Case Study- 21 year old just starting out.

[bexrayx91]

Income-
Me-1700
Wife-1500

Expenses-
Rent-711
Power-53
Insurance-189
unmustachian car loan-292/month w/ 14000 left
unmustachian financed wedding ring-260/month with 3000 left
cc me-25/month with 564 left
cc wife-25/month with 588
Cellphone-200

Food- $400 estimated
Gas- $160

Assets- No assets worth posting at ages 21(me) and 19(wife) respectively, we're just starting out.

The plan as of now is to pay lowest balance debts off first while snowballing the money toward the next debt as they get paid off.

[bexrayx91]

Any advice will help. At this point we have already paid off 2 credit cards, and should be able to pay off all debt within 19 months.  Thanks for reading.

[4alpacas]

What are the interest rates on your car loan, ring loan, and credit cards?

Also, is the insurance just car insurance for a single vehicle? 

[bexrayx91]

What are the interest rates on your car loan, ring loan, and credit cards?

Also, is the insurance just car insurance for a single vehicle?

Interest rates-
Car Loan 7%
Ring-25%
CC Me- 23
CC wife-21%

The insurance is full coverage on the car that has the loan as well as insurance on the car we have paid off.

[seattlecyclone]

The cell phone expenses are high. You're in a debt emergency. You cannot afford a data plan until your credit cards and wedding ring are paid off. Your food expense is also somewhat high. Eat out less and buy cheaper groceries until the high-rate debt is gone.

In the meantime, attack your debt starting with the highest interest rate first. Put every penny you can toward that ring debt first since it's the highest rate. Then move on to the credit cards and finally the car.

Speaking of the car, having a newer car is not the best idea financially. Looking into the medium term you should really sell it and replace it with a cheaper one that has less value left to lose to depreciation. Something fuel-efficient that's 8-10 years old is a good target to shoot for.

You might find that you would receive less money back from selling your car than you currently owe on the loan. That doesn't mean you can't or shouldn't sell the car. It just means you need to save up some money, until (your savings) + (the value of your car) > (the amount you owe on your car loan) + (the cost of a used car). Once that's the case, sell the car, pay off the loan, and buy an older car. You'll be debt free with a reasonable automobile, and you will be in a position to start really building up that stash.

[projekt]

If I were in your shoes and I did not have any savings, I would pay the minimums for a little while until I had about $4,000. Then, I would pay off the credit cards and put all of my extra income against that ring. The $4,000 provides a buffer for unplanned expenses like car repairs that and it can be refilled with the next paycheck.

Don't be afraid to ask the parents for money this holiday season. You don't have to do it all yourself. You can tell them your plans for frugal living and becoming debt free, and they'd probably support that.

The next step is to figure out how to increase that income. You are both making about $10/hr. If you live the way you do and get up to $30/hr each, you'll quickly save for ER.

[Cromacster]

It looks like you might have, but if you haven't, check out the guide for case studies. 

https://forum.mrmoneymustache.com/ask-a-mustachian/how-to-write-a-'case-study'-topic/

You provide very little detail here if you want any relevant responses.  What are you hoping to get out of this post?  The idea behind mustaschianism is essentially socially engineering your life to maximize its efficiency....ie not driving 20,000 cars...get a bike!

So, it would be my advice to provide a little more detail.  What is your background (work and schooling), how far to you drive to work, how about your wife?  How often do you eat out?  Your living situation seems reasonable, but could it be better?  You have to give real insight if you want real advice.

Do you have a budget that you and your wife follow?  You have listed the fixed expenses, and have seemingly vague numbers for food and gas.  Get a budget.

Are you saving any money?  There is $885 that is not accounted for in what you have listed.  Where is that going?

If you read the blog and are active in the forums, the first steps should be obvious.  Sell the Car, use the cash you get to pay off the loan and get a used car.  That is a lot of money, at a very high interest rate to be paying towards a car.  The 189 for insurance seems really high, shop around.  Also should go way done when you sell your fancy pants car.  What is your other car?

Pay off the CC's.  You say you already are, but you list the minimums in your expenses.  With what you have listed, it looks like these could be paid off next month.

The ring......I guess you would no longer be married if you tried to sell that.....haha

Cellphone:  Stop paying 200$ for you cellphone!  Read the following take action.  Even if you are under contract, the payback will outweigh waiting until you are not..
https://forum.mrmoneymustache.com/share-your-badassity/communications-tech-isps-voip-cell/?topicseen

[seattlecyclone]

If I were in your shoes and I did not have any savings, I would pay the minimums for a little while until I had about $4,000. Then, I would pay off the credit cards and put all of my extra income against that ring. The $4,000 provides a buffer for unplanned expenses like car repairs that and it can be refilled with the next paycheck.

This is a severely suboptimal strategy. I explained why in more detail in this post. The gist is that as long as you have high-rate debt, your best course of action is to pay it off as quickly as possible, keeping your checking/savings account balances as close to zero as possible until this is done. In the event that you have unplanned car maintenance or other expenses, put them on your credit card. Assuming you still have enough borrowing authority on your credit card to handle any likely expense, there is no situation where you're better off letting your cash gather dust in a savings account while your credit card continues accruing interest at a five-alarm hair-on-fire debt emergency rate.

Once the credit cards and rings are paid off, then you should build up a small emergency fund so that you never need to resort to high-rate debt again. Not before.

[acroy]

Congrats that's not bad for being 21 & 19. Wow you're young! Hey, you don't have 300k in student debt or anything tooo stupid. A little Mustache muscle and you'll be good.

obviously pay off highest interest % first. You might try a debt consolidation such as LendingTree. You're so close to paid off on the CC's though, it may not be worth it.

The car is of course the biggest financial target. If there is a way to get out of it (if you're not too far under water) & replace with a gas-saver $5-7k car, go for it. Then you can drop the expensive insurance or at least raise the deductible to $1k, which helps a lot.

Good luck! Remember, things you do over the next few years (savings, getting in good habits) will help TREMENDOUSLY 5-10-20+ yrs down the road.

[bexrayx91]

Back-story: Me and My wife both work at a call center in which she is a supervisor and I work in workforce management. The place of employment is 11 miles from home. We work opposite schedules which rules out car pooling, but I am in the process of acquiring a bike to cut transportation costs. She is in the process of going to school right now for occupational therapy which will increase our income when she graduates.

As for the vague numbers on groceries/food, we do not do a very good job at monitoring our spending and we eat out WAY too much. Gas is consistently about 160 a month.

The purpose of this post was to put out our plan of attack and find out ways we can make it better. I do have one question, a repeating theme here is to pay off the highest interest debt first and then move on to the next highest. Why is this method more efficient then just paying off the lowest total debt as quickly as possible and then using the extra capital to pay off the next highest debt until your snowball pays off the highest debt very quickly?

[bexrayx91]

If I were in your shoes and I did not have any savings, I would pay the minimums for a little while until I had about $4,000. Then, I would pay off the credit cards and put all of my extra income against that ring. The $4,000 provides a buffer for unplanned expenses like car repairs that and it can be refilled with the next paycheck.

This is a severely suboptimal strategy. I explained why in more detail in this post. The gist is that as long as you have high-rate debt, your best course of action is to pay it off as quickly as possible, keeping your checking/savings account balances as close to zero as possible until this is done. In the event that you have unplanned car maintenance or other expenses, put them on your credit card. Assuming you still have enough borrowing authority on your credit card to handle any likely expense, there is no situation where you're better off letting your cash gather dust in a savings account while your credit card continues accruing interest at a five-alarm hair-on-fire debt emergency rate.

Once the credit cards and rings are paid off, then you should build up a small emergency fund so that you never need to resort to high-rate debt again. Not before.

This was my thinking, get out of my debt emergency first and then save. I do also have a father who in the event of a large emergency I could likely talk into giving me a loan at a rate of probably 3% or less after he's the one who introduced me to MMM in the first place. He's seen the work we've been putting towards becoming more mustachian so I'm sure he'd understand.

[randymarsh]

I agree that saving $4,000 is likely overkill. I would maybe save up 500-1000 so you have a small cushion. Pour the rest on your high interest debt.

The reason paying off the higher interest debt first makes more sense is because it saves you the most money. Forget that you have 3 or 4 different debts. Pretend you have a Bucket-O-Debt that's around $18,000. Some of it is at 25%, some of it at 10% however. The debt with the higher rate is accumulating more interest and robbing you of your income. Putting as much money towards the highest interest debt slows down that accumulation of interest.

[bexrayx91]

perfect explanation. Thanks.

[seattlecyclone]

I agree that saving $4,000 is likely overkill. I would maybe save up 500-1000 so you have a small cushion. Pour the rest on your high interest debt.

Any cash saved in a checking/savings account while you're in a debt emergency is costing you money. You should have only enough money in your checking account to pay any bills that will come due between now and your next payday. Every extra cent should go toward your debt immediately.

Ask yourself this: would you borrow $1000 as a cash advance on your credit card just to put it in a checking account as a "small cushion"? Leaving money from your paycheck in your checking account instead of paying off your debt is exactly the same thing.

[dantownehall]

Sell the ring!!!

Just kidding; divorces are expensive.

[4alpacas]

What are the interest rates on your car loan, ring loan, and credit cards?

Also, is the insurance just car insurance for a single vehicle?

Interest rates-
Car Loan 7%
Ring-25%
CC Me- 23
CC wife-21%

The insurance is full coverage on the car that has the loan as well as insurance on the car we have paid off.

First, I would recommend you start doing a better job of tracking your spending.  Every penny.  I used a notebook.  Every penny spent or found. 

From your rough budget, it looks like you have about $885/month to play around with.  If I were in your shoes, this is the course that I would take:
1. Pay off your credit cards immediately. This month.  Find the extra $267 in your budget to pay off both cards.  (DECEMBER 2013)
                    Eat spaghetti every night.  Ramen.  PB&J.   
                    Cut cellphone costs.  Smaller plans, switch to pay-as-you-go, whatever you can do. 
2. Now you have at least $935/month to throw at your bills (maybe more if you took my advice to cut your bill).  Time to kill your ring debt in 3 months (Paid off by 3/31/14).  This time, you just need to find $65/month which should be easy after the previous rough month.
3.  You've freed up $1195/month for debt reduction.  Now, you need to evaluate if you need a second car.  If you do, I would recommend selling your expensive car and replacing it with something much cheaper.  Your insurance premiums will decrease (insuring cheaper cars) and you won't have to struggle for the next year to pay down the car loan. 
4.  $1500/month can go to savings.  I would recommend maxing out Roth IRAs for both of you ($5500/year/person). Add the remaining $2500 in an emergency fund.

Start 2015 with a net worth of $13,500.

Current net worth -$18,152 

Note:  I ignore the value of cars and property in my net worth calculations because I assume that I must need them if I own them.  :) 

[randymarsh]

Ask yourself this: would you borrow $1000 as a cash advance on your credit card just to put it in a checking account as a "small cushion"? Leaving money from your paycheck in your checking account instead of paying off your debt is exactly the same thing.

No, but in my personal situation, I have no debt higher than 7.9%. A CC advance would easily be 18%+. But for OP, your example does make more sense since they have some much higher rates.

I sleep better knowing I have a little bit of cash in my checking account. I'm getting used to reducing it over time though.

[seattlecyclone]

Ask yourself this: would you borrow $1000 as a cash advance on your credit card just to put it in a checking account as a "small cushion"? Leaving money from your paycheck in your checking account instead of paying off your debt is exactly the same thing.

No, but in my personal situation, I have no debt higher than 7.9%. A CC advance would easily be 18%+. But for OP, your example does make more sense since they have some much higher rates.

I sleep better knowing I have a little bit of cash in my checking account. I'm getting used to reducing it over time though.

Agreed. When all your debt is in the sub-10% category, I think it makes sense to have some extra cash set aside to prevent yourself from resorting to the 18-25% credit card debt when unexpected expenses pop up. I said as much in my previous advice in this very thread.

But when you're still paying down debt in that highest rate tier, and any spending past your current cash on hand would just add to that balance anyway, keeping cash sitting around makes zero sense.

[bexrayx91]

Just scored a big win. After recommendations earlier in this thread stating that my auto insurance was high, I went auto insurance shopping, and just got a quote dropping my insurance to $115 a month saving me $12802 over ten years.

[aj_yooper]

Excellent! 

Track all your spending carefully like you are doing a food diary.  No frills, coffees, snacks, just paying off those wicked interest rates that are siphoning the joy from your new relationship. 

If your wife can do the OT, that should help things in the future so stay energized.

[projekt]

This is a severely suboptimal strategy. I explained why in more detail in this post. The gist is that as long as you have high-rate debt, your best course of action is to pay it off as quickly as possible, keeping your checking/savings account balances as close to zero as possible until this is done. In the event that you have unplanned car maintenance or other expenses, put them on your credit card. Assuming you still have enough borrowing authority on your credit card to handle any likely expense, there is no situation where you're better off letting your cash gather dust in a savings account while your credit card continues accruing interest at a five-alarm hair-on-fire debt emergency rate.

Once the credit cards and rings are paid off, then you should build up a small emergency fund so that you never need to resort to high-rate debt again. Not before.

Mathematically this is fine, I know that my strategy will have a higher total cost in a perfect world. Mind you, in your post, you have only $250/mo. or $500/mo. going to debt, while I have everything going to debt repayment after the baseline e-fund is funded.

The reason why I want cash on hand is that some emergencies, really the true emergencies, do not accept credit cards. I've never been able to pay my rent with a credit card. If I lost my job with no savings, what do I do? Even if I got a new job in 2 weeks, it might take 3-5 weeks before I get paid. Also, a 21-year-old with no savings and low income might not have a very high credit limit. Perhaps $1000, $1500? Not a lot of emergency power there. For people who are just starting out, getting out of debt can be hard because they are not resilient enough to handle the minor shocks like a one-night ER visit or transmission failure in their car. They put money into a debt payment and then find that they are borrowing money the next week. Having the base e-fund means that you can pay your debt and cover these shocks.

The Mustachian approach of having a ton of home equity and an unused HELOC as an emergency fund does not pertain to these folks.

Their numbers suggest that they could save $4000 in 5-6 months. I still recommend this, and then they could pay off the credit card and ring debt in 3-4 months. They could own the car 12-14 months after that, or they could get rid of it and use the bike.

[Cromacster]

Mathematically this is fine, I know that my strategy will have a higher total cost in a perfect world. Mind you, in your post, you have only $250/mo. or $500/mo. going to debt, while I have everything going to debt repayment after the baseline e-fund is funded.

The reason why I want cash on hand is that some emergencies, really the true emergencies, do not accept credit cards. I've never been able to pay my rent with a credit card. If I lost my job with no savings, what do I do? Even if I got a new job in 2 weeks, it might take 3-5 weeks before I get paid. Also, a 21-year-old with no savings and low income might not have a very high credit limit. Perhaps $1000, $1500? Not a lot of emergency power there. For people who are just starting out, getting out of debt can be hard because they are not resilient enough to handle the minor shocks like a one-night ER visit or transmission failure in their car. They put money into a debt payment and then find that they are borrowing money the next week. Having the base e-fund means that you can pay your debt and cover these shocks.

The Mustachian approach of having a ton of home equity and an unused HELOC as an emergency fund does not pertain to these folks.

Their numbers suggest that they could save $4000 in 5-6 months. I still recommend this, and then they could pay off the credit card and ring debt in 3-4 months. They could own the car 12-14 months after that, or they could get rid of it and use the bike.

I get what you are saying, but I still feel your logic is flawed.  It feels comfortable to have some cash savings.  And if your landlord really wants to be paid, they will take a credit card.

The whole concept is that the debt is what is holding you back.  Having the debt in the first place is what puts you in a precarious situation.  Even in the situation you describe, if you lose your job, now not only do you have to pay rent from savings, but you are also paying back your debt, which, in my opinion, would be even worse.

Me personally, I would rather have no debt with little savings, than debt with some savings.  Just kick the debt.

[SunshineGirl]

Since your father introduced you to MMM, I would see that as a fantastic opening to build on, relationship-wise.

If he has his financial ducks in a row, here is what I'd do: I'd start using YNAB or some other budgeting program, or at least track by hand, every single penny coming in and going out. I'd also try to somehow make a little extra money over the holidays. Once I have several months worth of data, and after the holidays, take him out for a cup of coffee and show him exactly what you've been doing to improve your financial situation. Show him your tracking. Show him how responsible you were through the holidays.

If my kid did this, and was showing himself to be responsible, I would definitely offer to loan him some money at favorable terms to pay off high-interest-rate debt. I would probably make him set up automatic transfers from his account into mine, so if you're asking him for a loan, I suggest you'd offer that. Offer a high interest rate, like 6-8%, and most ilkely, he wouldn't take it, but you should offer it and be prepared to pay it. 

It's great you're working on this so young. What you do in your 20s really can set the stage for a stress-free financial life if you don't go overboard. I'd absolutely hold off on buying ANYTHING big for quite a while, like a house or car. I'd work hard to be the best possible employee, and get as much training and exposure as you can to everything at work. Many call centers pay like crap and treat their employees like crap, but others can be really good places to work, and if there are numerous call centers in your town, you should aim for getting a job at the best of them. Benefits are everything!

[bexrayx91]

Me and my father already have a financial talk probably about once a month so that relationship is already there as of now.

 I have been using mint as of recently to see exactly what's coming in and going out. We do need to set up a budget though so I can better tell where the extra money is going to and get it going in the right direction(paying off debt).

As far as the call center job, they don't pay all that great  but they treat their employees really well and I'm happy to work there until schooling is done.

[Frugalteacher]

The purpose of this post was to put out our plan of attack and find out ways we can make it better. I do have one question, a repeating theme here is to pay off the highest interest debt first and then move on to the next highest. Why is this method more efficient then just paying off the lowest total debt as quickly as possible and then using the extra capital to pay off the next highest debt until your snowball pays off the highest debt very quickly?
[/quote]


Paying off the highest interest debt is most efficient because it is costing you the most money. For example, if you owe $100 on two separate credit cards. Card A has an interest rate of 9% and Card B has an interest rate of 25%. After a year of no payments and no charges card A will now have a balance of $109 and Card B will now have a balance of $125 even though they both started with exactly the same balance. Obviously, this is an extremely simplified explanation but the general rule applies. If I were you I would throw every penny I have at the ring payment and the credit card debt. Also, see if you can find some way to get a low interest loan to pay those off immediately. If your wife gets student loans for school maybe she can take out extra and pay off the credit card and ring then you can pay that down at a much lower interest rate. Also, you definitely need to get track of where your money is going.

[Catbert]

I don't mean this in a troll-ish way, but put good birth control as your number one budget priority.  I've seen several young couples start out as your are and one of the things that makes the difference between financially succeeding and drowning in debt 5 years later is having or not having babies.  (Obviously I don't mean never have children, but you have plenty of time.)

Your opposite schedules likely contribute to your relatively high food budget.  It's easy to rely on fast food or convenience food when you're headed home to an empty apartment.  Your situation is ideal for making batches of easy to save and reheat food (chili, soup, crockpot meals in general)