Author Topic: Confused about the order in which to tackle some things...  (Read 5533 times)

Seiya174

  • 5 O'Clock Shadow
  • *
  • Posts: 3
Confused about the order in which to tackle some things...
« on: March 15, 2014, 02:41:28 AM »
Firstly, I am so glad to have found this website. It has completely changed my mindset and caused me to examine my expenses over the period of a month - I could not believe what I found.
In the month of Feb. 2014, my total expenditure was a whopping $5,200...$3500 of which had nothing to do with living expenses ($1100 in ATM withdrawls, $800+ dining out, etc.). I am ashamed of this, and am taking steps to make sure that it NEVER gets near that point again.

My question involves the order in which to go about paying debt/saving.
I have a bit of debt, including student loans, that I have been chipping away at. I also have literally not saved a dime since I began my career a couple of years ago.
$7000 (18% interest rate) in credit card debt and $20000 (6.5% interest rate) in remaining student loan debt.
I have the option of a 403(b) at work, but otherwise no savings account.

I am planning to SEVERELY limit my spending to the point where at least 50% of my monthly income ($4400 monthly income after taxes) will be saved.
Should I start immediately contributing to my 403(b), or should I use all of the money to pay the debt FIRST, and then start the contributions?
I am afraid to make a move in either direction, being new to the frugality thing, so I am just frozen in one spot.

One thing is for certain, I am going to examine each and every dime that leaves my hand from now on.
« Last Edit: March 15, 2014, 03:00:40 AM by Seiya174 »

livraison

  • 5 O'Clock Shadow
  • *
  • Posts: 8
Re: Confused about the order in which to tackle some things...
« Reply #1 on: March 15, 2014, 02:52:55 AM »
You should specify what interest rates you're paying on your debt. That makes a big difference.

On the assumption that your credit card debt is at the usual double-digit interest rates, you should most likely tackle it first (as fast as you can, as much as you can).

I have no idea what a 403(b) is, so will leave it to any Americans replying to advise if that makes any difference.

Seiya174

  • 5 O'Clock Shadow
  • *
  • Posts: 3
Re: Confused about the order in which to tackle some things...
« Reply #2 on: March 15, 2014, 03:00:53 AM »
Thank you for your reply! I just updated with the rates :)

livraison

  • 5 O'Clock Shadow
  • *
  • Posts: 8
Re: Confused about the order in which to tackle some things...
« Reply #3 on: March 15, 2014, 03:24:07 AM »
Yikes! My advice: Turn the heat down low and eat rice and beans until the $7,000 on the card is down to $0. I'll let others advise on which order to take after that between the student debt and the 403(b), but my guess is that after the credit card you should move on to the 6.5% loan.

The good news is, you'll see results quickly from the changes you're going to make. Good luck!

lizfish

  • Pencil Stache
  • ****
  • Posts: 821
  • Location: England
Re: Confused about the order in which to tackle some things...
« Reply #4 on: March 15, 2014, 03:47:43 AM »
Wishing you all the best for your journey. Welcome to the MMM community. Echoing another poster, with that level of spending you have a lot of changes you can make and fast. and you earn pretty good money from what I can see. You are in a great position and primed to make amazing changes. Good luck!

mariarose

  • 5 O'Clock Shadow
  • *
  • Posts: 50
Re: Confused about the order in which to tackle some things...
« Reply #5 on: March 15, 2014, 03:51:25 AM »
Hi!  The really good news is you seem to have a nice income, to have spent so much on nonsurvival, and still have been chipping away at that SL!  This means you can turn things around far faster that some of us who have less income to work with!  I agree with those who say to concentrate on the CC, but would suggest a small emergency fund first, to prevent you from turning to the CC the next time life happens.  It is so discouraging to make real progress and then have to charge again simply because you did not have a spare $200.  It does not matter where you put it, savings account, a buffer in your checking acct that you don't record, in cash.  I read one idea that I thought creative and hilarious.... Put $1000 in hundred dollar bills in a picture frame. In place of a picture, have a sheet of paper that reads in bold print "IN CASE OF EMERGENCY, BREAK GLASS".

Then tackle that CC.  Then I would start your retirement savings AND work on that SL simultaneously.  And be kind to yourself if you slip from time to time, because going from completely money mind-less to completely money mind-full is a huge leap, and badassity takes time and effort. Welcome.

warfreak2

  • Handlebar Stache
  • *****
  • Posts: 1140
  • Location: UK
    • Music by me
Re: Confused about the order in which to tackle some things...
« Reply #6 on: March 15, 2014, 04:43:16 AM »
I can't get behind advice to keep cash instead of paying off the credit card because 'it might be frustrating to charge an emergency to it later'. You're advising charging the emergency now, preemptively. Just put all non-living money towards the credit card debt, that already is an emergency.

Nancy

  • Guest
Re: Confused about the order in which to tackle some things...
« Reply #7 on: March 15, 2014, 06:48:38 AM »
Does your employer match retirement contributions? Also what is your monthly take home pay? Is it near the $5K figure that you spent in Feb or did that contribute to the CC debt?

stash4cash

  • 5 O'Clock Shadow
  • *
  • Posts: 38
Re: Confused about the order in which to tackle some things...
« Reply #8 on: March 15, 2014, 08:19:53 AM »
Personally, I would:

1) Tackle CC debt first. If you can really contribute half your income to debt, I would go for paying this off in 3 months - maybe selling a few things to make up any gap.

The next step is a bit more of situation / personal preference. If your employer matches 403b contributions, I personally would probably want to at least ensure I got all that matching money as well as taking advantage of the tax benefits of the 403b contribution.
If your employer doesn't match, I would probably go for paying off the student loan as quickly as possible. If you can really save 50% of your income to put towards debt, it seems like you will have completed 1 and 2 above in approximately 1 year.


mariarose

  • 5 O'Clock Shadow
  • *
  • Posts: 50
Re: Confused about the order in which to tackle some things...
« Reply #9 on: March 15, 2014, 09:05:51 AM »
I can't get behind advice to keep cash instead of paying off the credit card because 'it might be frustrating to charge an emergency to it later'. You're advising charging the emergency now, preemptively. Just put all non-living money towards the credit card debt, that already is an emergency.

OK, but I did not say "it might be frustrating to charge an emergency to it later"  Not all life happenings are emergencies.  Like a water heater needing to be replaced.  That should not be an emergency.  It just is life happening, as it does, and needs to be cash flowed.  It is a good idea, in my opinion, to have money in an account for life happenings.  The OP asked for ideas/opinions.  I gave mine. I make more progress when I have a stash that I can use to cash flow life without going backwards.  The OP's income is such that he/she/they can easily get a small buffer and pay off that card in 2 months.  Or they can just pay off that card in 2 months, have no buffer, and have to go into debt again for something that should not be an emergency.  Timewise, there is no difference.  He/She/They can not pay it off in 1 month, and should not have to take 3 months.  So....What?

mariarose

  • 5 O'Clock Shadow
  • *
  • Posts: 50
Re: Confused about the order in which to tackle some things...
« Reply #10 on: March 15, 2014, 09:35:24 AM »
Hi!  The really good news is you seem to have a nice income, to have spent so much on nonsurvival, and still have been chipping away at that SL!  This means you can turn things around far faster that some of us who have less income to work with!  I agree with those who say to concentrate on the CC, but would suggest a small emergency fund first, to prevent you from turning to the CC the next time life happens.  It is so discouraging to make real progress and then have to charge again simply because you did not have a spare $200.  It does not matter where you put it, savings account, a buffer in your checking acct that you don't record, in cash.  I read one idea that I thought creative and hilarious.... Put $1000 in hundred dollar bills in a picture frame. In place of a picture, have a sheet of paper that reads in bold print "IN CASE OF EMERGENCY, BREAK GLASS".

Then tackle that CC.  Then I would start your retirement savings AND work on that SL simultaneously.  And be kind to yourself if you slip from time to time, because going from completely money mind-less to completely money mind-full is a huge leap, and badassity takes time and effort. Welcome.

You are suggesting the OP effectively pay 18% on that emergency savings while earning 0.x% on it.

It is best to pay down that credit card as fast as possible with no money set aside for an emergency.  Paying 18% is the emergency!  Your joke about breaking the glass in case of emergency -- this is it.  Worst case scenario is the OP pays down some of the credit card, then is forced to charge some more on it because another emergency pops up.  Best case scenario is the OP pays off the card and builds up an emergency fund AFTER the card is paid off.  Either way, the OP still comes out ahead compared to sitting on cash while paying 18% on a credit card.

No, As I pointed out, but you did not quote, there is NO time difference here.  The OP can not pay $7000 in 1 month, and should not have to take 3 months, with $4400 extra per month.  So the OP has a buffer and paid off CC in 2 months, or the OP has no buffer and a paid off CC in 2 months, and has the risk of going backwards.  With only $4400 extra to put to debt, can he/she pay off $7000 in the first month?  I say no.  So, there we are, Best case scenario, 2 month pay off.  Do you suggest a 2 month payoff, no buffer, or a 2 month pay off with a buffer.  I prefer the buffer.  That is my advice to the OP.  He/She can take it, or leave it, with no ill will from me.  Not sure why you have an issue with me giving my opinion. It is as valid as yours, timewise.  I have not even opined on the amount of buffer the OP should consider.

AlanStache

  • Handlebar Stache
  • *****
  • Posts: 1866
  • Age: 39
  • Location: South East Virginia
Re: Confused about the order in which to tackle some things...
« Reply #11 on: March 15, 2014, 09:59:39 AM »
I generally like the idea of a emergency fund but given the income level and assuming a pay check twice per month if something does come up it will be a short wait till more income lands in the checking account.  Personally I would probably wait on the emergency fund till the cc is paid off in 2-3 months, then set my checking account hard deck to 1k.

Also you need to evaluate if you can use cc's responsibly and always pay them off in full.  I pay mine off sometimes every week online.  Maybe taking a brake from them cold turkey is a good idea, and only spend cash or debit card for a while.  Rewards programs are great but if you get back into bad habits they are a net negative.

If there is a match on the 403 I think you should start contributing up to that level.  It will be nice to see some positive growth while paying down the debt.  And the match will offset the bit of extra interest.  And it will establish a good habit, and make you learn a bit about saving/investing.

mariarose

  • 5 O'Clock Shadow
  • *
  • Posts: 50
Re: Confused about the order in which to tackle some things...
« Reply #12 on: March 15, 2014, 10:07:18 AM »
Good point about the 403b match being a possibility.  Would you suggest doing the match even before the CC is completely gone?

AlanStache

  • Handlebar Stache
  • *****
  • Posts: 1866
  • Age: 39
  • Location: South East Virginia
Re: Confused about the order in which to tackle some things...
« Reply #13 on: March 15, 2014, 10:13:00 AM »
Quote
Good point about the 403b match being a possibility.  Would you suggest doing the match even before the CC is completely gone?

Given the cc will be gone so soon and that it might take some legwork to get the 403 up and running, yes I would say try to get that going now.  Would stuck to pay off the cc in three months only to learn that enrollment in the 403 can only be done twice per year and it was just missed by one month. 

TomTX

  • Magnum Stache
  • ******
  • Posts: 3440
  • Location: Texas
Re: Confused about the order in which to tackle some things...
« Reply #14 on: March 15, 2014, 01:19:48 PM »
1) Get your spending under control. It looks like you are already on this step.

2) Put enough in the 403(b) to get the full employer match (usually 50-100% FREE MONEY) - and not one penny more. 403(b) is just a container for your money - you still have to pick an actual investment. Look for a LOW COST option that is also an INDEX FUND. You do not want any actively managed funds - they cost WAY too much in expenses and fees.

3) Pay off the credit card debt. In full. Never carry a balance again.

4) Set up a $1,000 emergency fund.

5) Pay off student loans in full.

6) Start real savings/investment : 403(b), IRA, post-tax investments, et cetera. Go read the Investor Alley board here while you are paying down debt and figure out where to put the $$.

Thegoblinchief

  • Guest
Re: Confused about the order in which to tackle some things...
« Reply #15 on: March 15, 2014, 07:43:45 PM »
Credit card first.

Contribute to 403(b) to get the match, if any. Your current tax bracket isn't very high, however, so the deferred tax isn't a huge deal.

Open a Roth IRA. Immediately max that out. Investments are your choice, but index funds are the favorite for most around here. This is the best "container" at your income level. Yes, you take a small tax haircut now, but it's tax free for life, and principal can be accessed within 5 years penalty free if necessary.

Then prepay the SL with what's left.

Seiya174

  • 5 O'Clock Shadow
  • *
  • Posts: 3
Re: Confused about the order in which to tackle some things...
« Reply #16 on: March 15, 2014, 08:35:18 PM »
Thank you ALL so much for your thoughts on my dilemma.
I learn so many new things every day just reading what you all have to say.

As far as 403(b), many mentioned to contribute to it to get the employer match, but I do not think my current employer offers any kind of match.
If this is the case, should I skip it and go right for an IRA, or contribute anyway for the benefit of pre-taxed investment, in addition to an IRA?

Thanks again for your insight, I really appreciate it..

Matt

AlanStache

  • Handlebar Stache
  • *****
  • Posts: 1866
  • Age: 39
  • Location: South East Virginia
Re: Confused about the order in which to tackle some things...
« Reply #17 on: March 15, 2014, 08:37:04 PM »
wrt contributing to an IRA, you might be able to do this for 2014 after the student loans are paid off or are really close.  Remember you can contribute to tax 2014 IRA up to April 15 2015.  One year from now you will have the cc paid off and a large chunk of the student loan paid off and once April 15 rolls by you cant contribute to that tax years free growth account ever again.  Strictly by the numbers we say long term market averages will return 7-8%, that is larger than your student loan rate but most all here would recommend paying off that debt before getting really into investments.  That said if you get to this time next year and have all but 4k left on the student loan I would try to fund an IRA for 2014. 

All that said, this is really stressing about how the weeds look from 35,000 ft up.  SPEND LESS, PAY OFF THE CC, PAY DOWN THE STUDENT LOAN, INVEST AS MUCH AS YOU CAN.  Its like losing weight, eat fewer calories, exercise more, the rest is details.

SPEND LESS!!!!  This is the biggest factor in everything.