Author Topic: Case Study: Large Debt, Large Family, and not too proud to ask for help  (Read 2764 times)

DJV007

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Life Situation: Married jointly - Iím 31, my wife is 29 and we have three kids (8,4,1.  Iím a teacher and she is going back to be college to be a Dental Hygenist.   She is also a permanent resident who applied for citizenship.  We live in Texas (no income tax, but wicked high Property Tax).

Gross Salary/Wages:  $4800
Individual amounts of each Pre-tax deductions:
HSA: $283
Health, Vision, Dental Insurance: $370.  Children are on CHIP
Teacher Retirement and Retirement HealthCare: $401
Qualified Dividends & Long Term Capital Gains:Dividends $60 in Roth IRA
Also from October 2017 to May 2018, Iíll be receiving an inheritance in monthly payments of $1000 a month

Adjusted Gross Income:$3740
Taxes: Federal, state/local, and FICA. 0.  Typically I receive a refund of about $3000 a year
Medicare: $82

Current expenses:
Mortgage: $648 (was 30 year FHA for 3.625% and 3.5% down taken out in May 2014)
Home Insurance: $130
Property Tax: $360
Electricity: $150 (It typically only gets that high in the Summer.  Normally itís about $80).
Water & Trash: $90
Two Cell Services (includes unlimited international calls for spouse): $55
Groceries: $570 (includes household items)
House Repairs: $30
Gas and Repairs: $250
Car Insurance ($44)
Medical OTC: $40
YMCA Membership: $35
Clothes: $45
Netflix and Amazon Prime: $15
Entertainment:$60

Total: $2500


Expected ER expenses:I do get a pension at 80% of my salary when I turn 59 Ĺ or I can take early retirement at 51 and 65% and receive5% more each year.  With rate of inflation, I guessimate my ending salary to be anywhere between $75000-90,000.  I do not receive SS.

Assets:
Dodge Journey:  $12,000
Kids 529. - $500
Vanguard Roth IRA: $6000
I Bonds - $300
Savings Account - $3600
HSA: $2600


Liabilities:
Car: $288 (2014 Dodge Journey purchased in May 2017 for 36 month loan at 2.2%)
Undergrad and Grad Student Loans:
$28,000 at about 5%.  Right now I pay $78 a month in the Revise PAYE plan
$24,000 in Credit Card Debt.  I pay the minimum which is $480 a month.  For the past few years Iíve done the credit card switch a roo between five different cards:
Included are the BT rates and the limits
BOA $19,000 Limit Balance Transfer 2%
Capital One: $21,000 Limit Balance Transfer 3%
Discover: $16,000 Limit Balance Transfer 3%
Barclay: $11,000 Limit, Balance Transfer 1%
Chase: $13,000 Limit, Balance Transfer 2%

Debt Minimum: 836
Left Over: 322


Left Over
At work, I also have available a:
403 (B): Can be used as Roth, no fees
457: Can be used as Roth, 2% fees
Then I have a Roth IRA with Vanguard, average fees about .35%

Specific Question(s):
Okay, I know itís a lot of debt.  Iíll stand ready for your punches.  I was young and stupid. Because Iíve always had the many options for a balance transfer for the past three years, Iíve paid it off, but always let it creep back up slowly.  So, it never got bigger, but it wasnít getting smaller either.
In the past year, Iíve also been paying down the debt since January (So you can see itís a big higher . . . ).
Now my questions are:

1.)Should I stick to the Investment Order?  In other words, pay off the CC debt first.  Yes, right now itís only 2 to 3% every 17 months, but with the Fed raising interest rates, and Murphyís law, I may not always find myself in a position to pay it off and all of a sudden find the 0% APR dry up.
Although, I expect to be paying more tax later than now since I wonít have my tax credits aka children, should I take advantage of that no fee 403B, despite the disadvantages?

2.) What else would you cut?  Before you attack YMCA, that is one of the reasons weíve cut down our budget down so much in that I've Gone from stress eating and a terrible 265lbs to a slightly less terrible 206lbs (Iím 5í11) in the past year and half and my wifeís given up her stress shopping habit.

SimpleCycle

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Welcome!  I'm impressed with the lifestyle changes you've made and I'm glad the lower stress is helping your budget.

A few questions:
Do you really not eat out at all?
How are you paying for wife's school?  Will you need childcare while she works on this?
Can you give us the total on the car loan instead of just the payment?
How confident are you in these budget numbers?  I see a few things missing.

DJV007

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No, we don't eat out.  Maybe once a month we'll go to Whataburger, but that's included in Entertainment.  With three kids, eating out is a chore and not a luxury.
School, we don't know yet.  She'll apply for fin ain, but classes will be in evening, so I'd watch the kids.  That's part of the reason why she doesn't work now.  She'd pay more in child care than how much she'd earn.

I did think of two things I missed.
Internet with AT&T - $40
Life Insurance:  I have a 20 year $550,000 for $500 a year, and my wife has a 20 year $275,000 for $300.  We pay for this from our tax refund.
The total on the car loan is $9800.
Legal Retainer (Because of Immigration): $17. Only filing fees when we use it

MDM

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Taxes: Federal, state/local, and FICA. 0.  Typically I receive a refund of about $3000 a year
...
Undergrad and Grad Student Loans:
$28,000 at about 5%.  Right now I pay $78 a month in the Revise PAYE plan
$24,000 in Credit Card Debt.  I pay the minimum which is $480 a month.  For the past few years Iíve done the credit card switch a roo between five different cards:
Above is the first thing that jumps out: probably a good idea to stop giving the IRS an interest free loan on $3K while you are paying 5% on your own debt.  Increase your W-4 allowances (or write "Exempt" in box 7 if applicable) so you get higher take home pay during the year.

ETA: If you are already doing this, because your refund comes from refundable credits, then you just have to wait until you file.

Quote
Now my questions are:
1.)Should I stick to the Investment Order?  In other words, pay off the CC debt first.
Other than the "if it's close, the order is more a suggestion than a rule" part, why not stick with it?

Although, the Investment Order doesn't suggest paying off the CC debt first, so that part is unclear.

Quote
Although, I expect to be paying more tax later than now since I wonít have my tax credits aka children, should I take advantage of that no fee 403B, despite the disadvantages?
Not sure what disadvantages there are.  You may want to look closely at traditional 403b vs. Roth 403b but for the 403b itself if you have the cash flow when you get to that part of Investment Order, why not?
« Last Edit: July 30, 2017, 07:58:55 PM by MDM »

DJV007

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"
Other than the "if it's close, the order is more a suggestion than a rule" part, why not stick with it?

Although, the Investment Order doesn't suggest paying off the CC debt first, so that part is unclear.

Quote

Yeah, I think that's the part that worries me.  I have good credit, or at least not bad, it's 730, so it's tempting to leverage and get more bang for my buck, but those CC debt even if it's only less than 3% a year is still unsecured debt and theoretically could jump to a ridiculous percentage.

SimpleCycle

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I'm confused about the tax situation.  It looks from the numbers you are claiming exempt, but still getting a $3k refund?  You're above EIC income, which is all I could think of.

I'd get rid of the credit card debt.  If you someday can't balance transfer it to a low rate card, your interest and payments would both go up and you don't have a huge margin of safety.  Plus $480 is a good chunk of cash flow to free up.

Do you plan to do public service loan forgiveness?  REPAYE is an eligible repayment plan, so it might be worth leaving that as is.

DJV007

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The refund includes EIC, for more than two children your AGI needs to be $53K when filing jointly.  Mine is about 44, 000.
Also that includes the refundable child tax credit. 

Also, I'll be eligble for some of the Public Loan Forgiveness at the end of this year.  The rest, I hope to forgive with REPAYE.


SwordGuy

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How long will your wife be in school?   What is her expected gross salary when she finishes and gets employed?

Will she be able to hold down a part time job and go to school?
Can you hold down a part time job while she is in school?

Is your principal balance actually getting smaller on your student loan, or is it going up at the current payment?  Loan forgiveness possibilities?  Have you done all the right paperwork if it's possible?

You have two problems:

1) You have a SERIOUS debt problem.   Your CC and Student loan payments are killing you.   If you are paying CC minimums you will be paying ALMOST FOREVER.  By US law, the CC statements have to tell you how damn long it will take for you to pay that balance off if you pay the minimum payment.   But since you are transferring to a new card every year, it will take even longer because you're adding an additional 3% penalty each time you transfer.

2) You have an income problem.  Part of that will go away as your kids age out of daycare (unless you have more) and your wife gets employed full time.  In 5 years the daycare should be negligible. 

Your job is to get that debt gone pronto.  Every available penny needs to go against that CC debt.   It's sucking away your ability to invest and thrive financially.  Your "spare" $300 a month won't cut it.  You need to get $1000 a month on the CC debt.   That will knock it down to zero in about 2 years, give or take a small emergency or two.   In 2 years your wife might be able to start work and her salary can be added to get rid of your current (and any new) student loan debt in another 1.5 to 3 years (depending on how much in new loans you need).

That corresponds to when your youngest goes to school and daycare costs get a lot smaller.  At that point you'll be able to get onto a rapid FIRE track.

SimpleCycle

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Ah yeah, sorry, I was looking at the wrong number.  EIC eligibility changes the math on what to contribute to pretty substantially.  Every $100 that you reduce your taxable income by increases your EIC by about $22.  In addition, you can get advance EIC payments rather than the large refund.

That said, I'd still pay off the CC debt because to me it's "high risk" debt.

mustachepungoeshere

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Before you attack YMCA, that is one of the reasons weíve cut down our budget down so much in that I've Gone from stress eating and a terrible 265lbs to a slightly less terrible 206lbs (Iím 5í11) in the past year and half and my wifeís given up her stress shopping habit.

Is the stress just about your finances?

How are you two communicating when it comes to money?

It's a tough on a marriage, turning it around like this, so make sure you're on the same page and tackling the problem (your finances) rather than each other.

I highly recommend budget meetings, if you're not already having those. Put the kids to bed and talk it all out, no distractions and no assigning blame, just focusing on your next steps.

DJV007

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Some of it was.  I suffer from Anxiety Disorder so that doesn't help.  Also, some of it was the school I worked at before.  Very violent.  Then there was the admin.

However, I agree with the budget meetings.  Part of the problem on us getting into debt in the first place is I grew up in a middle class family, whose parents tried to live like upper middle class (so debt was normal) and my wife was from Latin America (and not the nice part) so the first three years of marriage, I felt bad if I ever said no.  Luckily we realized that we were hurting outselves financially, and relationship wise as we weren't honest.  Now we have a competition on the fridge on how much we can cut out of the other categories each month.  Shoot, my wife just told me before I sat down, "I was going to get you a new shirt with the left over clothes money this month, but I think we should use that to pay off the debt."  Now that's sexy. ;)

Dictator_Mars

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Re: Case Study: Large Debt, Large Family, and not too proud to ask for help
« Reply #11 on: August 01, 2017, 06:56:27 AM »
"I was going to get you a new shirt with the left over clothes money this month, but I think we should use that to pay off the debt."  Now that's sexy. ;)

Yes, yes it is! You are on the right track.

Huskie87

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Re: Case Study: Large Debt, Large Family, and not too proud to ask for help
« Reply #12 on: August 01, 2017, 10:38:07 AM »
It's great to see you and your wife communicating like that, it really makes this whole process much more enjoyable.

One tip I'd just like to share.  If you aren't already, make an excel spreadsheet (or one on paper) and document each value monthly.  Assets, debts, all of it, so that you can get to a 'net worth' value each month.  While this number may very well be negative, at least it allows you to see the progress each month and celebrate that improvement.  Going from a ($31,000) net worth to a ($29,000) net worth in a single month doesn't exactly scream exciting, but being able to say 'we improved our situation by $2,000 this month' really helps keep everyone's motivation going.  Before long you'll be at $0 and into the positives.  It gets difficult to just make debt payments month after month, especially when others around you might be enjoying a new car or going on a vacation, but tracking this progress and sharing it monthly gives you something to celebrate too.

Civex

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Re: Case Study: Large Debt, Large Family, and not too proud to ask for help
« Reply #13 on: August 03, 2017, 08:51:39 PM »
Good work so far and congrats on getting everyone on the same page; with two people it is only half the work.

One thing that jumped out at me was your life insurance


Life Insurance:  I have a 20 year $550,000 for $500 a year, and my wife has a 20 year $275,000 for $300.  We pay for this from our tax refund.


These seem high for the term and coverage amount, as your health improves (way to go on your weight loss!) I would recommend shopping around. I am not much younger than you, and was quoted ~$500/year for 1 million in coverage for a 20 year term. I am all for having term life insurance, but make sure the price is reasonable.

Villanelle

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Re: Case Study: Large Debt, Large Family, and not too proud to ask for help
« Reply #14 on: August 04, 2017, 01:29:55 AM »
I would think very seriously about the plan for your DW's schooling.  You mention "financial aid", which sounds like "loans", and I think adding more debt right now is someting at which you want to look very, very closely before doing.  What are the employment prospects like in that career field.  Are they desperate for qualified bodies, mean she'll find work with no problem at all?  (And no, don't just take the word of a for-profit school about the need for a credential they are selling to you.)

It might make much more sense for her to just get a job.  Whatever she can find.  And frankly, I think you should also come up with a side hustle.  Tutoring, teaching summer school, online tutoring (tutor.com is usually hiring).  Similarly, your wife should look for side hustles as well.  You guys need more money, now.  Not maybe more money if she can get hired but also more debt, a year or two from now.

Will you sell the car and take that $12,000, throw most of it at debt and buy something (with great gas mileage, of course) for $5,000-6,000?