dental savings)
    -Checking: Paychecks pay bills

    Debt ($20k)...
    -4 Credit Cards ($6k) listed below:
    ----$1900 @ 20% ($50)
    ----$1600 @ 21% ($50)
    ----$1600 @ 9% ($35)
    ----$ 900 @ 20% ($35)
    -Car Loan: $505/mo, $25k balance (8%), $9k negative equity (prior bad decisions)
    -Personal Loan: $155/mo (10%), $5k balance
    -Needing dental procedure, will cost $5k

    What would you recommend doing with my savings money to lower my debt:income ratio? I'm not worried about the "emergency fund" right now; I'll get to that once I pay my debt down. All of the scenarios I can think of seems like getting rid of that $505 car payment will save me the most money.
    ---------------
    Option 1: Using $9k to trade in that $505 car payment for a $190 car payment (savings of $315/month). Using $1k to payoff $900 CC (savings of $35/month). Using $3k toward dental procedure. Adding $2k low-interest dental financing (+$50/mo) = $300/month debt decreased

    Option 2: Using $9k to trade in that $505 car payment for a $190 car payment (savings of $315/month). Using $4k for dental procedure. Adding $1k low-interest dental financing (+$30/mo) = $285/month debt decreased

    Option 3: Using $4.4k to pay down 3 high interest CC's (savings of $135/month). Using $5k to payoff Personal Loan (savings of $155/month). Using $3.6k toward dental procedure. Adding $1.4k low-interest dental financing (+$40/mo) = $250/month debt decreased

    Option 4: Using $7k to refinance car loan (savings of $160/month). Using $3.5k to payoff (2) highest balance/highest interest credit cards (savings of $100/month). Using $2.5k toward dental procedure. Adding $2.5k low-interest dental financing (+$75/mo) = $185/month debt decreased

    Option 5: None of these. Your thought? Thanks!
    3
    Option 1
    0.00%
    0
    Option 2
    0.00%
    0
    Option 3
    33.33%
    1
    Option 4
    0.00%
    0
    Option 5
    66.67%
    2

    The poll is expired.

    Last edited by gopokes1986; 04-10-2016, 04:17 PM.

    #2
    Pay in full the items below in bold; then use the rest for the personal loan (might be 500 short)...
    ----$1900 @ 20% ($50)
    ----$1600 @ 21% ($50)

    -Personal Loan: $155/mo (10%), $5k balance
    -Needing dental procedure, will cost $5k

    Don't finance the dental work and don't refinance the car. selling the car is an option, but I'd do the above and keep the car.

    Comment


      #3
      13K savings
      1) I'd sell the car first. What is the KBB? Pay the difference.

      2) Buy a beater car for 2 grand or less. (drive it for few years; upgrade to slightly used car until completely out of debt)

      3) Pay dental with remaining savings

      4) Any savings left from 13K, pay off the $900 credit balance first (lowest balance first to the highest) using snowball.


      5) Create a monthly budget zero based (list income - all expenses = 0)

      6) Set aside $1000 Emergency fund.

      7) Pay off all debt (lowest balance first to the highest) Cut all credit cards.
      Got debt?
      www.mo-moneyman.com

      Comment


        #4
        Originally posted by gopokes1986 View Post
        Using $9k to trade in that $505 car payment for a $190 car payment
        What exactly does this mean?

        Comment


          #5
          Originally posted by Nutria View Post
          What exactly does this mean?
          $9k negative equity... so I'd use $9k of the available $13k to have a zero equity balance on my car to get out from under it... the average replacement vehicle will cost me around $5k-$6k (~$190/mo).

          Comment


            #6
            The car will cost me another $30k ($5k interest) if I continue to keep it and stick to the contract terms. By then, the car will only be worth $10k. So let's say I paid an extra $100/mo on it until it's paid off ($605/mo), it'll still cost me $29k in the end and then be worth $11k. To me, that's a big loss of money (percentage wise) in a vehicle.

            Comment


              #7
              Originally posted by gopokes1986 View Post
              The car will cost me another $30k ($5k interest) if I continue to keep it and stick to the contract terms. By then, the car will only be worth $10k. So let's say I paid an extra $100/mo on it until it's paid off ($605/mo), it'll still cost me $29k in the end and then be worth $11k. To me, that's a big loss of money (percentage wise) in a vehicle.
              How's your cash flow?

              IOW, do you know where all your money's going, and have you cut out ALL the waste while leaving just a little for entertainment?

              I ask because those CC payments look like minimums, and without fiscal discipline, this discussion will be worthless as you'll just get back in the same situation again. (Sooner rather than later.)

              If your spending isn't organized (buying lots of lattes and eating lots of take-out or pizza), then you might be able to find the money to both pay off the cards pretty quickly while still trading in the car for something more reasonable.

              Comment


                #8
                Originally posted by gopokes1986 View Post
                What would you recommend doing with my savings money to lower my debt:income ratio?
                Who cares about lowering your DTI. Seriously. You have a mess on your hands, and your DTI only matters if you plan on borrowing some time soon. This may seem harsh, but you have absolutely NO business borrowing any time soon!

                New debt? Why? so you can get further behind?

                Mortgage? I highly doubt you would get approved. Not in your current situation.

                Let's focus on making some real progress and improving your financial situation. Let's not worry about the cliché "I need to improve my DTI so my credit score improves." If you make real progress, your credit will take care of itself. At the end of the day, your credit is just a reflection.

                If you don't focus on making real progress and improving your situation, then you will be coming back to us in a few months asking for much more serious advice.

                I am here to help you. And guess what? Your DTI is not going to help you at the end of the day. You need a plan.

                Originally posted by gopokes1986 View Post
                I'm not worried about the "emergency fund" right now; I'll get to that once I pay my debt down.
                You're not worried? Really?! Because your lack of an emergency fund is part of the problem.

                Without an emergency fund, unexpected costs become new debt. If you want to pay off your current debts (which I hope you do), you need to stop acquiring new debt. Plain and simple.

                So yes, you do need an emergency fund. Yes, you should be worried about it now. No, you will not worry about it once you pay down your debt because you WON'T pay down your debt (successfully) without it.

                Originally posted by gopokes1986 View Post
                All of the scenarios I can think of seems like getting rid of that $505 car payment will save me the most money.
                Yeah the $505 car payment is beyond ridiculous. At that point, I really don't care what your income is; I will just go ahead and say "you cannot afford that car."

                You have a negative equity in this car which tells me that was from a past car loan. Is this true? You had a car loan before, then traded up for a better car while financing the difference? I hope you learned your lesson.

                I am not sure what your income is or what you other expenses are (you never posted it). But I am willing to bet that your car payment is more than 10% of your gross income. That combined with your other debts... yeah it is no wonder you are struggling.

                Originally posted by gopokes1986 View Post
                Good day everyone,

                Here's my synopsis...
                -Savings: $13k (built up to payoff debt + dental savings)
                -Checking: Paychecks pay bills

                Debt ($20k)...
                -4 Credit Cards ($6k) listed below:
                ----$1900 @ 20% ($50)
                ----$1600 @ 21% ($50)
                ----$1600 @ 9% ($35)
                ----$ 900 @ 20% ($35)
                -Car Loan: $505/mo, $25k balance (8%), $9k negative equity (prior bad decisions)
                -Personal Loan: $155/mo (10%), $5k balance
                -Needing dental procedure, will cost $5k
                You have a mess going on!

                None of your options are really worth doing until you answer a few questions...

                Are you on a balanced budget? If not, then it does not matter what you do. Without a budget, you will spin your wheels and get no traction. You need to get on a budget and have a game plan as to how you will spend your money.

                What brought on the credit card debt? Are you prepared to stop doing what caused the credit card debt? Without a change in behavior, you run the risk of "reloading" (building back debts after paying them off).

                (Rhetorical) What are some things you want to do once you clean up this mess that you are in? Vacation? Travel? Invest for the future? You need to be looking towards something. This is the motivation aspect of personal finance, which is even more powerful than the practical/technical aspect.

                Here is what I recommend you do...

                Step 1: You NEED an emergency fund! Typically, you would need 3 to 6 months worth of expenses for emergencies. However, while paying off debt you can reduce that to $1,000 to $3,000. You will build up the rest AFTER you pay down your debt, but for the time being you need a smaller emergency fund.

                Let's say that you set aside $3,000 of your $13,000 savings. Set that aside for emergencies and DO NOT touch it for anything except an emergency! This money is your buffer and is not to be used except for the truly unexpected. Keep it in a simple bank savings account. Do you get too cute with this money.

                Step 2: You should earmark $5,000 of your savings for your dental procedure. Use this money to cover your dental procedure. DO NOT go into debt to pay your dentist.

                Step2b: Do you have dental insurance? I am guessing not. You should see if your employer offers dental insurance. If not, you could look at an open market plan.

                The point is that dental insurance (or a health policy that covers dental procedures) is important! Dental insurance is not necessarily for the cleanings; it is for the expensive procedures like what you have going on.

                Step 3: I wonder if you could sell the car and sign a note for whatever the sale won't cover. Talk to your car lender and see if they would be willing to do something like that. Ask the lender if they will allow you to sell the car and sign a separate loan for any deficit.

                That car loan is killing you. A deal like this would benefit you greatly!

                My guess is you should be able to do this. If not, then you will need to work on getting solvent on your car loan before you sell. Talk about difficult!

                Step 3b: Assuming that you sell the car and sign a deficit note, you will need some new wheels. So go find an inexpensive car that you can pay with cash.

                Of your $13,000 in savings, $3,000 will go to the emergency fund and $5,000 will go to the dentist. The leaves you with $5,000 to buy an inexpensive car.

                With that amount, you should be able to find something reliable. You are not looking for some image automobile, or something that will impress people. You are looking for something that will get you from point A to point B, and will not be a hole in your wallet.

                If you can spend less than $5,000, then GREAT! You could then use whatever does not go to the car to pay off debt. Maybe look at $3,000 for a car and $2,000 for debt? I think that would be pretty sweet.

                Step 4: When it comes to paying off debt, you need to establish a hierarchy. A pecking order for which you will attack your debts. Here is what I recommend...

                Obviously, if you cannot get rid of the car loan by swapping the sales deficit to a new loan, then your current car loan will be your #1 priority. Beyond that, here is the hierarchy:
                1. $900 @ 20% credit card
                2. $1,600 @ 21% credit card
                3. $1,900 @ 20% credit card
                4. $1,600 @ 9% credit card
                5. $5,000 @ 10% personal loan


                If you have any other debts that were not mentioned, then you can take those on after these other debts. Focus on interest rates and balances.

                What you need to do is make the minimum payments on all of your debt, except the one that you are focusing on (based on your hierarchy). On that debt that you are focusing on, throw as much money as you can muster! Once you clear that debt, you will have even more money to throw at your next priority.

                As you move down your list of debts, the amount of money that you are throwing at your priority debt will increase. This will make it easier and easier to wipe the slate clean!

                I hope this all makes sense!
                Check out my new website at www.payczech.com !

                Comment

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