How to organize accounts for paying off $50k in debt.

[JettRN]

Hi everyone.

We are trying to pay off about 50k in loans. Our combined monthly income is approximately $5500.

We've looked through the last year's worth of spending and have come up with a pretty good list of expenses. I was wondering, once you come up with a monthly budget, how do you organize it? For example, do I open up a checking account JUST to buy groceries? That comes to a lot of accounts. Haha.

This is what we have so far:

Rent: $1000
Car Insurance: $200
Cell Phones: $140
Health Insurance: $130
Gas: $140
Internet & Cable: $57
Electricity: $200
These are the things that don't change each month.

Total: $1867.

This is what we've come up with for other stuff:

Groceries/Toiletries/Household: $350
Entertainment: $100
Pet/Car/Medical: $200
Total: $650 + 1867: $2517

What is missing in other stuff/holidays/presents/clothes, etc. I was thinking maybe $200/month total for this stuff (we don't buy much in this category and use coupons/free websites/thrift stores/etc). So, if that's the case: $2717/month, leaving us with whatever is left over to put towards loans.

How do I organize this? We were thinking about getting a ledger and recording every purchase and the category to which it belongs... but how do you handle this? Multiple checking accounts with debit cards for each category? Envelopes with cash? This is the first time we're making a solid budget and trying to stick to it, and we're willing to make a great number of sacrifices. Right now, we have three checking accounts to work with + two savings accounts, so we're trying to figure out to which accounts we should funnel money into/out of. If anyone has any ideas, we would so greatly appreciate it!

Thank you!

[doingitallwrong]

A budget is the kind of thing where you throw a bunch of stuff at it and see what sticks. Different methods work for different people. There are lots of budgeting programs online that cover the basic 'types' of budgets; some are free, some aren't but generally have a free trial. The ones that seem most popular are YNAB (You Need A Budget), Mint.com, and Mvelopes. I've been using Mint.com and quite like it, though I don't exactly budget in the same way most people do. Still, it's good for letting me know where most of my spending happens; I don't really pay attention to budget categories (if I have $500 to spend, it doesn't matter to me whether it's spent on clothes or entertainment or the critters or whatever) but if I'm spending a lot more than usual in a certain area, I can either tweak things or rein them in as needed.

A few things to keep in mind before you start paying down your loans. First, do you and your partner have a 401(k) or 403(b) available? Is there a company match? Even when you're paying down debt, most will recommend you contribute up to the maximum amount the company will match (if you're not already). Next, you'll want to establish an emergency fund, if you don't have one. General recommendation is $1,000 until your debt is paid off, and then build it up to six months' expenses.

As far as the accounts themselves, again it depends on what works best for you. For my husband and me, what seems to work best is a joint checking account where all of our paychecks are deposited, and from which almost all of our expenses are paid. (Well, sort of. Anything we can put on a credit card goes onto a rewards card at the same bank, which we pay off by the closing date so that we're not being charged interest. Since it's at the same bank as our checking account, it's easy to make an online payment every week or two.) Then we have a savings account -- some would call it a 'slush fund' or 'sinking fund' -- where we set aside money for our non-routine but known upcoming bills, like property taxes, as well as a small amount that we can cash flow for unexpected expenses. This account is at the same bank as the checking so we can easily and immediately transfer funds when needed. Then we have another savings account at an online bank that I'm using to build up our emergency fund; it is linked to our joint checking account, but it takes 2-3 days for money to transfer so it's less tempting to dip into it for anything other than a true emergency.

[JettRN]

A budget is the kind of thing where you throw a bunch of stuff at it and see what sticks. Different methods work for different people. There are lots of budgeting programs online that cover the basic 'types' of budgets; some are free, some aren't but generally have a free trial. The ones that seem most popular are YNAB (You Need A Budget), Mint.com, and Mvelopes. I've been using Mint.com and quite like it, though I don't exactly budget in the same way most people do. Still, it's good for letting me know where most of my spending happens; I don't really pay attention to budget categories (if I have $500 to spend, it doesn't matter to me whether it's spent on clothes or entertainment or the critters or whatever) but if I'm spending a lot more than usual in a certain area, I can either tweak things or rein them in as needed.

A few things to keep in mind before you start paying down your loans. First, do you and your partner have a 401(k) or 403(b) available? Is there a company match? Even when you're paying down debt, most will recommend you contribute up to the maximum amount the company will match (if you're not already). Next, you'll want to establish an emergency fund, if you don't have one. General recommendation is $1,000 until your debt is paid off, and then build it up to six months' expenses.

As far as the accounts themselves, again it depends on what works best for you. For my husband and me, what seems to work best is a joint checking account where all of our paychecks are deposited, and from which almost all of our expenses are paid. (Well, sort of. Anything we can put on a credit card goes onto a rewards card at the same bank, which we pay off by the closing date so that we're not being charged interest. Since it's at the same bank as our checking account, it's easy to make an online payment every week or two.) Then we have a savings account -- some would call it a 'slush fund' or 'sinking fund' -- where we set aside money for our non-routine but known upcoming bills, like property taxes, as well as a small amount that we can cash flow for unexpected expenses. This account is at the same bank as the checking so we can easily and immediately transfer funds when needed. Then we have another savings account at an online bank that I'm using to build up our emergency fund; it is linked to our joint checking account, but it takes 2-3 days for money to transfer so it's less tempting to dip into it for anything other than a true emergency.

THANK YOU!

I did actually go ahead and sign up for mint, and I think this is going to help TREMENDOUSLY. Thanks for the suggestion! We have a pretty significant savings account, which I think we're just going to leave alone (take nothing out/add nothing in) until the debts are paid off.

As for the sinking fund -- I've read about this elsewhere... basically, we went through the last 6 months' worth of expenses, and came up with what we spend on pets/medical/cars/other randomness and came up with putting $600 a month into a sinking fund. We are going to pay the monthly bills that never change out of our combined incomes from the checking account, and whatever is left at the end of the month will go straight into paying off the debt.

I think we are going to take your suggestion and direct deposit everything into the same checking account. I was very much against using a rewards credit card (which he has been using) but I guess if we have an adequate amount in checking, we can just transfer it, as you described, to get the rewards & avoid interest.

Also, we both have 401ks... I just started working so mine has nothing in it, unfortunately, but I do put into it what my employee matches... he has much more than I do.

[Eagle]

If anyone has any ideas, we would so greatly appreciate it!

Thank you!

Welcome to the forums. I agree with doingitallwrong. She has it right

Use www.mint.com to track your expenses. We have done this and it has helped tremendously.

1. So you make $5500 take home? Or is that gross?

2. How much do you have in savings?

3. What kind of debt is your 50k? Is it composed of student loans, car loans, credit cards, or what? Please list the balances and interest rates.

4. Then you can either pay you debt off by lowest balance (snowball method) or highest interest (avalanche method). What would you prefer?

You are on the right path to becoming debt free!

[bjl584]

What are your debts? You didn't list them. You only listed recurring monthly expenses.

I wouldn't lump in health care with pets and car expenses.

[doingitallwrong]

I was very much against using a rewards credit card (which he has been using) but I guess if we have an adequate amount in checking, we can just transfer it, as you described, to get the rewards & avoid interest.

If part of your debt is credit card debt, using a rewards credit card can be risky -- you have to be very disciplined to be sure you aren't just running up more debt. We're in the midst of paying off a ton of cc debt ourselves, so I was a bit hesitant about it at first. (I might not ever have started with it, honestly, if we hadn't had a rewards program with our debit/check cards that ended. I got too used to not paying for movie tickets! ) I started out paying it off weekly -- and the balance was low enough that if I didn't do that, we'd be unable to use the card after a couple of weeks. They've increased the balance now, after a couple of years, but I still pay a chunk on it every couple of weeks, making sure I pay the last statement balance in full before the due date. (We're usually carrying a balance, technically, but we're not paying interest on it.)

By being able to responsibly manage the rewards card, we've been able to use the rewards for a new vacuum cleaner, a small flat-screen TV for the kitchen, $200-300 of movie gift cards, $200 in restaurant gift cards, maybe $400 in random cash. For 2014 my goal was to use rewards to set aside $500 for Christmas gifts (reached that goal in July) and then $100 for another movie gift card (I just reached that one today and have about $45 extra now, plus four more months of rewards still to come).

If you read through the blogs, a lot of people there use several rewards cards, depending on which give the best rewards on various purchases or at various times. Or, several cards will offer cash back if you open the card and purchase a certain amount in the first month or few. I'm not at the point of playing the rewards card game that intently but you can certainly make out quite well doing it!

As you're planning your debt payoff, there's a "snowball calculator" at http://www.whatsthecost.com/snowball.aspx that it great for helping figure out which payoff plan will be the most advantageous. Generally speaking paying off the highest interest rate cards is the best in the long run, but if you have some smaller balances the psychological boost can be worth a little bit of extra interest. The calculator will compare the two methods (highest interest vs. smallest balance) so you can see the difference in interest paid and time to payoff.

[snafu]

Do you know your FICO score? Have you looked at any one of the four, free credit reports you can easily access? It's helpful to add up how much you've paid in interest charges and fees on all your loans, CC since January or information at hand.

Have you looked at bank charges? So many services there were once free now have fees and more fees. I've noticed that adding up all the smaller expense together, easily become a significant sum. If you stick to Mint.com process it helps identify financial leakage. Are there any changes you are willing to make to reduce expenses and free up sums to apply to reducing debt?

Looking forward to cheering your every baby step forward.

[JettRN]

Thanks everyone!

So, for our debts:

$5400 is credit card debt (accrued by my fiance while I was in school.) - 19% interest rate... by FAR the highest.
$24000 is a private student loan - 4.9% interest rate
$15000 is federal student loans - interest rates are 3.8, 2.9, and 6.8
$3400 is car loan - 2.9% interest rate

They are currently in grace, so I don't know what the minimum monthly payment will be until November.

We both have awesome credit scores... both just above 800.

$5500 is take home after taxes.

[Eagle]

Thanks everyone!

So, for our debts:

$5400 is credit card debt (accrued by my fiance while I was in school.) - 19% interest rate... by FAR the highest.
$24000 is a private student loan - 4.9% interest rate
$15000 is federal student loans - interest rates are 3.8, 2.9, and 6.8
$3400 is car loan - 2.9% interest rate

They are currently in grace, so I don't know what the minimum monthly payment will be until November.

We both have awesome credit scores... both just above 800.

$5500 is take home after taxes.

So you make $5500 and on average your monthly expenses are $2717. That leaves $2783 unaccounted for or fund to put towards your debt. So we still don’t know if or how much you have in savings?

It would be logical to pay off that $5400 credit card debt first. 19% interest is a killer.

Is there a way to find out how much your minimum payments would be in November?

You are on the right path! Keep up the good work!

[doingitallwrong]

You look to be in very good shape to get this debt paid off pretty quickly! I agree on paying the $5400 first, 19% interest is high and you could get rid of it just in time to start paying on your student loans. Next in theory would be the 6.8% student loan, but you might look at paying off the car instead. You would pay a couple hundred more in interest over the long term, but since the balance is small and the car is a depreciating asset, paying it off may be the way to go. Then tackle the student loans in interest order, and you should be rid of it all within two years.

[scfr]

Isn't it your fiance who is responsible for the credit card debt? Is there any reason you feel obligated to help him pay that off?

[JettRN]

Isn't it your fiance who is responsible for the credit card debt? Is there any reason you feel obligated to help him pay that off?

It was accrued over the last year & a half while I was in nursing school and had a very limited income (i.e. rent, utilities, etc)... I do feel obligated to help him pay it back because I was not able to contribute very much in those 15 months.

We have $20k combined in savings.

[snafu]

Given your high credit score, I believe you are being ripped off by the CC that charged 19% interest. Once you've cleared that $ 5,400. balance, I suggest getting a card from another provider with a lower, more appropriate rate. Since it forms a part of your excellent credit score I'm not suggesting actually 'closing' that CC, just lock it away and don't use it. It's really in your financial favour to use credit but pay the balance in full, at least two business days before the required Due Date.

[Eagle]

It was accrued over the last year & a half while I was in nursing school and had a very limited income (i.e. rent, utilities, etc)... I do feel obligated to help him pay it back because I was not able to contribute very much in those 15 months.

We have $20k combined in savings.

If you have 20k in combined savings why not pay off the 5.4k in the CC debt at 19% interest today?

[JettRN]

If you have 20k in combined savings why not pay off the 5.4k in the CC debt at 19% interest today?

It makes me nervous to take so much out of savings... is that the best option?