Author Topic: Reader Case Study – What to do with all this debt?  (Read 3640 times)

MMMNewGuy

  • 5 O'Clock Shadow
  • *
  • Posts: 3
Reader Case Study – What to do with all this debt?
« on: November 16, 2016, 12:26:26 PM »
Sorry for the bump, just removing some of the more personal information.

Life Situation: Hey everyone, thanks for taking the time to read this. Single male, 24 years old.

Gross Salary/Wages: $50,000 CAD

Pre-tax deductions: $76.92 RRSP that is 100% employer matched. Max contribution is 4%, so $2000/year and my employer tops it up with another $2000.

Other Ordinary Income: None really, debating on starting to drive for Uber. I also typically receive about $2,000 at the end of the year as a bonus from my employer. 

Qualified Dividends & Long Term Capital Gains: None

Rental Income, Actual Expenses, and Depreciation: None

Adjusted Gross Income: $50,000 CAD minus my RRSP deduction but adding the 2k end of year bonus

Taxes: $11,200, making my take home pay around $38,000 CAD

Current expenses:
Bill                   Monthly   
Car Insurance   193   
Car Payment   420   
Car Gas           75   
RRSP           50   
Housing taxes   171   
Condo Fee   275 (I live in a town house so technically a condo)
Heat                   100   
Groceries           100   
Hydro           72   
Internet           54   ($50 subsidized by employer)
Phone              10    ($60 subsidized by employer)
Life Insurance   45   
Miscellaneous   100   
Mortgage           686
Spotify           10 (thanks for those who pointed this out, it is in fact $10/month)
Student Loan   250   
Water           50   
Water heater/   56   
Total                   2717   

Total for Me   $1917

Assets:
Home: Purchase price of $212,000 in Jan 2016 with 40k down payment
-   Not sure if this matters but an almost identical unit in my complex sold for $240,000 two weeks ago, just nice to know I guess

RRSP: 10k

Liabilities:
Mortgage: $165,833 left, 5 year fixed, 2.69% interest rate, remaining amortization is 25 years and 10 months

Student Loans: $15,860, 5.2% floating interest rate – at only $250/month I have 7.3 years left before this is paid off, would love to have this done in the next 2-3 years with such a high interest rate

Car Loan: $16,700, 1.99% interest rate – 3 years’ left

Started my MBA in Sept 2016 – approx. 3k every four months that I need to come up with. May have to delay this as I didn't realize how much trouble I was in financially to be honest.

Main question – which debt should I tackle first?

From reading MMM it sounds like the most logical thing to do is sell my car. It's a 2015 model and only has 23,000 km on it (about 14500m) and I believe I could get around 20-22k for it. I would more than likely have to use the excess to buy a used vehicle, but that $400/month I’m no longer putting toward a car payment could then go to my student loans or help fund my MBA. Does that make sense to the readers?

Any other glaring mistakes that I should correct? I’m wondering if I should be contributing the $50/month to RRSP. I try to keep my other expenses down by working out in my basement and try to cook the majority of my lunches/dinners on Sundays for the entire week.

Any advice would be greatly appreciated.

Thanks!

« Last Edit: November 18, 2016, 02:21:46 PM by MMMNewGuy »

Crazycarl

  • 5 O'Clock Shadow
  • *
  • Posts: 47
Re: Reader Case Study – What to do with all this debt?
« Reply #1 on: November 16, 2016, 12:52:13 PM »


Current expenses:
Bill                   Monthly   
   
Car Payment   420   
Life Insurance   45   
Spotify           120



That is a huge car payment, even in CAD terms for someone making less than 50k. You really need to change that ASAP.
Life insurance? I thought you were single??
Spotify for 120/month?? this must be a typo....

Unless you know you are getting an immediate jump in pay, I would hold off the MBA. Maybe you can work something out with your employer where you get a big bump or they help pay for it. Do not stop the RRSP contributions, if anything bump them up more when you slightly reduce the above.

I wish I would have put even more away when I was your age.

Good luck! keep us updated

jjandjab

  • Stubble
  • **
  • Posts: 134
Re: Reader Case Study – What to do with all this debt?
« Reply #2 on: November 16, 2016, 12:58:23 PM »
My quick thoughts. Kudos on no CC debt.

Get rid of premium Spotify - although I'm hoping you meant $120 per year. But go free anyway.

Do you or your mom have any savings left or emergency fund or are you living completely month to month?

Personally, I would think about selling the car and paying down a chunk if not all of the student loan and putting the rest aside for an emergency fund. As in, you just bought a house and what if a major repair comes up? Consider getting a home equity line of credit and paying off the student loan, as the line may be cheaper than 5.2%?

Can you ride your a bike to work/school or walk? Otherwise maybe get a real cheap used car.

I might cut out the extra to the RRSP if it is above and beyond what you need for the match from your company, at least for now.

Torn on the MBA decision. That's a tough one

Sibley

  • Magnum Stache
  • ******
  • Posts: 3357
  • Location: Chicago, IL
Re: Reader Case Study – What to do with all this debt?
« Reply #3 on: November 16, 2016, 01:06:15 PM »
Yes, sell the car and buy a cheaper used one (for cash if possible). Make sure you're getting the best rate possible on the car insurance.

Why do you have life insurance? No.

If you can get your employer to pay for the MBA, go for it. Otherwise, unless it's going to SIGNIFICANTLY increase your income, hold off.

After the car, see what you can do about the SLs. You're in Canada so I don't know if there's anything you can do to decrease the rate and/or get it to a fixed rather than variable rate. But those are a higher interest rate, so focus on paying them down.

If Spotify isn't a typo, cancel immediately.

I would reconsider a roommate, but carefully. I assume you have a spare room available. Try to find a middle aged/older adult that your mother can get along with well. Ideal if they're friends or quickly become friends. Ask her to put the word out to her friends that if someone doesn't want to maintain a house you may be willing to rent a room to them. I get that she's nervous about the idea, but this would go a long way towards reassuring her, and potentially helping out someone who's in a similar situation as she is. There's a big difference between a random stranger moving in and Sally's friend Betty moving in.

marty998

  • Walrus Stache
  • *******
  • Posts: 6201
  • Location: Sydney, Oz
Re: Reader Case Study – What to do with all this debt?
« Reply #4 on: November 16, 2016, 01:19:41 PM »
Cancel life insurance and keep doing the MBA... this is the best investment you could possibly make right now and will open up much higher paying jobs for you. If you put it off now I doubt you'll want to pick it up again.... and the cost will go up as well.

Car payment is the killer as others have said. You know your local market better than we do... find a way to profit from what car you currently have.

SKL-HOU

  • Pencil Stache
  • ****
  • Posts: 502
  • Location: Houston, TX
Re: Reader Case Study – What to do with all this debt?
« Reply #5 on: November 16, 2016, 01:57:48 PM »
I wouldn't cancel the life insurance because it sounds like your mom would be in trouble if it isn't for your income.

FLBiker

  • Pencil Stache
  • ****
  • Posts: 953
  • Age: 42
Re: Reader Case Study – What to do with all this debt?
« Reply #6 on: November 16, 2016, 02:23:15 PM »
I wouldn't cancel the life insurance because it sounds like your mom would be in trouble if it isn't for your income.

+1.  When I was single and 24, I didn't have / need life insurance, but if someone is dependent on you, that's a different story.  And I agree with getting a cheaper car and putting off the MBA unless you can get your employer to pay for it.

former player

  • Magnum Stache
  • ******
  • Posts: 4098
  • Location: Avalon
Re: Reader Case Study – What to do with all this debt?
« Reply #7 on: November 16, 2016, 02:59:55 PM »
You seem to be a good son, and to have done a decent job on the house purchase - the monthly mortgage is very reasonable and the putative gain in value nice to know.  I think asking your mother to contribute $8k a year from a pension of $20k a year, to cover house, utilities and food is very reasonable.

Car insurance at $193 per month is huge - is there anything you can do about that if you keep the car?  Keep it comprehensive, of course, but can you shop around?

Given your take home and your mother's agreed contribution, you would be on track to have $14k a year to play with -  except that your MBA is costing $3k every four months, so that leaves you just $5k to cover everything not on your list of expenses.  That is tight but doable, so as long as you have a full time job plus the MBA I wouldn't be looking for a sidehustle.  The MBA is time-limited and there should be prospects for a significant payrise afterwards.  So on your own figures you should be able to cope for the next year or two and after that you can look to a significant increase in pay and decrease in expenditure which will enable you to kill those student loans and accumulate for the future.

If you can get your employer to subsidize your MBA that would be great.  Any grants or scholarships you can apply for?  Otherwise, just getting your mother's contribution in place has been crucial and I think you should be able to manage as things are, concentrating on your work and your MBA more than worrying about money.

Crazycarl

  • 5 O'Clock Shadow
  • *
  • Posts: 47
Re: Reader Case Study – What to do with all this debt?
« Reply #8 on: November 16, 2016, 03:08:51 PM »
I wouldn't cancel the life insurance because it sounds like your mom would be in trouble if it isn't for your income.

Does your employer offer a Life insurance plan? I know mine and my wifes offer 2-3x annual salary if something happened to one of us. That should be able to cover your mortgage if something happened to you.

I am not sure about Canada, but in the US, there are survivor benefits for SS. Have you looked into if there is anything additional your mom could get to help her out? With the additional 800 from her, that is like you earning an additional 10k per year. I would not be comfortable with that size of a mortgage only earning 60k/year.

Goldielocks

  • Walrus Stache
  • *******
  • Posts: 6180
  • Location: BC
Re: Reader Case Study – What to do with all this debt?
« Reply #9 on: November 16, 2016, 03:13:48 PM »
It's the car... really.   That is the crux of the financial problem with the data provided. 
With only $75 in gas, maybe alternative transportation options are not too far fetched for you?  or a less reliable car (old) might be ok?

Your mom appears to be paying half the housing costs, or more than that... so if something should happen to you, she would not need life insurance to cover her... but she would need to find a room mate or move.  Moving would free up more capital for her to use as well, so the only challenge is the 6 months or so until she can sell.   If you are an engineer or technologist, (or accountant) you can get this low low rate for term insurance... $3.88 per month for a 29 y.o for $100k in coverage.  That would be PLENTY for her to gap her income.

https://www1.manulife.com/can/affinity/afge.nsf/quote?OpenForm&_fn=quote-tl&ParentUNID=93C119F83B7414AA8525806D0079BEC5&pd=tl


Question -- your net expenses are just under $2k per month, and you bring in over $3k per month. Savings $1200 ish per month. 
 What is your specific question?  Why is money so tight?  Is it the 3k every 4 months for the MBA?  A worry about the SL debt of $15k while carrying a car debt and wanting to do an MBA?

Generally speaking, I would recommend that a person kill the SL debt before incurring the MBA debt.  And that you kill the car loan in order to kill the current SL debt..  At this rate, you could crush it in a year, just by downsizing your vehicle a bit.

And keep the matching RRSP with employer, you will love that you did so in 10 years, as the money started to compound on itself.

myhotrs

  • Stubble
  • **
  • Posts: 135
  • Age: 40
  • Location: Los Angeles
Re: Reader Case Study – What to do with all this debt?
« Reply #10 on: November 16, 2016, 03:35:22 PM »
You seem to have your shit pretty well together, congrats!! No cc debt, own your own place, taking care of mom, have a good job, and getting a master's degree. You're way ahead of where I was at 24. Plus you're here asking for advice!

By far the biggest positive change you can make is to downsize the car expenses. If you can get rid of the car payment and cut insurance by 1/2 that's over $6k a year -  assuming gas stays the same, but it won't as you'll be biking to work :). You should be able to find a decent ride for just 1 years worth of savings. I'd stick with MBA and get it done, mine cost much more but was definitely worth it on a NPV basis.

Like others mentioned, kill or downsize the life insurance policy, check if work offers life insurance or buy the bare minimum to cover the mortgage for mom. Get rid of Spotify premium, suck it up and listen to ads once in a while! Remember WWMMMD (What Would MMM do?)

Pretty tight ship otherwise with not a lot of easy targets, good job! If you stick with it, you'll be all set long before you get to my advanced age ;)

SoftwareGoddess

  • Stubble
  • **
  • Posts: 117
  • Location: Canada
Re: Reader Case Study – What to do with all this debt?
« Reply #11 on: November 16, 2016, 04:10:10 PM »
Since I haven't seen this mentioned yet: $56 per month for water heater. Is that a water heater rental? Can you get out of that and buy one instead? You should be able to break even on that in a year or less.

Knitwit

  • Stubble
  • **
  • Posts: 157
  • Location: zone 3, Canada
Re: Reader Case Study – What to do with all this debt?
« Reply #12 on: November 16, 2016, 04:16:19 PM »
$100 a month for groceries for two people seems low. Especially if you are in Canada. Are you sure that number is right?

human

  • Pencil Stache
  • ****
  • Posts: 791
Re: Reader Case Study – What to do with all this debt?
« Reply #13 on: November 16, 2016, 06:41:26 PM »
Thank you all for the great responses, I really appreciate it.

A couple notes:

- Spotify was definitely a typo, it's $10/month and yes it really is a luxury that I could probably do without
- The life insurance is in place of mortgage insurance, it was explained to me that having portable insurance is the better option (life insruance goes with me if I move whereas I'd have to reapply for mortgage insurance if I move. I guess it's also better to lock in life insurance when I'm young and healthy?). Could definitely have been duped here by the agent, but it sounded right to me at the time. It is definitely also peace of mind that my Mom won't be left stranded if something happens to me.
- The $56/month is for a water heater and a water softener, I left that out by mistake. My Mom likes soft water, tbh I'm not even sure what the difference is other than hard water is rough on appliances and plumbing? I will certainly look into buying either of the units and how long it would take me to come out ahead.
- $100/month for groceries is definitely low, thanks for calling BS on that. $50/week seems more appropriate, but my Mom also buys some of her own food since I usually do all my cooking on Sundays.
- My fuel bill is low because I don't drive often and work from home a decent amount
- I can bike to work (definitely in the summer, think I'm too much of a wuss to do it in winter)
- Employer won't cover any of MBA, keeping my eye open for another company that will help

Thanks again! While I had a bit of an idea of what to do, it seems much more clear now. Will be cleaning and putting my car up for sale this weekend!

That 56 a month for a water heater water softener is ridiculous. An electric water heater itself is maybe 400 bucks, not sure how much a softener would be. Just buy them out right. When it comes to electric water heaters they are all basically the same don't fall for the b.s. line that some are more efficient than others. To save money on hydro install a 1gpm shower heard. You could also lower the tank temp.

I personally think 12k a year for an MBA is cheap, does it take one year or two? I would not stop taking it.

That car is a real killer, get rid of it and buy a used one. The insurance is insane $2,200 a year! I know Ontario is expensive for young guys but get a beater with just liability. You say your gas for the car doesn't cost much since you don't drive much . . . get that car sold damn fast.

Dicey

  • Walrus Stache
  • *******
  • Posts: 9739
  • Age: 61
  • Location: NorCal
Re: Reader Case Study – What to do with all this debt?
« Reply #14 on: November 17, 2016, 03:29:29 AM »
If you keep a car, can you put it in your mom's name with you as an occasional driver? Could save a bundle on insurance.
We have three paid-for cars for three adult drivers, one of whom is under 25. DH does not drive to work, he walks. We're all low mileage drivers and have legitimate reasons for keeping three sets of wheels (plus we're FI and I'm RE), so no hate, please. Somehow, our insurance agent shuffled who drives what to significantly lower the premiums. Worth looking into.

Cheap term life insurance is the only way to go. Have you compared prices?