Author Topic: Please help!!! Need to determine best method of attacking debt!  (Read 3719 times)

gbp1986

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Please help!!! Need to determine best method of attacking debt!
« on: January 30, 2015, 04:21:05 PM »
Hi Everyone,
First time poster here, but a long time lurker (~2 years).  The MMM community has helped improve my quality of life significantly, so thank you to everyone!  A little about us: I am 28 and very recent Ph.D. graduate in the biomedical science field.  My SO, and recently engaged fiancé, is 24 and currently a graduate student in the biological sciences.  We both have very secure positions, although the pay is not great right now (but has the potential to be much higher in the future).
My question (below financial details) is regarding how to best attack the debt we have.

Income (monthly): $4700

Expenses (monthly):
$3580

Assets (total): $20,300
Cash: ~$10,000
Post-tax index funds (VTSMX): $7400
Employer matched 403b: $2900

Debts (total): ~$42,750
SO Car loan: ~$10,000 remaining, 2.75% interest
SO student loan 1: $7,500 earning 6.8% interest
SO student loan 2: $18,500 earning 0% interest until SO graduates from grad school, then ???
CC balance: ~$4000 We both have credit cards, but pay them off in full each month
Wedding ring payment: $2,750 0% interest for 15 months

Other things we need to save for: $10,000
Wedding (May, 2016): need about $7,500
Trip to Europe (May, 2015): $2,500

The question I have is: how should we attack our debt?  After we pay off our CC’s and living expenses for the month, we will have about $2,500 in cash, which we were thinking of using for Europe (the only reason we are doing this trip is because we have free airfare and hotel for 1 person paid entirely).
Should I take funds out of the vanguard account and get rid of SO’s 6.8% school loan?  Or leave the money in and just attack it with our extra income?  It would be really nice to get rid of that debt before our wedding, but we’re going to need a bunch of money for the wedding since our parents can’t or won’t give us much.
Do we need a large emergency fund?  We both have very stable jobs, so I was thinking only $500 or $1,000 and use the rest for Europe.  We will have a year after our trip to save enough money for the wedding. 
My goal is to be completely debt free by the time SO finishes school (about 2.5 years).
Thank you everyone!

MDM

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Re: Please help!!! Need to determine best method of attacking debt!
« Reply #1 on: January 30, 2015, 05:45:05 PM »
Cash: ~$10,000
SO student loan 1: $7,500 earning 6.8% interest
Trip to Europe (May, 2015): $2,500
You could start by taking the cash and applying it toward the loan and the trip.

Some specific questions:
 - Why will the trip cost so much if the hotel and 1 plane ticket are free?
 - Does the wedding need to cost that much?  Not suggesting you ask people to BYOB and serve pretzels & chips, but...?
 - What does your own spreadsheet (or Quicken, etc.) projection say for your cash flow over the next 2.5 years?


cashstasherat23

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Re: Please help!!! Need to determine best method of attacking debt!
« Reply #2 on: January 30, 2015, 05:49:53 PM »
What are your living expenses each month? If you post them, I'm sure we can help you find some areas to trim down on!

Shor

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Re: Please help!!! Need to determine best method of attacking debt!
« Reply #3 on: January 30, 2015, 06:04:55 PM »
CC balance: ~$4000 We both have credit cards, but pay them off in full each month
Is that every month? That's a lot... you guys bring home a lot, but if it's just getting spent every month then your debt payoff will take a long time...
We must trim away the fat!

What are you spending on, why, can you drop it, then do so please.

gbp1986

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Re: Please help!!! Need to determine best method of attacking debt!
« Reply #4 on: January 30, 2015, 06:17:10 PM »
Cash: ~$10,000
SO student loan 1: $7,500 earning 6.8% interest
Trip to Europe (May, 2015): $2,500
You could start by taking the cash and applying it toward the loan and the trip.

Some specific questions:
 - Why will the trip cost so much if the hotel and 1 plane ticket are free?
 - Does the wedding need to cost that much?  Not suggesting you ask people to BYOB and serve pretzels & chips, but...?
 - What does your own spreadsheet (or Quicken, etc.) projection say for your cash flow over the next 2.5 years?
Hope I'm doing this response right. Anyway, to answer your questions:
Europe probably won't cost that much, but transatlantic plane tickets are expensive (1800).  1500 might be more realistic, but I want to have excess rather than a shortage.
Ugh, wedding.  If I had it my way we would just go to the courthouse.  Nevertheless, venues are expensive and we want to have an open bar.  Once again, I may be over-budgeting, but I would rather do that than under budget.
Not sure about this one.  I would expect our income to go up quite substantially within the next 5 years or so.  I would guess income would at least double for both of us, maybe more. 

gbp1986

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Re: Please help!!! Need to determine best method of attacking debt!
« Reply #5 on: January 30, 2015, 06:18:42 PM »
CC balance: ~$4000 We both have credit cards, but pay them off in full each month
Is that every month? That's a lot... you guys bring home a lot, but if it's just getting spent every month then your debt payoff will take a long time...
We must trim away the fat!

What are you spending on, why, can you drop it, then do so please.
No, this amount was a one time thing.  We put down a deposit on a wedding venue and booked my ticket for Europe ($1800 I mentioned in my previous post).  Spending post will be next

gbp1986

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Re: Please help!!! Need to determine best method of attacking debt!
« Reply #6 on: January 30, 2015, 06:28:39 PM »
Ok, here is my half of the estimated budget per month.  I'm not really sure of our overall budget, since we are newly engaged and just starting to share financial info.
Rent:$ 475
Groceries: $200
Travel: $150
Wedding ring payment: $125
Alcohol and bars: $110
Internet and cable: $100
Giving: $100
Pets: $100
Renters/car insurance: $100
Restaurants: $80
Cash: $80
Home supplies: $70
Entertainment: $50
Unexpected expenses (doctor, pharm etc.): $60
Clothing: $15

Note: these are my averages for the last 12 months according to mint.  I have implemented a lot of changes in the last 6 months and made major improvements (even though it may not look like it). We moved within walking distance of work, changed our expensive phone plans for cheap ones, cut down on drinking from ~$400/month to $100, sold one car, and switched investments from Edward jones (who robs you) to vanguard among other things.  I'm not a perfect mustachian (still drink too much), but I'm getting better.  Always looking to improve though :)

MrMoogle

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Re: Please help!!! Need to determine best method of attacking debt!
« Reply #7 on: January 30, 2015, 06:29:47 PM »
Just doing basic math, with your current income and expenses, you will net $33.6k in the next 2.5 years.  Plus your 20k in assets, is 53.6k.  Your loans and wedding and trip is $53.75k, so you would basically break even in 2.5 years. 

Your expenses total $43k/year, I'm guessing a lot of this goes towards education?  If not, that seems like a lot for two people right out of college.

I might cash out your post tax fund and pay off the 6.8% debt.  How long have you had the fund?  How much capital gains are there?  If it's not much, I'd do it.

I wouldn't worry much about the other debt other than being able to pay off the ring before interest starts.  You can pay off the rest with minimum payments if you are fine with that.  I'd put more into your 403 instead.  But of course if you hate debt, paying it off is acceptable too :)

cashstasherat23

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Re: Please help!!! Need to determine best method of attacking debt!
« Reply #8 on: January 30, 2015, 06:34:45 PM »
Ok, here is my half of the estimated budget per month.  I'm not really sure of our overall budget, since we are newly engaged and just starting to share financial info.
Rent:$ 475
Groceries: $200
Travel: $150
Wedding ring payment: $125
Alcohol and bars: $110
Internet and cable: $100
Giving: $100
Pets: $100
Renters/car insurance: $100
Restaurants: $80
Cash: $80
Home supplies: $70
Entertainment: $50
Unexpected expenses (doctor, pharm etc.): $60
Clothing: $15


Highlighted a few areas where you could definitely cut down. You mentioned that you cut down on alcohol, so congrats on that! However, there is still plenty of room to come down on that-I know because I definitely struggle with keeping that one too!

Home supplies-WHAT in the world are you buying for $70 a month? You cannot be going through that much toilet paper :) If you can buy these supplies in bulk at a Costco or something similar, you can probably spend that once and get enough to last you for at least a couple months.

Giving-Is this something that is really important to you, or that you feel obligated to do? There was another thread a day or so ago where someone mentioned feeling that it was the right thing to do, and if you are in that camp, then you may see it as a necessary expense. I personally believe that if you have your own debt to pay down, you cannot afford to be giving away $1,200 a year, but opinions may differ on that.

Internet and cable-Super expensive. Get rid of cable and get Netflix for 7.99/month!
« Last Edit: January 30, 2015, 06:36:41 PM by cashstasherat23 »

gbp1986

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Re: Please help!!! Need to determine best method of attacking debt!
« Reply #9 on: January 30, 2015, 06:39:46 PM »
Just doing basic math, with your current income and expenses, you will net $33.6k in the next 2.5 years.  Plus your 20k in assets, is 53.6k.  Your loans and wedding and trip is $53.75k, so you would basically break even in 2.5 years. 

Your expenses total $43k/year, I'm guessing a lot of this goes towards education?  If not, that seems like a lot for two people right out of college.

I might cash out your post tax fund and pay off the 6.8% debt.  How long have you had the fund?  How much capital gains are there?  If it's not much, I'd do it.

I wouldn't worry much about the other debt other than being able to pay off the ring before interest starts.  You can pay off the rest with minimum payments if you are fine with that.  I'd put more into your 403 instead.  But of course if you hate debt, paying it off is acceptable too :)
MrMoogle,
Thanks for the reply! I have only had the fund for about 2 years, so I don't think there are too many capital gains.  Even if there are, from what I've read it is better to take the guaranteed 6.8% that I would get by paying off the loan than taking a chance in the market.

As far as spending, unfortunately there is no education expense.  Like I said, we are making progress towards growing as stache, but not there yet.  A lot of the averages I've posted include several poor decisions by us, which have now been reversed (such as housing situation, multiple cars etc.) We also lived in a much more expensive apartment for 6 of the last 12 months, so I think a lot of our averages are increased from where they are now.  Also, about $500 a month of our budget is repaying loans. 

gbp1986

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Re: Please help!!! Need to determine best method of attacking debt!
« Reply #10 on: January 30, 2015, 06:45:40 PM »
Ok, here is my half of the estimated budget per month.  I'm not really sure of our overall budget, since we are newly engaged and just starting to share financial info.
Rent:$ 475
Groceries: $200
Travel: $150
Wedding ring payment: $125
Alcohol and bars: $110
Internet and cable: $100
Giving: $100
Pets: $100
Renters/car insurance: $100
Restaurants: $80
Cash: $80
Home supplies: $70
Entertainment: $50
Unexpected expenses (doctor, pharm etc.): $60
Clothing: $15


Highlighted a few areas where you could definitely cut down. You mentioned that you cut down on alcohol, so congrats on that! However, there is still plenty of room to come down on that-I know because I definitely struggle with keeping that one too!

Home supplies-WHAT in the world are you buying for $70 a month? You cannot be going through that much toilet paper :) If you can buy these supplies in bulk at a Costco or something similar, you can probably spend that once and get enough to last you for at least a couple months.

Giving-Is this something that is really important to you, or that you feel obligated to do? There was another thread a day or so ago where someone mentioned feeling that it was the right thing to do, and if you are in that camp, then you may see it as a necessary expense. I personally believe that if you have your own debt to pay down, you cannot afford to be giving away $1,200 a year, but opinions may differ on that.

Internet and cable-Super expensive. Get rid of cable and get Netflix for 7.99/month!
Cash,
Thanks for reading! Home supplies is the money I use to buy supplies for my side gig, which is wood working.  I think this can be pretty profitable, but it does cost some.
You are right about giving, since most of this is presents for other people.  I need to do better here.  Same with the alcohol.  I'm getting much better, but there is always room for improvement.
I know this may be contrary to a lot of people on here, but I really enjoy cable. In my opinion, I think it is worth working an extra year or two for cable (personal choice).  I spend a lot of time watching sporting events, which is one of my biggest hobbies.

MrMoogle

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Re: Please help!!! Need to determine best method of attacking debt!
« Reply #11 on: January 30, 2015, 06:58:53 PM »
MrMoogle,
Thanks for the reply! I have only had the fund for about 2 years, so I don't think there are too many capital gains.  Even if there are, from what I've read it is better to take the guaranteed 6.8% that I would get by paying off the loan than taking a chance in the market.

As far as spending, unfortunately there is no education expense.  Like I said, we are making progress towards growing as stache, but not there yet.  A lot of the averages I've posted include several poor decisions by us, which have now been reversed (such as housing situation, multiple cars etc.) We also lived in a much more expensive apartment for 6 of the last 12 months, so I think a lot of our averages are increased from where they are now.  Also, about $500 a month of our budget is repaying loans. 

I was checking you wouldn't have to pay short term capital gains, like if you had them less than a year I believe.  Then I believe it would be your marginal income tax rate.  If that was the case you should hold them for the full year.  But I agree, just sell them to pay off the high interest loan.

If your expenses are coming down that's good.  And if you're paying $500 a month in loans, then I double counted those, so you'll have some surplus after 2.5 years.  You can cut out more, and you won't miss it as much as you think, although everyone has some "luxury" expense they keep for sanity reasons :)