Author Topic: Case Study: Spreading the Good Word  (Read 12313 times)

RetireAbroadAt35

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Case Study: Spreading the Good Word
« on: October 21, 2014, 11:57:40 PM »
I present you with a pair of recent converts.  This is a story of a fairly typical middle-class couple reaching retirement age in the US.  He is retired and disabled.  She is eligible for social security in 4 years.  Until about 10 years ago, they were pretty debt-averse, but somehow credit card balances climbed, a high-interest student loan was taken, and new (but sensible) cars were financed.  Until recently, they hadn't really considered that they could pay off these debts early and even start saving again.  They are excited at the prospect of a faster path out of debt but a bit wary of change and online account management.

A cursory review of their finances shows me that they should have plenty of room in their budget to pay down debt.  Some facepunches will surely be in order once I have imported all the accounts into mint and determined exactly where the spending is going.  I will post updates once I have that data.

Financial goals are:
  • Get Out Of Debt
  • Home repairs, estimated at around $10k.  To sell the home, most of those repairs would be required.
  • Financial stability for the surviving spouse in the event of one's untimely passing
  • Upgrade 2011 Honda (there's no good reason to do this, just consumer desire)
  • Downsize to a smaller, safer home.  Stairs in an an old farmhouse will soon be a problem.

I'd like to start by getting some advice on the following topics:
  • Debt paydown strategies.  I will set them up on a snowball going after high-interest loans first using all funds I can free up from careless spending, but I'm also curious about options for refinancing cars, mortgage, 0% interest balance transfers, etc.  Anything that can lower interest rates.
  • Term life insurance.  I don't know even know what questions to ask.
  • The Tax-Deferred Annuity - I imagine they should shift this over to a Vanguard IRA?

Income (monthly):
  • Social Security - $1k (his)
  • VA Disability - $3k (his)
  • Job - $2k (hers)
  • Total: $4k $6k

Expenses (monthly):
  • Mortgage Payment - $955.53
  • 2011 Honda - $230
  • 2014 Honda - $356
  • Credit card 1 - $250
  • Credit card 2 - $250
  • Parent Plus Loan - $150
  • other - $?? (still sorting this out)
  • Total: $5100

Assets:
  • Home - $85k.  That's just a wild guess based on some zillow searches.  Very rural area.  Hard to find comps.  Partially renovated (kitchen, dining) but needs some work before its sale-able
  • Cash - $16k.  Mix of checking & low-interest savings
  • Vanguard IRA (his) - $26k.  Mostly stock funds.  Needs safer allocation.
  • Vanguard IRA (hers) - $15k.  Mostly stock funds.  Needs safer allocation.
  • Tax-Deferred Annuity (hers) - $7.5k.  Appears to be bleeding money to fees.
  • Total: $149.5k

Liabilities:
  • Parent Plus Loan - $8000 @ 7.9%
  • Mortgage - $38k remaining @ 5.875%.  $687 remains in escrow.
  • 2011 Honda Loan - $4k @ under 1% through Honda.  2 years to pay-off
  • 2014 Honda Loan - $10k @ 4.5% interest through local bank.
  • Credit Card 1 - $7.5k @ 20%
  • Credit Card 2 - $8k @ 12.2%
  • Total - $75.5k

Aside from the obvious (spend less, pay down debts more), what would you suggest to get their financial situation aligned with their goals?  The phrase "hair on fire" won't resonate with this crowd.  We're taking some baby steps here.
« Last Edit: October 22, 2014, 09:45:16 PM by RetireAbroadAt35 »

surfhb

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Re: Case Study: Spreading the Good Word
« Reply #1 on: October 22, 2014, 12:45:33 AM »
Hello and welcome!

Well there really are no baby steps to take because all your budget is consumed by money you already spent.   You have no cushion to make the transition easy is what I mean.   

For starters, The newer car needs to go.   He's not working so why not drive you to work ?   

The cable and verizon need to go to

That's $700 a month right there :).    I hope you don't come back with reasons why you need these items because you're both in a bad situation right now based on your ages and income.   Not to be mean because I've been there too


RetireAbroadAt35

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Re: Case Study: Spreading the Good Word
« Reply #2 on: October 22, 2014, 01:41:37 AM »
This is not me, rather, it's people I know.  I've got plenty of ideas for them on spending reduction.  They would take on financial risk and delay their retirements to keep those damn cars so I'm not leading with that.

  • For the first card, I think I can find $500 a month that they could easily throw at it before I suggest they do anything too painful. 
  • For the second card, I'm wondering if they should look for a 0% balance transfer to get relief on interest until the first is paid.
  • For the student loan, they are going to discuss with the student, who may take that on once graduated and employed this summer.
  • That brings me to the cars, one of which is at an unknown interest rate.  Downsizing here is not a conclusion they'll come to anytime soon.

I am breaking the reality of the debt situation to them gently. 

I'm also looking to optimize their asset allocation & insurance coverage.
« Last Edit: October 22, 2014, 01:53:58 AM by RetireAbroadAt35 »

Primm

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Re: Case Study: Spreading the Good Word
« Reply #3 on: October 22, 2014, 03:37:51 AM »
You do realise that you can't make anyone do anything they don't want to do, don't you? Unfortunately in this couples case (your parents?), you have to sit and wait for them to realise where they're heading and change track, or do nothing.

I appreciate that you want to help, but specific advice isn't going to change the situation.

Breaking the reality of the debt situation. Hmm. They're most likely aware, they just choose not to do anything about it. And there's not a thing you can do to change that unless they want to change it. Sorry.

Setters-r-Better

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Re: Case Study: Spreading the Good Word
« Reply #4 on: October 22, 2014, 05:11:51 AM »
Doesn't the income add up to 6k? You typed 4k.
Is there any life insurance since you mentioned one goal is security for surviving spouse.

Jacana

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Re: Case Study: Spreading the Good Word
« Reply #5 on: October 22, 2014, 06:13:57 AM »
That mortgage payment seems quite high... The house is only worth 85k how can the monthly payments be that big? Ours is for 190000 @  3.5% in a high tax area and our monthly total is only 1070 (VA loan, no down payment). Do they have a VA loan? Refinancing a VA loan is very easy, we did it once at practically no cost. If they don't, perhaps he can look into his eligibility for one so that they can free up $ to fix the place up and sell or snowball those credit cards.

RetireAbroadAt35

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Re: Case Study: Spreading the Good Word
« Reply #6 on: October 22, 2014, 07:50:46 AM »
you have to sit and wait for them to realise where they're heading and change track, or do nothing.
That's already happened.  The reason I am here is because I was invited.  Leading by example and playing the slow game is bringing them around.  So don't get all discouraged after one post :)

Quote
I appreciate that you want to help, but specific advice isn't going to change the situation.
On the contrary, the reason they haven't taken action is analysis paralysis.  They don't know what their term life insurance means.  They don't know how to do a debt snowball.  They don't know how to have one view of their finances using tools like mint.  As I show them each of these things, they are getting more and more into it.

That said, if I run into any issues of psycholology and motivation, I'll post the questions and surely solicit all of your input.  For now, it's not an issue.

My problem is, having never had a mortgage, or a car loan, or credit card debt, or term life insurance, or a tax-deferred annuity, I am doing a lot of learning to show them what they can do.  You are my shortcut to that learning.  Point me in the right direction. 

In return, I will deliver you either a success story or a tale of woe.  Either way it'll be entertaining.

Quote
setters-r-betters:
Doesn't the income add up to 6k? You typed 4k.
Yep - fixed it.  Holy crap, there should be a ton of room in this budget for debt service.  I'm kind of scared what I'll find when I load the spending up into mint.

Quote
Jacana:
I don't believe it is a VA loan.  All I know is the interest rate, the pay-off amount, the escrow (taxes/insurance) and the servicing bank.  I'll ask.

There was some refinancing and extracting of equity back in the boom days.  That may well have put them underwater or close to it for a time.  Some of that money was used for home improvements.  This is a low tax area.
« Last Edit: October 22, 2014, 07:54:26 AM by RetireAbroadAt35 »

Primm

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Re: Case Study: Spreading the Good Word
« Reply #7 on: October 22, 2014, 08:04:09 AM »
you have to sit and wait for them to realise where they're heading and change track, or do nothing.
That's already happened.  The reason I am here is because I was invited.  Leading by example and playing the slow game is bringing them around.  So don't get all discouraged after one post :)


Excellent! If they've asked you for help then that's half the battle won.

I look forward to hearing updates one way or another.

Seņora Savings

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Re: Case Study: Spreading the Good Word
« Reply #8 on: October 22, 2014, 08:22:20 AM »
you have to sit and wait for them to realise where they're heading and change track, or do nothing.
That's already happened.  The reason I am here is because I was invited.  Leading by example and playing the slow game is bringing them around.  So don't get all discouraged after one post :)


Excellent! If they've asked you for help then that's half the battle won.

I look forward to hearing updates one way or another.

They want to be in better shape financially... I'd say that's 1% of the battle.  50% of the battle is when they want to get out of debt for some reason other than to acquire more stuff.

If they really take in $2500 more than they spend, they'll be fine soon.  But I'm guessing that's an average month that doesn't include their yearly car updates and absolutely essential home repairs and once in a lifetime vacations.  If they want to get out of debt they have to spend less money, period.  Help them figure out what they spend money on, tell them to pick out things to stop spending money on.

Don't help them out with little tricks to save $20 unless they are willing to actually cut their spending, it will frustrate them and convince them that trying to save money is impossible.

RetireAbroadAt35

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Re: Case Study: Spreading the Good Word
« Reply #9 on: October 22, 2014, 08:33:32 AM »
They want to be in better shape financially... I'd say that's 1% of the battle.  50% of the battle is when they want to get out of debt for some reason other than to acquire more stuff.
That has been a factor in the recent past, where getting the debt under control led quickly to building it back up.  But they have come to recognize that health problems + financial problems are leaving them in a precarious situation.  I think it's for real, which is why I'm spending the time to help.

Quote
If they really take in $2500 more than they spend, they'll be fine soon.  But I'm guessing that's an average month that doesn't include their yearly car updates and absolutely essential home repairs and once in a lifetime vacations.
I'm not sure where that money is going.  $250 of it is moving into savings automatically.  The rest is either evaporating or accruing in their bank accounts.  I'm not sure yet.  However, these are folks that grew up in very modest circumstances and haven't taken on any luxury habits.  They don't vacation.  The car thing is relatively new.  Until a few years ago they always bought used.  For the last 5 years, they have maintained a stable of two new cars.  Each has been updated once.  The cars are the biggest / stupidest pot of spending I've identified so far.  Time will tell if they revert back to older, better habits.


Quote
Don't help them out with little tricks to save $20 unless they are willing to actually cut their spending, it will frustrate them and convince them that trying to save money is impossible.
I don't have the time or energy to focus on $20 tricks.  I'm looking for advice on the things I don't know how to figure out.  I'll update the thread once I have finished analyzing the cash flow.  I could really use some ideas on how to cut down interest rates to minimize how much goes to the banks while they snowball their debts down.

I'll post more on cash flow once I've done the analysis.

RetireAbroadAt35

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Re: Case Study: Spreading the Good Word
« Reply #10 on: October 22, 2014, 04:54:16 PM »
A short bump and a summary of my open questions.  Any resources are handy.
  • How would you design the snowball?  Does refinancing make sense?  0% balance transfers?
  • Term life insurance.  Is this a good or bad thing for someone their ages?  When I asked them about it, they could only say they were concerned about cancelling it and losing what they'd paid (sunk cost fallacy).
  • The Tax-Deferred Annuity - should I put any thought into this or just have them roll it over to a Vanguard IRA?

Quote
setters-r-betters:
Is there any life insurance since you mentioned one goal is security for surviving spouse.
I just saw this question - sorry.  They do have term life insurance.  There are four policies in total, one on her and three on him.  I am told the total payout would be ~$100k but I haven't seen the documents to confirm this.  Premiums are $400 a month so I'm skeptical that it's worth it going forward.
« Last Edit: October 22, 2014, 04:57:49 PM by RetireAbroadAt35 »

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Re: Case Study: Spreading the Good Word
« Reply #11 on: October 22, 2014, 05:13:02 PM »
Is there any reason why they're holding $16K in cash? FIrst step would be to take half of that and kill the 20% interest credit card loan.  It sounds like they might have other cash that you don't know about as well.  If they turn to have enough of an e-fund elswhere, they could kill both credit cards with that lump of cash.  A balance transfer makes sense if they have the discipline to pay it down during the intro period. 

No real reason to pay down the 1% Honda loan.

I don't know anything about the term life and annuity, but really, if they get rid of the non-mortgage debt payments they'll be in pretty good shape as he has $4K in fixed income plus whatever she makes or gets for SS on top of it.

RetireAbroadAt35

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Re: Case Study: Spreading the Good Word
« Reply #12 on: October 22, 2014, 05:40:23 PM »
Is there any reason why they're holding $16K in cash?
General emergency fund.  I think it's larger than it needs to be, but then again, they need cash on hand for dealing with home repair issues (like the furnace that died in the dead of winter). 

I think taking a (big) chunk of that and throwing it at the highest interest debt makes sense.

JoJo

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Re: Case Study: Spreading the Good Word
« Reply #13 on: October 22, 2014, 06:56:33 PM »
I'll talk a little about the life insurance.  I get the impression that they are around 60 and not in the best health.  Insurance is cheap when your young but for older ages the cheapest plans for 75,000 of term coverage would be in the ballpark of $100+ per month on the dad and $60+ for the mom (could be much more depending on health).  That would be for term where the premiums would jump up significantly after 10 years and has no "cash value" meaning they wouldn't get any premiums back if death didn't occur while the policy is inforce.  There are other alternatives that have return of premium or cash values but are much more expensive. 


RetireAbroadAt35

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Re: Case Study: Spreading the Good Word
« Reply #14 on: October 22, 2014, 09:53:17 PM »
His health is not so great, hence the disability-driven "early" (age 60) retirement.  Her health seems fine but she's aging and doesn't go to the doctor.  They should plan accordingly.  It sounds like term life is something to have when younger, but if you are lucky enough not to croak at an early age, it's best to shed the plan as you get older and it is prohibitively expensive.  Now that I'm seeing account statements, they are spending $300/month on premiums.

How do they decide if it is worth continuing?

Here's my current proposed debt snowball strategy:
  • Take half of e-fund and use it to pay down credit card 1
  • After the balance hits 0, do a 0% balance transfer from card 2 to card 1.  Stop putting anything on credit cards
  • Take the $325/month that is currently auto-transferred to savings, plus the $500 previously used to service credit cards, plus anything they can squeeze from their fat, bloated, non-mustachian spending and apply it to one of the remaining debts.

I am not sure if that last step means tackling the student loan at 7.9% (it is unclear to all involved if the parents plan to pay it off or the student does), tackling the Honda @ 4.8%, or the mortgage at 5.85%.  Thoughts?

Spondulix

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Re: Case Study: Spreading the Good Word
« Reply #15 on: October 23, 2014, 12:19:42 AM »
I'm a fairly new Mustacian, so feel free to correct me...

With the snowball plan - I'd tackle the high car loan first. The interest on the mortgage and student loans are tax write-offs, while the car is not.

For the student loan, do they qualify to refinance at a lower rate? Have you looked into forgiveness options (being a vet)?

Home mortgage - if they qualify to refinance at a lower rate, they still could pay ahead on the loan (after hitting other debt) and have lower interest in the meantime. May not be worth it if they are looking to move in the next year, though. Definitely should look into VA loan options for the new home.

Perhaps there are other discounts/services they can find for vets/disabled folks to get their expenses down...

marty998

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Re: Case Study: Spreading the Good Word
« Reply #16 on: October 23, 2014, 12:47:57 AM »
I'm a fairly new Mustacian, so feel free to correct me...

With the snowball plan - I'd tackle the high car loan first. The interest on the mortgage and student loans are tax write-offs, while the car is not.

For the student loan, do they qualify to refinance at a lower rate? Have you looked into forgiveness options (being a vet)?

Home mortgage - if they qualify to refinance at a lower rate, they still could pay ahead on the loan (after hitting other debt) and have lower interest in the meantime. May not be worth it if they are looking to move in the next year, though. Definitely should look into VA loan options for the new home.

Perhaps there are other discounts/services they can find for vets/disabled folks to get their expenses down...

Credit cards first. I remember posting a long long time ago that maybe a balance transfer is not the best idea. One sure fire way to really learn a lesson is to pay of a gigantic credit card debt @ the full 20% interest.

It needs to hurt and it needs to leave mental scars. That way you will never dig that hole again

RetireAbroadAt35

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Re: Case Study: Spreading the Good Word
« Reply #17 on: October 23, 2014, 08:33:12 AM »
"Ok guys, here's the plan.  I recommend you pay this off the hard way so it leaves a scar."

I hear what you're saying, but that doesn't sound like the sort of conversation I'd have with somebody.

The goal is to minimize the amount of money (interest, fees) that the banks can snort up their collective noses while setting the couple in question on a path to financial stability.

I think I'll be sticking with the plan as outlined above and start my own education on annuities and life insurance.  I'll drop back in though to see if anybody has any gems for me.

Thanks y'all.

Seņora Savings

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Re: Case Study: Spreading the Good Word
« Reply #18 on: October 23, 2014, 09:31:52 AM »
"Ok guys, here's the plan.  I recommend you pay this off the hard way so it leaves a scar."

I hear what you're saying, but that doesn't sound like the sort of conversation I'd have with somebody.

The goal is to minimize the amount of money (interest, fees) that the banks can snort up their collective noses while setting the couple in question on a path to financial stability.

I think I'll be sticking with the plan as outlined above and start my own education on annuities and life insurance.  I'll drop back in though to see if anybody has any gems for me.

Thanks y'all.

I would avoid balance transfers until you see a change in their behavior (reduction in spending) for two reasons.  It'll typically give them more credit, which isn't what they need.  If they end up not paying off the loan in the 0% time frame, the interest will shoot way up.  They have the cash to pay off the 20% card, so they won't be stuck with that interest.  It doesn't sound like they understand that it costs $8000 to pay off $8000 of debt.

RetireAbroadAt35

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Re: Case Study: Spreading the Good Word
« Reply #19 on: October 23, 2014, 10:06:38 AM »
I have no control over their behavior.  I'm just giving them some recommendations. 

But for what it's worth, they haven't put anything on these cards in over a year, and they upped the payments to at least be above minimum.  They had their own personal wake-up call to that effect.  I doubt they'll run the cards up again - this was not normal behavior for them.  But, as I mentioned, if that's what they wanna do it's not anything I can control. 

All I'm giving them is some of my time, and that's something I can spare.

I'll give them a plan that pays off card 1 immediately, gets card 2 down to 0%, and then they attack the next high-est interest debt.  That seems pretty clear-cut to me.  My only remaining debt-snowball-strategy question is when I get down to house (5.8%) or car (4.8%), which one do they go after first?  I'll have to puzzle on that a bit.

Future Lazy

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Re: Case Study: Spreading the Good Word
« Reply #20 on: October 23, 2014, 10:47:51 AM »
I have no control over their behavior.  I'm just giving them some recommendations. 

.....

I'll give them a plan that pays off card 1 immediately, gets card 2 down to 0%, and then they attack the next high-est interest debt.  That seems pretty clear-cut to me.  My only remaining debt-snowball-strategy question is when I get down to house (5.8%) or car (4.8%), which one do they go after first?  I'll have to puzzle on that a bit.

Why not let them decide? Pick one, or the other, or split extra money between the two? I personally would say the mortgage, since the interested rate is about 1-1.5% higher than today's rates, make it simple by just putting more toward that bill. The interested paid over time on a mortgage is way more than on a car, so even throwing an extra couple hundred a month at it snowballs way more over time.

However, as was suggested above - selling one car to pay off the other wouldn't hurt much either, so you eliminate a payment and eliminate a debt.. That is, as long as they aren't underwater on their car loans. However, that might be a stretch for someone just starting out on their journey to financial wellness...

RetireAbroadAt35

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Re: Case Study: Spreading the Good Word
« Reply #21 on: October 23, 2014, 11:09:15 AM »
Ultimately it will be for them to decide, but when I get to this part of the plan and ask which one they want to focus on ... they will ask me which one I think they should focus on.

My response will be, if you pay the car, it will save X over the next 5 years.  If you pay the house, it will save Y over the next 5 years.  Which do you prefer?

I'm just not sure how to estimate X and Y given deductible mortgage interest and such.  I've lived in rental units, corporate housing through work, hotels, my car, the couch at a friend's house, and every creative arrangement I could scrounge up in my adult life, but but I've never had a mortgage.

Future Lazy

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Re: Case Study: Spreading the Good Word
« Reply #22 on: October 23, 2014, 11:40:13 AM »
Ultimately it will be for them to decide, but when I get to this part of the plan and ask which one they want to focus on ... they will ask me which one I think they should focus on.

My response will be, if you pay the car, it will save X over the next 5 years.  If you pay the house, it will save Y over the next 5 years.  Which do you prefer?

I'm just not sure how to estimate X and Y given deductible mortgage interest and such.  I've lived in rental units, corporate housing through work, hotels, my car, the couch at a friend's house, and every creative arrangement I could scrounge up in my adult life, but but I've never had a mortgage.

I really like this calculator:
http://www.bankrate.com/calculators/mortgages/mortgage-calculator.aspx

I don't know that I would include the tax deductible interest part of it, that's kind of complicated stuff (imo) and (also imo) shouldn't be a deciding factor in paying something off. Less debt is always better  Plus, in the end, paid off credit cards mean more money towards other debts - like putting it toward the car, and a paid off car means putting car money into the mortgage, and that leads to a more quickly paid off house - and that's the snowball.

And that train of thought leads me to another - Focus on the CC debt first, since those are (probably) smaller sums and will be paid down quicker, and higher interest rates and will show more bang for the buck, so to speak. Once those debts are eliminated, that leaves more money to aggressively pay down cars, and then the house. They'll see the process in action on a small scale, their commitment to paying off larger debts will be more powerful.

horsepoor

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Re: Case Study: Spreading the Good Word
« Reply #23 on: October 23, 2014, 11:51:30 AM »
Once the cc an SL are gone, I think I'd go after the mortgage because its the roof over their heads, and they don't owe a ton on it.  The car could be sold and paid off if needed, or replaced with a cheap car if need be.  The idea of owning their home free and clear might be very compelling to them if you plug the accelerated payoff plan into that Bank rate and show them the amortization schedule.

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Re: Case Study: Spreading the Good Word
« Reply #24 on: October 23, 2014, 12:19:02 PM »
My only remaining debt-snowball-strategy question is when I get down to house (5.8%) or car (4.8%), which one do they go after first?  I'll have to puzzle on that a bit.
My answer is: Both! Right Now!! If they belong to a credit union, they should be able to re-fi that big, fat car loan into something much lower fairly easily, assuming decent credit scores. Ditto on the house. Interest rates are creeping up, don't waste any time on this. 5.8%? Holy crapola! Since their balance is so small, there could be some creative options out there, but do not have them pull money out to pay off other debts. Bad idea at their age/stage. Pulling equity out of the house could "save" them now; poor decisions/health issues could cost them their home later. Don't do it, no matter how tempting. Consider doing both re-fis together with a credit union, but don't let anyone talk them into pulling cash out. As someone else mentioned, some scarring is helpful to prevent future mistakes. (Note: I'm not a member, but a lot of folks around here love PenFed. Sounds like they would be eligible if they don't have a CU affiliation at present. Worth exploring.)

Finally, this situation is far from unsolvable. They are not in as deep doo-doo as it now seems. If this current mess really is a "blip" there is a lot of hope for their future. Good for you for making time and caring enough to help. Those who stick their necks out sometimes get their heads chopped off, so kudos to you for taking this on. Hope you all survive with everything but the debt intact.

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Re: Case Study: Spreading the Good Word
« Reply #25 on: October 23, 2014, 03:02:02 PM »
If you read around some, debt repayment snowballs generally break into two camps: highest effective interest first or lowest total balance first.  From a mathematical standpoint paying extra money toward the highest effective interest will save you the most money (all other things being equal).  From a psychological standpoint some people will find it more satisfying to have one debt completely paid off before moving to the next, so starting with the smallest balance gives them the "rush" of paying it off sooner and may lead them to keep making better financial choices.

Either method can work, but the key is in getting the overspender to adjust their habits.  One of the big keys is to make sure they're very involved and invested in the process of eliminating this debt, which may provide some of the "pain" other people have referenced.

It sounds like you have a pretty good setup with this couple, since their highest interest debts also happen to be the lowest balances (outside of the 1% car loan which I wouldn't touch).  I'd agree with paying off the 20% rate credit card immediately out of their savings, but you may want to make sure they're completely on board before suggesting a 0% balance transfer (BT rates are usually even higher than purchases).  In the meantime you might want to see if the husband or wife would be willing to call the CC company to see if they'd adjust the interest rate down.  It sounds wacky, but if you're in a position to pay off or transfer your balance to a different bank, the CC company will often give you some kind of concessions (lower interest, waived balance transfer fee in your current account, etc.).  Just keep in mind that nothing the CC company will do is out of altruism, it's to help their bottom line.

Regarding paying down the house or car, if it was me I'd pay down the car first since it is a depreciating asset that will need to be replaced at some point and the current balance is considerably smaller (unless of course that means they'd trade it in to buy a new car).
« Last Edit: October 23, 2014, 03:05:38 PM by GoodStash BadStache »

GoodStash BadStache

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Re: Case Study: Spreading the Good Word
« Reply #26 on: October 23, 2014, 03:17:02 PM »
One other purely psychological idea to keep them motivated on paying down the credit card debt would be to have them send two checks (or make two electronic payments) to the card they're paying down each month.  Rather than breaking them down into the minimum payment check and the principal paydown check as I've seen suggested, break them into monthly interest paid and monthly principal paid*.  This lets them see not only how much they're paying in interest, but how the interest is going down each month.

*I'm not sure if this is original or whether I saw it somewhere and have now forgotten the source.  All of the above assumes the bank will accept two checks/payments per billing period.

RetireAbroadAt35

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Re: Case Study: Spreading the Good Word
« Reply #27 on: October 23, 2014, 03:48:48 PM »
I don't know that I would include the tax deductible interest part of it, that's kind of complicated stuff (imo) and (also imo) shouldn't be a deciding factor in paying something off. Less debt is always better  Plus, in the end, paid off credit cards mean more money towards other debts - like putting it toward the car, and a paid off car means putting car money into the mortgage, and that leads to a more quickly paid off house - and that's the snowball.
Intuitively, I want to focus on the car first, then the house, but when I compare the interest rates, my "pay the highest interest rate first" strategy conflicts.  I'm still not sure which way is best, or even what constitutes best.

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horsepoor:
The idea of owning their home free and clear might be very compelling to them if you plug the accelerated payoff plan into that Bank rate and show them the amortization schedule.
I've been avoiding psychological considerations but this might get them excited to take a harder whack at their spending.  I'll keep that in mind when I show them their spending graph vs time-to-pay-debt.  Speaking of which, y'all will have a field day with the spending graph when I post it.  They have no idea how much their annual income is (it's higher than it's ever been in their lives) or how their earnings are evaporating through unplanned, mindless spending at Wal-Mart and Home Depot.  Our next conversation will probably blow their minds.

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GoodStash BadStache:
In the meantime you might want to see if the husband or wife would be willing to call the CC company to see if they'd adjust the interest rate down. 
I gave them a to-do list that started with calling every one of their creditors, utilities and media providers to negotiate.  This has started to pay off, and it kept them busy while I crunched numbers.

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Diane C
If they belong to a credit union, they should be able to re-fi that big, fat car loan into something much lower fairly easily, assuming decent credit scores. Ditto on the house. Interest rates are creeping up, don't waste any time on this. 5.8%? Holy crapola!
They do not have a CU.  He is a combat vet and may have access to something via his military association.  Any recommendations?  Otherwise, I don't know if there are any community CUs they could get into.

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Consider doing both re-fis together with a credit union, but don't let anyone talk them into pulling cash out.
Good point.  Part of why they are still paying the house is because of the cash they pulled out during the bubble days.
« Last Edit: October 23, 2014, 03:52:04 PM by RetireAbroadAt35 »

horsepoor

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Re: Case Study: Spreading the Good Word
« Reply #28 on: October 23, 2014, 07:01:24 PM »
It doesn't really take special credentials to use a many credit unions.  I've financed vehicles through two different credit unions (yes, punch me in the face); they just put $25 into a savings account to make you "a member" and you're good to go.  The ones I've used were Idaho Central and Les Bois; you probably have similar in your area.

Dicey

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Re: Case Study: Spreading the Good Word
« Reply #29 on: October 24, 2014, 11:49:31 AM »
What horsepoor said. As a vet, there should many available to him, including PenFed. Community CU's generally have very low barriers to entry for residents. I know of one that will allow your qualifier to be a Costco membership, lol!

solon

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Re: Case Study: Spreading the Good Word
« Reply #30 on: October 24, 2014, 01:41:07 PM »
Just saw this in my new posts list. Click to embiggen.

RetireAbroadAt35

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Re: Case Study: Spreading the Good Word
« Reply #31 on: October 26, 2014, 01:22:35 PM »
I'm writing up some suggestions on refinancing and giving them some actions.  I'll include checking with military credit union options as well as some local community CUs to call.

Thanks.

@solon - funny but true.  I am an ordained reverend and a fervent follower of the FSM.

feelingroovy

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Re: Case Study: Spreading the Good Word
« Reply #32 on: October 26, 2014, 02:35:06 PM »
For the debt snowball, I agree with horsepoor.  Credit cards first, try to get the student to take over student loan payments, then house.

In deciding between the car loan and the mortgage when they get to that point in the snowball, keep in mind that mortgage interest is only deductible as part of itemizing.  With that small of a mortgage balance and payment, they're not paying enough to get past the standard deduction. (Unless they also have high medical bills or charity contributions or something).  So it's probably not really deductible.

For your term life insurance question, they may still need it.  They need to clarify:

- who it is on
- for how much
- for what term (how long)
- what happens to each source of income if each spouse dies

For example, would wife continue to get anything from SS or the disability if husband died? I know my parents still have life insurance b/c a chunk of their retirement income is from dad's pension.  It has no survivor benefits, so if he dies first, mom loses 25% of her income.

In this couple's situation, it would really help to lessen the need for life insurance if they got rid of the debt.

Are they at all willing to sell one of the cars?  That would really help overall.  Even after paying off one CC, they could buy a $5k car for cash, sell a car to pay off one loan (as long as it's not underwater) then quickly build the EF back up with what had been car payments.

Dicey

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Re: Case Study: Spreading the Good Word
« Reply #33 on: October 26, 2014, 08:45:52 PM »
I am an ordained reverend and a fervent follower of the FSM.
Ooh! Where did you go to seminary? ;-)

RetireAbroadAt35

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Re: Case Study: Spreading the Good Word
« Reply #34 on: October 27, 2014, 11:42:49 AM »
This little endeavor has turned into quite a project.  I have a 22-page financial plan with analysis, references and supporting spreadsheets.  At some point I'm going to have to stop before analysis paralysis sets in.  That said, I have calculated out 5 repayment scenarios using the excellent calculator at What's the Cost.

Here's how they break down:

  • Business As Usual: Pay $2.1k/month across debts as currently allocated.  Debt-free by Dec, 2017 after paying $9k in interest
  • Slow Snowball: Put $5k against the highest card up front, divert $250/month from savings to debt payments, and do a high-interest snowball on the rest to be debt-free by June 2017 after paying $5.4k interest
  • Fast Snowball: Pay off one card, do a 0% balance transfer on the other, divert $250/month from savings to debt payments and do a high-interest snowball on the rest to be debt-free by April 2017 after paying $4.2k in interest.
  • Reign in the Spendypants: Do the Fast Snowball but cut $500 from spending and apply that to debt as well to be debt-free by Nov 2016 paying $3.3k interest.
  • Do I Smell Smoke?: Do the Fast Snowball but cut $1k from spending and apply that to debt as well to be debt-free by July  2016 paying $2.7k interest.

Whew.  So now, ladies and gentlement, the post you've all been waiting for, every MMM'ers favorite game, your chance to vent and rant, to experience Schadenfreude ... let's play ...
Punch ... That ... Face

The rules for this round are simple:
  • The folks in question have good, frugal roots but have lost their way over the last 5 years (lifestyle inflation, a child's student loan, home repairs and medical bills hit at once).
  • They have not downsized as kids left the nest.  Potential emotional bog here, so recommendations in this area will be made gently.
  • The cars are off-limits for round 1. They are experiencing the "joys" of new car ownership for the first time and they love it.  I'm playing the slow game on this one.
  • Their phone/TV needs are generally unremarkable.  Fertile ground here IMO.
  • Grocery/sundry shopping is out of control.  This would be dangerous territory, but she voluntarily opened up that she could improve here.  Punch away.
  • The house is old and will need repairs to keep it livable or to make it saleable.  Worst case is the $6-8k roof repair goes from "something we can do next summer" to "OMG emergency when snow falls this winter."
  • Drafty, midwestern farm house is probably very, very energy inefficient.
  • Heat/stove is gas, AC/water heater is electric
  • They need to plan for the day when they sell the house and move someplace more appropriate for his health issues.
  • Medical costs for him are low as he is covered by the VA.  Hers are unknown as she has only recently gotten insurance and hasn't been to the doc in a while.

And now for the breakdown.  This is based on one month's spending as I don't yet have a good stream of historical data in Mint.  It looks pretty representative though:

The Mint Categories:
  • Home: $1,112.80 ($950 mortgage, some home depot stuff)
  • Auto & Transport: $1,062.86 (loans, insurance, fuel, service)
  • Shopping: $828.94 (A blend of groceries and household items)
  • Bills & Utilities: $693.84 (DirecTV, Verizon iPhones, DSL/landline, gas, electric)
  • Food & Dining: $495.77 (all groceries)
  • Uncategorized: $302.28 (one ATM and a couple checks)
  • Financial: $297.25 (term life insurance premiums)
  • Fees & Charges: $213.82 (mostly interest on credit cards)
  • Other: $177.98 (from $20 at the dollar store to the $5 spent at Amazon's Kindle store)
  • Total: $5185.54

A few targets/insights:
  • Debt Principal: $1,464
  • Debt Interest: $495
  • Utilities: $249
  • Verizon: $200
  • DirecTV: $150

Spondulix

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Re: Case Study: Spreading the Good Word
« Reply #35 on: October 27, 2014, 08:24:17 PM »
One other purely psychological idea to keep them motivated on paying down the credit card debt would be to have them send two checks (or make two electronic payments) to the card they're paying down each month.  Rather than breaking them down into the minimum payment check and the principal paydown check as I've seen suggested, break them into monthly interest paid and monthly principal paid*.  This lets them see not only how much they're paying in interest, but how the interest is going down each month.

*I'm not sure if this is original or whether I saw it somewhere and have now forgotten the source.  All of the above assumes the bank will accept two checks/payments per billing period.

(I just realized you were referring to credit card debt and not mortgage payments... but this might be a good technique to get someone excited about saving and not spending money)

This is sort of the method I use (which I got from my real estate agent). Call the lender and ask them to send a copy of your amortization schedule. If your extra payments are in the amount of the next payment's principle, you can see exactly how far ahead you are time-wise. For example, if I make an extra principle payment today, it will actually be payment #47 due January 2016 (except it's interest free).

Seeing that is huge motivation because it shows you that your payment has impact. Plus, you can see exactly how much you saved in interest. Wells Fargo allows for extra principal payments through the web (so I'm guessing others do to). Or, if you send a separate check, make sure it says "principal payment only".
« Last Edit: October 27, 2014, 08:27:49 PM by act01 »

Spondulix

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Re: Case Study: Spreading the Good Word
« Reply #36 on: October 27, 2014, 08:39:42 PM »
  • Business As Usual: Pay $2.1k/month across debts as currently allocated.  Debt-free by Dec, 2017 after paying $9k in interest
  • Slow Snowball: Put $5k against the highest card up front, divert $250/month from savings to debt payments, and do a high-interest snowball on the rest to be debt-free by June 2017 after paying $5.4k interest
  • Fast Snowball: Pay off one card, do a 0% balance transfer on the other, divert $250/month from savings to debt payments and do a high-interest snowball on the rest to be debt-free by April 2017 after paying $4.2k in interest.
  • Reign in the Spendypants: Do the Fast Snowball but cut $500 from spending and apply that to debt as well to be debt-free by Nov 2016 paying $3.3k interest.
  • Do I Smell Smoke?: Do the Fast Snowball but cut $1k from spending and apply that to debt as well to be debt-free by July  2016 paying $2.7k interest.

Not to add to your workload... but how about a scenario where they focus on fixing and selling the house, and what their expenses could be like if they moved into a more efficient home with a lower mortgage? I wonder if you could knock 6 months off that time to be debt-free just through lower mortgage, utilities, etc. Plus, the process of going through their belongings, deciding what they really need in the future, etc could bring up a lot of those sensitive questions, but with the enthusiasm of knowing where they are going. Being in a smaller house could change spending habits, too - decrease shopping, groceries, etc.

feelingroovy

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Re: Case Study: Spreading the Good Word
« Reply #37 on: October 27, 2014, 09:39:03 PM »

  • Business As Usual: Pay $2.1k/month across debts as currently allocated.  Debt-free by Dec, 2017 after paying $9k in interest
  • Slow Snowball: Put $5k against the highest card up front, divert $250/month from savings to debt payments, and do a high-interest snowball on the rest to be debt-free by June 2017 after paying $5.4k interest
  • Fast Snowball: Pay off one card, do a 0% balance transfer on the other, divert $250/month from savings to debt payments and do a high-interest snowball on the rest to be debt-free by April 2017 after paying $4.2k in interest.
  • Reign in the Spendypants: Do the Fast Snowball but cut $500 from spending and apply that to debt as well to be debt-free by Nov 2016 paying $3.3k interest.
  • Do I Smell Smoke?: Do the Fast Snowball but cut $1k from spending and apply that to debt as well to be debt-free by July  2016 paying $2.7k interest.


First, I love the plan names.

Does debt-free include the mortgage?  Truly 0 debt?

I would be seriously tempted to not show them option 3--the Fast Snowball.  It benefits them only slightly compared to #2, and it's a little dangerous in that it's really not enough.  I fear that it makes an "easy" solution (no budget cuts) seem good enough.   

These people need to feel the pain and make some solid decisions.

Quote
Whew.  So now, ladies and gentlement, the post you've all been waiting for, every MMM'ers favorite game, your chance to vent and rant, to experience Schadenfreude ... let's play ...
Punch ... That ... Face

The rules for this round are simple:

You are seriously cracking me up.

Quote
The Mint Categories:
  • Home: $1,112.80 ($950 mortgage, some home depot stuff)
  • Auto & Transport: $1,062.86 (loans, insurance, fuel, service)
  • Shopping: $828.94 (A blend of groceries and household items)
  • Bills & Utilities: $693.84 (DirecTV, Verizon iPhones, DSL/landline, gas, electric)
  • Food & Dining: $495.77 (all groceries)
  • Uncategorized: $302.28 (one ATM and a couple checks)
  • Financial: $297.25 (term life insurance premiums)
  • Fees & Charges: $213.82 (mostly interest on credit cards)
  • Other: $177.98 (from $20 at the dollar store to the $5 spent at Amazon's Kindle store)
  • Total: $5185.54


Holy shit.  (Sorry!)

If some of the details were not slightly different, I would think these people are my parents.  They're "making it" on their retirement income, but very, very close to a major disaster.  Waste so much at walmart and on cell phones they forget to ever turn on.  Would give up a kidney before cable or their newish cars.  Sigh.

Okay, it's very clear they MUST cut the budget, and I think $1000 is too little.  Luckily, they have a lot of fat to cut.

I'm hoping they see this and flip out b/c for most of it, they just have to stop wasting money.

Some easy wins:

- Shopping and groceries.  Not sure there's anything to really say except STOP.
- The cell phones must be replaced with a cheap plan.  Question the landline.
- I know you said not to mention the cars but this is killing them.  I hope this makes them see this.  It's such an easy win.
- They need to figure out if they really need that life insurance.  As I said upthread, they might.

Home and real utilities (G&E) actually seem reasonable.  Until the roof caves in, of course.


RetireAbroadAt35

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Re: Case Study: Spreading the Good Word
« Reply #38 on: October 29, 2014, 06:12:10 PM »
First, I love the plan names.
Hah, yes thank you
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Does debt-free include the mortgage?  Truly 0 debt?
Yep

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You are seriously cracking me up.
Excellent :)  I figure we could use some levity 'round this joint.

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Holy shit.  (Sorry!)
Yeah, I had two holy shit moments.  First when I determined their net income.  Second when I added up the spending.  It was a two-fer double wtf.

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Some easy wins:
I plan to talk about cars once they have agreed to take some sort of action.  So far I've only presented options for what they could save, not how they would save it.  That's coming up.  Thanks for the ideas.

I am waiting for some info on life insurance so I can start my education on that.

horsepoor

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Re: Case Study: Spreading the Good Word
« Reply #39 on: October 29, 2014, 08:30:36 PM »
I love this thread.  You're doing them a great service and I hope they really take your recommendations to heart and take the fast route to being debt-free.