New to debt - help?

[cheaplynn]

Hi everyone: I've been a MMM forum reader for a while, but this is my first post.
The thing is...my finances are locked down. I have a low rate on a 15 year mortgage, pay off my credit card every month, and am saving/investing 40% of my take-home pay. I'm 36 with about 200k in assets and savings. It's been hard work, but I've enjoyed it.

THAT SAID, I am about to marry my SO, who has debt. A lot of it. And he wants me to be in charge of money for the household, since I'm 'good' with it and he isn't.

My problem is this: I've never had to deal with paying off significant levels of debt, and I'm not sure what the best strategy is. I was hoping you all could give me some advice.

His situation...
Child support: $1300/mo (thankfully, the kids are great)
CC #1: 8,000 (lower interest rate for financial hardship locked in for about 9 more months)
CC #2: 16,000 (higher interest rate)
Car payment: $10,000 (his ex-wife's car. Le sigh.)

Between the two of us, we will be making $150k. My housing is $1600/mo (mortgage, tax, HOA -- it's high, but I live in a high COL area and I'm putting a LOT into my principal). I can comfortably afford this, along with my other monthly expenses which are modest. While I don't want to cut back too much on my retirement savings (again, 40% of my take home pay), I would be willing to scale back a year or two in order to help us pay off these debts.

Some questions for you all:
- how long, given our money in/out, do you think it would take to pay off this 32k of debt? I'm hoping for 18 months -- reasonable?

- I'm planning on focusing payments on the highest interest rate bills first, while making the minimum payments to the lower interest rate debts. Is this the best strategy?

- Just to confirm: my SO only has $50k in a retirement fund (he's 48). He will also get a military pension for 7 years active service and 13 years reserves -- nothing to sniff at. The $50k bothers me, but I figure this should wait until we've paid off the debts. Right?

- Can you recommend any specific payment-tracking budget spreadsheets or apps? I know a lot of people here use YNAB. I am pretty hopeless with excel (English major right here) and have always done my money 'stuff' in a notebook with pencil and calculator.

What I'm trying to say is that this is the new level of budgeting and debt-paying than I am accustomed to, so I'd love to get advice or insight from anyone who has successfully tackled this amount before. Our goal is to buckle down for the next year or two to clear out these debts, so that we have the option/freedom to change our living situation. We currently both work pretty high-stress jobs in a major city, but we dream about a more relaxed lifestyle. The inevitable pay cut would be worth it for the increased quality of life, but that's not an option until this Debt. Is. Done.

Thanks, all!

[SavinMaven]

And he wants me to be in charge of money for the household, since I'm 'good' with it and he isn't.

This isn't a red flag, but it is kinda orange. You CAN'T be "in charge of money for the household" unless you literally hand him money right before each and every purchase he makes.

Generally speaking, people with a lot of credit card debt have it because they make poor daily cash flow decisions that add up over time. You balancing the checkbook, rebalancing the portfolio etc is the easy part of household finances. The day-in, day-out nitty gritty of whether, what, and when to spend has to come equally from him. Has he honestly faced, and reversed, the issues that led him to have $24,000 in credit card debt? If he has, paying it off will be relatively easy. If he hasn't, you'll never get it to zero. Are you sure you're on the same page with this moving forward?

[SwordGuy]

And he wants me to be in charge of money for the household, since I'm 'good' with it and he isn't.

This isn't a red flag, but it is kinda orange. You CAN'T be "in charge of money for the household" unless you literally hand him money right before each and every purchase he makes.

Generally speaking, people with a lot of credit card debt have it because they make poor daily cash flow decisions that add up over time. You balancing the checkbook, rebalancing the portfolio etc is the easy part of household finances. The day-in, day-out nitty gritty of whether, what, and when to spend has to come equally from him. Has he honestly faced, and reversed, the issues that led him to have $24,000 in credit card debt? If he has, paying it off will be relatively easy. If he hasn't, you'll never get it to zero. Are you sure you're on the same page with this moving forward?

Spot on.

Could be a sign of true reform and recognizing current limitations.   Or could be passing the buck to someone else while his behavior doesn't change.

Unless you absolutely, positively know which one it is, I would tread very carefully with any action that combined finances - including marriage.

Did the debts come from a temporary one-off situation, or are they a symptoms of over-aged man-child syndrome?   

Again, if you don't know which, don't get hitched!

How often do you get a face punch that's so poetic? :)


That said, assuming he's a real catch, you could definitely expect to pay it down pretty quickly.   Or pay it a off a bit more slowly to build up some frugality muscles by curtailing spending longer and keeping the savings rate higher.   That's not a mathematically optimum suggestion, just one to consider when it comes to behavior change.

I would be interested to see what kind of progress can be made on his own before you get married.   

Best of luck, and may he be worthy of you!

[cheaplynn]

SavinMaven and SwordGuy, you both bring up a really good point, and I appreciate the directness. Thankfully yes, in the last two years, we have had a lot of transparent talks about money and spending. This debt is from before we met (during his marriage - three kids and a spouse who didn't work), and the problem for him now is that he is making so little money now that between child support, rent, and his credit card payments, he is barely making ends meet month to month. So while he hasn't been able to get on top of the debt, it hasn't grown in any significant way. This is an achievement unto itself.

I was the person to talk him into trying to negotiate a lower percentage rate/lower payments on his credit cards. He has a lot of shame around his financial state, so I think he looks to me for 'wisdom' and guidance about money. On the plus side, while he has made foolish decisions in the past (e.g., a $5k stereo system), he is not a big 'shopper' and otherwise lives quite frugally -- biking to work, packing lunches. The silly spending habits he used to have (like buying books instead of checking them out from the library) have been reformed. In many ways, our money and lifestyle values are aligned.

Trust me, I have spent a LOT of time journaling and soul-searching and talking to my therapist about this -- I've had to address the fact that I have a fair amount of frustration (even resentment) about the fact that I have scrimped and saved my whole adult life, while he has made bad financial decisions in the past. The bottom line, I've come to see, is that in order for us to move forward together, I have to help him tackle this debt.

[MDM]

1) how long, given our money in/out, do you think it would take to pay off this 32k of debt? I'm hoping for 18 months -- reasonable?

2) I'm planning on focusing payments on the highest interest rate bills first, while making the minimum payments to the lower interest rate debts. Is this the best strategy?

3) Just to confirm: my SO only has $50k in a retirement fund (he's 48). He will also get a military pension for 7 years active service and 13 years reserves -- nothing to sniff at. The $50k bothers me, but I figure this should wait until we've paid off the debts. Right?

4) Can you recommend any specific payment-tracking budget spreadsheets or apps? I know a lot of people here use YNAB. I am pretty hopeless with excel (English major right here) and have always done my money 'stuff' in a notebook with pencil and calculator.

cheaplynn, welcome to the forum.

1) 18 months seems doable.  See more below.
2) Yes, good strategy.  Not a tracker, but see http://forum.mrmoneymustache.com/ask-a-mustachian/which-loan-to-pay-extra-first/msg1307278/#msg1307278.
3) Depends on the interest rates.  See Investment Order.
4) We've used Quicken "forever".

Even english majors can use spreadsheets. :)

Might be worth some quality time together looking at the debt reduction calculator from question #2 so the two of you agree on a payment plan.  That spreadsheet will also confirm that your idea to pay the highest interest rate first will be best in terms of minimizing interest paid.

Might also be worth some quality time together looking at the case study spreadsheet and adjusting the guesses shown below to fit your actual situation.  In short it appears you can both
- pay off all the loans in 18 months, and
- contribute $37K/yr to 401k plans and $11K/yr to tIRAs
if, beyond housing, food, child support, and loan payments, you can live on $1000/mo for "everything else".

Again, many assumptions/guesses behind that, so you could download your own copy and collaborate.  Good luck!

Paycheck frequency:	Annual	Annual
Paycheck Items	Earner #1	Earner #2	Annual
Gross Salary/Wages	$75,000	$75,000	$150,000
401(k) / 403(b) / TSP / etc.	$18,500	$18,500	$37,000
W-2 Box 1	$56,500	$56,500	$113,000
Subtractions for AGI	Annual	Annual	Annual
Traditional IRA	$5,500	$5,500	$11,000
1040 AGI			$102,000
Payroll Taxes	Annual	Annual	Annual
Social Security	$4,650	$4,650	$9,300
Medicare	$1,088	$1,088	$2,175
Income Taxes
Federal tax	$9,039	2018, MFJ, std.	$9,039
State+local tax	$3,581	CA state calc'n	$3,581
Total income taxes	$24,095		$24,095
	Monthly
Income before other expenses	$6,492		$77,905
Monthly Average Expenses		Comments
Mortgage	$1,357	Input to Item. Ded.	$16,287
HOA	$143		$1,716
Property Tax	$100	Input to Item. Ded.	$1,200
Child activities	$1,300		$15,600
Groceries	$700		$8,400
Miscellaneous	$1,000		$12,000
Non-mortgage total	$3,243		$38,916
Loans
CC#1	$444		$5,333
CC#2	$889		$10,667
Car	$556		$6,667
Total Expense	$6,489		$77,870
Total to invest	$3		$36
Summary:
"Gross" income	$12,500		$150,000
Income taxes	$2,008		$24,095
After-tax income	$10,492		$125,905
IRA+401k/403b/TSP/457	$2,000	$2,000	$48,000
Living expenses	$4,600		$55,203
Non-mortgage loans	$1,889		$22,667
After-tax investable	$3		$36

Time to FI?:
Guess at time to FI	11.82	years
Safe Withdrawal Rate	4.00%	percent
Real return on tax-deferred investments	5.00%	percent
Real, after tax, return on taxable investments	4.25%	percent
Current Savings
Projected Savings at Retirement
Taxable	$286,716
Tax-deferred (e.g. trad. IRA/401k)	$749,002
Total projected stash	$1,035,718
Projected Expenses in Retirement
Non-loan, non-work expenses	$38,916
Annual non-tax retirement expense	$38,916
Income taxes	$532
Total	$39,448
Total loan principal due at FI	$49,529
Stash needed for retirement @4.0% SWR	$1,035,718
	Perfect plan!

Filing Status	2	1=S, 2=MFJ, 3=HOH
	Adult #1	Adult #2
Age	36	36
Full-time student?	0	0
AGI	$102,000
Std. Deduct.	$24,000
Act. Deduct.	$24,000
Exemption	$0
Taxable	$78,000
1040 Tax	$9,039
Tax after n-r credit	$9,039
Net Tax	$9,039
Mtg. Int. (approx.)	$5,445	1000000
State tax	$3,581	CA
Prop tax	$1,200
Item. Deduct.	$10,226
Version	V11.11

Loans:	Orig. Prin.	Orig. Length	Curr. Prin.	Yrs left	Rate
Mortgage	$200,000	15	$200,000	15	2.75%
CC#1	$8,000	1.5	$8,000	1.5	0.0%
CC#2	$16,000	1.5	$16,000	1.5	0.0%
Car	$10,000	1.5	$10,000	1.5	0.0%

[cheaplynn]

MDM: Thank you!!! All of these responses have been exactly why I turned to this forum for help. You all are so generous with your experience and insights.

[Nords]

- Just to confirm: my SO only has $50k in a retirement fund (he's 48). He will also get a military pension for 7 years active service and 13 years reserves -- nothing to sniff at.

Two comments:
1.  The biggest couples issue I see on debt forums is the spending decisions.  Ideally it's a team pulling in harness.  Frequently, however, one gets put in charge (not always by choice) and becomes the authority figure.  This can set up a dynamic where one feels like the bad cop and the other feels like they're perpetually begging for spending money.

The best solution seems to be giving each of the couple a monthly allowance that they can spend on anything-- no questions asked, not even commentary.  They can also save their monthly allowance for a larger goal. 

That way you guys only need to decide on the amount of the monthly allowance for that year, and then it only has to be reviewed annually.

2.  If you want, I can help you with the math when you get to the point that you're figuring out the amount of his pension.  The Reserve/Guard pension system is horribly complicated, and its calculation has been the most popular topic on The Military Guide for over five years.

Most Reserve/Guard pensions start at age 60, but if your spouse deployed to a combat zone after 28 January 2008 then he may be eligible to start the pension a little earlier.  It's roughly three months for every 90 days in the combat zone, with some fine print on that 90-day figure. 

Just so you can know when to start looking at the pension number.