Case Study: How to navigate down the interest/debt highway to ER.

[asbvSBVPibv]

Hello everyone,

I have been an avid follower of MMM for a couple years now and this is my first post to the forums. I have implemented many of the recommendations made in MMM's many incredible posts. However, I have hit a road block on my path to ER. I am writing this post to try and figure out the best option for handling my debt in the near future, i.e. 2014, in order to guarantee ER within 10 years’ time. Let me introduce you to my Personal/Financial Situation:

I am 34 years old and I have been a home owner for 1 year, I purchased a fixer upper close to my place of business (10 miles) and I have purchased a bicycle that I sometimes ride to work but find difficult because I either need to ride on train tracks or country roads with absolutely no shoulder (I have been clipped by one car already which is why I use the train tracks). I live in Brighton, CO which is very nice and very cheap for the area. I have spent most of my life living by the motto "You can't take it with you and as a result I have amassed quite a bit of debt even though I lived a relatively frugal lifestyle. My problem has always been eating tons of fast food for every meal, buying the latest and greatest Electronics and buying new cars every couple of years. Otherwise, I would stay home and watch tv or tinker around the house or work on a project car in the garage. Since discovering MMM I have cancelled my cable service and phone (I have a company phone and transferred my personal number to Google voice). I have limited myself to only eating out occasional and never more than 100 dollars a month, period. I have spent the last 2 years aggressively paying down my debt and refuse to finance anything new (I save up and purchase what I need cash). This is the first year that I will max out my 401k contributions, the second year I max out my HSA, and my first year contributing to the profit sharing program at my company. Unfortunately, I have nowhere else to make cuts to my expenditures to help progress toward financial freedom.

INCOME: 85K (before tax and deductions), 60K after taxes, 40K after retirement accounts (401K and HSA). All income is from my place of employment.

EXPENSES:

Mortgage: $70,000 @ 3.65%, Monthly payment is $456.00, 30 year fixed, not paying extra anymore based on interest rate.
Food: $300.00 per month. Slowly going organic and learning how to buy food (Like I said 15 years of nothing but fast food).
Water: $50 per month.
Gas: $40 in summer, $70 in winter
Electric: $35 home, $40 Electric Car (last big purchase before discovering MMM)
Student Loan: $27,700 @ 5.875%, Monthly payment is $300.00, 13 years left, Currently paying $600.00 per month.
Waste removal: $200.00 per year, cheapest price in the area.
Car Payment: $33,000 @ 1.79%, Monthly Payment is $900.00, recently refinanced down from 3.99% and 7 years. 2012 purchased 2 years ago currently, $13,000 upside down.
Entertainment: Netflix $7, One online MMO video game at a time $15, misc.: No more than $200.00 per month.

ASSETS:

401K: Currently sitting at $78,000
HSA: $1000, I just got Lasik best money I have spent in my entire life.
Motorcycle: worth about $5000, not willing to sell
Treadmill: I Paid $2000 4 years ago, used it about 20 times, like I said I liked to buy crap. Trying to sell but people keep changing their mind. Will be putting on Craigslist this weekend. Hopefully I will get more than a grand.
Nothing else worth noting: In the past I always traded or threw away any new toy that I was replacing.

Here is my Questions:

I need to get rid of this car but currently the only way to pay it down is to cut back on my 401K contributions and increase my monthly payment, any suggestions on how to accomplish this would be greatly appreciated.

Zillow values my house at $110,000.00 but it is in rough condition and needs a lot of work. Ironically, I have been planning to do exactly what MMM is doing to his current home. My house has no insulation, single pane windows and hollow doors that constantly leak in cold air. I keep the Thermostat at 60 in the winter and wear layers to keep my costs from gas bill out of triple digit territory. No air conditioner just a swamp cooler that I run when the temperature goes over 90 in the summer. I just talked with my bank about refinancing at 15 year 3.00% for $100,000 and using the extra cash to pay off the car buy a 5 year old Scion xA or similar car and shore up the house and install a much needed fence, roof, insulation, windows, Radiant floor heating would be nice (Loved that article by the way, can't wait for the results, cause I will use that design in a heartbeat). I will do all the work myself and my brother who is a GC. That being said, closing costs will be $7,000.00 which will cut into the cash I need for home repairs, however, It will  help me get out of the car now and not in 14 months. Let me know if you think this is the way to go or should I just open a HELC at 4.5% and keep the original mortgage.

With my current expenses I am maxing my Tax advantaged accounts but putting nothing aside for the 5 year gap I will need to fill once I retire and get the Roth conversion working in my favor. If I can get rid of this car I can start paying off my debt faster and then get a vanguard account going. Should I continue maxing the 401K or should I cut it back down to the 6% company match and channel that money into Vanguard? My goal is to retire at 45 in 10 years with ~$600,000 in investments that will give me $2000 a month to live on which is far more than I need. My life would be luxurious if I had that and no debt and no mortgage.

If you know of any other ideas that I could utilize please share them as I have only changed the form of my debt for lower interest rates in the past to great benefit. If you have read this far thank you for your time. I apologize if some of my points aren’t very clear. I look forward to hearing all your suggestions.

Best Regards,
FilmOtaku

Update: Just for clarification, The Student loan should be payed off in a few years at my current payment, I was just showing how long I had left on the term of the loan.

Update 2: I would keep the motorcycle after selling the car so that I can visit family and friends around the Denver area. If I refinance and get another car cash I would sell the bike and put it toward debt or the home repairs.

Update 3: I will be taking my misc. $200 expense to $0 this month. I just wanted to give you full disclosure since that is what I spent last month.

Update 4: I have a cash back credit card that I use for all my purchases and for paying whatever bills take plastic. I always pay it off at the end of the month so I didn't include it.

Update 5: This is an additional question. I have heard some people utilize 0% interest credit cards to convert their debt and pay it off faster. I doubt I could get a card with a $13,000 limit so that I can use it to sell my car but is it possible to sign up for multiple cards at the same time or is there systems in place to prevent people from doing this? I know it comes with the risk of the introductory period running out. I don't plan on moving anytime soon or financing anything in the future so I'm not worried if my credit score takes a hit for all the activity. Does anyone recommend this strategy or am I just looking for trouble?

[MDM]

Let's start with a small bite: what is the nominal payback period on your student loan?  The reason I'm asking is that a $27,700 loan financed at 5.875% over 10 years has a monthly payment of $305.  E.g., plug =PMT(5.875%/12,120,-27700) into Excel.  I assumed you rounded that to $300 (which is fine), but can't reconcile that with "13 years left."

Also, paying $600/month (~$300/month toward principle) would have that load paid off in a little over 4 years - even more different from 13.

[Cheddar Stacker]

Welcome to the forum. This is a relatively tough case study if you ask me. I've read quite a few of these and something usually seems painfully obvious, but I can't really decide how to attack it. Here's what I have for you, but it's likely not all inclusive as I feel a little undecided at the moment.

Expenses:
Food-You don't have to go straight from fast food to all organic. One is terrible for your health, the other unkind to your wallet, and there is a happy medium. You need to limit that $100/month eating out budget to something between $0 and $25 while the debt is dragging you down. On the grocery front, sure all organic and healthy is great, but again you have ridiculous debt ($60K SL and car) so you need to pull out all the stops here. Go for cheaper proteins like eggs, beans, peanut butter, etc. Many people on the forum get away with $300/month for a family of 4. You have some work to do here.
Misc-No more than $200 is sort of vague. You need every extra dollar right now to pay down your debts. Clean this up.

Assets:
The 401K is respectable considering your history, so good job there. However, Facepunch - a $5,000 motorcycle that you are not willing to sell is not an asset worth mentioning. Either sell it to get rid of your debt, or consider it a sunken cost. This is not doing you any financial good.

Debts:
Car-I don't know what to do with your car situation. You have an electric car that doesn't cost you much to run on a monthly basis ($40 in electricity) so I'm not sure getting rid of it is the best move, and you didn't mention what you think it's worth (at least I don't think, but maybe $20K if you're $13K upside down). It was obviously a mistake to buy looking back, but it's all a sunken cost. What you are left with is a big loan and a big monthly payment, but a low interest rate. You can't get rid of that debt without paying it off or selling the car, and dumping it into a mortgage or HELOC will only delay the monthly payment amounts which doesn't get you out of debt faster. Tough call.
Student Loan-This is the one I would attack. That rate is waaaay to high to pay over 13 years. Put every extra dollar towards this.
Mortgage Refi-This is not a bad thought, but find yourself a different bank and/or different terms. $7K closing costs for such a small balance (under $100K) is downright robbery. Consider a slightly higher rate and a no cost refi. Plenty of banks/bankers will do this, and I can recommend someone if you can't find anyone. Send me a PM if you really need help on that.

Good luck!

[asbvSBVPibv]

Let's start with a small bite: what is the nominal payback period on your student loan?  The reason I'm asking is that a $27,700 loan financed at 5.875% over 10 years has a monthly payment of $305.  E.g., plug =PMT(5.875%/12,120,-27700) into Excel.  I assumed you rounded that to $300 (which is fine), but can't reconcile that with "13 years left."

Also, paying $600/month (~$300/month toward principle) would have that load paid off in a little over 4 years - even more different from 13.

Thanks MDM for the quick reply,

You are correct that I will have this paid off in the next 4 years, I was just showing how much time is left on the loan specifically. The loan was originally for 20 years when I got it back in 2007. I was just indicating that that was how much time I had left to pay it off. Sorry about the confusion. :)

If I was to continue paying all my debt and kept the car it would take me approximately 4 years and 10 months to pay off the car, student loan, and mortgage. But then I would be cutting it real close even with a 75% asvings rate to meet my goal of 10 years.

[asbvSBVPibv]

Hello Cheddar Stacker,

With regards to my food, I completely agree and I am continuing to improve from month to month on my food spending. Believe it or not I was spending over 1000 a month on food a couple years ago. My house didn't even have appliances until 6 months ago.

As for the motorcycle I wanted to hold onto it because we are starting to head out of winter and I figured that I could use it to visit family and friends around town if I sell the car. If I get the Refinance then I would probably part with it since I will have another car (cash) and I can use the money on my house.

I just started looking at the refinance today so I need to do more research and this is one of the places I decided to get advice.

Thanks for your input.

[Thegoblinchief]

I don't think I would bother with the house refinance. Do it ONLY if you add zero cost to the loan, but 3.65 is already a very low rate.

Cheddar Stacker already hit most of the points I was going to. Food and the vague entertainment budget is killing you.

As a former hardcore gamer, consider reading some books. No, seriously. Not sure given your area, but libraries are FREAKING AWESOME! At the very least, consider an MMO like Guild Wars 2 that's high quality but requires no sub. Unless you're playing EVE, in which case *hat tip*.

On the bike front, can't remember where I read this, but someone attached two of those long "flag pole" markers you see on kids trailers, one vertically and the other HORIZONTALLY. Cars never, ever clipped him, since they wouldn't want to scratch their death trap.

[asbvSBVPibv]

I don't think I would bother with the house refinance. Do it ONLY if you add zero cost to the loan, but 3.65 is already a very low rate.

As a former hardcore gamer, consider reading some books. No, seriously. Not sure given your area, but libraries are FREAKING AWESOME! At the very least, consider an MMO like Guild Wars 2 that's high quality but requires no sub. Unless you're playing EVE, in which case *hat tip*.

The reason I was considering the refinance was because I could get more cash with a $100,000 loan at 3.0% instead of a HELOC for only $20,000 at 4.5%. But now that you mention it I would basically have $20,000 after the closing costs anyway unless I find a bank that can do it for free.

Believe it or not I actually used to spend $1000 a month on Movies, TV shows, and Video Games at Best Buy. I haven't looked into GW2 yet since I have been playing FFXIV since giving up SWTOR. I am planning on reducing that $200 to $0 this month but I didn't want to hide the fact that last month I spent $200.

Thanks for the game suggestions, I need to look into more free to play options.

[MDM]

Ok, that makes sense on the loan payoffs.  Not much to add to the other suggestions - maybe a couple of fine points:
- Cooking in bulk, then refrigerating/freezing the excess will allow you to come home and quickly feed yourself most nights so you don't "have" to go out to eat.
- Don't fixate too much on "10 years".  You may get there faster, or it may take more time.  The important thing is that you are making changes now.  Keep up the good work (and adopt at least some of the other suggestions).

[asbvSBVPibv]

Ok, that makes sense on the loan payoffs.  Not much to add to the other suggestions - maybe a couple of fine points:
- Cooking in bulk, then refrigerating/freezing the excess will allow you to come home and quickly feed yourself most nights so you don't "have" to go out to eat.
- Don't fixate too much on "10 years".  You may get there faster, or it may take more time.  The important thing is that you are making changes now.  Keep up the good work (and adopt at least some of the other suggestions).

Thanks again MDM,

Most of my culinary skills are of the crock pot and Lasagne pan variety so I usually make a weeks worth of meals when I cook. I do most of my shopping at King Soopers because I'm only one mouth and bulk items end up spoiling before I can use them. If anyone knows of a good cooking blog for bachelors that would be fantastic information to add to this thread.

[Cheddar Stacker]

If the mortocycle is your new transportation after selling your car that's a different story, and I would definitely encourage you to sell the car then. Selling the car would still leave you with $13K vehicle debt correct, but a new HELOC can cover that. You will pay a higher interest rate, but you will wipe out $20K in debt in one quick step.

Once winter comes back you might need to pick up another cheap vehicle though right? Unless you want to be really badass and be the only guy riding a motorcycle through the snow.