Liquidating assets to pay debt/changing habits

[Alw1977]

Hi all -

I am fairly new around here. I am writing because I need help. We're pretty deep in CC debt, despite the fact that we make $260K a year combined. We're a couple in our late 30s with two young children. Over the last four years (since our first child was born), we've taken our hand off the wheel. Honestly, we've not been keeping an eye on our finances because our lives have been so busy, with two full time jobs, two kids under 4 and increased expenses in the form of child care (approx $30K/year, non-negotiable). We don't live in an extravagant home, our mortgage is around $2700/mo, about 20% of our post-tax income.

I didn't grow up a spender, so I am majorly stressed to find myself $49K in cc debt. Last night we talked through the situation and realized we have non-retirement stocks worth approx $22K that we could liquidate, plus I'm about to get a $5k bonus from work. So, we can put $27K towards the debt, leaving us with $22K. We can wipe this out in under a year, as we have at least $2K a month to throw at the debt.

We own our cars, but have student loans (very low interest rates - 2% or so). Jobs long-term and stable. Retirement funds over $200K. I guess we should liquidate our non-retirement stock to reduce this debt?

My concern - how do we prevent this happening again? What budget tools/resources do you recommend? To me, it's a giant waste if we liquidate all those funds and end up here all over again in 4 years.

Thanks - this is horribly stressful and embarrassing for me.

[scfr]

Is the stock company stock that you received as a bonus or stock that you inherited?

I'm guessing/hoping that you didn't go out and buy individual stock outside of a retirement account when you had so much cc debt.

[Alw1977]

Of the $22K, approximately $4K is some Ford stock we bought back when it was $5 a share or so.

The remaining $18K are in low-cost index funds. My husband has been throwing cash at that for a long time, and I didn't realize it had amounted to that much. I think he's slowly been paying "us" around $400 a month for a while now, even with this debt. We have it on auto-transfer so it just happened.

[YLTL_Dan]

The first thing most people on this board will want is to see your monthly spending. If you can't tell us how much you're spending each month (and on each category) then the first thing you need to do is get that figured out. You'll probably be amazed when you finally figure out where your money is going - and then you can take steps to start controlling your money. I'd hold off on selling the stock until you figure out how long it'd take you to pay it off by cash flowing it. If it takes longer than 12-16 months, I'd start to sell some stocks.

This is the plan I used (leveraged heavily from the Dave Ramsey plan) to take control of my money... you can read more on it here.

1. Complete a current assessment
2. Track your spending
3. Create a spending plan
4. Monitor plan and adjust as necessary
5. Save some money
6. Attack your debt

[Petunia 100]

I think liquidating non-retirement stock to throw at CC debt makes a great deal of sense. However, as you have already realized, that will not solve the problem.

The problem is spending with no budget or other plan. It doesn't matter how large your income is, if you spend more than you earn you won't have good financial results. That is what you have been doing. Now, you need to spend less than you earn so that you free up money to reduce debt. It will take some adjusting, but you can certainly do it.

The word "budget" oftentimes has a very negative connotation, but keep in mind, it is simply a spending plan. It doesn't have to be austere or restrictive; it can include plenty of discretionary spending. I find it is actually liberating, because I know exactly how much discretionary spending I can do.

You should have a budget.

[kalikala1980]

Read The Total Money Makeover by Dave Ramsey. Also, $30k for child care for two kids seems way expensive.

[disneysteve]

we make $260K a year combined.

we have at least $2K a month to throw at the debt.

A couple making 260K should be able to save more than 24K/year. That's not even 10% of your income. I would not cash out investments to pay the 49K in debt. I would stop adding to the investments for now though.

You guys need to figure out where all of this debt came from. Not only are you spending 100% of your income but you spent that much plus another 49K. Where did all of that money go?

A good rough budget is 50/30/20. That's 50% for needs, 30% for wants, 20% for savings. So that would be 130K for needs, 78K for wants, and 52K for savings. Personally, I'd say until your debts are cleaned up, the wants need to be trimmed back significantly and the savings needs to be boosted so lets make it 10% for wants (26K) and 40% for savings (104K). So in 6 months, you can repay the credit cards without touching any existing savings.

The main thing is to know where your money is going and to have a plan. Right now it sounds like neither of those is true.

[Alw1977]

Thanks for input so far. To answer the child care question, the kids go to a Montessori school that is very different from day cares attended in the past. This cost is NOT negotiable, we are not moving the kids from what has proven to be an excellent school where both are thriving.

Here is what our monthly looks like, not accounting for any spending or savings. We have a few weird circumstances: (i) we have a rental property (cannot sell it, underwater), (ii) husband is self-employed and it is over $400 cheaper to be self-insured than to ride on my policy, (iii) AT&T bill is almost $200 but includes internet and both phones - necessary evils as husband works from home 2x/week:

INCOME
Salary Income 13975
Rent Income 1300
TOTAL INCOME 15275

EXPENSES
Childcare 2,306
Townhome 1st 1,029
Townhome 2nd 125.89
Residence 1st 2233.24
Residence 2nd 497
AT&T 191.99
Home Phone 32.8
Natural Gas 30
Home Security 20
Home Cleaning (2x/month) 200
Power 100
Student Loan 1 236.57
Student Loan 2 300
Lawn Weed Service 40
Disability Insurance 72
Health Insurance (3 ppl) 646
Life Insurance ($500K each) $70
DirecTV 90
Car Insurance 150
Water 60
HOA (Townhome) 223

TOTAL EXPENSES 8,653

REMAINING 6,622

[Alw1977]

Oh - and the $260K is pre-tax. Take home is around $180K/yr, plus $1300/month in rental income, or $195,600/yr.

So 50/40/10 would be: $97,800 needs/$78,240 savings/$19560 wants. We're running about $500/mo higher on "needs" than that budget.

It's clear that the issue is NOT our needs budget. It's our spending - out of control.

I guess cash or a cc with a set limit ($2500/mo or similar) makes the best sense?

[disneysteve]

TOTAL EXPENSES 8,653

REMAINING 6,622

What you've posted is a good start but you need to keep going. You've listed your fixed monthly expenses. Now you need to list where the other $6,622 and more is going. You haven't included groceries, dining out, car expenses, clothing, entertainment, travel, kids' activities, gifts, etc. You obviously don't have a $6,600 surplus each month or else you wouldn't have 49K in credit card debt. Where did all of that money go?

On a separate note, you are significantly underinsured. I'd fix that ASAP. 10 times income is a good rule of thumb.

[LivingAlmostLarge]

the 50/30/20 is on gross so $130k is for taxes and spending. Then the 30% wants is fun stuff like travel, kids activities not necessities like food, shelter, minimal clothes, car, gas, etc. Then 20% savings.

I find it easier to just save 20% and let the 80% go be spent on whatever. So autosave. However with the debt it might be wise to really put a budget together.

[disneysteve]

I find it easier to just save 20% and let the 80% go be spent on whatever. So autosave. However with the debt it might be wise to really put a budget together.

We're the same way. We do not budget our spending, only our savings, but for OP, I agree that a budget is needed. They need to figure out how they ended up overspending their 260K income by an additional 49K.

[Alw1977]

Okay, we're making progress. Below is a budget that contains the basics plus a bit of entertainment - gas, food, a few lunches out per week (work), prescriptions, etc.

Apologies for messed up formatting, but I think you get the point - columns are "#/month, cost per and total. This is $2334. What I'm struggling with is the bigger ticket items - clothing, hair, dry-cleaning, tires, things like that. How do I account for those things that aren't necessarily monthly? Do I calculate total cost for year for all and divide by 12? Obviously some months we're going to be hit worse than others.

#/mo Per Total
Gas 5 60 300
Dave Breakfast 12 5 60
Dave Lunch 12 10 120
Alissa Lunch 8 8 64
Grocery 4.25 200 850
Walgreens, etc 1 200 200
Eating Out Dinner 8 40 320
Eating Out Lunch 4 20 80
Babysitting 1 60 60
Date Night 2 60 120
Kids Entertainment 4 40 160


TOTAL 2334

Also, on the school, this is only until kids reach kindergarten. So in 1.5 years we'll drop one tuition and in three years we'll drop the other. That $2306 is not ongoing until age 18 or anything.

[disneysteve]

What I'm struggling with is the bigger ticket items - clothing, hair, dry-cleaning, tires, things like that. How do I account for those things that aren't necessarily monthly?

The way to budget in the non-monthly expenses is to take the annual amount and divide it by 12. Then you need to be sure to set aside that money each month so that you have it ready to go when the bill comes. This applies to things like insurance premiums, car registration, repairs, etc.

[scfr]

Of the $22K, approximately $4K is some Ford stock we bought back when it was $5 a share or so.

The remaining $18K are in low-cost index funds. My husband has been throwing cash at that for a long time, and I didn't realize it had amounted to that much. I think he's slowly been paying "us" around $400 a month for a while now, even with this debt. We have it on auto-transfer so it just happened.

- What was your husband's reason for doing this? Is HE willing to sell these assets to pay off cc debt?
- Are there any other assets (or debts) that you are not aware of? Are you sure that the 2 of you have cleared the air on everything and you are completely aware of all of your assets & liabilities and therefore your net worth?
- Are you (and your husband) ready to take some serious action to fix your situation? I went back and read your old threads, and sorry if this sounds harsh but it sounds like what you have done since the last time you visited these forums is dig the hole you are in even deeper. Before taking the time to make suggestions, I'd sure like to know if you are serious and ready.