Author Topic: Case Study - Help me tackle debt and build plan for future  (Read 10127 times)

moustache1979

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Case Study - Help me tackle debt and build plan for future
« on: February 28, 2014, 05:39:31 PM »
My income after tax & deductions (medical, 401k, mass transit): $9,000/mo.  $1,700 a month going into 401k including employeer match. 

Current Avg Monthly Expenses
1st Mortgage $1750 includes $450 per month for prop taxes and $60 per month for homeowners ins.
2nd Mortgage $300
Heat, Electric, water, trash $250
Car payment $500
Credit card (2.99% fixed) $60
Student loan $80
Car insurance $40
Term life $40
Parking $25
Kids school $400
Gasoline $200
Groceries $1000
Other $655 (dining, shopping, kids activities)

$5,300 per month spending

Assets
401k $136,000
checking $16,000 @ 2.5%
I Savings bonds $16,000 @ CPI
CD's $13,000 @ 2.5%
IRA $5,000
college savings $9,000 (3 young kids)
investments $5,000
property value $185,000 (well underwater on mortgage)
Company stock $150,000 vests over next 5 years; after tax; $20,000 vesting late May
Cash Bonus $35,000 after tax available late march
Paid-off car $3,000
Total $443,000 (excluding stock that vests over a year from now)

Debt
mortgage $203,000 @ 4.875% (25 years left on a 30 year fixed)
2nd mortgage $34,000 @ 8.125% (10 years left on a 15yr balloon)
student loan $20,000 @ 2.25% fixed
Car $26,000 @ 0% interest (value $18,000)
Credit card $4,500 balance @ 2.99% fixed
Total $287,500

Objectives - family of 5.  Our life is hectic, I work a lot, my wife stays at home to take care of 3 young kids.  I want to get out of debt and on track to retire early so I can work less.   What is best way to tackle / refi mortgage debt given underwater and current rates?   

Longer term I'm interested in owning a rental house and saving for kids education and eventual full retirement.

Please help me plan out some next steps to execute this strategy, especially given near term bonus $ and stock vesting.   Thanks!

MDM

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Re: Case Study - Help me tackle debt and build plan for future
« Reply #1 on: February 28, 2014, 06:12:45 PM »
1.  Pay off the 2nd mortgage by the end of March 2104 by using checking, CDs, bonus, etc.  Don't want to keep money earning 2.5% that could be used to "earn" 8.125%.
2.  If you aren't already (appears you are at least close) take your 401K contributions to the maximum allowed.
3.  Check into refinancing mortgage for lower rate (may or may not be doable, but check) and shorter term
4.  If you can't refinance, start paying down principle now.  E.g., what would it take to get it paid off in 10 years?

Start with the above.  If you can do all that, then you will be ready for another look at expenses and investment options.

Certainly other ways to approach this and you'll likely get some....

Another Reader

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Re: Case Study - Help me tackle debt and build plan for future
« Reply #2 on: February 28, 2014, 06:42:28 PM »
In your shoes, I would kill the second mortgage with the bonus.  Does your AGI put you above the Roth phase out?  If not, I would fund any Roth eligibility for you and your wife with the bonus, pay down the second with the remainder, and kill it by selling some of the company stock.

Having credit card debt with your income is silly.  You should be able to cash flow that away in a couple of months. Where's the $3,700 difference between $9,000 and $5,300 going?

If you and your wife want to get you out of the rat race, you need to sit down together and pare the expenses.  And account for that $3,700.


moustache1979

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Re: Case Study - Help me tackle debt and build plan for future
« Reply #3 on: February 28, 2014, 06:51:57 PM »
I plan to do ira contributions before I file.  I can do a Roth contribution this year I believe but I am close to limit.  Doing a standard IRA for wife or I will be paying taxes.

401k contribution will max out in 2014

$3, 700 is a new thing.   Started  reading MMM in mid January and that's our new spending plan. Did a decent job in Feb so far.
« Last Edit: February 28, 2014, 07:06:32 PM by moustache1979 »

Weedy Acres

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Re: Case Study - Help me tackle debt and build plan for future
« Reply #4 on: February 28, 2014, 08:45:38 PM »
Yes, pay off the second mortgage.

Then use some of your cash/equivalents to pay off your car.  Then sell the car and get something more mustachian.

Then take the rest of your cash and car proceeds to pay off the CC and student loans.

Now within a month, without those payments you've got close to five grand a month to do great things with.  Do some math on current mortgage rates and whether a refi will save you much.  If it's not a compelling case, I would probably chunk half your monthly at the mortgage and put the rest in index funds.  Maximize tax advantaged accounts, but when you're maxed, then put it in after tax accounts and watch it pile up.

moustache1979

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Re: Case Study - Help me tackle debt and build plan for future
« Reply #5 on: March 01, 2014, 11:33:36 AM »
any advice on the mortgage?   Is it worth throwing some cash at that to get to 80% ltv in order to refi into a 15 yr fixed?

ASquared

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Re: Case Study - Help me tackle debt and build plan for future
« Reply #6 on: March 01, 2014, 12:19:18 PM »
Agree pay off 2nd mortgage ASAP.  High rate, you have the $ to do it, and decreases your monthly expenses permanently. 

Consider refi if its worth it.  Run the #s.  Check pentagon FCU for rates. 

Do you have an HSA? Consider setting one up, since you don't pay taxes on either end.  Esp with your family of 5 - will come in handy someday I'm sure!

I know this won't be popular but throwing it out there anyway:  do you need that expensive of a car?  Could you sell and downgrade?

moustache1979

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Re: Case Study - Help me tackle debt and build plan for future
« Reply #7 on: March 01, 2014, 12:44:00 PM »
Yes, should have added I have about $6k going into HSA pre tax.   

Cheddar Stacker

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Re: Case Study - Help me tackle debt and build plan for future
« Reply #8 on: March 01, 2014, 12:50:22 PM »
5 liquid(ish) assets total $85K; cash, savings bond, CD, Investments, and Bonus. Use these to complete these steps:

Step 1 - Lose the horrible debt - 2nd Mortgage $34K at 8+%. Pay that off immediately, like Monday, or right now if possible.
Step 2 - Pay off the $4,500 CC. It's a low rate, but also a low balance and easy to wipe out and simplify things a bit.

Step 3 - You have $45K left, and 3 more debts to consider. If you're keeping the car (which I wouldn't recommend) don't pay it off early until everything else is cleared. You can't beat 0.0% loans. I would also leave the SL debt alone and simply pay the minimum until you're ready to get rid of it. You are likely right in the SL interest phase out range so it's not fully deductible, but there is no reason to accelerate this other than to simplify. I'd pay it as slow as possible and invest.

Step 4 - If you followed step 1-3 and still have the car, you still have $46K to use. Talk with a banker who specializes in mortgages (not a mortgage company/broker). If you don't already know one, credit unions would be a good place to start. If they can't help, go to a smaller local/regional bank, not a BOA/US Bank type. Use the least amount of your remaining $46K required to refi to a 15 year loan at a great rate. Use the HARP program if you have to which allows a refi with a LTV of up to 125%. This rate isn't absurd like the 2nd, but it's still worth doing unless you have to use $30-40K to do it. You should be able to get a better rate for less.

Step 5 - Invest whatever is left, preferably in IRA's. Your wife can do a Traditional IRA contribution of up to $5,500/year, but you can't. Use whatever you have access to: HSA's, Roth/backdoor Roth, 529 plans, etc.

Good luck!

moustache1979

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Re: Case Study - Help me tackle debt and build plan for future
« Reply #9 on: March 01, 2014, 01:07:03 PM »
Cheddar - that's very helpful.  I've already used harp in 2009 to get the 4 7/8% mortgage.   I have a credit union account and also a local bank so will give them a call next week to run through options.

For now we are holding on to car

La Bibliotecaria Feroz

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Re: Case Study - Help me tackle debt and build plan for future
« Reply #10 on: March 01, 2014, 01:09:27 PM »
I notice that you have school tuition but your wife stays at home. That's my situation, too. I work part-time from home during evenings, nap times, and preschool for a company called Leapforce. Might be something for either you or your wife to consider--a little extra income would help hit the debt faster. Here's my link if you want to check it out: https://www.leapforceathome.com/qrp/public/jobs/list?uref=195bda36a5c5a2df16251c3f2b7985b3

Cheddar Stacker

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Re: Case Study - Help me tackle debt and build plan for future
« Reply #11 on: March 01, 2014, 01:16:33 PM »
I notice that you have school tuition but your wife stays at home. That's my situation, too. I work part-time from home during evenings, nap times, and preschool for a company called Leapforce. Might be something for either you or your wife to consider--a little extra income would help hit the debt faster. Here's my link if you want to check it out: https://www.leapforceathome.com/qrp/public/jobs/list?uref=195bda36a5c5a2df16251c3f2b7985b3

^ This would also allow you to get a 20% tax credit for the tuition if it's preschool/daycare type. This is limited to $3K expense/$600 credit per year per kid, but you can only take it to the extent you both have wages.

Also, I didn't mention it before and no one else has yet, but $1K/month for groceries is high. I know you said you just implemented the new budget and I'm sure it's a struggle to change everything at once, but that expense really sticks out. Once you settle into this, look into various ways to lower that one.

La Bibliotecaria Feroz

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Re: Case Study - Help me tackle debt and build plan for future
« Reply #12 on: March 01, 2014, 02:59:55 PM »
CheddarStacker is right and makes a good point. The child care tax credit is substantial and it can be used for preschool as long as both parents have earned income.

moustache1979

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Re: Case Study - Help me tackle debt and build plan for future
« Reply #13 on: March 01, 2014, 03:02:36 PM »
Thanks will look into it.  Its for kindergarten but will have preschool too next year

moustache1979

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Re: Case Study - Help me tackle debt and build plan for future
« Reply #14 on: March 14, 2014, 02:06:35 PM »
Update - followed the suggestions and got rid of the 2nd Mtg and ramped up the retirement savings.

My income after tax & deductions (medical, 401k, mass transit): $9,000/mo.  $1,700 a month going into 401k including employeer match. 

Current Avg Monthly Expenses
1st Mortgage $1750 includes $450 per month for prop taxes and $60 per month for homeowners ins.
2nd Mortgage $300
Heat, Electric, water, trash $250
Car payment $500
Credit card (2.99% fixed) $60
Student loan $80
Car insurance $40
Term life $40
Parking $25
Kids school $400
Gasoline $200
Groceries $1000
Other $655 (dining, shopping, kids activities)

$5,300 per month spending

Assets
401k $136,000 146,000
checking $16,000$10,000 @ 2.5%
I Savings bonds $16,000 @ CPI
CD's $13,000 @ 2.5%
IRA $5,00016,000
college savings $9,000 (3 young kids)
investments $5,000
property value $185,000 (well underwater on mortgage)
Company stock $150,000 vests over next 5 years; after tax; $20,000 vesting late May
Cash Bonus $35,000 after tax available late march
Paid-off car $3,000
Total $443,000 (excluding stock that vests over a year from now)

Debt
mortgage $203,000 @ 4.875% (25 years left on a 30 year fixed)
2nd mortgage $34,000 @ 8.125% (10 years left on a 15yr balloon)
student loan $20,000 @ 2.25% fixed
Car $26,000 @ 0% interest (value $18,000)
Credit card $4,500 balance @ 2.99% fixed
Total $287,500

MDM

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Re: Case Study - Help me tackle debt and build plan for future
« Reply #15 on: March 14, 2014, 03:41:36 PM »
moustache1979,

Congratulations - nice work!

If I read your update correctly, you still have $3,700/mo available to invest.  Below is a quick look at what putting $1K/mo of that toward your mortgage could do: save $96K in interest, and get it paid in ~10 years instead of 25.

Again, nice work and thanks for communicating back.

Loan amount$203,000.00
Annual interest rate4.875%
Loan period in years25
Number of payments per year12
Start date of loan12/1/2013
Optional extra payments $1,000.00
Scheduled payment $1,171.98 $1,171.98
Scheduled number of payments300300
Actual number of payments300118
Total early payments $-    $117,531.99
Total interest $148,594.27 $52,832.63

moustache1979

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Re: Case Study - Help me tackle debt and build plan for future
« Reply #16 on: March 14, 2014, 03:52:07 PM »
Thanks - I do plan to start paying the extra $1k or more towards the mortgage. 

Thegoblinchief

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Re: Case Study - Help me tackle debt and build plan for future
« Reply #17 on: March 14, 2014, 06:01:24 PM »
1,650 spending in groceries and other is really high.

I have three kids and spend $500 including alcohol. You should shoot for $1,000 tops and optimizing further will be easy without compromising lifestyle. This would still allow for eating out, alcohol, some convenience food. I'd feel silly spending even that much.

Cutting to $1,000 in variable spending gives you an immediate after tax raise of $7,200.

Cheddar Stacker

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Re: Case Study - Help me tackle debt and build plan for future
« Reply #18 on: March 14, 2014, 09:32:54 PM »
Thanks for the update moustache, and great job getting rid of that high interest debt.

Quick note, after updating your expenses and wiping out the $300/month toward your 2nd mortgage, you forgot to update the total expenses, so you actually may have $4K extra per month for investing/accelerating debt payments.

Great to see you maxing out the retirement accounts, that should accelerate FI very nicely for you.

Another Reader

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Re: Case Study - Help me tackle debt and build plan for future
« Reply #19 on: March 14, 2014, 09:57:16 PM »
In your shoes, I would cash flow the credit card debt and the student loan debt next.  The low interest on the credit card likely expires at some point and student loans are alligators because they are not bankruptable.  That's the next 5 months at $4,000 a month, or sell some of the company stock when it vests to speed up the process.  Once all the miscellaneous debt is cleared, give some thought to whether you really want to pay off that mortgage or if you want to invest.  If you are getting any mortgage interest deduction, that should be considered as well.  My preference would be to keep the mortgage or maybe refinance to a shorter term if the rate can be reduced significantly with little or no cost and your income is secure.  I like leverage when it allows me to use my capital to earn a higher rate of return elsewhere. 

Keep working on the expenses, usually high spending is the result of lack of focus and/or organization.  You will also re-build your taxable investment accounts quickly once you get rid of more debt and reduce spending.

Cheddar Stacker

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Re: Case Study - Help me tackle debt and build plan for future
« Reply #20 on: March 14, 2014, 10:12:23 PM »
In your shoes, I would cash flow the credit card debt and the student loan debt next.  The low interest on the credit card likely expires at some point and student loans are alligators because they are not bankruptable.  That's the next 5 months at $4,000 a month, or sell some of the company stock when it vests to speed up the process.  Once all the miscellaneous debt is cleared, give some thought to whether you really want to pay off that mortgage or if you want to invest.  If you are getting any mortgage interest deduction, that should be considered as well.  My preference would be to keep the mortgage or maybe refinance to a shorter term if the rate can be reduced significantly with little or no cost and your income is secure.  I like leverage when it allows me to use my capital to earn a higher rate of return elsewhere. 

Keep working on the expenses, usually high spending is the result of lack of focus and/or organization.  You will also re-build your taxable investment accounts quickly once you get rid of more debt and reduce spending.

I agree on the credit card since it's small and there's no real benefit to keeping it. However, at 2.25% I don't see a good reason to pay the SL debt quickly which I mentioned above. Hell, their checking account is earning 2.5% so what's the point? They might still get a tax deduction for the SL interest depending on AGI, and can almost certainly double that return by investing in stock funds. I see your point about the SL debt not being bankrupt-able, but if your assets far exceed the outstanding debt, it has a low fixed rate, and the monthly payment is manageable within your budget (OP meets all these conditions) I say keep the low fixed rate debt and invest whatever you can.

To each their own though, there is certainly something to be said for carrying no debt.

stash4cash

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Re: Case Study - Help me tackle debt and build plan for future
« Reply #21 on: March 15, 2014, 08:44:32 AM »
Out of curiosity, what checking account do you have that earns 2.5%?

ASquared

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Re: Case Study - Help me tackle debt and build plan for future
« Reply #22 on: March 15, 2014, 11:56:42 AM »
Congrats!  Nice work.  I'm sure it feels great to have that 2nd mortgage off your back.  And your expenses are now permanently reduced.  Excellent job. 

Consider looking into a refi for the 200k balance you have.  Pentagon Fed has excellent rates.  You might even want to consider if an ARM (5 or 10 etc) would be a good option - getting a lower rate for when you have the highest balance, especially if you want to pay extra on your mortgage.  You will likely pay significantly less overall if you do this rather than paying extra on your existing mortgage. 

Either way - great job.

moustache1979

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Re: Case Study - Help me tackle debt and build plan for future
« Reply #23 on: March 16, 2014, 07:27:23 AM »
Stash4cash - I have 2 reward checking accounts
1) Great lakes CU - 3% rate on up to $10k, you need to make 10 debit transactions, and a few other qualifications each month to get the 3% rate
2)Standard Bank and Trust - 2.25% rate up to ~$20K same type of qualifications

I tend to have a bunch of small transactions each month which I use my debit for to qualify on these accounts...many other credit unions and small neighborhood banks offer similar options.  Check out depositaccounts.com for more info

moustache1979

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Re: Case Study - Help me tackle debt and build plan for future
« Reply #24 on: May 22, 2014, 06:20:08 AM »
Further Update - I have ~$25k coming in from stock vesting.  I'm not compelled to further pay off student loan or mortgage.  Vehicle loan and Credit card rates are very low and fixed for life.  Also not excited to throw cash into stock market, have a lot of exposure through retirement accounts and also employer stock. Already maxing out tax advantaged accounts (401k, IRA's and HAS).  Any suggestions on where to put this cash?  Any additional feedback?  Biggest struggle is keeping expenses down with 3 young kids!

~~~~~~~~~~~~~~~~~~~~~~~~~~~

My income after tax & deductions (medical, 401k, mass transit): $9,000/mo.  $2,000 a month going into 401k including employer match.  On track to hit max in Dec.

Current Avg Monthly Expenses
1st Mortgage $1750 includes $450 per month for prop taxes and $60 per month for homeowners ins.
2nd Mortgage $300
Heat, Electric, water, trash $250
Car payment $500
Credit card (2.99% fixed for life) $60
Student loan $80
Car insurance $40
Term life $40
Parking $25
Kids school $500
Gasoline $200
Groceries $1000
Other $655 (dining, shopping, kids activities, gifts, donations)

$5,100 per month spending - this is a best case ideal month.  Recent months have been higher due to some fairly expensive home/car items hit regularly, so hopefully that stops

Assets
401k $151,000
checking $11,000 @ 2.5%
I Savings bonds $16,000 @ CPI
CD's $13,000 @ 2.5%
IRA's $16,000
college savings $10,000 (3 young kids)
property value $186,000 (well underwater on mortgage)
Company stock $137,000 vests over next 5 years; amount is after tax
Loaned car $18,000
Paid-off car $1,000
Total $422,000 (excluding unvested stock)

Debt
mortgage $202,000 @ 4.875% (25 years left on a 30 year fixed)
2nd mortgage $34,000 @ 8.125% (10 years left on a 15yr balloon)
student loan $20,000 @ 2.25% fixed
Car $25,000 @ 0% interest (value $18,000)
Credit card $4,300 balance @ 2.99% fixed
Total $251,300

PloddingInsight

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Re: Case Study - Help me tackle debt and build plan for future
« Reply #25 on: May 22, 2014, 07:00:43 AM »
First, I am surprised at the similarity between my numbers and yours.  We are in a similar situation in life.  (I have 4 kids, low six figure salary, own a 200k property, pay tuition, stay at home wife, etc etc.)

My two cents:  I have never regretted paying down debts, even when the interest rates are low.  Less debt means more peace of mind. 

Cheddar Stacker

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Re: Case Study - Help me tackle debt and build plan for future
« Reply #26 on: May 22, 2014, 11:18:46 AM »
First, I am surprised at the similarity between my numbers and yours.  We are in a similar situation in life.  (I have 4 kids, low six figure salary, own a 200k property, pay tuition, stay at home wife, etc etc.)

+1. Many of my numbers are eerily similar to OP, even down to company stock that I don't really include in my assets due to liquidity issues. My main difference is I carry less savings (no cd's, bonds or college savings) and no retail debt (cars & CC's).

My two cents:  I have never regretted paying down debts, even when the interest rates are low.  Less debt means more peace of mind.

-1? Can I do that when I disagree (I guess I can do whatever I want right, this is the internet)?

Anyway, I have no problem with getting rid of high interest debts or small debts to eliminate monthly payments if that's what you need to do, but I don't think moustache1979 has that problem. But I'm in the "keep all low interest, leveraged debt for as long as possible and invest the difference" camp.

That said, I think your biggest weakness right now, other than high expenses particularly groceries, is your 4.875% upside down mortgage. You are still holding $29K in CD's and bonds that are likely earning much less interest than the mortgage is costing you. If you have extra funds and you don't want to invest in the market, pay down the mortgage. Get it to a point where you can refi into a 15 year 3.5% rate. If you don't want to do that, at least don't hold too much cash/CD's/Bonds at
0.25%-2.5% when you are paying almost 5% on the mortgage. Unless you have an immediate need for that cash, use it to reduce your highest interest rate debt.