Case Study--Pay off debt, and then do what with my husbands income?

[lvbhappy]

I am a new reader.  I am 30, and my husband is 32.  We have two dogs.  We have a 2006 Rav4 with a car payment(see below) and a 1999 Honda civic that we bought for cash. I am an RN, and my husband is in school for airframe and powerplant certification (aircraft mechanic essentially).

My question is this:  Currently my husband is in school, but will be graduating next September.  I have been making strides to pay off our debt and set us up for a much easier freer way of living, hopefully eventually debt free.  I currently take home roughly 50k per year. I just paid off my high rate student loan this month (total paid off 50k over 7 years, it was a $350/mo payment and I paid over usually), and have one 3.4% 10k student loan left. I'm planning on putting the $350/mo I was putting on the loan onto the credit card debt. We have 8K in credit card debt, wracked up from several years of living beyond means, expensive flights due to family illness, unexpected vet bills (prior to us getting pet insurance), and various other reasons(young and dumb).  We are currently living within our means now, and I have a plan to pay off the credit card debt hopefully within the next 10 months between --a bonus at work in november, 3 paycheck month in November, and tax return in February and previously mentioned 350/mo.   I currently take home ~4,000 a month after taxes, plus or minus overtime. No overtime--I make 1700/ every 2 wk, 1 day overtime--I make 2000/ every 2 wk, 2 days overtime--2400/every 2 wk. On average.  My job opted out of social security, and they take a mandated 6.2% of my income into a 401k, and I contribute 3% more, matched by my employer. Currently have about 20k in my 401k, my husband doesn't have one yet.

Since we are living within our means(now), and hopefully will be debt free besides a mortgage and his student loans and mine as of when he graduates in 9/15, I would truly appreciate advice on how to invest/save/ build a better future with his income. We are expecting him to graduate with about 40K in loans, and I want to use the money he makes to pay towards those until they are gone.  I just wonder how much I should put in his 401k/normal savings acct/ or put it all on the loans.  We are expecting him to be hired on around 30-35k/year.  A higher wage is definitely possible, but we want to start off with what the low end would be and that would be 30-35k. 

Monthly expenses are:

Mortgage-1079/mo
Student loan-147/mo
Car ins-117/mo
Satellite tv- 128/mo (non negotiable according to the hubs, I could live without tv)
Car payment-$450(bought while young and dumb, now owe 1 year left, will be paid off 10/15)
Pet ins-80/mo for 2 dogs
Utilites-~230/mo
Phone- 132/mo
Groceries/food- ~400/mo
Gas-~125/mo for 2 cars
Pet food- 100/mo
MISC- 400/mo

Currently have $200 in a capital one 360 savings account.  I have 2% of my income set to auto deposit in there every pay period, usually around $60/80/mo.


I handle all the money, but I'm out of my depth trying to figure out what is the best pay to pay off and save? And then once the debt is paid off, what is the best place for my money?  Savings account? More in a 401k? IRA? 

CC dbt-8k
Student loan me- 10k
Student loan him-40k
Mortgage- 155k @3.75%
car loan-6k


Income- Roughly 50k take home
Future hubby income- 30k.

I know I'll probably get beat up a little, but I'm trying to change our lifestyle, Promise! 

LVB

[Catbert]

When your husband starts working I'd look first to his 401k - if there is a match then contribute up to the match.  The rest of his money should go toward debt, whatever had the highest interest rate.  Once debt aside from mortgage is paid then work on maxing out both 401ks.

[lvbhappy]

Thank you for your reply! 

I guess what I don't understand is the  "maxing out 401K".  How much is that?  Doesn't this mean the money is unavailable to us until we are 59.5 from what I've been reading? Do you then get an IRA?  should I go to a financial planner? This is the part that gets confusing for me. I'm all on board with paying off all debt FIRST, highest interest first, and then starting to seriously save....but where and how is my problem?

[dandarc]

Thank you for your reply! 

I guess what I don't understand is the  "maxing out 401K".  How much is that?  Doesn't this mean the money is unavailable to us until we are 59.5 from what I've been reading? Do you then get an IRA?  should I go to a financial planner? This is the part that gets confusing for me. I'm all on board with paying off all debt FIRST, highest interest first, and then starting to seriously save....but where and how is my problem?

For 2014, you can defer up to 17,500 into a 401k.  The specific plan may limit it to some maximum percentage of income, so you'd be at the lower of that or the 17,500.

The 59.5 rule only effects people who don't do their research, or can't execute a multi-year plan faithfully - there are ways around it.  Search substantially equal periodic payments and the Roth IRA pipeline - both ways to withdraw your retirement money early, and penalty free.

Most financial planners are there to sell you unnecessarily expensive mutual funds and even more expensive life insurance products.  If you go to one, try and find a fee-only one where you basically pay an hourly rate for his/her time.  This will save you a lot of money in the long run.  You can learn everything you need to know without going to a planner at all - forums here, books, bogleheads forum all have a wealth of knowledge to mine.  Best to know the basic rules yourself too, because a lot of financial planners are not actually as well-versed in this stuff as you might expect.

[Catbert]

Maximum IRA contribution under age 50 is $5500.  Maximum 401k contribution under age 50 is $17,500.  When you are over 50 then there are higher limits.

When you leave an employer (either for retirement or another job) you can roll your 401k into an IRA w/o any tax implications.
If it's a traditional 401k then it goes to a traditional IRA.  If you have a Roth 401k (some employers offer) then it rolls to a Roth IRA.  If you are retiring early you can do conversions of traditional IRAs to Roth IRAs and pay income taxes (but no penalties).  Google or search these forums for "Roth pipeline".  There is also a MMM article with a title something like "Am I saving too much in retirement accounts" that outlines how to handle.

I wouldn't go to a financial planner.  There is lots of info on MMM and these forums. Just poke around and keep reading while you work on paying off non-mortgage debts.   

[nuprinmmm]

1) Please list interest rates for all debts to better help

http://www.mrmoneymustache.com/2012/04/18/news-flash-your-debt-is-an-emergency/

2) Read above link. Tell husband his hair is on fire and he cannot afford satellite,at least until credit cards are paid off.

If he objects tell him all the words you know that rhyme with duck

3) take more shifts.

4) pay off all debts above 3%

Here are words/phrases that rhyme with duck:
Don't throw me under the TRUCK, we got in this together
I think it SUCKS that we both aren't willing to sacrifice a little, e.g. I am going to take one more extra shift a month
LUCK has nothing to do with it. It's going to be hard work that will set us up

Use your imagination if it gets bad enough that you feel you need to find other rhyming words

[lvbhappy]

Thank you, I think I'm starting to understand.  Once the debt is paid off, and my husband and I "max out" our 401ks,....this will be pretax so the ~$35k or so that is going in to the 401k would lower our tax bracket, and we'd still have our combined take home pay of about 50k to do other things with since our debt would be gone. Once we're to the point of thinking of possibly retiring, there are ways to move money out of 401ks into an IRA that would give us access to the money if we retire early.

nuprinmmm--you made me laugh:)  I've fought the TV battle and given in.  He's not the most natural frugal person but he's allowed me to cut out many other things as I'm naturally more of a scrimper/saver so to save peace and happiness--I decided not to fight it right now. He lets me do pretty much whatever else I want with our money which is so much easier than other people I see fight about money, but thanks for the smile:)

CC #1--$5,910.40 @17.8% APR (has usually been $80-85in interest/mo since I started carrying a balance)
CC#2--$1,578@23.2% APR (~$30/mo)
CC #3- $1,400@ 23.99 APR (haven't carried a balance on this but am about to starting this month, this is also a rewards card)-- some of this is from some emergent vet bills I haven't been reimbursed from yet. In a month or so when the claim goes through, I can pay off about half.
CC#4- is a rewards card, I put most purchases on this and pay it off twice a month- ish, usually it's at $600 when I pay it off. SO no balance on it right now


I do pick up shifts when I can--I am actually working 2 extra this pay period and one extra the next. Tax wise, I've figured out its not worth it to work more than 2 shifts extra per pay period.  And it's solely depended on OT availability though. When our unit is busy, I get my OT.  If we are slow...my OT gets cancelled.. I'm all for working more and getting more money until things are paid off.

[dandarc]

Yeah - those rates = hair on fire emergency.

[lvbhappy]

Yes, I've reached panic mode in my head, and passed it on to my hubs finally. 

I'm expecting a bonus at work of ~$850 in November (based on last years, and this year should be similar) which I will smack down immediately on the CC debt if I get it.

November is a 3 paycheck month, and the 3rd paycheck should be around $2200, which I am putting all on the CC. 

That's 3K paid off, plus starting in September, I can put $350 more down a month on CC debt that I previously had been paying on my student loan that is now gone.  Over 6 months, that is ~$2100 more off. 

Our tax return is usually around $3000, and hopefully I will get that again this year as our tax situation has not changed.  That will pay off the remainder of the CC debt hopefully.  Then hubs graduates in September 2015 and I can start building up savings. 

That's the plan as of now:/

[former player]

Pay the minimums only on your mortgage and student loan, as you have decent interest rates on those - 3.75% and 3.4%. Your retirement is fine for now, as you are getting the most match from your employer you can.  You can look at upping this once your credit card and car debts are gone and your husband is earning.

Your priority is to pay off the credit cards, highest interest rate first.  Your current plans for paying them are too leisurely: you need to throw every penny you have at them as soon as possible.  You are earning a decent income and have no kids to support: you can pay off your $8,888 of credit card debt much sooner than you think.

Firstly: you have a take-home of $4,000 a month (including an average amount of overtime) and list expenses of $3,388, so there is some leakage somewhere even in your budget, even taking account of the $350 former student loan payment and $60 to savings.  Your first job is to find that leak, plug it and put that extra $200 to your credit card debt each month.  Together with the $350 no longer going to the student loan you are now throwing $550 to your credit cards each month.

Your second job is to take a look at your listed expenses and see where you can reduce them:  at $132 per month you are paying over the odds on your phone bill and should be able to reduce it considerably depending on your contract  (check this forum for info).  Utilities are also high for two healthy adults.  I don't know what your "misc" category covers, but if you can halve it (e.g. give yourself and your husband each $100 cash a month to spend in this category) that is another $200 a month at least to credit card debt, for a total of at least $750 a month from September onwards. 

You are expecting a refund of about $700 on vet bills, an extra $2,000 paycheck in November and a bonus in November, for a total of over $2,700, all of which can go to credit card debt.  So by the end of November you have made three monthly payments of at least $750 totalling $2,250 or more, plus that $2,700 or more.  You have then paid more than $5,000 off your debt of $8,888 within three months.  That puts you more than half way to getting rid of the whole debt in three months, you have credit cards 2 and 3 paid off entirely and credit card down to about half what it is now, and your husband even gets to keep his cable subscription while you are doing it.

One other thing to look at is your tax withholdings.  If you are usually getting a tax return of about $3,000, then you are effectively giving Uncle Sam an interest free loan of up to that amount each year.   If you could adjust your withholdings so that you pay less tax out of each paycheck, you would have up to $250 per month more to send to the credit card debt.  Just don't overdo it and end up paying penalties to the taxman.

I'm betting you can have this credit card debt gone within 6 months, rather than 10.  Good luck.

[begood]

We cut our satellite bill from $100 to $75 by switching plans, and the only channel we lost that we cared about was BBC America. We still have ESPN and ESPN2, which is important to both hubby and me.

Depending on whether you're with DISH or DirecTV, you could check the channel lineups and see if you could downgrade to a lower plan. Ditch any premium channels - even that would be a good place to start.

Basically, I'm saying it doesn't have to be $128/month or no satellite - there might be a compromise that would free up another $50/month or so to go to your HAIR-ON-FIRE DEBT.

You seem like a really organized person, and many, many people on this forum recommend a software product called You Need A Budget (YNAB) as a tool that helps give all your dollars a job. That can help stop leakage and give you a map or blueprint to show your husband about your plan to get out of debt.

[dandarc]

+1 on adjusting that withholding - you're giving up an extra $250 per month in cashflow.  Doesn't sound like much, but by not adjusting witholding, you're costing yourself at least $4.00 in interest on those credit cards for every month you delay this.

Month 1 - $4.00
Month 2 - $8.00 - 4 from month one again, plus you've got another $250 that your paying in excess taxes this month and not throwing at the debt
Month 3 - $12.00

and so on.

In your case, this is costing you hundreds of dollars in extra interest on the credit card balances over the course of a year.

If anything big changes / changed this year, be careful to run the numbers first, but if this year looks a lot like last year, you should reduce your withholding for the remainder of the year so that you're sending in ~$750 / month less for federal taxes for the rest of the year - about 4 months left in the year, and you'd expect another 3K refund - 3K / 4 = $750.  If you're not sending in that much per month on your paycheck, then reduce withholding to 0.  Your HR people at work should be able to help you with this.

Then remember in January to up your withholding by about $500 / month, assuming you don't expect any major changes next year, or to whatever your expected tax bill will be for 2015.  You want to be pretty close on your estimate as far as withholding taxes.  A lot of people on this forum would probably choose to have nothing withheld the whole year, then send in the exact amount of taxes owed on April 15th, if that were legal (it is not).  Next best thing is to get your withholding as close to the actual taxes owed as possible.

[snshijuptr]

On the withholdings, the IRS will help you calculate exactly what you should be withholding until the end of the year:

http://www.irs.gov/Individuals/IRS-Withholding-Calculator

Also, most 2 income families need to use page 2 of the W-4 form to calculate their withholdings. Most people don't realize this and use the first page.

[lvbhappy]

The only thing that is different tax wise, is that we bought our house last year 3/2013.  So I'm not sure how that will impact us.

My utilites (to me) include - Electric/gas-~75-175/mo(depending on season/use of A/C and heat), Water-60/mo, Trash-$17/mo , Internet-$49/mo.  I kind of lump all of the "have to pay" household bills together.

My MISC category are things like -new tires for the car, stuff like hubby's spending at home depot for little projects (tend to be like 15-20 at a time, but adds up to like 100 so I account for it there), traveling for family wedding, out to eat at least twice a month ~$50 each time,  gym membership for ~$30/mo, dog treats,....it's become more and more clear to me as I type this that I need to get a much better handle on this category and where the money is going, facepunch for myself.  Sigh. I thought I was doing better than this. 

I get that I should reduce my with holding, but I really really do not want to owe.  I'll look into this and possibly change it.

I'm with Direct TV, we signed on with a 2-year promotion where our bill was $50/mo for a year, and that year has since worn off and increased to $128. This I hate, but don't know if I can do anything about until the contract is done.
 
Thank you all for your input, I really appreciate it.

[dandarc]

[editing because I'm a moron]

You'll want to look at your return for 2013 and see if a big part of that $3,000 refund was due to any of the following:

1.  Tax credits - not sure if there is any 'first-time home-buyers credit' any longer, but maybe you made some efficiency improvements that created tax credits?
2.  Large amounts of home interest deductions - usually one year of paying down won't change it that much, but the year you buy (2013), you might have paid points which is pre-paying interest, so you might have had a much higher interest deduction than you would this year.  This may not matter if you took the standard deduction any way.
3.  Any other deductions or credits you had in 2013 that you won't get in 2014 - maybe you moved for a job or had big medical bills in 2013, for example.

[/edit]

I'd be surprised if buying a house increases your taxes for the year.  Only thing I can think of is if you sold something else like appreciated stock or another house to buy this house, and created a capital gain.

Usually your house has no impact or reduces your federal taxes - mortgage interest and property taxes are deductible for federal, though might not be enough for you to itemize vs the standard deduction.