Too much of credit card debt....

[FoolFromAZ]

I have balances in 6 credit cards. Total CC debt comes around $55000. I am paying $2400 every month for home mortgage. I have a car loan for $26000K, paying $550 per month.

Intrest Rate on CC ranging from 12% to 5%.
Intrest Rate on First Mortgage (243K) : 6.25%
Intrest Rate on Second Mortgage (40K): 7.5%
Intrest Rate on my car loan (26K) : 7.5%

Me and my wife together have $10000 in 401k and Roth IRA.

I make 9K per month and my wife makes 5.5K per month (Gross). Our employers are not contributing for our 401K but we can contribute if we want.

This is our situation. How should we manage our finance from here. Should we contribute for 401k? or wait till we get rid of our CC debt? our credit score is around 625, which is very poor.

Any kind of advice is greatly appreciated.

Thanks

[kork13]

It depends on your age and how close you are to your anticipated retirement, and also on the amount of money you have per month available to put towards the goals of funding retirement and paying down your debt. Also, can you shave off some of your monthly expenses to free up more money to pay down debt?

In any case, my personal recommendations would be this... First, you want (need?) to at least put some money into your Roth IRA (focusing there since your employer isn't providing a match anyway). Max your Roth IRAs (between you and your wife, $10k/year, ~$833/mo) every year, then add anything else you're comfortable with, maybe an additional $5k/year, into your 401k's. $15k/yr would be $1250/mo, or about 8% of your monthly income. Preferably, you want to save at least 10% of your income for retirement. However, since you also want some of your money available for the debts, 8% is better than nothing. Retirement will come eventually, so realistically, saving for retirement cannot be optional.

To deal with the debt... Pay just your minimums on the mortgages and car loan, because they're at least stable and won't kill your credit. You need to focus on the credit card debt, paying down the highest-interest debts first. Your credit cards are costing you the most in interest, and are also hurting your credit the most significantly. After saving a reasonable amount into your retirement accounts, plow as much as you can into paying off the credit card debt. Minimize additional CC charges, cut expenses as you can, and get the CC's paid off. Once those are under control, I'd say stick with what you're doing, and continue to focus on paying down your highest-interest debts first.

[disneysteve]

Welcome to the boards. You will surely get lots of great advice here. I've got lots of thoughts already. Let me try to put them in some coherent order.

Can you list the CCs individually with outstanding balance, credit limit and interest rate? That will help guide some advice.

Even with your current credit score, have you checked on mortgage rates lately? If you could refi that mortgage debt you could save a bundle. If you don't currently qualify for a better rate, absolutely keep an eye on your score as your debt goes down and refi as soon as it makes sense.

Very important question: Have you stopped using credit cards entirely? If the answer is no, you need to stop immediately.

To address your actual question... You earn $174,000 and currently have only $10,000 in your retirement accounts. I would certainly suggest that you at the very least max out your Roths each year for starters. What to do from there will depend on your cash flow and how much money you have free to chip away at debt. Clearly, you have been living well beyond your means and now you are paying the price for that indiscretion (high debt, low credit score, high interest rates).

Once you get the credit card debt down to where your outstanding balances are less than 50% (and preferably less than 30%) of the credit limits, you should see your credit score climb into a healthier range. At that point, I'd start calling the CCs and requesting lower rates and look into refinancing the mortgages.

I'm not sure I want to go in this direction, but how much equity do you have in the house? If you have gotten your spending under good control, it could possibly be worth looking into a home equity loan to consolidate some of your debt IF you can qualify for a decent rate.

Sorry to ramble on but your situation raises all kinds of issues.

[maat55]

I recommend that you read Dave Ramsey's book The Total Money Makeover. It will give you plan on how to get out of debt and build wealth.

You make plenty of money to attack your debt. Read the book, it will help you immensely.

[Like2Plan]

I have balances in 6 credit cards. Total CC debt comes around $55000. I am paying $2400 every month for home mortgage. I have a car loan for $26000K, paying $550 per month.

Intrest Rate on CC ranging from 12% to 5%.
Intrest Rate on First Mortgage (243K) : 6.25%
Intrest Rate on Second Mortgage (40K): 7.5%
Intrest Rate on my car loan (26K) : 7.5%

Me and my wife together have $10000 in 401k and Roth IRA.

I make 9K per month and my wife makes 5.5K per month (Gross). Our employers are not contributing for our 401K but we can contribute if we want.

This is our situation. How should we manage our finance from here. Should we contribute for 401k? or wait till we get rid of our CC debt? our credit score is around 625, which is very poor.

Any kind of advice is greatly appreciated.

Thanks

FoolFromAZ,
Are you eligible to make contributions to your Roth account anymore? (It looks like your gross annual income is 174,000--not sure what your MAGI is?)

"Once MAGI hits the top of the range, no contribution is allowed at all. The ranges, for 2007, are:
* Single filers: Up to $99,000 (to qualify for a full contribution); $99,000-$114,000 (to be eligible for a partial contribution)
* Joint filers: Up to $156,000 (to qualify for a full contribution); $156,000-$166,000 (to be eligible for a partial contribution)

The ranges, for 2008, are:
* Single filers: Up to $101,000 (to qualify for a full contribution); $101,000-$116,000 (to be eligible for a partial contribution)
* Joint filers: Up to $159,000 (to qualify for a full contribution); $159,000-$169,000 (to be eligible for a partial contribution)
"
Link to wikipedia/roth ira

It would help to know what your cash flow is like in terms of all your obligations (on a monthly basis). If you don't have much wiggle room, you may be forced to find some more income--but, if you do it at expense of the 401K contributions it will put you behind (you can't make up for past years contributions) and it will increase your tax liability.

Have you started tracking your expenses by writing down everything you spend? This is an eye opener for most people? Have you stopped using the CCs so that you don't incur more debt? Have your prioritized your CC debt in the order you plan to pay them off? In essence these are steps which help you to know what plan you need to put in place.

[Merch]

Right now, you are probably feeling some strains on your cash flow. You have a lot a debt you're servicing each month.

I think you are one bump away from disaster. What would happen if you or your wife lost your job or had a medical issue? I think that you would be in deep trouble.

Looking at your situation from the worst light, I would stop using the CC and start aggressively paying down the debt. At $174k a year, you could possibly knock that out this year. I am trying to knock out about $49k this year in debt (CC, medical, cars).

After that, you should be in good shape to max your retirement and pay of the car next year. I would go to the 401k. It's deductible from your income. What's a year in the grand scheme of retirement?

Think of it this way, how do you feel today? With the debt today, how much would you be saving for retirement? Today, is your EF totally funded (3-6 months of expenses)?

Now how would you feel if you only had the mortgage payment?

This year I am putting $15.5 k into my 401k while paying off $49k in debt. If I can do it, so can you. You just need to focus and attack.

[FoolFromAZ]

It depends on your age and how close you are to your anticipated retirement, and also on the amount of money you have per month available to put towards the goals of funding retirement and paying down your debt. Also, can you shave off some of your monthly expenses to free up more money to pay down debt?

In any case, my personal recommendations would be this... First, you want (need?) to at least put some money into your Roth IRA (focusing there since your employer isn't providing a match anyway). Max your Roth IRAs (between you and your wife, $10k/year, ~$833/mo) every year, then add anything else you're comfortable with, maybe an additional $5k/year, into your 401k's. $15k/yr would be $1250/mo, or about 8% of your monthly income. Preferably, you want to save at least 10% of your income for retirement. However, since you also want some of your money available for the debts, 8% is better than nothing. Retirement will come eventually, so realistically, saving for retirement cannot be optional.

To deal with the debt... Pay just your minimums on the mortgages and car loan, because they're at least stable and won't kill your credit. You need to focus on the credit card debt, paying down the highest-interest debts first. Your credit cards are costing you the most in interest, and are also hurting your credit the most significantly. After saving a reasonable amount into your retirement accounts, plow as much as you can into paying off the credit card debt. Minimize additional CC charges, cut expenses as you can, and get the CC's paid off. Once those are under control, I'd say stick with what you're doing, and continue to focus on paying down your highest-interest debts first.

I am turning 32 in 2 months. As my total household income is over 165K, I think I am not eligible for Roth IRA. My wife has started working recently and I have been working for the past 8 yrs, as none of my present and previous employers matching 401k contribution, I never contributed for 401k.

My situation was worser few months ago as I had CC debt of 65k and 52k on 2nd mortgage (HELOC). I brot them down to 54K and 40K respectively.

My total net income is 11k.

Mortgage - 2400
car loan - 550
day care - 800
gas - 400
Utilities - 500
Food/groc- 1000
car ins - 150
CC min pay 750
------------------------
6600

I have remaining 4400 to pay off my debt. Anyway thanks for your advice. Yes as you said I should start paying down my CC debt.

[FoolFromAZ]

Welcome to the boards. You will surely get lots of great advice here. I've got lots of thoughts already. Let me try to put them in some coherent order.

Can you list the CCs individually with outstanding balance, credit limit and interest rate? That will help guide some advice.

Even with your current credit score, have you checked on mortgage rates lately? If you could refi that mortgage debt you could save a bundle. If you don't currently qualify for a better rate, absolutely keep an eye on your score as your debt goes down and refi as soon as it makes sense.

Very important question: Have you stopped using credit cards entirely? If the answer is no, you need to stop immediately.

To address your actual question... You earn $174,000 and currently have only $10,000 in your retirement accounts. I would certainly suggest that you at the very least max out your Roths each year for starters. What to do from there will depend on your cash flow and how much money you have free to chip away at debt. Clearly, you have been living well beyond your means and now you are paying the price for that indiscretion (high debt, low credit score, high interest rates).

Once you get the credit card debt down to where your outstanding balances are less than 50% (and preferably less than 30%) of the credit limits, you should see your credit score climb into a healthier range. At that point, I'd start calling the CCs and requesting lower rates and look into refinancing the mortgages.

I'm not sure I want to go in this direction, but how much equity do you have in the house? If you have gotten your spending under good control, it could possibly be worth looking into a home equity loan to consolidate some of your debt IF you can qualify for a decent rate.

Sorry to ramble on but your situation raises all kinds of issues.

I bought my house for 315K, now the value of the house is 290K. I hardly have any equity due to real estate slow down.

[noppenbd]

FoolfromAZ,

First off, I want to commend you for coming here to post your situation and ask for help. It takes guts to stand before the "firing squad" and take your lumps. You have already gotten some great advice and I will only try to add my thoughts.

The things you have going for you are,

1) You are young. You have time to sort out your finances and get on the right track. Do not waste another second though, because time waits for no one.

2) You make a fabulous income. The median household income in the US is around $48K a year. You make almost 4 times that amount.

YET... you have no money. Even without your wife's recent income addition, you were making in excess of $108K a year, and have net worth of around -$40K (from what you posted). I am sure it is frustrating to work and work and work and be getting nowhere.

Rather than give you specific tips on where to put a little bit of money here and there, I will give you a more holistic, psychological approach.

-No matter how much you make, you can always outspend it if you do not take a hands-on approach to your money. You need to start thinking like you make $70K a year and not $200K.

-You need to cut up the credit cards NOW, today, do not wait to do this. You are not ready for credit cards yet. With your income you should be able to clean up the credit cards completely in 12-13 months by getting radical about your lifestyle. Within another 4-5 months after that you can get the car paid off. So by the end of next year you will be rid of all of your consumer debt.

If you think you will stick to this plan then I think it is ok to suspend your retirement savings until you finish with aggressively paying down this debt. If you are going to go at it half-heartedly and limp along, putting a little bit here and a little bit there, you should not do this plan, because you will never make it and you will end up with nothing saved for retirement. But, if you can sit down with your wife, and write out your plan and your goals and stick to it, it can work.

Good luck, and let us know how you progress!

[dardhel]

$4400 should get your CC's paid off in a little over a year, especially if you don't add any additional balance. Which cc's you pay off first can best be handled if you post balances / int rates. I tend to lean towards the highest interest rate first since you are looking at a decently short timeframe to get out from under that debt.

After your cc's are paid off I would work the car loan, then HELOC, then crank up the savings.

Just my 2 cents...

[dardhel]

Oh, do you have an emergency fund? I didn't see it anywhere...

[disneysteve]

Really, your situation isn't all that bad thanks to your high income. If you've got $4,400/month free, you can clear this up in no time. You've got $81,000 in non-mortgage debt. You can have it all paid off in under 2 years. Even faster if you scale back your lifestyle a bit. For example, I don't know how many kids you have, but $1,000/month for food is awfully high. Plenty of folks around here feed a family of 4-5 on less than half of that.

You say you've paid off 10K in CC debt in the past few months which is great. You've also paid off 12K of your HELOC, also great, though I'd suggest focusing on the CCs first, then the car, then the home.

If you don't have an emergency fund, I think you should start one. Perhaps put $4,000/month to debt and $400/month to your EF.

[aida2003]

Other members already pitched in good advice, but I'd like to add my 2 cents as well .

First, if you posted your CC debt break down (balance and %for each card), you'd get more specific advice.

Anyway, IMO, you should start an EF since you have none and then if I were you I'd agressively chop CC debt next. Paying your debt off is a very good return vs. investing in the market (e.g. you mentioned 12% CC).
After the CC debt is paid off, you both should peruse 401k offerings with your co. If they're good (=T.RowePrice, Fidelity, Vanguard), I'd invest in them. That way you'd bring your MAGI down to qualify for a partial RothIRA investment probably.
If 401k's are bad, I'd consider an IRA and/or taxable investments. I mean, after using your spare $$ to pay-off debts now, I'd resist accumulating consumer debts again in the future. Instead I'd use that money for investing and paying your 2nd mortgage off.
Are considering a college fund for your kid?

One more question. What grocery stuff do you buy that you spend $1,000/mo.? That's a lot!!! How many people do you feed? Does the $1k include frequenting restaurants? Anything else?

Anyway, it's wonderful that instead of going with the crowd your family decided to stop and look at the debts and start doing something about them. Some other people just keep their heads in the sand and continue accumulating debts instead of wealth. So, kudos to you for that. Now stay the course and have your debts out of your life for good and then start accumulating wealth. Like DS mentioned, you can easily pay your debts off by 2009 X'mas. For me, having NO DEBTS by then would be the BEST Christmas gift.
You're young so you've got lots of time to build your retirement.

[FoolFromAZ]

Oh, do you have an emergency fund? I didn't see it anywhere...

No I dont have emergency fund. Credit Limit in my HELOC account is 60K. I had around 10K in my saving account, later on I took that out and paid down my HELOC. I am depending on HELOC for emergency.

[noppenbd]

Be careful using a HELOC for an emergency fund, especially when your home equity is low or negative. Banks have been freezing HELOCs when property values drop in certain zip codes. It is usually built into the HELOC closing papers that they can do that. You should probably build up at least a couple of thousand in the bank ASAP, then hit the debts hard.