New to the forum -- need some advice!

[cbr600rr]

Hi, I read a lot of posts on here and they have been helpful but I haven't found any that really correspond with my current situation. I also read that more details = better, so here goes:

I am 25 y/o, married with a young child.

I got married at a young age (19) and bought my first house when I was 18 w/ 10% down.

I did refinance my house during the real estate boom and used the cash I took out to re-finish my basement, which was a bad move in retrospect.

I didn't have any student loan debt after getting my bachelor degree due to grants and scholarships. However, I am currently taking out student loans to pay for my graduate degree.

Here's a snapshot of my current finances:

My income - $70-80K
Wife's income - < $10K (take home probably less than $5k a year) from part time position used only for her discretionary spending and kid toys/etc...

401(k) - $1700, stopped contributing due to lack of employer match last year and opened R-IRA.

Roth IRA - $3000, contributing $400 monthly.

HSA - $3000

Savings - $4000

Monthly expenses - around $4000

No credit card debt.

Autos: currently leasing two cars, one lease will be up in February then we're considering sharing one car and once the other lease is up we should have enough saved up to buy a gently used car in cash.

Home -- here's where things get messy...

I originally bought the house for $130k, got appraised a few years later for $160k and took the cash out per above... I've been paying more than the amount due every month in an effort to remedy the equity situation since my house value is now anywhere from $70k-110k.

First mortgage - 30 year 5/1 ARM, first adjustment a year from now to LIBOR + 2.25% -- currently at 5.875 APR, balance 114k, min payment 560/month, actual payment 600/month.

Second mortgage - 15 year fixed at 8.625% APR, balance 32k, min payment 350, actual payment 500/month.

My credit score is 824.

Some people have been urging me to do a short sale and move, but I do not want to ruin my credit.

When I refi'd into the ARM, I was not planning on staying in the house longer than 5 years, but clearly, plans have changed due to home values.

Any input from you guys is greatly appreciated.

Also, I've considered talking to a professional planner/adviser, but I'm not in trouble financially and our monthly budget is pretty solid, but at the same time I don't have enough assets for a professional "wealth adviser" to help with, so advice on that angle is also welcome.

Thanks!!

[disneysteve]

Welcome. Why the 10K range for your income? Is it 70K or is it 80K? If it is 70K, that means your take home is somewhere around $4,100/month. Is that about right?

You say your monthly expenses are $4,000. How firm are you on that number? Is that just rounding off an actual number or is it an estimate of the range you are spending?

I think this is a fixable problem. The main thing you need to do is trim your expenses so that you can throw every extra penny at the debt. The rate on the 2nd mortgage is ridiculous. I'd also stop paying extra on the first mortgage since the rate is much lower. Put that extra money toward the 2nd mortgage. That will save you a lot more in the long run.

Is there any reason why your wife isn't working more? I understand that you have a young child, but that alone isn't an excuse considering your situation. I'd look for her to increase her income. It sounds like you are working full time and going to school, so there may not be any spare hours for you to work more.

Can you break down your monthly expenses for us? Lots of folks here are very good at picking apart budgets and suggesting places to cut spending.

[creditcardfree]

I'd also stop paying extra on the first mortgage since the rate is much lower. Put that extra money toward the 2nd mortgage. That will save you a lot more in the long run.

I agree with this.

If there isn't reason to move, you are already doing the right thing by paying the home debt down. You need to change focus on the higher interest rate debt first, though.

You need to find all the extra cash in your budget to put toward this debt, too. That may mean more work, and/or looking at how you spend your money and how your wife spends hers. Cut grocery, entertainment, communication and clothing expenses if possible.

[cbr600rr]

Disneysteve,

Thanks for the prompt reply!

Here are my answers:

1) the range is due to commission/bonus, true range for a year could actually be $65-100k, but this year I'm calculating it'll end up around $75K gross/ $55k take-home.

2) The $4000/month is an average over the calendar year. I used that because there are a couple expenses during the year (homeowner and auto insurance, property taxes, etc...) that skew certain months.

3) I neglected to mention that the 560 payment on the first mortgage is interest only (option ARM), which is why I've been rounding up. You still think I should put that toward the second?

4) The wife has a HS diploma and didn't go to college and although she's been looking for better positions that make more, she hasn't found anything outside of part time retail management, which is what she does now at a ridiculously low pay.

Here's a sample of my budget (for June):

Take home income: 3,784
mortgage: 1,100
electric/gas: 90
water: 30
phones: 0 (no home phone and company pays for cell)
satellite: 70
internet: 36
Home improvement: 105 (not typical, had a couple side projects)
auto payments: 783 (2 leases)
Fuel: 150
Gifts: 195 (couple birthdays, father's day, etc)
Groceries: 250
Dining out: 250
Kid's dance lessons: 127 (for 11 weeks)
Hair: 18
Pool supplies: 158 (seasonal expense)
Roth IRA: 400

Thanks again!

[creditcardfree]

Disneysteve,

I neglected to mention that the 560 payment on the first mortgage is interest only (option ARM), which is why I've been rounding up. You still think I should put that toward the second?

I still think you should send the extra money to the 2nd mortgage. If you can get rid of this one, then you'll be in a much better position to move, or refinance the first mortgage at a later date.

Once you get rid of the lease, that money can be thrown at this debt, too. At some point, you may consider if it is worth taking a break from roth contributions to pay down this debt faster. I don't like suggesting that unless you can pay down the debt VERY fast, two years or less.

Look for all extra income to go to this loan. Do you have anything you can sell?

[cbr600rr]

Look for all extra income to go to this loan. Do you have anything you can sell?

Well, I had actually planned on putting the lease payment toward retirement contributions, but your statement regarding the second mortgage makes more sense.

I did own a motorcycle (hence the handle) which I sold and used to pay off all credit card debt...

Otherwise, not really...

[cbr600rr]

I still think you should send the extra money to the 2nd mortgage. If you can get rid of this one, then you'll be in a much better position to move, or refinance the first mortgage at a later date.

Once you get rid of the lease, that money can be thrown at this debt, too. At some point, you may consider if it is worth taking a break from roth contributions to pay down this debt faster. I don't like suggesting that unless you can pay down the debt VERY fast, two years or less.

So I just did some math and if I strictly apply the lease payment in 6 months towards the 2nd, it'll be paid off in 2013, which is not bad at all... But I will take your advice and contribute what I can (probably a couple hundred extra that I was stashing away toward a bigger emergency fund) to have it paid off within a couple years.


What is everyone else's opinion on this? Emergency fund, retirement or 2nd mortgage paydown?

Where's the priority?

Thanks!!!

[disneysteve]

Here's a sample of my budget (for June):

Take home income: 3,784
mortgage: 1,100
electric/gas: 90
water: 30
phones: 0 (no home phone and company pays for cell)
satellite: 70
internet: 36
Home improvement: 105 (not typical, had a couple side projects)
auto payments: 783 (2 leases)
Fuel: 150
Gifts: 195 (couple birthdays, father's day, etc)
Groceries: 250
Dining out: 250
Kid's dance lessons: 127 (for 11 weeks)
Hair: 18
Pool supplies: 158 (seasonal expense)
Roth IRA: 400

There is way too much fat in this budget. You are way upside down on your home and taking on more debt in the form of student loans. Quite simply, you are living beyond your means and it needs to stop.

$70/month for TV - get rid of this. If you live in an area where broadcast TV is an option, do that. Its free. If not, change to limited basic cable. Around here, it is under $11/month.
$195 for gifts - You are way too generous. Set a limit of who you give gifts to and how much you spend on them. Perhaps $10 for children, $20 for adults.
$500/month for food is ridiculous. That's for 2 adults and a baby, right? You need to cut way down (or cut out entirely) the eating out. I'd say to shoot for total food spending of $300 as an initial goal. Even $350 would free up $150/month for debt repayment.
$158/month for pool I realize that is only a seasonal expense but it is a total luxury that you really need to reconsider until things are in better shape. My next door neighbor has a pool and this year, for the first time, they didn't open their pool. I'm not sure if finances had anything to do with that as we aren't that close, but I wouldn't be surprised as he works for the auto industry. Ask yourself if the pool is worth more to you than financial freedom?

As for priorities, you have a small EF of $4,000. That's at least one month and probably more worth of expenses. You also have a $3,000 medical EF in your HSA. Then you've got another $3,000 in your Roth which in a real emergency could be withdrawn. I think that's plenty for the moment. I'd focus every spare dollar on the highest interest debt, the 2nd mortgage.

[cbr600rr]

Steve,

Your feedback is very valuable and eye-opening. Thanks!

[anonymous_saver]

Here's a sample of my budget (for June):

Take home income: 3,784
mortgage: 1,100
electric/gas: 90
water: 30
phones: 0 (no home phone and company pays for cell)
satellite: 70
internet: 36
Home improvement: 105 (not typical, had a couple side projects)
auto payments: 783 (2 leases)
Fuel: 150
Gifts: 195 (couple birthdays, father's day, etc)
Groceries: 250
Dining out: 250
Kid's dance lessons: 127 (for 11 weeks)
Hair: 18
Pool supplies: 158 (seasonal expense)
Roth IRA: 400

Thanks again!

(1) I'd say cut down the eating out to maybe 1 time a week or even better 1 time every two weeks. If you can cut this down to $100/month on eating out, that is saving $150. In that case, your grocery bill would increase, let's say even by $100. That would save you $50/month and it would be healthier!

(2) Hair at $18 a month?? I know I'm extreme, as in I get a haircut, maybe once a year (it's long and straight), but really could you go once every 2 months? Ask a friend who knows how to cut hair to do it?

(3) Cut the pool expenses completely (at least until you get things in order). Do you have a lake/beach nearby, that is a pretty hefty expense for a pool. I mean that's more than you pay every month for gas for your cars! I'd also say cut out the satalite completely for now. Could you get cheaper internet service?

(4) Gift expenses of $195/month shocked me. I don't know if I spend more than $400/year and I thought I was extreme! I like the idea of setting limits on everyone of $10-$20 per person, and even better, why not do something like make a cool card from scratch instead for some people. I know I would appreciate that, there is no reason to be in debt just to give a gift to someone else.

(5) I just realized with this month this would leave you with $22 extra. What about shampoo/conditioner, paper towels, medical co-pays, etc.

(6) Once you get your money a bit more in order, I would suggest starting a Roth IRA in your wife's name as well. It's important for you guys to save as much towards retirement as possible, seeing as though you do not receive a match from your 401(k).

(7) I think spending over $700/month on two leased cars sounds outragous. I strongly think you should take the hit, get out of those contracts and buy one used car instead. Do you have public transportation around you? Try using it for some trips just to save the money. This could free up a large amount of money!

I'm interested in seeing what you do, so keep us posted! Good luck!

[creditcardfree]

Well, I had actually planned on putting the lease payment toward retirement contributions, but your statement regarding the second mortgage makes more sense.

I did own a motorcycle (hence the handle) which I sold and used to pay off all credit card debt...

Otherwise, not really...

You did a great thing selling your motorcycle. Keep your eyes peeled around your home for things you don't use or really need. I sold an old printer on ebay for $25. Kids outgrown clothing and toys can be sold on ebay, consignment stores, craigslist and garage sales. These items sell fast and bring in some decent money that can be thrown at debt.

Make it your second job, to find things that can bring in any amount of cash. It all adds up and can lead to paying off debt faster than you might expect. You could also take on traditional part time work, or mowing lawns.

What is your wife's income spent on specifically? Do you track this? Could some of it go toward debt? I'm just not clear if her money is considered in your household budget.

[Merch]

I think you cut out dining out and send your roth contributions to the second mortgage. This would be 650 a month. Plus cut your gift budget to 45 a month, that gets you 800 a month.

You could probably squeeze some more money out of you budget by keeping track of every penny and any found money (bonus, gifts, etc.) could go straight towards the second mortgage.

Realistically, I think you could have the second mortgage paid off in a few years. I also think that your wife you continue the job search. It's just tough and it's going to take longer.

The trick is to squeeze the budget (really seperate wants from needs), communication (you and your wife have to be on the same page), and long term focus (you need to rebudget every month and keep at it).

You can do this.

[Merch]

Oh yea, when the lease is up you'll me saving that money too. So in less then a year you could be throwing over 1,000 at the second.

Once the second is paid off, you might save up to pay cash for the used car.

[Ima saver]

I agree, get your 2nd mortgage paid off as soon as possible. Ask your wife if she would consider using some of her pay for this debt to be gone! Don't ever lease a car again, it is a bad decision! See if you can make do with just one car for a few years.

[maat55]

I would find a way out of the leases and buy a cheap car. You may have to use some savings and get a small two year loan, to do so.

Next I would rebuild savings to at least 3 months expenses.

At your age, I would stay with the 400 to IRA and apply all extra funds towards the 2nd mortgage.

You can cut back or out on:

Gifts( gifts are a luxury)
eating out.
satelite
home improvments
pool supplies are a little high(I had a pool once)
grocery is a little low.

Good luck.