Case Study-- Help eliminating debt

[Catastrophysicist]

Hello all-- I've been a fan and reader of the site since October of 2014. We are a family of 4 living in Portland, OR. I am working really hard to roll back a good deal of the spending I, and my wife, once took for granted. Laying out our financial life, such that it is, below has been such an eye-opener for a number of reasons--not least of all our outrageous minimum 'cost of living' expenditures. Unfortunately, there are so many that I can not simply ax, just because I wish it so, and that is my main reason for posting. I am looking for some advice on the best way eliminate my liabilities, and tips on how to reduce my bills, of course. I am not really thinking past that right now. Below are the details furnished to the best of my ability.

Income: Our combined income is approximately $60,000 or $5,000/month (My wife's income is hard to pin down b/c she works as a server, and it fluctuates greatly from month to month. We agreed that we earn approximately the same amount of money per month accounting for her really good months, and my summer overtime numbers. For this reason our current savings rate  doesn't necessarily match our remaining income.) --note: we probably could earn more, and may decide to amp up our work load if things really start to roll, but we greatly value our family time, and each of us only works 4 days/week currently.

Current expenses (monthly):
Mortgage:                   $1225
My Student Loan:        $ 210
Wife Student Loan:      $ 250
Daughter's Pre-school: $ 275 (Ouch- point of contention, but she loves it and needs it, and out-right rejected our attempted public pre-school placement.)
Car:                           $ 280
Credit Card:                $ 150
Electric:                      $ 140 (current for winter--could be lower but we have a 2 and 4 yr old who we prefer to keep on the warmer side. Approx. $40 in spring/summer)
Water:                        $ 100 (Portland, OR water rates are insane--planning on capturing rain to bring this down a bit [doubtful.])
Groceries:                   $ 150 (AVG) $133(Feb) $78(Jan) $225(Dec) $163(Nov) $442(Oct) --Not including Oct in avg b/c i will never let Groceries go that high again--this was a major problem area
Gas:                           $  50-75
Car insurance:             $  90 (Working on this)
Cell phone:                  $  50 (Mine-in contract till June) $25 (Wife- just took her off my Verizon plan in favor of Republic) Down $50 from last month, plan on doing $10 Republic plans soon.
Internet:                     $  40 (includes entertainment budget, if you nawnsayin'. Except for High Maintenance--we paid for that.)
Trash:                         $  25
Restaurants/cafes:       $ 117 (AVG.) $160(Feb) $0(Jan) $390(Dec) $0(Nov) $35(Oct)-- Ashamed of Dec, but includes a trip to Georgia, and our first night out in Months. Kids were sick for 2 weeks in Feb, and we needed some relief somewhere.-- Another major problem area.

Miscellaneous:             $  400 (I'm including this approximate number as my wife's contribution to household goods and groceries, home improvement expenditures, and misc child expenses)[I probably need to
                                            hammer this out some more, and I will in due time, but it includes culling through my wife's bank statement's and passing judgments and stating decrees, and there's only so much
                                            one can do in an evening.]

Total:                          $3,427 
Remaining income:      $ 1,573

Assets:
Employer 401k:           $19,700
Checking/Savings:        $1,000

Liabilities:
My Student Loan:   $19,854        2,844-- 3.38%
Wife Student Loan: $29,063      28,200--4.00%
Credit Card:           $ 4,775
Car:                      $ 6,500          3,422-- 1.9%

Total:                     $60,192      $34,466   ($25,726 in total debt reduction in past 12 months)

OK--I've been saving at a clip of around $1000/month since I found this site, which means that my savings has doubled since November 2014. That means that we are bleeding around $400/month somewhere, and I inadvertently accosted my wife about the sum until she abruptly stormed off to bed (--b/c our youngest began to wail in despair.) The way we divide our responsibilities is that I: (1) pay the mortgage, and then save whatever I can; and that she (2) pays all the other bills. Its a division of labor based on our strengths. We are making strides, but we both feel that we can do better.

The reason that I have so much savings in a checking account, and yet such a great debt to lenders is that I was waiting until our tax return cleared-- and now here we are. I think that my wife and I are beginning to feel confident that we can wipe all of these liabilities away. Our goal is to do so in 2 years or less. But, we're a little hung up on logistics.

My feeling is that we should take our savings and lay it on the credit card and the car, freeing up $430 in monthly payments, which would then be rolled over, in addition to the $1000/month I currently save, making for an effective payment of $1640 or more, into my student loan payment-- clearing it in 12 months or less, before tackling hers. Is this foolhardy, or a legit plan of action? I have thought about the interest rates, but half of this plan is about freeing up a little bit of cash, as well.

Thanks for any consideration the board gives our situation, and I welcome a beatdown if one is deemed suitable.

Best,
Phil

[kvaruni]

Hi Catastrophysicist, hope I can help a bit. I won't touch on the trash, internet, cellphone and electric as these are probably outside of your control. Keep your groceries in check, as the better months are very good indeed. Pre-school ... well, it is up to you of course, but if the public pre-school is free or considerably lower cost then it doesn't make that much sense to me to put so much money towards it as you don't really have the money to do so. I leave this one up to your best judgement. Water, well, think about putting a bottle of water in the toilet cistern to turn it into a low flush toilet, take a shower/bath every other day instead of daily (just assuming) and don't wash clothes that pass the "sniff" test. Keep restaurants to an absolute minimum. Again, you don't have the money for it.

What is left are debt repayments and those really put a dent in your income. For all of these, always pay down the highest cost debt first, aggressively so, and only make minimum payments to the others. This means you should forget about the car. First and foremost, pay down the credit card. I would indeed just take this from savings. There is no real reason to have any money in savings (with maybe 1% interest) if you can put that money to work and get 13% savings instead by paying down that credit card. Keep the credit card around though. If you pay off your credit card with savings, you suddenly dip quite low in the savings you have set aside for a rainy day. At least a credit card gives you the opportunity to quickly get out more money if needed (fingers crossed you won't need to, and only use the credit card for an extreme emergency). Next up is the student loan of your wife. This one is painful with 5.375% interest and because of the outstanding amount. I would put in the effort to call around and see if you can negotiate a lower interest rate. Something around 3% would be better. Another option might be to remortgage to consolidate this debt, but this entirely depends on the interest rate you have on your mortgage. The problem remains that it will take a while to pay off any of these debts (again, if your car loan is a fixed 1.9%, don't pay it back until the very end). What I would advice instead is to split the money you have for savings (1000 + 150 from credit card) into 500 which you put towards savings and 650 you put towards debt repayment (so: student loan of your wife since that one is highest interest). After about 5 months your savings will have increased to $8500, which should be enough to cover for that rainy day. From that point on I would put all extra money you have towards paying down those debts. In this way, you avoid that you need to create new debt when something goes wrong in life. I think, for your case, this will work better than simply using al of your savings to pay down the debt.

To summarise:

• pay off that credit card with your savings. Now!
• get on the phone and see if you can renegotiate the student loan of your wife to about 3%
• do a number of small steps to reduce your expenses. The easiest is probably to reduce your water usage, and you do need to figure out what the miscellaneous expenses are for. Electricity should reduce by itself, and stay out of the restaurants.
• Put $500 of the money you have left in a month towards your savings. Do this until your savings hit about $8500. This is about 6 times what you spend each month, excluding the various loans. Put all the other money towards paying down the debt with the highest interest. This includes the $500 which you would normally put on savings once you hit the $8500.

Following up on these steps should allow you to get rid of the credit card loan and cut the student loan of your wife in half in just 12 months. This is based on the $1000 you quoted + $150 which you free up by paying down your credit card straight away and putting that money towards paying down other debt. I assume you keep the repayments to your other loans as they are. Cut down your expenses by another $250 (pre-school, or reduced water/electricity/no restaurants) and put that towards debt and the student loan of your wife should be reduced to about $10,000 in just 12 months.

Don't forget: first pay down the loans with highest interest rate. The interest rate is the actual cost of a loan, whereas the minimum repayment you have to make every month isn't all that important. So leave the car loan out of this :).

[Travis]

Catastophysicist - welcome and great job getting the ball rolling.

You already have a pretty good plan in the making and I agree with all of kvaruni's recommendations.  The one thing I'm curious about is when will your daughter be old enough for public kindergarten?  I send my son to a paid preschool/day care, but this fall he'll be in public school which will save a ton.

Just to stomp my foot as a reminder - you have enough in savings to kill that credit card bill immediately.  At your current payoff rate it'll take you 3.5 years to pay it off which will cost you another $1000 in interest.  Rolling your $150 credit card payment into your wife's student loan cuts the payoff time of her loan in half.

[Sibley]

I don't see you mention that you use anything to help you track expenses. Mint, YNAB, Personal capital, Quicken, download to excel - may assist with the drudgery.

You have a young child. Try to time your discussions with your wife to when she's not exhausted and stressed. I know, that's probably impossible, but avoid the worst times if you can.

Good luck!

[MayDay]

The preschool is ridiculous if you have a free public option.  4 year olds have loads of things they have temper tantrums about, I know, I have a 5 year old.  She goes to preschool where we, her parents, decide.  If she doesn't like the new public place, drop her off anyway, she'll get used to it. 

For electric, little kids aren't a good reason to keep the house extra warm.  Newborns, yes.  Maybe even all babies.  But at 2 and 4, they can handle a 60 degree house just fine. 

Restaurants, ack. 

I would pay off the CC right now, then start throwing everything at the higher interest student loan.  You have an extra 1000-1600 a month, you have plenty of cash flow. 

[frugaldrummer]

Seems to me, a large part of the discussion here is about whether to use the Snowball or the Avalanche method to pay off your debts.
https://www.creditkarma.com/article/how-to-pay-off-your-debt

While yes, mathematically the Avalanche method will result in the least amount of interest being paid, there are some other considerations here.

The Snowball method can actually reduce your required monthly minimum payments more quickly - which can give you more flexibility if one of you loses a job or has to stop working for some reason (ill child, perhaps).  With the Snowball method as you planned, you could reduce your monthly payments by $430/mo by paying the high-interest credit card and the low-interest car loan off first.  The Avalanche method would have you paying off the credit card (for a $150/mo reduction, I believe you said) and then tackling wife's 29k loan - which will take a couple of years to pay off.

So the real question, I think, is this:  would you rather have the increased security/flexibility of a $430/mo reduction in required payments, or take just the $150/mo reduction in order to pay the least possible interest overall?

Also, build that emergency fund back up to at least 3 mos living expenses ASAP.

[Catbert]

I agree with most of the others.  Pay off your CC immediately and then work on your wife's SLs.

As a server does your wife get a lot of cash?  If so that can be part of the money leak which makes tracking where it goes difficult.  For some cash just disappears.  Maybe she should deposit the cash and then use CC or debit or whatever you both otherwise use.

[2Birds1Stone]

Not to sound like a broken record but PAY OFF THE CC NOW!

Otherwise you are on the right track, its amazing what a little awareness can do to your financial landscape.

You are in a good position, with that card paid off, and a little trimming to the budget, you are well on your way to accumulating wealth at an accelerated pace.

[Catastrophysicist]

Wow, posting here has really opened up the conversation between my wife and I, and I think that she has really re-calibrated, and is on board more than ever. I have admittedly been a bit over-bearing at times in regard to the goals I have set, but I know she believes that this is all what is best for our family and future. It's maintaining the SUSTAIN that is most difficult because who doesn't love a little bit of luxury and relaxation? We've had an imperfect but impactful period these past 4 months, and I think we are ready to fight for this.

We scheduled the payment to kill the Credit Card debt today, so that's gone.

@Sibley-- I have actually signed up for Mint, but it hasn't done that much for me b/c its hard to find the time to dot all the i's & etc. There is a lot of work to do in the app, it seems. However, I do love the weekly email they send, and I especially love it when it notes I've spent $0 in the last 7 days. Thats the tops! Also, I was just joking about harassing my wife-- I know that as a mom she automatically takes on more child induced stress than me, but she would never accuse me of not doing enough around the house or with the kids. But I get your meaning-- I try not to be too big an ass while the kids are still awake.

@Travis, @Mayday-- Re: Preschool-- I don't love this bill, but there is nothing I can do about it until at least the start of the new school year in September. My daughter will be eligible for Kindergarten in 18 months. But the thing is, she loves the school, and she's is there now. I pressed the issue with my wife, and she says that to be in a public preschool program in Portland would cost at least $150 anyway, amounting to a savings of $125/month. Don't get me wrong, I wish I didn't have to pay any of it, but knowing that we, her parents, are recluse cave-dwellers, we deem it a necessary expense in order to acclimate her with the idea of 'other people.' My younger daughter, on the other had, possesses more social poise than the rest of us combined, so I don't foresee this bill continuing in perpetuity.

@kvaruni, @mary w, @frugaldrummer -- Re: the Avalanche Vs. Snowball Method -- I think we are Snowball people (shout out to Clerks!) We like the idea of freeing up the cash. I totally get the highest interest rate POV, but I also don't think that our income level is high enough above our expenses to not see the benefit of freeing up close to $500/month. I am also not too concerned about bringing my Savings down to virtually nil bc my job is locked in for real. After discussing it, my wife and I think the best course of action for us is to pay off the credit card (done!) and the car (sorry, kvaruni) and then, perspectively, focus on her Student Loan first. This is contingent on her lowering her interest rate, which she has been motivated to do. If she can bring it in line with my interest rate, we'll probably hit mine first. As far as the interest rates, were are committed to a two year timeline, so in that regard we feel that the interest is *almost* negligible, as we've had our head in the sand on the issue for nearly 10 years already.

@kavauni-- thank you for all the practical advice, notwithstanding the fact that I appear to be turning a deaf ear to your most crucial point, I just don't think it's the wisest choice for us. I'd heard the cistern hack in passing before, and I agree that it's worth ago, but just for the record, we're an 'if it's yellow let to mellow' family, unless other people are over, then of course we feel obligated to flush! Haha.

@2birds1Stone-- Thanks for the vote of confidence, we need that too!

Thanks everybody,

Phil

[Prairie Stash]

Wife's SL after the cc. If you want to start "passing judgment and stating decrees" the accepted decree from Mustachians is "Pay high interest debt first." Then spend your time cutting/reducing expenses or earning more money till you hit FI.

In a marriage it isn't my debt/her debt. It's all your debt, own it and deal with it.

Edit: you posted while I was typing. I'm glad you're paying her loan next

[MDM]

Wow, posting here has really opened up the conversation between my wife and I, and I think that she has really re-calibrated, and is on board more than ever. I have admittedly been a bit over-bearing at times in regard to the goals I have set, but I know she believes that this is all what is best for our family and future. It's maintaining the SUSTAIN that is most difficult because who doesn't love a little bit of luxury and relaxation? We've had an imperfect but impactful period these past 4 months, and I think we are ready to fight for this.

We scheduled the payment to kill the Credit Card debt today, so that's gone.

More food for thought:
 -  If Mint doesn't work for you, try Quicken.  It's not free, but for $64 via Amazon it's pretty cheap vs. your own per hour cost if you tried to replicate it with a spreadsheet.
 -  A significant value to Quicken (or Mint, etc.) comes when you use a credit card as much as possible instead of cash (of course you will pay the balance in full each month, right?), and download the transactions.  That will help you get a better handle on where your money is going.
 -  It would be worthwhile for you to (re)start making tax-advantaged investments.  E.g., take a look at the attached.  See the graph between rows 131-158 on the Calculations tab.  Then change cell B12 (monthly 401k) to $1093 and look at the graph again.  Cuts ~five years off your time to FI....  Note: your OP is very good with details, but there are still guesses at some numbers - modify as needed to match reality.

Keep up the good work together.

[kvaruni]

You are in the good position where you have a number of ways you can get out of this debt, so of course you are free to choose your own course of action! Try your very hardest now to put all the money you have towards the student loan of your wife. Every dollar counts, and if you truly aggressively pursue it without building up any savings, you could be rid of that one in just under a year. Your student loan is then peanuts in comparison, and you could be rid of that in just a few extra months.

Glad to hear your wife is on board as well! No worries, you are in a good position and you will be rid of all this debt in no time!

[justajane]

I wouldn't worry about the preschool bill. It's not that high. I pay $400 in a LCOL area. Of course preschool isn't obligatory, but it's an important step for children who have not spend that much time in institutional environments. I view it as just the cost of having kids, and it's a finite time period. One way we saved is that we didn't put our kids in preschool until they were four. These days most people I know do it at three.

[Catastrophysicist]

 -  It would be worthwhile for you to (re)start making tax-advantaged investments.  E.g., take a look at the attached.  See the graph between rows 131-158 on the Calculations tab.  Then change cell B12 (monthly 401k) to $1093 and look at the graph again.  Cuts ~five years off your time to FI....  Note: your OP is very good with details, but there are still guesses at some numbers - modify as needed to match reality.

Thanks so much for posting this MDM. I've spent a bit of time with it today. It has admittedly made me feel pretty ignorant about finances, but thats OK. Is there a page somewhere that I can use to educate myself about what all is happening on this spreadsheet?

We definitely need to investigate some tax advantages btw-- we decided to marry in order that my wife would be eligible for my company's health plan and it cost us dearly in tax refund dollars-- 3,700 vs, 8,500. We have no idea what we could have done differently, so this will be something i'll have to work on this year.

[MDM]

Is there a page somewhere that I can use to educate myself about what all is happening on this spreadsheet?

There is some information in the Instructions tab of the spreadsheet itself, and a little more background here.

Any other questions, just ask here or PM me.  Hope that it has been / will be useful. 

And yes, you have identified that looking out the front window is a lot better for tax planning than the view out the rear window.  What's past is past, but you are doing well by planning 2015 now.

[Catastrophysicist]

Greetings,
 Well--I've been following the Mustachian way for approx. 12 months now. In the beginning, I set a goal of paying off my student loan debt before my next birthday. That day has now come and gone, and while I am sad to say that I didn't quite meet my goal, we came pretty damn close. Hoping to polish it off by the New Year, and get to work on the wife's. Just posting now to say thanks again to all the folks on this thread that shared their advice and wisdom, and that you didn't waste your time on what appears to be, by my post count, someone who just dipped a toe in and retreated to the mall. We're sticking it out, and here's to being debt free in 2016!

Assets:
Employer 401k:           $19,700
Checking/Savings:        $1,000

Liabilities:
My Student Loan:   $19,854        2,844-- 3.38%
Wife Student Loan: $29,063      28,200--4.00%
Credit Card:           $ 4,775
Car:                      $ 6,500          3,422-- 1.9%

Total:                     $60,192      $34,466   ($25,726 in total debt reduction in past 12 months)

[Bracken_Joy]

Greetings,
 Well--I've been following the Mustachian way for approx. 12 months now. In the beginning, I set a goal of paying off my student loan debt before my next birthday. That day has now come and gone, and while I am sad to say that I didn't quite meet my goal, we came pretty damn close. Hoping to polish it off by the New Year, and get to work on the wife's. Just posting now to say thanks again to all the folks on this thread that shared their advice and wisdom, and that you didn't waste your time on what appears to be, by my post count, someone who just dipped a toe in and retreated to the mall. We're sticking it out, and here's to being debt free in 2016!

Assets:
Employer 401k:           $19,700
Checking/Savings:        $1,000

Liabilities:
My Student Loan:   $19,854        2,844-- 3.38%
Wife Student Loan: $29,063      28,200--4.00%
Credit Card:           $ 4,775
Car:                      $ 6,500          3,422-- 1.9%

Total:                     $60,192      $34,466   ($25,726 in total debt reduction in past 12 months)

Thanks for coming back with an update! It's always awesome to see progress like this.

[justajane]

Awesome progress! Thanks for sharing.

[asauer]

It's SO hard to make tough choices that affect our children- but really, we have to do it anyway.  It's the shitty, but necessary part about being a parent.  I have two kids and have set that house on 63 in the winter since they were 2 years old.  Put them in socks and a sweater and they're fine.  I promise.  There's no health-based reason for keeping the house "warm" after the child is 1 year old (according to my pediatrician).  They'll whine for the first month and then they'll get used to it. 

Also, unless your daughter has special needs (diagnosed), then she needs to go to the public pre-school.  Yeah- she'll throw a tantrum and you'll feel like crap for a month but then she'll be used to it and so will you.

[Sibley]

Glad you're making progress! It's tough to maintain through all the ups and downs of daily life, so don't feel like you're alone there. Keep at it, and in a few years I'm sure you'll be amazed to look back at this and see how far you've come. I am, and it's only been a year for me!

[justajane]

she needs to go to the public pre-school.  Yeah- she'll throw a tantrum and you'll feel like crap for a month but then she'll be used to it and so will you.

Was the implication that public preschool was free? Usually that costs money as well.