The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: Shop_man on December 21, 2015, 01:19:37 PM
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Basics:
Divorce finalized 1 week ago.
Joint custody of 2 young children.
She kept the house (72K equity), her student loan (14 K), and the 2009 car that we owe $2600 on.
I kept my 401K (96k), credit card debt (14.5 K) , get to pay off her car and giving her a $2000 signing bonus to get it done.
Credit card paid the lawyers, ridiculous vacations to try to make her "happy", and some household items when I had to start over.
I kept all of my tools in the divorce and have already started doing some odd jobs for friends.
My new annual net take home is $41,600 from my 9 to 5 job.
I have to pay $12,012 in child support.
I am renting a duplex that is geographically between my job and the children, it costs $995 ($11,940). Lease for 10 more months.
My utilities are $125 a month, $40 for cable internet, $30 cell phone, $45 for H2O, and $10 Netflix for a total of $3,000 annually.
I drive a 10 year old car that we "bought" new and I do all my own maintenance. Gas, insurance, and plates costs $185 ($2220).
So I am left with $12,428 annually to feed myself and pay down the credit card debt and cash to her.
I have the following credit card debts:
Local bank - $1400, 8.99% APR - monthly bills go on this one.
Chase - $6700 transferred balance, 0% APR for 15 months
Discover - $4200, 3.99% for 12 more months
PNC - $2200, 0% APR for 18 months
Total of $14,500 of credit card disaster.
I need $4600 in cash NOW to pay off her car and her signing bonus.
This is going to come from my 401K, no getting around it. Loan to myself is 2.125%. I can only have one loan of this type at a time from my 401K.
My questions are:
Best strategy to pay down this debt?
Obviously the highest interest credit card 1st and don't ever carry a balance on it again.
Pull all $19,100 out of my 401K now since I can only have one loan?
My concern is that if I don't get the credit cards paid down before the introductory rates run out I'm going to be stuck transferring them to another card and paying fees.
Of course this takes a big hit on my retirement, but gives me the piece of mind of only managing one payment and I am paying myself albeit loosing money from not being in the market.
At the end of my lease I hope to purchase a house, again using my 401K as down payment. I can have a 2nd loan from my 401K for a house. In my area I can buy houses that need TLC for 60-80K, flip and sell 2 years later for a profit. Much cheaper than rent and will build equity.
Thoughts on this debt disaster?
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Need more info.
When do your promotional CC rates end?
What is your typical food spending?
Have you read this article: http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/ (http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/)?
Do you have experience flipping houses? Were you successful? How much market research have you done and over what period?
Flipping a house typically requires significant liquid assets (cash/credit) that will not be recouped until the house sells. Seems like you don't have the spare $20K to flip a house if you have to borrow from your 401K to make the down payment. Also, living in a house while work is getting done is often counter-productive (requires a storage unit or time/delays moving your stuff around as projects require).
Please note that none of the above text states you should not proceed, but as an outside investor your house flipping endeavor appears to be a risky investment.
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No, you should not use a 401(k) loan to pay off all your credit cards.
More than half of your credit cards are currently on zero interest! Zero is less than 2.125. If you really, really think you must, then maybe borrow just enough to cover the Discover and an extra thousand dollars for emergencies. Then devote your energy to paying off the zero interest before it runs out.
You can't afford to buy a house in 10 months. You would be taking on more debt to get the materials to fix it up. Do yourself a favor and buy yourself some breathing room first.
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Whose name is on the mortgage for the house she is getting? If your lawyer did not require a refinance to her name only, you could have a big problem. Even bigger if you signed over title without getting off the loan. The loan will count against you when you go to buy and guess whose credit is ruined if she does not make the payments. If the bill is not coming to you, you might not know until it is too late.
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I wouldn't do anything drastic for at least a year. That way you can see what's really going on in your life financially. Take the least amount possible out of your 401k.
Get a second job.
Get a roommate.
I'm so sorry your marriage didn't work out! Tough times don't last -- tough people do.
Best of luck.
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More than half of your credit cards are currently on zero interest! Zero is less than 2.125. If you really, really think you must, then maybe borrow just enough to cover the Discover and an extra thousand dollars for emergencies. Then devote your energy to paying off the zero interest before it runs out.
Most credit cards will charge a 3% transaction fee to service a zero interest period. If the loan on his 401k is really 2.125% fixed and his money is still earning market returns on those investments, I'd consider taking the loan. There's no chance that will go past a deadline and cost him big interest. Also, fresh of a divorce weird stuff can still happen and his 12k extra won't hold up if he gets hit with a couple surprise expenses and still have to try and clear the cards. Obviously there's all kinds of halfways. Maybe only loan part of the money from 401k and figure he can clear at least half the credit cards but I'm just stating the consideration to illustrate the point. Without incredibly specific detail on when promo period end, etc. one can't get too specific.
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Need more info.
When do your promotional CC rates end?
What is your typical food spending?
Have you read this article: http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/ (http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/)?
Do you have experience flipping houses? Were you successful? How much market research have you done and over what period?
Flipping a house typically requires significant liquid assets (cash/credit) that will not be recouped until the house sells. Seems like you don't have the spare $20K to flip a house if you have to borrow from your 401K to make the down payment. Also, living in a house while work is getting done is often counter-productive (requires a storage unit or time/delays moving your stuff around as projects require).
Please note that none of the above text states you should not proceed, but as an outside investor your house flipping endeavor appears to be a risky investment.
Promotional rates are as listed - Chase for 15, Discover for 12, and PNC for 18 months.
Food spending is about $60 a week.
Just read the article - thanks.
Extensively remodeled a house from 2003 to 2008. Gutted to the studs, addition, new garage, etc. Bought it for 42K in 2003 sold for 118K in 2011. Every penny back out including mortgage payments. Cost me property taxes and sweat to live there. I understand the headaches of living in something that is being remodeled.
I don't see it as so much "house flipping" as building sweat equity. But I see your point of it being risky. I wouldn't have to sell and move. I could always repay my 401K and continue on with a small house payment.
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Whose name is on the mortgage for the house she is getting? If your lawyer did not require a refinance to her name only, you could have a big problem. Even bigger if you signed over title without getting off the loan. The loan will count against you when you go to buy and guess whose credit is ruined if she does not make the payments. If the bill is not coming to you, you might not know until it is too late.
House was completely refinanced by her. I do not have an outstanding mortgage.
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Need more info.
When do your promotional CC rates end?
What is your typical food spending?
Have you read this article: http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/ (http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/)?
Do you have experience flipping houses? Were you successful? How much market research have you done and over what period?
Flipping a house typically requires significant liquid assets (cash/credit) that will not be recouped until the house sells. Seems like you don't have the spare $20K to flip a house if you have to borrow from your 401K to make the down payment. Also, living in a house while work is getting done is often counter-productive (requires a storage unit or time/delays moving your stuff around as projects require).
Please note that none of the above text states you should not proceed, but as an outside investor your house flipping endeavor appears to be a risky investment.
Promotional rates are as listed - Chase for 15, Discover for 12, and PNC for 18 months.
Food spending is about $60 a week.
Just read the article - thanks.
Extensively remodeled a house from 2003 to 2008. Gutted to the studs, addition, new garage, etc. Bought it for 42K in 2003 sold for 118K in 2011. Every penny back out including mortgage payments. Cost me property taxes and sweat to live there. I understand the headaches of living in something that is being remodeled.
I don't see it as so much "house flipping" as building sweat equity. But I see your point of it being risky. I wouldn't have to sell and move. I could always repay my 401K and continue on with a small house payment.
I think it is good to consider the number of hours spent over the 8 years at the previous location and pay yourself a reasonable wage for those hours. If you spent 20hrs/wk and assume that you could have made $20/hr as a construction worker. You would have made approx $20K/year or $160K for the eight years you lived there or $191K if you invested with 5% ROI.
I am all for sweat equity, but realize that maybe you could sweat for dollars that are far less risky.
My vote: move into the cheapest housing close to work, get part time gig doing whatever, and crush some debt. Once you have a zero net worth re-evaluate.
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Commenting to follow, as I'm also in post-divorce financial recovery (about 1.5 years out). I agree that waiting a bit to see how everything shakes out is a good move. Emotionally speaking, I understand how borrowing from yourself to pay off all credit card debt is extremely attractive, too. I guess it's a matter of doing the math to see how everything will shake out and deciding which is more important right now: making sure you come out ahead by the numbers and can live with the multiple streams; or the peace of mind of not owing anyone but yourself (and your ex). Good luck to you.
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First, I'm sorry about the divorce. It's a rotten thing to go through.
I'd take out enough money from the 401K to pay off the credit cards (yes, I know some are only 0%, but you don't have a lot of extra cash to pay on those cards and I'd be worried that you couldn't pay them off before the time runs out and the rate goes sky high.)
Don't think about buying a new place any time soon. You are very early in this process and you have no idea what your needs will be in a couple of years. (Say, for instance, you marry someone new with more kids? Someone who already owns a home? ). Sit still until you build up some savings.
Think about a side hustle or second job to crank up your earnings. Or what about lobbying for a raise or promotion at work? Can you get a roommate to share your duplex, or do you need any extra bedrooms for the kids? Do you have the kids half time or just on weekends?
Frankly, you came out of this ok, even though I know it doesn't feel like it to you. (My ex wisely said, if we both felt like we got screwed, it was probably a pretty fair settlement). Basically, you split assets and debts pretty evenly, and you're only paying child support not alimony.
If you feel that you must buy a house after your lease is up, crunch the numbers very very carefully. Compare it against what you could make working a second job vs. the hours you would spend building sweat equity. Calculate in rent from roommates and unforeseen repair costs. Don't forget taxes and higher utilities. Sweat equity can be a great way to build up your finances but like any other investment, it has to pencil out.
For me, even though my income went way down in the divorce, the freedom of being completely in charge of financial decisions was freeing. No unexpected expenses by my husband. Clarity on goals. I spent more than I should have the first year or so, soothing myself after the pain of being left, and have spent large unexpected sums on my 3 kids (now in their 20's). But I've lived within my means, worked to increase my income gradually, and although I'm a little late for early retirement, I am on track for a safe solid retirement.
Another piece of advice - pursue some dreams. In a marriage you are always adjusting yourself to the other person - likely there are hobbies or dreams or pursuits that you gave up because of your spouse. Now may be the time to let yourself tackle them. (I learned to play the drums - as a middle aged woman in her 50's - and now play in a punk rock cover band and have even recorded on another friend's album with a bunch of professional musicians.)
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Sorry dude,
This sucks emotionally but financially you can recover from this. To be honest, if one/both of you was unhappy enough to split you are much better off apart.
This happened to me in '96, looking back it was the best thing that could have happened to me, but it heck it sure didn't feel like it at the time.
Keep it frugal and 20 years from now you could be FI'd.
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I've been thinking about your situation and it is definitely a tough one, not a lot of financial wiggle room.
I do not think I would use a 401k loan for the credit cards b/c: 2% interest on 4200(discover) is only $84(money you save by doing this transfer in one year) while doing transfers every time the special rate runs out will be a 3% fee charge and since these rates last 12-18 months you are effectively paying 2-3% apr. they also have different expiration dates so you will have time to transfer one before moving on to the next one, or if the newest transfer has additional credit, put some of the loan on the next expiring one on it too. You will want your 401k to have as much credit as possible when you make the leap to getting the fixer upper. The only thing I would use the loan on is the $4600 for her and your $1400 high interest personal loan.
The other thing I wonder is your housing situation. It really is the only thing you can cut down on. I would get a roommate or even a subleaser. I am guessing the X has them during the week and you get the kids every other weekend? Maybe keep them out of your house/place you sleep for the most part during those weekends. Try camping or visiting family. Do you have a relative or friend that would let you sleep in spare bedroom during the week, maybe even closer to work? You currently spend a lot on gas, if you can eliminate your commute and getting a cheaper place I would go for that. Ask the landlord if they/you can get someone to take over the lease, even take a hit, and pay some of the rent still, if you can make the difference be overall less money out of your pocket you win. You may have to get a storage unit for your stuff, but $50 is way less than the $995. This will be tricky and just hard to give any real advice without a lot more details but if I were you I would be looking at a way out of that lease.
wish you the best
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Thanks so much for the thoughtful comments and insightful ideas. I have 45 days to get her paid off, so I'm still scraping more together to make the least impact on the 401K.
I have my children 6 out of 14 nights and drive them 8 miles to the bus stop two days a week, then backtrack 15 miles to work. Yes the duplex is a little pricey. However, the ex is EXTREMELY picky about where our kids spend time. Now that the divorce is signed I can tell her to pound sand, but I went with a nicer place in a better location to not have a fuss from her. I'm worn out from the fighting. I have a yard on a quiet dead end street and walking distance to a playground. The duplex is under 6 miles to work and will be using the bicycle in the months when it is warmer and more importantly enough light to make the commute.
I did live with family and had my stuff in a storage unit for a few months ($86) to save enough to get my own place. I already hate that I don't get to see my kids everyday and as such I'm not keen on having a roommate that could potentially impede on my time with them. Psychologically I like knowing that all the messes and chores are mine and the kids. Had plenty of years of living with another adult that didn't pull their weight.
As I said in the initial post, I have started doing some side jobs. Just added trim and painted bathroom cabinets for friends. Spent an hour putting an alternator on a family member's car - $30 and breakfast.
Thanks for the input.