Family struggling each pay, need advice

**lehresman** · 06-02-2008, 11:27 AM

Hi,

You mentioned that you have $4200 in debt payment per month. Can you break that out into mortgage, consumer debt (i.e. credit cards, car loans, etc), bills, and other expenses?

I'm not sure what your particular spending habits are, but the first thing you should do is cut up your credit cards and never use them again. Ever.

Next, if you have credit card debt, you should work hardest on paying that down. Once you're free from credit card debt, you won't have that monthly payment, and that's wonderful freedom. You shouldn't consider credit card debt as "normal." It's not a normal monthly payment -- it's a burden and you should try to get rid of it as quickly as possible.

After that, you'll have some more breathing room in your budget. After that, I'd recommend starting to save more, and pay more on your mortgage. (I've found that by increasing my mortgage payment by $200 per month lets me pay it off 10 years sooner!)

I hope that helps.. If you can offer some more specific details about your situation, that would be helpful.

Thanks!

**familyof4** · 06-02-2008, 11:52 AM

Mortgage (taxes and ins included) 1,462.50
Vehicle 1 (leased for another 22 months) 398.00
Vehicle 2 (5,010 balance) 260.00
Son / Daughter acct deposit (college savings) 40.00
401k loan ($3,900 balance) 163.00
Recreational vehicle ($3,100 balance) 174.00
Personal Loan ($2400 balance) 200.00
Credit card 1 ($730 balance) 40.00
Credit card 2 ($1230 balance) 40.00
Auto Ins 185.00
Recreational vehicle insurance 29.00
Life Insurance 52.00
Student loan ($9,500 balance) 48.00
Light 80.00
TV 25.00
Cell (2 phones on one plan) 52.00
Home Telephone with DSL (company pays $44 worth) 65.00
Average heat bill over 12 months 100.00
Furniture ($2800 balance) 40.00
Lawn Equipment ($4,700 balance deferred payment/interest till Oct) 0.00
Appliances ($2100 balance deferred payment/interest till July) 0.00
Living (gas food spending) 800.00

Now a few of these items I have plans and are working on either consolidating, or eliminating. The recreational vehicle (3,100 balance) should be paid off this September. My wife opted from her health insurance last year and went on mine. We should have enough to pay that 100% off.

The furniture is deferred until July and we have made payments on it. We will be consolidating the personal loan (2400 bal and the 2800 bal into one). We pay 100 every paycheck on the personal loan and will continue to pay a little extra when they are combined.

My 401k loan was taken to purchase a vehicle (title in hand). I took an 18 month term and currently and paying back in more than my current rate of return.

Once we get some bills settled, I plan to attack the appliances and pay off by December of this year.

We work extra freelance projects and try to use that money toward home projects and keep up with bills.

We just finished a remodel project in our home (hence the appliances and furniture) and added 700 sq ft and probably another 30k in equity. Total we own 2.5 acres of land and a 2500 sq ft home. We owe 160k and it is worth aprox 260k to 280k.

We refied to do this and have one single mortgage with 6.5% fixed 20 year. All taxes and home owners ins are escrowed and current.

Any other info needed?

**zetta** · 06-02-2008, 12:00 PM

How about the interest rates on all the loans? I'm a little confused about the 401k loan and car -- do you have 3 cars, one of which was bought with the 401k loan? Also, how much would you get if you were to sell the recreational vehicle today?

**familyof4** · 06-02-2008, 12:08 PM

Mortgage (taxes and ins included) 1,462.50 6.5% fixed
Vehicle 1 (leased for another 22 months) 398.00
Vehicle 2 (5,010 balance) 260.00 7.25%
401k loan ($3,900 balance) 163.00 6.5%
Recreational vehicle ($3,100 balance) 174.00 high at 17.5%
Personal Loan ($2400 balance) 200.00 11.5%
Credit card 1 ($730 balance) 40.00 12.5%
Credit card 2 ($1230 balance) 40.00 14%
Student loan ($9,500 balance) 48.00 4.2%
Furniture ($2800 balance) 40.00 no payments until July (I think interest accrued)
Lawn Equipment ($4,700 balance deferred payment/interest till Oct) 0.00 0% no payments until Oct (I don�t think interest accrued)
Appliances ($2100 balance deferred payment/interest till July) 0.00 no payments until July (I think interest accrued)

**familyof4** · 06-02-2008, 12:14 PM

Originally posted by zetta View Post

How about the interest rates on all the loans? I'm a little confused about the 401k loan and car -- do you have 3 cars, one of which was bought with the 401k loan? Also, how much would you get if you were to sell the recreational vehicle today?

I took a 401k loan for a vehicle that will not really depreciate. It is a 15 year old mustang that should keep it's value if not go up. The market is good on these particular vehicles. Yes we have three vehicles. I bought the mustang for a summer driver to keep the wear down on my winter vehicle. it is a 2000 suv that is a must for winter where I live. I plan to pay that off in the next 18 months and not have a payment on my vehicles. We don't mind one payment on a good vehicle in the family with a warranty.

The recreational vehicle is worth about what I owe (3k or so). It is a snowmobile and is tough to unload this time of year. We have two of them, one is owned and also have an enclosed trailer for them that is owned. the owned trailer and second sled are worth about 5k combined. I would not sell just one because the second would not really get used. We use it as a family recreation in the winter. We do not take family vacations other than some camping trips in the summer.

**lehresman** · 06-02-2008, 12:18 PM

Ouch. You have a lot of loans.

Any chance of selling the furniture and buying something from goodwill? I actually ended up getting my furniture free from the Freecycle mailing list in my local area. That would free up some debt.

Also, any chance of selling the RV? That is a huge amount of your debt. It might be cheaper to rent one when you want to go on vacation. How often do you use it?

I don't mean this to sound like I'm scolding or anything, but you really should consider your spending habits. Debt is insidious. It creeps up on you without realizing it. Have you sat down and calculated out how much money you owe? Not counting your mortgage, I calculate you have $37,526 in debt. That is a lot hanging over your head.

I've worked hard to get myself out of consumer debt. Before I had the mentality that borrowing money was a bad idea, I managed to rack up quite a bit of debt too. Now I have only a couple thousand left and will have it paid off by December. It has been a long time since I bought anything that I couldn't pay cash for. Now that I'm nearly on top of this problem, I am seeing the benefit of saving before spending. Now if I want new furniture, I'll save a couple hundred a month for a few months and buy it. That way I'm earning interest instead of paying interest -- and better yet, I don't have all those debts hanging over my head.

The best advise I can give to you is:
(1) change your spending habits and view credit as a terrible thing only to be used in the most dire emergency (i.e. not to buy an RV or furniture)
(2) sell as much of this extra stuff as you can.. it sounds like you can barely afford all the stuff you have. living below your means is a good idea. I'd sell the RV and the furniture first, but that's just me.
(3) pay off existing debt as quickly as you can and don't buy on credit again. save before buying, instead.

I hope this advise helps.. it's probably not what you wanted to hear though.

**lehresman** · 06-02-2008, 12:23 PM

Actually.. I think I missed a couple things in that calculation. You have $44,226 in debt by my calculation.

**familyof4** · 06-02-2008, 12:29 PM

Originally posted by lehresman View Post

I hope this advise helps.. it's probably not what you wanted to hear though.

You are right, there are allot of small loans. And there are some things I can sell. I don't mind getting rid of things to pay debt and especially if that one toy will pay debt and open up more available money to put on other things.

I think before we get to that point, what we need first is a structure, a habit, a discipline. If I can take all of my monthly payments and divide in two.. take that amount and place in one account and autodraft most of them. I think that is where I need to get to first.

Once I establish we can do that as a family, I think then we can approach selling items to eliminate the debt.

We track our expenses thru an online program that both my wife and I have access to. The problem is, what is the point of tracking spending when there is no discipline behind the spending.

We need to set a budget for ourselves and stick to it.. come hell or high water. I would like to achieve that first for a good two months, then see where we can sell and cut.

I guess the advice I seek is how to accomplish this as a family.

**dardhel** · 06-02-2008, 12:41 PM

I cannot tell where you are from exactly but my guess would be Alaska or Montana. Haven't heard them called sleds that many other places. Anyway, if you are then you probably use them more then just at the random vacation and I honestly believe you shouldn't get rid of them just to get out of debt if they are a large part of your life.

However; looking at your other debt like appliances, furniture, etc, I can see many areas to learn from in the future. There are a lot of things that you have loans for that unless you are replacing something that broke, you could probably have waited on till you had cash to pay for it.

You will feel a ton better when you set goals like wanting new appliances and actually saving month after month. It also gives you time to decide whether you really need it or not. You can spend more time researching models, finding the best bang for the buck.

Also, some advice for the future if you haven't heard it a dozen times already. Never take a loan against a retirement account. You take out untaxed money and replace it with aftertax money, only to pay tax on it again when you get it out at retirement.

Just my 2 cents...

**lehresman** · 06-02-2008, 12:47 PM

Great! I'm glad to hear that you see the need for better spending habits. And I think you're right on target with recognizing that is your first step.

Before I go any further, I'd also like to say that I think in this case, consolidating all your loans isn't a good idea. At least not right now, not until you know what you can sell and what you will keep. On paper, that might be a good option, but mentally it can make you think you've done something about the debt problem, when really you haven't. You've only alleviated it for a bit. I'll touch on consolidation a bit later.

For now, good for you! Creating a budget and sticking to it can be tough. Again, it's all about your mindset. You know your monthly expenses and that's good. So you know that at the bare minimum, you need $X to pay all your bills, and $Y to live on, and $Z to pay your debts.

I don't think you need to necessarily wait for anything before you start selling some unnecessary stuff. Once you have it all figured out on paper, I think that's good enough. Here's what I'd do:

1) list out all your regular monthly bills (i.e. dsl, electric, etc) and add that up. Those are your $X (your bills)
2) if you've been keeping a budget and tracking expenses for a few months, then you know what you normally spend on living expenses like food and gas and such. Average that out and add a little bit (so your estimating high) and that is your $Y
3) Now you know what your expenses are -- $X + $Y. Everything else is for paying off your debts and saving. Once you know how much you can spend on paying down debt, figure out what you can sell to get your debt down quickly. That will lower the amount that you actually owe.

Stick to this for a few months, then see if you can tighten up $Y (your living expenses) so you can pay more per month on debt.

Regarding how to stick to a budget, it's all about habit. Don't look at your bank account and think that's how much money you have to spend. Look at your $Y figure that you already figured up. That's what you really have because everything else is taken up by other obligations. Get in the habit of thinking that you are living on $Y per month.

For the rest of your family, I'd recommend sticking them on their own budgets. Tell whoever buys groceries that they can spend $100 this week on groceries and that's it. Give them a goal to stick to. Hopefully they're on board and want to help you make ends meet, or else this is going to be difficult if they don't cooperate.

Finally, regarding consolidating. After a few months, maybe consolidating is a good idea. because you might be able to get better rates. But don't fool yourself into thinking that it's taking care of the problem. It won't help as much as you think it will. I'm speaking from experience. Rather than having 5 smaller loans, I had one gigantic one. This was much more daunting. Rather than getting a rush from paying off one loan at a time, and using that rush to encourage me to pay off the others, I was just slowly plodding along on this HUGE debt, and it was hard to feel like I was making progress. On paper, consolidating might be a good thing, but I think that 80% of the battle is mental, not financial. I've heard stories of people making $11/hr retiring as millionaires because they saved rather than spent.

**familyof4** · 06-02-2008, 12:52 PM

Originally posted by dardhel View Post

I cannot tell where you are from exactly but my guess would be Alaska or Montana. Haven't heard them called sleds that many other places. Anyway, if you are then you probably use them more then just at the random vacation and I honestly believe you shouldn't get rid of them just to get out of debt if they are a large part of your life.

However; looking at your other debt like appliances, furniture, etc, I can see many areas to learn from in the future. There are a lot of things that you have loans for that unless you are replacing something that broke, you could probably have waited on till you had cash to pay for it.

You will feel a ton better when you set goals like wanting new appliances and actually saving month after month. It also gives you time to decide whether you really need it or not. You can spend more time researching models, finding the best bang for the buck.

Also, some advice for the future if you haven't heard it a dozen times already. Never take a loan against a retirement account. You take out untaxed money and replace it with aftertax money, only to pay tax on it again when you get it out at retirement.

Just my 2 cents...

I live in the northeast. We don't get to use the sleds as much as I would like, but if I can avoid selling them I will. As far as the appliances and furniture, you are all correct in saying that we could have done without. We really only "needed" the stove and oven because that was a major part of the remodel. The frig and dishwasher we could have kept.

the furniture we did not have enough of and it was a long time coming for us. the stuff we had was over 10 years old and did not fit our growing family. We still have it and used it in our childrens playroom for them.

I do agree with everything stated and am willing to make changes, sacrifices and liquidate items. I think the more important issue for us right now is to get on track and get to a routine in spending everyday. Track all spending and budget all funds so that we do not only know where it went.. but where it needs to go before it is spent.

I am really looking for baby steps and then worry about eliminating the debt after we have learned to manage.

even if we need to struggle for the next few months, I feel a routine is more important than rushing in and selling everything. If my numbers are correct, we should still be able to make all payments (possibly minimum on some and tack extra to others to pay down) and still have funds available to throw at the higher interest loans.

**LivingAlmostLarge** · 06-02-2008, 01:36 PM

Depends on how quickly you want to get through with debt? Why not sell the summer driver and your winter car and buy a beater? I too live in the northeast and I drive well basically beater cars and make it work. If it helps my DH never drove cars better than what we have in Canada, very, very far north! Farthest northern city.

So a little corolla or focus can work easily. AWD is a luxury. So is space. If you really need AWD then a subaru would work well. Consider selling all cars and consolidating down.

This way I'm allowing you to keep the RV and sleds and stuff. But getting into something affordable and able to pay off debt.

**zetta** · 06-02-2008, 02:11 PM

Run all your debts except the mortgage (and maybe the student loan) through this calculator:
Snowball debt calculator - Become debt free at WhatsTheCost.com

This will tell you how long it's going to take to get out of the hole. Then run it again and see how much faster the debt would go away if you sell off a car, sleds, or other items. Then you can make the decision about which path you'd prefer.

As for baby steps, I'd suggest you check out Total Money Makeover by Dave Ramsey from the library.

**maat55** · 06-03-2008, 12:25 AM

Dave Ramsey has a baby steps plan that goes:

Save first 1000 EF.
Next list all yours debts smallest to largest and attack the smallest first and move to the next, with all available funds.
When out of debt, save up EF to 3 to 6 months expenses.
Then begin to fund 529's and retirement.

To start this plan you need to write down a strict budget. No eating out, no shopping for non essential consumer goods etc. Sell any un needed stuff. Be aggressive about getting out of debt and save for your purchases and do not borrow money for consumer goods including: cars, tv's, food, sedu's, golf clothes etc. Get rid of your credit cards.

It's important to have a strict budget and focus on one objective at a time.

Family struggling each pay, need advice