Friend's budget

[LivingAlmostLarge]

This is a real budget for my friend

Gross income $4000/month
20% to 401k = $400
SSN/Medicare/Medical/ Dental/Federal = $400/month

Rent - $1500 (she pays her mom this and she told me they'll take away the kids if she moves into a place smaller than 3 bedrooms with 3 kids she's living with her mom)
Utilities $720 - cable, cell, water, electric
mom's car $154 payment

I keep trying to get her on a budget but she's just awful with money. She tries not to spend but she uses cash so she's not really sure.

Right now she has $3500 and $1300 may alimony and child support in her hands. From June she'll get $2000/month alimony and 1050 child support

Problem? What does she pay off and she can't really afford to live.

Debts
Lawyer $8000 - she pays $500/month towards her divorce lawyer
CC 1 $1800 0% - been paying it down for 1 year, over $5k
CC 2 $1300 9% - she's been paying it down for 1 year was over $4k
car mom $154/month
car 2 - $1000/month - she's trying to sell it but she has no idea how much she owes on it. She just got it a week ago in the divorce and now she is more than willing to trade it in. But she suspects it's worth $22k and they owe $22k. 2014 Yukon Denali XL 120k miles are the details. it's a gas hog and she wants to dump it before she has to make a payment. We've narrowed it down to a used minivan Kia or Honda.

Now i don't know where to tell her to put the last big alimony and child support payments. Which debt? Should she pay off the cards? Or hang onto the cash in case she needs it to buy a car?

[Butterscotch]

She will lose her kids if she moves into a place with less than 3 bedrooms? If I were her I would be spending my money on a new lawyer. Even if you don’t want 3 kids in one bedroom, on principle the threat would be enough for me to drag everyone back into court.

[creditcardfree]

She pays rent AND utilities to her mom? She has two cars? Or she's using her mom's car, but paying the payment? If she realistically needs a new to her car than she should save for that rather than taking on new debt. Is she current on her debts?

[Smallsteps]

It should be easy to take any extra amount and pay off whatever is costing her money in interest charges. she made GOOD progress on both CC but she should have paid the 9% interest before the 0% interest card.
It does not seem like she is doing well in the divorce ending up with the Yukon albatross. I doubt she will get a decent trade in considering the mileage on it. Occupancy rules can insist on so many bedrooms per however many kids/ people.
This is why it is VERY Important that anyone even considering a divorce needs to be INFORMED about cost/ value of ANY property period. It seldom happens so quickly that a person cannot do their homework and get a good idea of what items they want and what they DO NOT.
For some people I do not think cash is a good way to go some people simply do not track their spending close enough. Using a debit card at least gives you a black and white accounting of things. Perhaps she is avoiding the discussion by pretending NOT to know so many things. If she is a roommate to her mother why is she paying a portion of the rent/ bills sharing them with her mother.
Why she is paying her moms car payment unless that is what she is using even then if I was paying for it I would have my name on it instead of just paying for it for mom. It is important from this point on to focus on her finances and future. Perhaps when she see that she will get serious about learning this quick.

[sblatner]

Is her 20% to her 401k $400 or $800? 20% of $4k is $800.

She needs to follow Dave Ramsey.

Baby Steps
1 - $1000 emergency fund
2 - pay off debt
3 - six month fully funded emergency fund

Figure out the Denali. That is my first step. She should call the lender and then take it to a dealer to see what they will do. Or, sell it in a private sale where she would probably get more money.
If she gets rid of the Denali and gets a different car, does the $154 to her mom for that car go away?
Pay off the 9% credit card.
Is the divorce lawyer charging her interest? If not, pay $500 per month and he/she will be paid off soon.

Re the $2220 she pays to her mom for rent and utilities. That seems high but we don't know the situation so that may be fair.

[FullyFI]

I echo the poster above.
1. 1000 dollar emergency fund.
2. Debt reduction - I'd start with that 9 percent credit card.

Find a way to get rid of that newly acquired yukon.

The budget lacks many categories such as food, and gas, insurance. But in terms of not overspending, the envelope system works great to help keeping you from going over in a particular category.

[GoodSteward]

I recommend Ynab if you want a digital envelope system. I've tried a bunch of them, and it is by far my favorite.

[msomnipotent]

Why start an emergency fund now? She doesn't have a car or a place of her own and she has a lot of debt. Is that not an emergency situation? Start an emergency fund after she pays off the debt and gets settled.

Does she know what her credit score is? Going through a divorce can make your score plummet, and she might not qualify for a decent auto loan. At this point, she might be better off buying new and stretching the payments out if she qualifies. She can double down on payments after the cards and lawyer are paid off. Is her mother in a position to pay her own car payment? Does she even need a car if your friend gets a minivan?

If I were her, I would drop the 401k to the bare minimum, cancel the cable, look for a different cell phone plan, and keep a written account of the budget and debts. It will help her track her cash better. Once most of the debt is paid, increase the 401k and start the emergency fund.

[sblatner]

Per Dave Ramsey, most emergencies are less than $1,000. If she has $1,000 in an emergency fund, it will help her not go into debt in the future. His system works.

Especially in her case where she is living with someone else. There will not be any maintenance issues with where she lives.

[msomnipotent]

Per Dave Ramsey, most emergencies are less than $1,000. If she has $1,000 in an emergency fund, it will help her not go into debt in the future. His system works.

Especially in her case where she is living with someone else. There will not be any maintenance issues with where she lives.

I'm sure his system works for some people, but debt isn't one size fits all. From what I know about it, it would drive me crazy trying to follow it when I was paying off my huge debt.

Most emergencies would be related to a home or a car since she has medical insurance, and she has neither right now. If something did happen, she can either put it on her credit card or perhaps borrow from her 401k, which is my preferred route. At the rate she is paying her cards down, she could have a $1,000 emergency paid off in a few months so that really doesn't count as a true emergency to me. Our last emergency was a $5,500 furnace replacement in the dead of winter. We had cash in the bank. We put it on a credit card anyway and paid it off later.

I'm all for building up a cushion, but not when you are paying interest on debt.

[disneysteve]

Most emergencies would be related to a home or a car since she has medical insurance, and she has neither right now.

Where are you getting that she doesn't have a car. It looks to me like there are two of them.

As for medical issues, insurance certainly doesn't eliminate that as a problem, especially with 3 children. One ER visit can set you back hundreds of dollars WITH insurance. If there's a deductible, it could be thousands of dollars. Co-pays aren't cheap either. $30 for a PCP. $50 for a specialist. That can add up very quickly if someone gets sick or injured. Prescription co-pays get costly too.

Everyone needs an emergency fund. A credit card isn't an emergency fund. Neither is a tax-sheltered account like a 401k. Those are fine as last resorts for catastrophic stuff but she needs to have some money set aside for day to day unexpected expenses.

[msomnipotent]

Where are you getting that she doesn't have a car. It looks to me like there are two of them.

As for medical issues, insurance certainly doesn't eliminate that as a problem, especially with 3 children. One ER visit can set you back hundreds of dollars WITH insurance. If there's a deductible, it could be thousands of dollars. Co-pays aren't cheap either. $30 for a PCP. $50 for a specialist. That can add up very quickly if someone gets sick or injured. Prescription co-pays get costly too.

Everyone needs an emergency fund. A credit card isn't an emergency fund. Neither is a tax-sheltered account like a 401k. Those are fine as last resorts for catastrophic stuff but she needs to have some money set aside for day to day unexpected expenses.

Her mom owns a car and she is getting rid of the other. Of course everyone needs an emergency fund, but she is paying interest on several debts. That is an emergency. Pay the debt first. Copays come out of the normal budget. Copays are not emergencies. Deductibles can be put on payment plans. Not an emergency. If on the off chance that she actually does have an emergency, she can use her credit card and do a 0% transfer for a year or more, or borrow from her 401k and pay the interest to herself instead of paying the credit card companies.

I don't think people are aware of how mentally draining having a large amount of debt hanging over their head is. She is in emergency mode now. Pay the debt off, then start saving for things that may or may not happen in the future.

[disneysteve]

Copays come out of the normal budget. Copays are not emergencies.

I don't think people are aware of how mentally draining having a large amount of debt hanging over their head is. She is in emergency mode now. Pay the debt off, then start saving for things that may or may not happen in the future.

Whether or not she can afford co-pays out of her budget is questionable because we haven't actually seen her budget. I'm going on the assumption that she's not running with any sort of surplus.

I get that having debt is mentally draining but isn't part of that the fear over how you'll pay an unexpected bill? I work in Urgent Care. I've seen co-pays as high as $125 and lots of people are in the $50-75 range. Doesn't it make more sense to set aside a small amount of cash for stuff like that and not have to pay interest on a credit card because you had to charge an unexpected bill?

We don't know but if her credit isn't great, she can't qualify for a 0% balance transfer.

We really need to see her full budget. I'm confused by a few things listed (like why she's paying for her mother's car) and we don't know the situation with the Denali. Can she sell it for what she owes or is she upside down, and if so, by how much?

As always, without full information regarding her income and expenses, it's tough to give worthwhile answers.

[GoodSteward]

I'm sure his system works for some people, but debt isn't one size fits all. From what I know about it, it would drive me crazy trying to follow it when I was paying off my huge debt.

Most emergencies would be related to a home or a car since she has medical insurance, and she has neither right now. If something did happen, she can either put it on her credit card or perhaps borrow from her 401k, which is my preferred route. At the rate she is paying her cards down, she could have a $1,000 emergency paid off in a few months so that really doesn't count as a true emergency to me. Our last emergency was a $5,500 furnace replacement in the dead of winter. We had cash in the bank. We put it on a credit card anyway and paid it off later.

I'm all for building up a cushion, but not when you are paying interest on debt.

I can see both sides of this. I believe in an emergency fund, but there have been times I chose to put 100% of my available cash flow towards debt instead of saving anything (pre-emergency fund days). You get this idea that it's 6 of one, half a dozen of the other. Really, it doesn't matter if she pays on a credit card the charges it back in an emergency, or if she saves some up front and prolongs that much of the credit card debt getting paid. In the end, it's about the same.

However, it's also a mental game. In most cases, debt is a result of living above your means, so the idea of cutting all cards is a way to force you to avoid using debt at all, even for emergencies(everything is an emergency when you have a spending problem). The $1000 emergency fund is meant to replace using a card, but this isn't as much of an issue if there isn't a credit card spending problem. It is better to err on the side of caution and follow the traditional steps(DR isn't the only one, most all financial advice authors go this route), but I can understand msomnipotent's point of view as well. I've been there.

[GoodSteward]

I put my hat in the ring for a used Toyota Sienna. Super reliable. Just be careful she doesn't accept a bad offer in a hurry to dump the SUV.