Author Topic: help me get started  (Read 4831 times)

moustache1979

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help me get started
« on: January 21, 2014, 03:05:17 PM »
My income after tax & deductions (medical, insurance, 401k): $8,000/mo.  $1,700 a month going into 401k.  Presently spending most of the $8,000 most of the time, but wanting to cut back to $6,000 to start, so having $2,000 leftover.  For the $2,000 per month, should it be saved or put towards debt, and if so what debt would you start with?  I have additional assets I am not counting such as unvested stock awards and typically get a decent cash bonus on top of the $8,000 described above.

Assets
401k $130,000
checking $16,000
I Savings bonds $16,000
CD's $13,000
IRA $5,000
college savings $9,000 (3 young kids)
investments $5,000
property value $185,000 (well underwater on mortgage)



Debt
mortgage $203,000 @ 4.875% (25 years left)
2nd mortgage $34,000 @ 8.125% (20 years left)
student loan $20,000 @ 2.25% fixed
student loan $850 @ 5% fixed
Car $27,000 @ 0% interest
Credit card $4,500 balance @ 2.99% fixed

mensa

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Re: help me get started
« Reply #1 on: January 21, 2014, 03:58:46 PM »
Welcome Moustache 1979!

Your hair is on fire! You are being stung to death by killer bees! The debt is draining your will to live. Once you get out from under it, your invstments will start to rack up quickly.

I would begin with killing that 8%+ 2nd mortgage! That's a toxic amount of interest you're forking out.
Next on the list would be your wee amount at 5% on the student loan and your credit card balance. I realize the interest isn't huge on the cc, but since you're carrying a balance your charged interest on current purchases. This makes you a tool for the cc company, rather than making the credit card a tool for you use. (No I'm not calling YOU at tool :-) )

Doing the above 3 things would be accomplished in less than 2 years and take you from a net worth of ~135000 (which is basically your 401k) to 174000. It would get you rolling along well.

I see you've got some bonds and cds listed, which are likely paying crap. Can you get out of those and get that ~30k working harder for you?

Also, can you pare down your proposed 6000 in spending a month any further?It seems like a large amount to spend on a monthly basis, even with 3 wee ones. Throwing that extra onto your debt can make a huge difference.

Wishing you well!

moustache1979

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Re: help me get started
« Reply #2 on: January 21, 2014, 04:26:45 PM »
Thanks.   Some more info
The CC is not used for new purchases so only charged the 2.99%/mo.  Have another one I use to get 2% ccash back
The $6k includes $2100 for mortgage/prop tax, $2000 for spending on groceries,baby stuff, school, etc.

On the investments, I have. A lot of "risk on" w/ company stock worth $150k (vests over 5 years) and has performedator better than the S&P.  Didn't list that individually as its not mine until it vests.  The CDs and checking are paying 3%.

Do I need to give any consideration to the fact my 2nd mtg is underwater?

Saverocity

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Re: help me get started
« Reply #3 on: January 21, 2014, 04:42:12 PM »
Thanks.   Some more info
The CC is not used for new purchases so only charged the 2.99%/mo.  Have another one I use to get 2% ccash back
The $6k includes $2100 for mortgage/prop tax, $2000 for spending on groceries,baby stuff, school, etc.

On the investments, I have. A lot of "risk on" w/ company stock worth $150k (vests over 5 years) and has performedator better than the S&P.  Didn't list that individually as its not mine until it vests.  The CDs and checking are paying 3%.

Do I need to give any consideration to the fact my 2nd mtg is underwater?

I don't think you should worry about the mortgage being underwater unless you want to try to walk away from the debt, which will involve moving home and a lot of hiding your other assets- basically you can afford to pay it down so the general thinking should be that you should be responsible for it.

It does suck to be in that position, but give it some time and I am sure you will be back in shape.

My advice, may not be mathematically perfect as I often advocate holding debts and paying into a 401K, but in your case I would suggest that you may wish to just blast the debts out of the way, at the expense of 401K contributions.

Further to that, even though your 2nd mortgage is the worst debt, due to the size of the others it might be wise to take the $3700 and attack like this:

1. student loan $850 @ 5% fixed
2. Credit card $4,500 balance @ 2.99% fixed
3. 2nd mortgage $34,000 @ 8.125% (20 years left)
4. mortgage $203,000 @ 4.875% (25 years left)
5. student loan $20,000 @ 2.25% fixed

It is mathematically incorrect to tackle in this order, but if you do it like this then in month 1 you kill 1 debt, in month 2 you kill the second debt, and then in month 3 you are killing the third debt, and from a psychological perspective the sense of achievement (plus desire to get your 401k payments back online might encourage you to save even more each month as you become determined to kill your debt.  You could be free and clear of 1,2,3 in under a year, then if you are able to keep things tight you can lump money into a IRA at year end to balance out your retirement contribution.





seattlecyclone

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Re: help me get started
« Reply #4 on: January 21, 2014, 04:53:06 PM »
Do I need to give any consideration to the fact my 2nd mtg is underwater?

They charge the same interest regardless of whether your loan is underwater. Unless you want to get foreclosed on, you have to pay it off sooner or later. Why not sooner?

Liquidate your CDs and savings bonds to pay off this high-rate debt. Would you put $30k on a credit card at 8% to buy CDs that pay 3%? Of course not! So get rid of them and use the proceeds to kill the debt!

I also really have to question the car loan. 0% is a nice interest rate, but even better is not having a car payment in the first place! Sell the fancy car and buy a used one that costs $5k or less. Boom! No car payment!

These are two huge things you can do right now to improve your cash flow situation. When you do this, the money you're currently using to repay your car loan and your second mortgage every month can be used to further dig yourself out of debt, or start making some investments.

moustache1979

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Re: help me get started
« Reply #5 on: January 21, 2014, 05:47:58 PM »
Further clarifications and comments - the $1,700 401k includes a ~ $500 employer match.

The 2nd has a monthly payment of $294. 

Also, I am nervous about taking most/ all my savings to pay the 2nd given ihave 3 kids and my wife does not work.   I like having the $45K in no risk cash like vehicles in an event like job loss 

Thanks for all the comments so far

seattlecyclone

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Re: help me get started
« Reply #6 on: January 21, 2014, 06:31:06 PM »
The 2nd has a monthly payment of $294. 

Also, I am nervous about taking most/ all my savings to pay the 2nd given ihave 3 kids and my wife does not work.   I like having the $45K in no risk cash like vehicles in an event like job loss

I understand the desire to keep an emergency fund in case you become unemployed. One neat thing is that the amount you need for an emergency goes down when your spending does, just like the amount you need to retire goes down when you decrease your spending.

At your current spending level of $6k/month, your $45k that you have socked away could sustain your spending for 7.5 months. Do you really think that you wouldn't be able to find a new job for 7.5 months if you became unemployed? Might you be willing to go down to a three-month cushion until you get your debt under control?

What if you got rid of your second mortgage and car loan? You haven't said how much your monthly payment is, so I'll assume you have five years left on the loan (for a monthly payment of $450). With those two loans gone, you're only spending $5,250 per month, so you only need $15,750 for a three-month emergency fund. Coincidentally, that's less than you have in your checking account right now.

So I'll repeat my advice. Get rid of your CDs and savings bonds, and cash out your $5k in taxable investments. This money will pay off your second mortgage in full. You don't need to touch your checking account balance, which will become your three-month emergency fund.

Sell your car. It's costing you how much per month to have a fancy new car? Find a reliable, fuel-efficient, used car instead. Pay cash. If you can't afford to pay cash for a car, you can't afford the car. Period. The 0% loan is a marketing gimmick to convince you that you can afford to borrow money for a car. You can't!

Then look at the rest of your spending. Break it down in great detail. You say you spend $2.1k/month on your mortgage, $2k/month for "groceries, baby stuff, school, etc." and another $2k/month on other things that you haven't categorized. That's not nearly specific enough. There has to be some room to cut in there, but you need to analyze it better so that we can help you find the potential savings.

moustache1979

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Re: help me get started
« Reply #7 on: January 21, 2014, 07:33:10 PM »
More detail on expenses
Gas/electric/water/garbage. -300
Phone+internet - 175
Tv - 75
Gas for cars 250
Baby. Formula 200 (going away in next. 2 mos)
Diapers 100
School tuition 400
Groceries 800
Mortgage/prop tax 2100
Car 500
Student loans 125
Credit card 55
Life ins 40
Babysitter 150
Other (dining, entertainment, etc)

G-dog

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Re: help me get started
« Reply #8 on: January 21, 2014, 08:14:50 PM »
I think you've gotten lots of good ideas from the crowd.
I would search for ways to cut costs: My 1st targets are your phone/Internet, TV, babysitter, school tuition, and groceries.  The 1st 4 would fall in my "want" category, not my "need" category, you may keep but find less expensive options.  You obviously need food, but you may find a way to reduce that spend.

I notice the update says "cars", so I assume there are 2, with one paid for.  Getting rid of your car debt is a good option. The may also reduce your insurance cost, which you didn't list.

I'd also pay off same debts first to just have the success of having one less debt!  I think you can balance this with tackling the high interest rate. 

I don't know if you are regularly contributing into college funds for the kids, but since you noted that they are young, I would stop/ slow those in the interim and tackle the debt (catch up later). 

Greg

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Re: help me get started
« Reply #9 on: January 21, 2014, 08:37:24 PM »
Quote
ihave 3 kids and my wife does not work.

Quote
Babysitter 150

These two sentences could cancel each other out if you wanted.

astadt

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Re: help me get started
« Reply #10 on: January 21, 2014, 09:46:18 PM »
Just my two cents here.

But I would keep funding your Kids College funds (not my bag, mine will be making their own way, but if thats your families plan you want to do it right!)

Get rid of your CDs, and Bonds Use that money to pay down your high percentage debt.

What are your "Investments" in? Make sure they are in core stock index funds. Keep or start dollar cost averaging into those. Small at first but once you start crushing your debt it'll be fun to start adding more each month here.

Make sure put $5500 in a roth for 2013 before tax day... have a mind to get another $5500 out for this year.

Good luck!

moustache1979

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Re: help me get started
« Reply #11 on: January 22, 2014, 09:07:13 AM »
Action plan
Paid off the $850 student loan today
Reduce savings to 6x monthly spending (~$36k) and put excess (~$9k) toward the 2nd mortgage starting in Feb.
Will put bonus $ plus restricted stock (when it vests) towards debt (could be good amount of cash in March-May time frame)
Track spending more closely to get below the $6k monthly spend goal starting now
Put all cash above the 6x monthly spending towards 2nd mortgage.
May reduce 401k to the amount my employer matches and use the excess cash to pay down debt.  i don't like the idea of giving up the tax break though.

Regarding the roth comment, i believe my AGI is too high to contribute to an IRA, but my wife can so will do that.
My auto insurance for 2 cars is $523 in total (one car is paid off and very mustache-esque in its age and use).  It is payroll deducted so comes out before the $8k of income.  My homeowners is part of the mortgage amount will look into reducing that by increasing deductible.  I believe the annual cost there is $900.

astadt

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Re: help me get started
« Reply #12 on: January 23, 2014, 09:43:12 PM »
For Roth Contributions.

The limit for a married couple is a MAGI of $181,000.

If you are single it is $114,000


Modified Adjusted Gross Income is used to determine IRA eligibility. The calculation starts with adjusted gross income and then adds back in a number of items such as IRA deductions, self-employment tax, rental losses, student loan interest and other items. The calculation is explained in detail at IRS.gov.