case study f/u to debt prioritization post

[lavagirl]

thanks to everyone who replied to my other thread asking for help prioritizing debt.  I realize now I will get better advice if I lay out all our finances.  Here it goes: me- early thirties. Husband- pushing 40.  I grew up in a very non frugal family and both of us have been spend more than we make until now.  We have a nice income but this is pretty recent. Most of our debt was from when we were making a lot less and spending way too much.  We have two kids- one in preschool one in elementary.


Gross Salary/Wages: me- 93k. Husband- 86k

Pre-tax deductions: 401k- I contribute Ute 7%, husband contributes enough to get a match ~ 180/check. Dependent care spending account-4k (wasn't sure what daycare would be when I signed up for it last year)


Rental Income, Actual Expenses, and Depreciation: income: 1050/month. 10% goes to property manager. 
mortgage 122,000 @4.6% - $826/mo
2nd mortgage- 23,215 @ 8.6% -$199/month
Hoa: $205/month (this went up recently from $186)


Current monthly expenses: 
Hoa- 240
Mortgage- 1949
Condo loss- 285
Comcast-80
Cell phone- 145
Car1- 550
Car2- 485
Student loans- 300
Car Insurance- 140
Gas/electric-avg 140
Gas- 200-250 - we have long commutes but choose to live near family who help a lot with child care.
Food- 800 (includes all items at grocery store like pull ups, cat food and litter, paper towels, soap, etc)
Daycare- 500
401k loan- 206
Dependent care spending account- 153
I don't have a miscellaneous category, we try not to buy anything unless absolutely necessary. Guessing this category would be under 200.
Total: $6423

Assets: we have just under 100k in our 401k's
Checking: 2k
Savings: 5.5k. We have very stable jobs so I keep this kind of low.

Liabilities: 
Student loan 2- 6,815 @ 6.5
Student loan 3- 6,784@ 3.5%
401k loan- ~ 9000 left (took this out last year to pay high interest credit Card debt)
Rental property- mortgage 122,000 @4.6%
                        2nd mortgage- 23,215 @ 8.6% (purchased during housing boom)                   Mortgage: 263,100@ 3.75%
Car 1- 28,500@ 2.95%
Car 2- 35,000@ 3.95%

Specific Question(s): I need help getting out of debt!  The condo was bought during the boom. We bought our townhouse after our second child was born and we needed more space. It's upside down. If I pay off the second mortgage I could likely sell it- I would love to sell this asap!

Also, i spoke with a mortgage guy from the bank about refinancing our primary residence. We have an fha Loan and need to keep mortgage insurance for 2.5 more years. Mortgage insurance is $247/month. We could refinance to a conventional loan if our house appraises for what we think it will.  We would have to bring 15k max to settlement but we would save $375/month. Should I save up $ to do this before paying any debt?

Thanks so much!

[ShoulderThingThatGoesUp]

Any way you could sell your primary residence and move to something cheaper?

[midweststache]

More Questions to Clarify Your Situation:

1. You list the Liabilities of your residences (Mortgages) but what about Assets? You have a condo that you rent and a townhouse that serves as your primary residence; what are those two properties valued at?
2. You say you make $1,050 from your condo, but that's not true--you are paid $1,050, and then that income goes to pay a) the mortgage b) the property manager c) the HOAs, etc. You also list "condo loss" as an expense; does that mean when all the above payments are said and done you're losing money on the rental property? Would this change if you paid off that second mortgage ASAP?
3. Are you using all of your FSA for daycare? That doesn't roll over annually, so if you don't spend it you lose it; can you adjust your withholding accordingly, or is it on point now?
4. What is the difference between daycare and the dependent care spending account?
5. Work on food/grocery/household spending. It takes some time to learn to cut here, but it's also some of the most malleable space you have in your budget.
6. What would it cost to move your phones? You'll find lots of lovers of Republic Wireless here, but SOMETIMES if you're in a contract with a big company (AT&T, Verizon) it can be more financially sound to wait it out.

I wouldn't worry about your primary mortgage at 4.6% when the second mortgage on your rental property is at 8.6%. If you buckle down, you can have that paid off in a year, and then you can try to sell the condo.

My comment on the other about selling the cars for cheaper options still stands as the best options, but if you're currently underwater and unable to sell them your interest rate on the cars isn't as terrible as the 8.6% on your house and the 6.5% on the student loans.

[lavagirl]

More Questions to Clarify Your Situation:

1. You list the Liabilities of your residences (Mortgages) but what about Assets? You have a condo that you rent and a townhouse that serves as your primary residence; what are those two properties valued at? Condocondo ~115k guessing, townhouse ~315k again guessing
2. You say you make $1,050 from your condo, but that's not true--you are paid $1,050, and then that income goes to pay a) the mortgage b) the property manager c) the HOAs, etc. You also list "condo loss" as an expense; does that mean when all the above payments are said and done you're losing money on the rental property? Would this change if you paid off that second mortgage ASAP? i would only be losing $86/month then and I would be in a better position to sell it.
3. Are you using all of your FSA for daycare? That doesn't roll over annually, so if you don't spend it you lose it; can you adjust your withholding accordingly, or is it on point now?I should have maxed it out, but at the time I didn't know what daycare costs would be. Next year I will do the whole 5k
4. What is the difference between daycare and the dependent care spending account? the spending account lets me use pretax dollars to pay for daycare
5. Work on food/grocery/household spending. It takes some time to learn to cut here, but it's also some of the most malleable space you have in your budget. yes, still working on this
6. What would it cost to move your phones? You'll find lots of lovers of Republic Wireless here, but SOMETIMES if you're in a contract with a big company (AT&T, Verizon) it can be more financially sound to wait it out. i will look into it. Thanks for your advice!

I wouldn't worry about your primary mortgage at 4.6% when the second mortgage on your rental property is at 8.6%. If you buckle down, you can have that paid off in a year, and then you can try to sell the condo.

My comment on the other about selling the cars for cheaper options still stands as the best options, but if you're currently underwater and unable to sell them your interest rate on the cars isn't as terrible as the 8.6% on your house and the 6.5% on the student loans.I'm looking into getting a cheaper car.  Husband won't give up his car

[larmando]

Tell your husband he can have a nice car when he can afford it. Now this is not the case. Consider even selling everything (both houses) and renting: you don't say where you live but you should find something cheaper than 2200 p.m. once the debt is gone you could consider buying a house or a car, but in your current situation just going along with things is quite irresponsible. Especially for the cars, which are easily replaceable.

[RangerOne]

I think most would agree those car loans though relatively low interest are crazy.

Granted many dual income earners like yourself's regularly take on car loans like these but that doesn't mean you should. How much would you lose if you sold them? I assume you bough new, hopefully you put enough down to were you still break about even if you sell them?

[ShoulderThingThatGoesUp]

Yeah, "husband won't give up his car" isn't the territory you're in.

[cautiouspessimist]

Yeah, "husband won't give up his car" isn't the territory you're in.

It is if he's not fully on board. You can only go as fast as the slowest partner.

[neo von retorch]

Assumptions:

• 401k loan is 0%?
• Have about $4k left over after deducations/expenses?
• Want to get rid of high interest 2nd mortgage + student first, and 401k + car before other mortgages

If you did nothing but dedicated debt payoff, you could have everything but your two big mortgages paid off in 20 months. Check out this debt waterfall spreadsheet. Does it make sense? What adjustments would you like me to make so you can "see your future" a little more clearly?

Now, as others have said, selling big ticket items would of course speed up this process considerably. Even if this is accurate and you pay things off this quickly, you'll face over $12k in interest on the rental and $2000 extra for those cars.

[swick]

I noticed you didn't total up your debts...your sitting at just shy of 1/2 a million dollars in debt.

You might get some tough love with the case study - especially in regards to the cars. At this point EVERYTHING needs to be on the table for consideration. It is really hard to do a 180 - especially if you were both raised in a consumerist household. A great thing about doing a case study is once you have the numbers in front of you - you can start planning the life you want to build.

I don't see it listed, perhaps you have coverage through work, but with that staggering amount of debt and 2 children, you might want to have some life insurance.

[RangerOne]

To look at things on the positive side, combined you and your husband have a very healthy income to work with. Unless you are both on board I wouldn't go for a complete 180 on spending and debt.

If you were to sell off at least one item causing you to carry extra debt, like 1 car or that rental prop, you may be in much better shape and free up a lot of income.

I understand wanting a nice car. But do you both need killer new cars? Especially when you are beating them to death with a work commute. You still have a really nice weekend car if one of you gives up a fancy car to commute in a cheap used compact vehicle.

Selling the Condo may be the most bang for your buck if it is worth more than the cumulative debt by enough to leave you with some cash to pay off your student loans and or cars.

[midweststache]

If you did nothing but dedicated debt payoff, you could have everything but your two big mortgages paid off in 20 months.

And then I think general advice would be to
1) Max out all your tax-advantaged retirement vehicles (401ks, HSA, Roths, etc.)
1a) Sell your condo if that's what you two choose to do. (Alternatively, raise the rent. You'd have to look into trends in your area, but it seems like this should be another option besides selling.)
2) Refinance your primary residence if it seems like it will work out for you in the long term, financially speaking.
3) Start putting away money in taxable accounts.

That could be you in April of 2017. Sooner if you sell your car and/or get hubby on board. Perhaps the way to get him on board is to lead by example and sell your car for something cheaper?

Good luck! It seems overwhelming, but with your income you can make pretty good headway pretty quickly. Once you get your game plan, you could start a journal; I'd love to see your progress. (I get so excited when people on the forums pay off their debts--it motivates me to keep on keepin' on at mine!)

[justajane]

I like your idea of freeing up $375 a month by refinancing, but is this your forever home? How long before you make back closing costs?

Is the 2nd mortgage on the rental property a balloon? If so, how much longer do you have on it? If I were you, I would make paying off that second mortgage a high priority. You can't refinance or do anything with it. You still might not be able to refinance even with it gone, but you are in a much better position to explore your options.

How long have you had the tenants? Are they good? If so, I wouldn't suggest raising the rent too much on them, at least not too much, but when they leave, at least raise it to 1,150, maybe even more. You probably could get away with such a $50 increase even with your current tenants. Whatever you can do to at least begin to get in the black on that would be great.

What about dropping the property manager? Is it in another state? Think of it as your side hustle.

[Malaysia41]

Yeah - cars are hair on fire.  Personally, I'd start with the cars.  Never borrow for a depreciating asset. 

Oh, and if any part of that $80 comcast bill is cable - I'd kill that too.

The good news is - you've got LOTS to work with. You're young, have good incomes and have loads of options for killing your debt. 

[lavagirl]

Thanks everyone! And thanks neogodless for the awesome spreadsheet!

[charis]

If it hasn't been mentioned, you should be able to adjust your FSA contribution amount up to the max due to a "change in cost."  That is a qualifying event that I just learned about when I thought that my daughter would need more care than I had originally anticipated.  I would definitely look into that asap.

[Doulos]

Might I suggest starting with Dave Ramsy's FPU (Financial Peace University) class?
http://www.daveramsey.com/fpu/home/?snid=classes.fpu-a

That could go a long way to getting your Husband fired up and on board with the easy baby steps.
FPU is like the beginners version.
MMM is like the advanced course.

[starterstache]

Wow, it's always depressing to read posts like this - especially when the couple is making nearly 200k a year.

Thank god you're young and have good income, otherwise it would be game over.  Seriously, tell your husband he needs to get onboard or he will be living in a cardboard box for retirement.

As a compare, we live off my single income (~90k) and didn't even really start saving MMM style until last year - yet we have a net worth of 200k.

I completely understand the need to have nice things (been there myself, made many mistakes), but you can't have 'nice' *everything*.  You have to compromise on a lot and only spend on what is absolutely the most critical.  Obviously cars are the wrong choice as many people have pointed out above - dump them ASAP and get paid-off cars less than 6k/each.

Also, you said you were living far from work for help with childcare but you still spend $500/mo in daycare?  That doesn't make sense.

/face-punches