Debts vs Emergency Funds & general finance advice

[Petunia 100]

You have a family and a lot of expenses. In your situation, I would want a nice fat emergency fund. That would be my priority over reducing low interest debt.

[Wino]

You should use $8600 as your monthly budget amount for long range planning ($101,200 per year). The eight weeks cuts your income, which is not figured in the $9400 you used. From that, you're down to just about $1K each month "extra." Imagine what you would have thought $8K per month would be worth when you were in university. You'd be like, "I'd be set! I could easily live on that." Yet, you're really only living paycheck-to-paycheck.

You need to cut spending. You need to build an emergency fund. Your income is sufficient. Your spending is the problem. Where else can you cut? You need to lower your lifestyle until you get the debts under control.

The two glaring areas where you can cut are the cell phones and internet. Amazon Prime or Netflix can stream movies and TV. Either of them is only about $9 per month. Your cell phones can go on the Wal-Mart Straight-Talk plan that is unlimited for only $40 per month per phone (no international dialing). I have DW's phone on that plan. Between those two, you can easily cut $100 to $200 (or more) from your monthly budget. Of course, you probably have a cellular contract. See what the terms are for canceling your cell phone contract. If less than $400 ($200 if the projected savings is only $100), I'd cut it, take the temporary hit, and then save the balance going forward. If over $400, I'd wait, and bide my time until I could cut the service.

You put "spending money" and "eating out" in two different categories. I think you could combine these as "blow money" and lower the amount to $250 or $300. That's $100 or $50 off, again.

Your lifestyle needs to be cut back. I suggest a rigid budget until you get things under control. All OT should be allocated to your debts after your emergency fund is set up ($5K to start; $15K once you get some breathing room; $30K final). The order you pay off the debts does not matter. Google "debt tsunami" and "debt snowball" and you'll find those and many other methods for paying off debt. Either choose "highest interest first" (mathematically the best way) or "lowest balance first" (the proven most successful way). You are not "in trouble" with your finances, but you are on the edge. One major setback, and you're "in trouble."

[TBH]

I agree with others who have said you need to establish a budget based on a monthly average. It's a lot of work to tweak the budget every month based on the exact paychecks you expect, and that constant tweaking allows room for a lot of short-term anxiety in months where your DH is laid off or where there are unpaid vacation days.

My household has very uneven income. Some of my work is seasonal, some is freelance. Spouse's work is steady but provides only half our necessary income. To deal with this, I put all my income into a savings account and pay myself a fixed monthly amount from that account. During the months I earn more than that minimum payment, it builds up a little buffer. During the months I earn less, it cuts into that buffer a bit. This is separate from our emergency fund, and makes it so I don't have to raid the emergency fund just because I've had a low-earning month.

If you did that, you wouldn't have to track your income as closely. You can look at trends over time, and maybe once a year adjust what your estimated monthly payment to yourself should be.

I agree with others who suggest debt snowball or debt tsunami methods, whichever appeals to you. The important thing is to pick one of your debts and attack it. Then pick the next one and attack it. You want to reduce overall debt, but you also want to reduce the number of minimum payments you have to make each month.

If it were me, after averaging out your income, I'd probably do something like the following:

* build EF up to $10,000, which is a little more than a month's income for you
* attack that unsubsidized student loan until it's gone
* then maybe build the EF up a to $15,000
* then maybe increase retirement contributions so debt pay-down is slower but at least you're not neglecting the long term
* then attack the overpayment repay even though it's interest-free just to get it out of the way
* build EF up to $20,000
* then attack the car loan big time
* build EF up even further, establish a sinking fund for eventual car replacement so you won't need to take a loan again, etc.


Something like that.

Really, I think you're poised to get everything under control. You sound like you're making smart choices now. If you can manage to pay your tuition OOP and keep chipping away at the debt, you'll be in pretty good shape in a couple years, with very low debt, hopefully a rental property building equity, and the ability to start paying catch-up with retirement savings.

This board is great. Check back in here with updated numbers when you feel uncertain, and people on here will help you readjust.

[Wino]

I second TBH's plan, with the small change of only $5K EF to start. You're not about to lose your job. If you do, the whole plan is out the window, anyway, so the larger EF isn't really needed until later, when job loss is one of the emergencies the EF is supposed to handle.

[asdf]

I think that one of your first priorities should be to get House #1 rented out so you're making a profit on it instead of a loss (and that does appear to be your goal by the end of the year). Once that's done, there won't be a huge need to sweat about the debt there.

After that's handled, here is how I would look at an EF for you. By math, after House #1 is rented out you'll be taking in about $2750/month if my math is right. If, for whatever reason, you were unable to work, you would still be in the black even with the loss of your ~$2460/month. However, if the same were to occur to your DH, you would now be in the red to the tune to about $3700/month. It is that potential loss that I would indemnify against with your EF. For 3 months, that would be about $11k, and for 6 months about $22k.

So I guess that's an illustration on how I would pretty much concur with TBH's plan. The good news is that once House #1 is rented out, your only debt with a significant interest rate that should be addressed ASAP is the unsubsidized student loan. Hammer that one out first, and then we can consider what should come next.

[ProjectDebtRelief]

You have a family and a lot of expenses. In your situation, I would want a nice fat emergency fund. That would be my priority over reducing low interest debt.

Same here. Get the first house rented so there's extra money coming in, then pad yourself a very healthy EF before reducing low interest debt.

[Wino]

You have a family and a lot of expenses. In your situation, I would want a nice fat emergency fund. That would be my priority over reducing low interest debt.

Same here. Get the first house rented so there's extra money coming in, then pad yourself a very healthy EF before reducing low interest debt.

What good is a fat emergency fund in this situation? Have large EF, but lose the job: Must get another job right away due to high monthly debt; have small fund, but lose job: Must get another job right away due to no EF. The only difference is that paying off debt decreases interest paid, while building the EF does nothing to change your total income to out-go.

I still say a small fund and pay off the debt, then build up the fund larger. I don't recommend going as low as Dave Ramsey's $1000, but $3K to $5K before paying off some debt will handle almost all car and house emergencies until the debt is gone and the EF can be built up.

I'm really surprised at Petunia100's response, because she and I always disagree on the best debt payoff method. She always maintains the "highest interest first" for precisely the reason I'm suggesting the "pay the debt first" here.

[RoadWorkAhead]

We have 5k covered, actually including the faster access account (have EF and sinking funds online, BEF at primary bank) we have about $6594. The account attached to my bank has been getting paid $200 every other week until I get to $500 and transfer. We didn't actually have to use any EF funds for last lay off - I just picked up work and increased my exemptions (we're overcautious with taxes on first year breaking 6 figures) to reflect the loss of income. We were able to cash flow a washer/dryer despite his lay off and grow savings a small amount. I'm just anxious by nature

I'll look at our cable bill - When we moved, we didn't expect to have to have home phone service, but our cell phones enter a magical black hole inside the house Previously we did ridiculously basic cable + internet. I'll see if I can find internet + phone without cable....This area is weird for phone service. As for cell phones, we can only use major 2 carriers b/c of where DH works (remote site). I wouldn't care, but with a medically involved kiddo and a job where I can't just leave (nurse), he has to be accessible. We can lower it though, b/c they have newer options and we need to update our plan with them. Should cut a good $30 off at least. And I'll have him check with co-workers just to be sure no one has found a smaller carrier that works out there.

We found that youngest is riding a bus back to daycare that doesn't get there until after we do, so dropped after school care. That's $20/wk savings (only counts for school weeks, so I'll have to look at annual savings)

We've had no budget except don't go broke and pay savings for the last several months, so all amounts were based on making sure I wasn't under budgeting + school stress = more eating out, grabbing coffee, etc. They can be adjusted down. My focus has been paying off the only unsub student loan before saving, but I didn't know if I should split amounts to cover both areas. I plan to start picking up overtime again as this semester winds down and go back to an extra shift at least every other week in the spring, which brings in an extra $600/mo. and will raise retirement savings in June by 5% (get a slightly better than 5% raise then, so it won't be noticed) and paycheck will go up by about $250 on 1/1 (dropping bennies, no more/less FSA for childcare).

Will work on going to annualized income - currently I'm budgeting Nov. pay in Nov, but really, I'll be living on Oct. income b/c we already have worked it so we're living on last months income. Thanks for all the advice, even where it conflicts

[LivingAlmostLarge]

So EF depend on how comfortable you are. You are wise to be cautious of taxes. After a certain income you phase out of the child tax credit and you phase out of a lot of tax breaks families get.

I think you should pay off debt. You have a lot of flexibility on your debt repayment I think it'll be okay.

[TBH]

Will work on going to annualized income - currently I'm budgeting Nov. pay in Nov, but really, I'll be living on Oct. income b/c we already have worked it so we're living on last months income. Thanks for all the advice, even where it conflicts

Sounds great! That's amazing that you didn't have to touch the EF in your DH's last layoff.

I bet the debt will melt away quickly and then without those minimum payments you can even more easily live off one income during DH's layoffs.

Keep us informed. It will be fun to see your progress.