Author Topic: What to do in an adverse financial situation?  (Read 1598 times)

stratozyck

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What to do in an adverse financial situation?
« on: May 01, 2018, 07:26:04 AM »
I see so much on here about basically "ok I have more inflows than outflows, what to do with it and how to decrease my outflows?"

But what about in a "minor in the big picture" but still adverse situation? I am not really asking specifics for my life but are there posts on here or guides on how to handle a "outflows higher than inflows" situation?

I have been working in a decent career job for 4 years. I graduated with 60k in debt (now down to 43) and since graduating got married and had two kids. Long story short, we ended up with a 2nd house we are renting out. The gains are all in equity while annually it is a net cash outflow. In short, we can't afford to sell it, but it is also costing us money (and thus making us less likely to be able to sell it).  It would be nice to hold on to it for 1-2 more years because I do think we could make our losses back and end up with 20-30k after tax.

But man, in the two years we have had that rental house we have also had unexpected bill after unexpected bill. In short, right now we are about 11k in credit card debt. All of the credit card debt is 0% interest until June 2019. On a pure assets - debt we are positive (because of 401k and 4k savings). But what keeps me up at night is knowing that a year ago - we were also 11k in credit card debt at 0% interest for a year. Every time I pay it to near zero another 5k-6k expense comes up.

So, what I am asking in specific is:

1) What is the best way to manage medium term debt that will be around for 1-3 years? I know the obvious is "spend less and pay it off faster!" The demoralizing part is not being able to pay it down - its that every time I get near zero (say, 3-4k left) another huge expense comes in.

My recent thinking is I need to get 10-20k in savings, and not worry about the debt as long as it is always trending down and is not interest bearing. So, by that I mean instead of putting 1k down, I have been splitting 500/500 to debt and savings.

2) We are all in agreement that 0% interest (minus the 3% they charge) is better for unexpected bills than drawing down 401k right? A month ago at 13k debt I considered wiping it all out. I reasoned I could pay down 13k in a year. But, I have to be honest it is tempting because the credit card debt, even though its itroductory 0%, makes me ache.

3) Finally, is this normal? One thing this has fostered in me is a balance sheet mindset. Is it normal for people to carry 0% credit card debt year over year? By that I mean, it actually somewhat makes sense to pay for things that you would already buy on 0% cards and keep the liquidity options. By that I mean, given a choice of emptying out 5k in savings or taking out 5k in debt at 0%, I should take out the debt and divert future flows to the debt. Is that normal? I can see at the rate I am going now the short term debt will average 7-9k but liquid (non 401k) assets will eventually surpass it.

On the plus side, my credit score is pretty good. I keep fighting this debt. I pay off a chunk and then get whacked with a 4k expense (air conditioner, ER visit). Its a downer.
« Last Edit: May 01, 2018, 07:27:44 AM by stratozyck »

undercover

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Re: What to do in an adverse financial situation?
« Reply #1 on: May 01, 2018, 07:39:49 AM »
By "can't afford to sell it", do you mean your loan is literally underwater or that the value of the house has just come down? If the latter, you should sell the rental house now. If it's losing money, it's losing money. It's a bad rental. It won't be a good rental in five years much less two. Cash flow is everything to you right now.

"My recent thinking is I need to get 10-20k in savings, and not worry about the debt as long as it is always trending down and is not interest bearing. So, by that I mean instead of putting 1k down, I have been splitting 500/500 to debt and savings."

It doesn't matter as long as your CC debt is eliminated before the rate goes up. Divide debt by months remaining and only put that amount towards the debt.

"Is it normal for people to carry 0% credit card debt year over year?"

Yes, it's cheap money, but you don't have an unlimited supply of it. I assume some is the balance transfer fee of 3% and some is from spending at 0%. It's fine as long as you don't spend more than you can pay off obviously.

In short, the only way to come out ahead is to reduce expenses and increase income. Selling the rental house will reduce your expenses TODAY.
« Last Edit: May 01, 2018, 07:51:45 AM by undercover »

mbl

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Re: What to do in an adverse financial situation?
« Reply #2 on: May 01, 2018, 07:42:35 AM »
Start with posting a Case Study as that makes it easier for the audience here to see the whole picture
and then comment appropriately

https://forum.mrmoneymustache.com/case-studies/how-to-write-a-'case-study'-topic/

Lady SA

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Re: What to do in an adverse financial situation?
« Reply #3 on: May 01, 2018, 08:52:08 AM »
If you have relatively regular "unexpected" expenses, then they shouldn't be unexpected and you should plan for them in your budget.

You KNOW you will eventually have to replace your roof, furnace, fridge, etc. This maintenance cost should never be a surprise and you should set aside some cash monthly to cover this.
You KNOW that eventually, someone will break an arm or get sick. Again, this shouldn't be a surprise. Or at least, not a financial surprise.
etc, etc. The point is, it sounds like you are not planning for those larger expenses that happen only semi-randomly, and are therefore set back on your heels whenever they (inevitably) happen.

But theres no way you could fit that into your monthly budget, you might say. In that case, a case study would be great to help find some wiggle room. Because these expenses are going to happen one way or another, and you somehow need to pay for it regardless. One way is horribly stressful, and the other is not. It's up to you.

Bracken_Joy

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Re: What to do in an adverse financial situation?
« Reply #4 on: May 01, 2018, 09:18:58 AM »
What you are referring to are "known unknowns", and they should be part of your budget. You don't know exactly WHEN your laptop will die, but you know it will. You don't know WHO or WHEN or WHY a family member will hit their deductible or OOP max, but you can rest assured, at some point, they will. That means your life is ONLY affordable if you account for these factors. That's what sinking funds are for. I use a less formal "emergency" fund, but I have sized it according to the likelihood of certain events, and replenish it immediately- so "communal sinking fund" is probably more accurate.

It's a mistake to think that these things that "just keep coming up" are unknowable. If your numbers don't work with those known unknowns factored in, then your numbers do not work.

Rosy

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Re: What to do in an adverse financial situation?
« Reply #5 on: May 02, 2018, 10:36:30 AM »
Basically, your situation means that you do not have sufficient money set aside to deal with the extra expenses you incur throughout the year.
Look back over your finances for the past two-three years - what patterns do you see?

It is entirely normal to have extra expenses i.e. unpredictable emergencies, we all do, regardless of income. Smart Mustachians simply address their own particular needs, that's all. If you have a rental and your own home, you'll need more money set aside then someone who just rents, it is the nature of the beast.
Certainly there will be expenses throughout the year - what is the average $$$ you came up with for the past three years? That is your answer as far as your house/rental fund - don't even call it an emergency fund, because in truth - it is not.
Where are you now - have you already replaced all the usual stuff like electrical, plumbing, roof etc so that going forward you could get away with $5K for a while? or are you at a point where your own home will soon need expensive replacements?
It's sort of like the boy scout motto - always be prepared:) Cruising along expecting the rental money to come in and float your living expenses is not a good idea - although we've probably all done it at one point or another:)

Yup, zero percent credit cards are a wonderful thing, especially if you can find one that gives you 15 months or more, instead of just 12 months to pay it off.
The trick is to use it only for emergencies or those planned purchases that are high enough to impact your budget - meaning you benefit twice, it gives you leverage - you can still invest in your 401K - gaining tax advantage each month as well as making money on your investments. It isn't just the interest you save, but the fact that you have more ready cash in your budget each month.
So take the advice someone gave already - divide the total out by month to pay it all off within the zero percent timeframe and then forget you even have that card.
You can benefit double if you use the local AC dealers zero percent offer - same deal, divide by month and pay it off within the zero percent timeframe so you don't end up owing 27% interest for the whole thing at the end of the offer.
Cha-ching for you - not for them:)

It can be a good way to manage your cash flow - as long as you keep in mind that you can't continue to keep adding expenditures, because at some point you will not have enough money in your regular budget to make the monthly payment amounts needed to pay it all off in time. It could become a slippery slope, but it doesn't have to - it can simply be a fantastic way to get a free loan.

I think you are on the right track - the debt bothers you, because you are beginning to realize this is a recurring problem and you need to find a way to stop the hemorrhaging - good call!!!


Post your dilemma as a case study in the case study thread and we'll help you sort it out. We need reliable numbers and more information so we can see the entire picture.
It could mean re-evaluating your rental or even your own home or taking drastic measures for a while until you saved up enough to correct your lack of sufficient funds to cover your own particular circumstances.
Or it could be a rather easy, simple fix.

Key is - be open to considering changes. I get it, I'm way too emotional about money and I have no patience. Being pragmatic about your options and focusing on the math and the long-term beneficial outcome always works in your favor - so don't fixate on paying it off right now!
It wouldn't be a good idea in your current situation - patience in your case will pay off handsomely in the end.
... and yes, this is all quite normal, until you become mustachian and put a stop to it:)