Help a Reader: Paying Off Over $500k in Debt

Here's an email I recently received from a reader:

I have been making progress and crawling out of debt for the last 2-3 years, but my law school loans are serious, and so were my bad credit card habits for a while.  Lately I have made the conscious decision to really get serious about my (our, I'm married just over a year) financial future.  I make a decent salary, 6 figures, and I want out of debt, for good.  We've consolidated on credit cards with good terms (low/no interest rate promotions) and my school loans were almost entirely Stafford and I consolidated at the lowest rate in history. Still... the mountain is high.

Did lots of research on your site, and read a good amount of Dave Ramsey, and I like his "debt snowball" concept, but I'm not sure if it really applies to me.  Here is a breakdown of my debt situation:

• $6,000 on credit card #1 - 1.99% through June 2008.
• $9,200 on credit card #2 - 0% through Jan. 2009 (then jumps to 13%)
• $3,800 on student loan #1 - 0% interest
• $12,000 on student loan #2 - locked in at 3.625%
• $15,000 on student loan #3 - variable rate, currently at 9.825%
• $65,000 on student loan #4, locked at 3.875%
• $13,500 on car loan - 7.49%
• We also have a $400K mortgage locked at 6.25%

Here are my issues:

#1 - Dave Ramsey's plan would have me paying off the smallest balances first, but do I really want to throw my excess income towards my 0% loan?  My goal at the moment is to pay off CC#1 in full before the 1.99 promo rate ends in June (a realistic goal).  After that, I want to make a dent in CC#2, but I can't pay it off entirely before Jan 09, and I'm confident we can get a 0% promo rate on another card to avoid any huge interest payments there for a while.  Therefore, I'm leaning towards focusing on SL#3 and the car loan, which have the higher interest rates.

#2 - I'm debating on whether I should even bother aggressively both paying off my SLs that are locked in the 3's.  Wouldn't I be better off paying down my mortgage instead and/or investing?  (I've read your posts that debate this topic)

#3 - If I throw all my excess income towards paying off ALL my debt, do I completely forgo retirement savings and/or building an emergency fund with 3-6 months of income?  I'm 31 years old with only $7K in my 401(k) right now.  I get no match from my employer, but I don't want to "start" building my 401(k) when I'm in my mid-late 30s, and it will take years to seriously pay off most/all of my $125K of debt.  I'm leaning towards contributing 2-3% for now, and then maxing it out my 401(k) every year once debt is paid off.  But at the same time, I don't feel comfortable not having a significant emergency fund anytime in the next 4 years, which I've calculated to be the minimum time needed to payoff everything (except mortgage of course).

My debt is significant, but I can contribute $2500/month towards paying it off.  Just looking for ideas and thoughts on the best way forward.

What would you suggest she do?

Comments

[Mud Puppy]

Get a smaller house.

[Sarah]

Dave Ramsey's approach is geared towards people with (a) not much income and (b) little to no financial sophistication at all. It's silly to listen to him here. If you really can't internalize that it's better to pay off the debts that are (or soon will be) anywhere from six to thirteen points higher interest, you might as well put yourself into receivership right now.

Reader has left out the single most important piece of information. It sounds as if she is working in Biglaw, though probably not (given the mortgage size) in NYC. The question is whether she conceives herself as being able to stay in that particular milieu indefinitely, or whether she is only planning to do a short stint to attack her debt. If the former, then taking a more gradual approach (higher-interest debts first, but balanced against significant 401(k) investment) is fine. If the latter--and she may want to wait until she's done a year or so before she makes this judgment--then debt reduction is the name of the game (though I'd still make some 401(k) contribution as a hedge and to get in the habit). There's such a huge yawning chasm between Biglaw salaries and what lawyers get in almost every other setting.

[Kyle]

I'd pay off all the debt over 6.5% asap and keep the rest as long as they will let me. You're young and can do better than 6.5% in your 401k over the long run without too much risk. The mortage, especially, is tax deductible so I'd keep that one around for a while.

Firse, sock the $2500 a month into an interest bearing savings account (4% or so in ING) in order to save up enough to cover the June 2008 1.99% reset rate. This will take February, March, and April and leave you with an extra $1500 (2500*3-6000=1500). Pay off the $6000 loan right at the end of May, spend the $50 or so interest your earned on yourself. Throw that extra 1500 into your 15000 9+% student loan which leaves you with 13500 in debt there. The next 4 months, pay down that 9+% student loan (4*2500-13,500=3500 left to pay) and it is now the beginning of Sept 2008. Put the next 4 months of $2500 into the interest bearing account (keep the $70 or so interest and spend on yourself). Use that right at the end of Dec to pay off your other 13% reset debt. This leaves you with $800 and it is now the beginning of Jan 2009. Pay off the student loan with the $800 and this months $2500 plus by now you'll have a extra few hundred bucks extra since you are not making as many minimum payments so get rid of the higher rate student loan entirely. February through June takes care of your car loan. So now it is July 2009, pay minimums on all your other debts and sock into the 401K.

[Suze]

No, I wouldn't throw money at the 0% loan right now.

This is what I would do:

1. Cut up all but one low/no interest credit card. Put that card away. Do not carry it with you.

2. Set up a budget. Get help if you need it, but do it.

3. Pay yourself first: get a monthly automatic savings account set up immediately to build an emergency fund, even if it's only $100/month.

3. Keep putting a minimal amount (2 - 3 %) in your 401K. It's a good habit, keep it going.

4. Focus on the credit card debt first. Pay off credit card #2 as quickly as possible. Then focus on credit card #1. Work on your behavior: get out of the habit of spending on your credit card, consolidating, etc.

5. Your auto loan rate is high. While paying off the credit card debt, see if you can't renogotiate to a lower rate. After paying off the credit cards, focus on paying this off, or making double payments every month.

Then, when you've made good progress with consumer debt, I'd take a look at the student loans and mortgage. (Although you may be able to get a better rate on the mortgage, it maight make sense to address that while you are paying off these other debts.)

[Kevin]

Start with an emergency fund, then here's what I would do:

1) student loan #3 - not a good rate

2)pay off the car first (or sell it and buy something else for cash if you are really diehard)

3a)either credit card #1 or #2 since both those rates will jump up

3b) the other credit card from 3a)

4)cheaper house perhaps? Without knowing where you live this is hard to judge.

5)retirement savings - Roth IRA or 401(k)

6) save more or payoff mortgage - really a personal choice

7) I would pay off the other 2 student loans last since they are a low rate and not really that bad of debt to have.

[Minimum Wage]

Get a smaller house.

What if you can't find a smaller house that you can own?

[JACK]

Sarah's right. One big thing to figure out is your likely longevity in the end of the law field that you have chosen. Most don't make it more than four years in biglaw. Many much longer, but would be a hell of a lot happier if they didn't stay.

If you are in biglaw, I think the first name of the game isn't debt reduction. It's setting a salary cap. By that, I mean, figure out what you can be comfortable living off of as a salary. If you are in big law, you are making more money than anyone can justify, particularly if you are a junior lawyer who (let's face it) knows nothing. (None do coming out of law school.) Don't get caught up in the salary inflation that occurs. You price yourself with your lifestyle out of many in-house positions and non-biglaw jobs. Plus, if you can stick to a number, as your salary increases, you will be able to shove the overage into savings/debt reduction.

Second, decide what you value the most. I wanted the ability to exit if I wanted to. I had 140K in law loans. I figured, if I had to, I could sell my house to pay off the mortgage. Can't sell my degree. So I've devoted a lot to paying those off, even though I had cheap interest rates (although nowhere near yours.) I let that guide me in my car and home choices (i.e., not overspending). Almost done with the law loans. Will probably pay them off a full decade before most do. Maybe not the most financially savvy move, but damn, I can't wait.

Third, don't carry credit card debt. If you are in biglaw, there's just no excuse. None. Learn that you make a lot of money but aren't rich. Most lawyers never get that. I can't tell you how many people I know who are making low six figures but think that can support a lifestyle that's really a mid six figure lifestyle. We all suffer from lifesyle dreams that are bigger than our wallets, no matter our salaries. It's important to let reality intrude.

Finally, start saving! I dream of the day I might work for an employer that does a 401K match, but that's just not our industry. But there's plenty of good reasons to do it, from the benefits of automatic saving mechanisms to tax advantages. Unless you plan on going into lifestyle shock or doing this for thirty years, understand that your lifetime income pattern is going to be way different than normal. That should be effecting your choices now.

If your not in biglaw, then sorry for the above rant. The economics are far different.

If I were in your shoes, I'd focus on getting rid of the credit card debt and savings. I'm still a fan of the psychological benefits of paying off student loans, but I have to admit yours are as cheap as they come.

[Sarah]

Oh, yes, emergency fund first. I failed to process that she didn't have one. First two months' excess into that, I'd say.

[Mud Puppy]

@Minimum Wage: In this market? But it is a catch-22 because you might not make what your house is worth when you sell it. But it is not necessary to live in an extravagant home when you have that much debt over your head.

As Ramsey would say, "Live like no one else now, so you can live like no one else later."

[Sarah]

The debt reduction is directly related to the "salary cap," though--it's going to be one of her single biggest monthly expenses. You can't exit until you can exit to a job which pays enough to cover those loans (and her mortgage). She's got less debt than many ("only" about $100K, at mostly good interest rates), but it's still enough of a burden to set an unattractive floor on the salary she can take. Unlike the mortgage, she actually has a realistic chance of eliminating the individual credit-card and student-loan debts, even if it might be a bit better financially to go after the mortgage rather than the SLs (she makes too much to take the SL interest deduction, I'm too lazy to run the numbers). Again, a lot of it comes down to how long you can stand the Biglaw grind and how much of a tradeoff you're willing to make to get out earlier.

[JACK]

Yes, an emergency fund is very important.

Out of curiosity, what was the car loan to begin with?

[JACK]

Sarah, that's my exact reason for the salary cap. There's no reason, in my view, a non-NYC lawyer starting out at a 145-160K base first year can't live off of that and devote every future raise/bonus to savings/debt reduction. I just don't buy any argument to the contrary. The benefit of setting a salary cap (I do it by splitting my direct deposit over multiple accounts so I never -- or at least am less tempted to -- touch the overage) is that (1) it can help you quickly increase your savings if you can tough out big law for 4-5+ years and (2) if you stick with it, you are already living at a lower lifestyle, where, if you take the lower paying job, the cost to you is on additional savings/debt reduction, not lifestyle (or less so, if your new job is below your salary cap).

Again, I'm assuming biglaw. But if so, I really have a tough time seeing why, but for lifestyle choices, the vast majority of biglaw lawyers couldn't pull this off.

[Angeline]

I think an important part of the debt snowball that is forgotten is that it can be psychologically beneficial.

Even if it might make financial sense to throw money at the debt with the highest rate first, it can be more rewarding for a person to throw the money at the smallest balance first. They could say "wow, 1 debt down, xx more to go"...instead of just seeing this mountain of a number taking forever to get reduced.

For example then, with the student loans...start with the lowest balance first, when it's paid off, roll that money into the second student loan balance, etc.

Of course this way isn't the best way for everybody, but it works because you can see the results quicker and sometimes that is all a person needs in order to keep at it.

[Dan]

I really think she would do well on the Dave Ramsey plan. I am also 31. We paid off around 100k in 2 years, only have 81k left on our house, have 6 months of an emergency fund, etc. Responding to the reader comment that it is for people that don't make a large income is hogwash. Combined my wife and I made 150k this, 125k when we started the Dave Ramsey plan. Saying it has no financial sophistication is pretty accurate. What is sophisticated about the basic principles of maying off debt, living on less than you make, saving and giving. Dave Ramsey lacks a little in instruction once you do have no debt, but he is going in the right direction as the reader wants to do. If the reader is interested please feel free to pass on my email and I would be glad to help them. I have been helping friends of ours for a while in what I consider the "enhanced" dave ramsey method, with tidbits of info I have picked up over the last three years that I think are relevant. She is missing some basic methods in the DR method, that if she read the book the total money makeover, she would be well on her way. My wife and I both have degrees and I am going back for my MBA this fall. There is something to be said for keeping it simple. If this is something she thinks might be good for her, it is all about finding what works for her and just doing it.

[CF]

I think you're on the right track:

1) Get rid of CC#1 because of the looming increase in rate
2) then focus on the Car loan and high-rate student loan.
3) Move the other 0% cards to new 0% cards when necessary
4) Contribute a small amount to 401K
5) Throw any NEW money (tax rebate, bonus-which as a lawyer could be significant, raises) toward your debt

By my quick calculation, you should be rid of ALL credit card debt, car loan and high interest student loan by 15 months at the most (sooner given any bonuses etc), which is pretty impressive. Then it's probably worth re-evaluating your situation.

[Ken]

Your Debt
* $6,000 on credit card #1 - 1.99% through June 2008.
* $9,200 on credit card #2 - 0% through Jan. 2009 (then jumps to 13%)
* $3,800 on student loan #1 - 0% interest
* $12,000 on student loan #2 - locked in at 3.625%
* $15,000 on student loan #3 - variable rate, currently at 9.825%
* $65,000 on student loan #4, locked at 3.875%
* $13,500 on car loan - 7.49%
* We also have a $400K mortgage locked at 6.25%

Couple questions. And I will make some assumptions as well.

If you don't pay off the $9200 by Jan 2009 do they tack on interest in Jan 2009 that you had not been paying? If they do you should definitely pay that off first. Same goes for the $6000. What happens to rate on the $6000 in June?

Next is about the home loan, I assume its relatively new purchase. But could help people to know when the mortgage was originated, value of the home (realistic in current market value), 30 year term? This right now is likely giving you a big deduction. Saving you roughly 25% off that interest rate.

Do you on your own make 6 figure? Or is that your spouse and you combined? If not combined, what does spouse make and is all their debt included above?

Next is more along the lines with taxes. At 6 figures you are unlikely seeing the full benefit of writing off student loan interest. So SL#3 should be an account you target (Even if you were seeing right off benefits, this rate is too high and would still be one of your highest). The other SLs are at such low interest rate, even without tax benefits you can do better investing elsewhere.

So heres my plan. If you add some more ifno this may change.

I say that right now you pay minimum on all then focus the left over on SL#3. Then in June, if CC#1 goes higher in rate than SL#3, focus on that. At that point this should look roughly like this.

* $6,000 on credit card #1 - Now rate is ? (most likely 10-20%)
* $9,200 on credit card #2 - 0% through Jan. 2009 (then jumps to 13%)
* $3,800 on student loan #1 - 0% interest
* $12,000 on student loan #2 - locked in at 3.625%
* $5,000 on student loan #3 - variable rate, currently at 9.825%
* $65,000 on student loan #4, locked at 3.875%
* $13,500 on car loan - 7.49%
* We also have a $400K mortgage locked at 6.25%

For the next 3 months pay off CC#1. Then go back to SL#3 for 2 more months. So in December things should look roughly like this.

* $None on credit card #1
* $9,200 on credit card #2 - 0% through Jan. 2009 (then jumps to 13%)
* $3,800 on student loan #1 - 0% interest
* $12,000 on student loan #2 - locked in at 3.625%
* $None on student loan #3
* $65,000 on student loan #4, locked at 3.875%
* $13,500 on car loan - 7.49%
* We also have a $400K mortgage locked at 6.25%

The next 4 months focus on CC#2 and get ride of that. So around April 2009 it should look like.

* $None on credit card #1
* $None on credit card #2
* $3,800 on student loan #1 - 0% interest
* $12,000 on student loan #2 - locked in at 3.625%
* $None on student loan #3
* $65,000 on student loan #4, locked at 3.875%
* $13,500 on car loan - 7.49%
* We also have a $400K mortgage locked at 6.25%

Spend the next 5-6 months paying off car. Then from there you can invest in other things more like 401K.

So in beginning of Q4 2009 you should just have.

* $3,800 on student loan #1 - 0% interest
* $12,000 on student loan #2 - locked in at 3.625%
* $65,000 on student loan #4, locked at 3.875%
* We also have a $400K mortgage locked at 6.25%

This of course assumes you put $2500 towards debt in addition to monthly minimums. Which is not clear.

Also you may want to thing about funding some into 401k, but might be good to pay off all the debt now and wait 1-2 years.

[CF]

Added to my above comment.

The reason I wouldn't advocate her using the Dave Ramsey plan at this point is that she is able to retire all of the credit card, car loan and high-interest student debt so quickly. Dave Ramsey would make more sense to me if it involved a longer time frame, and she could then feel better about eliminating one debt at a time. At her rate, she'll be rid of all but the low-rate student debt by next Spring.

[Ken]

I should also note that if you start contributing to 401k now. If you put in 8%, it will only seem like 6%.

So assuming 120K for easy numbers. Is 10k per month. You will put away $800, but only is $600 from paycheck. Which would likely be only $1900 to put towards debt.

The thing with paying off debt, is that you are guaranteed a a return equal to the rate on the debt. And with debt in the 10% range, you may likely be better off paying off the debt and waiting to invest, then shift that money once its paid off towards retirement funds.

[Minimum Wage]

@Minimum Wage: In this market? But it is a catch-22 because you might not make what your house is worth when you sell it. But it is not necessary to live in an extravagant home when you have that much debt over your head.

All I need - and all I want - is a 400-sq ft house on 2,000 sq ft of land. The house I live in now is even smaller than that. If it could be bought separately, I could have afforded it several years ago when it was sold.

But government typically does not offer poor people the option of buying real property in bite-sized increments they can afford.

I have a solution that will allow the average hamburger flipper to stabilize his housing costs - something renters cannot do - and build wealth instead of making someone else wealthy. And it is environmentally sound, with a low carbon footprint.

[99kby2011]

#1 smallest to biggest ala Dave Ramsey? Or my own order? What to do! - I would follow your gut and do them in the order you want. - One thing, the car loan is going to be done in X years no matter if you pay extra on it or not. I like to consider that when deciding on the order (although that is a highish rate).

#2 Should I go after the SLs? They have a low rate! - They are STILL DEBT - and there are 4 of them. Think of that combined minimum payment and how it would feel to sock that away into savings month after month. That would fund your ROTH for the year right there (i'm guessing!)! Yes, do them last, but I would still do them. Debt is debt is debt and you gotta get rid of debt!

#3 savings? retirement? emergency fund? what to do! - It really depends on you - Dave suggests a $1k mini emergency fund before launching the debt snowball, and I know for our family, 1k wouldn't last long, so I'm doing 2k for ours, just for my own sanity! Also - I'm still contributing 15% into my 401k, and my husband is doing 7%. I debated lowering these amounts, but I like to think that these three years won't have nothing at all going into 401k, especially with an ok-base-line-ludicrous-but-hey-it's-something match for my employer, and a fantastic-let's-not-ever-lose-THAT-job match for my husband. I would do a little retirement saving, especially since it helps your tax situation.

Here are my thoughts in general:

I'm on a plan to pay off 100k in 3 years (credit, car & hel), and I have to say, get yourself a spreadsheet and fiddle away with it to your heart's content. Even if you decide on a plan of action, it's going to take a long time to get to the end of that plan, and that plan is going to change. I love my spreadsheet that I can fiddle around with different scenarios and see what the best route will be. It really helps me see the end, even when the end is so far away. Seeing the end is vital to staying with it.

Some of the above commenters that are advocating shoving the $2500 into high interest savings every month until X card's 0% rate is up... Sorry, but they are not realizing that the $2500 is probably the TOTAL, INCLUDING minimums that she is making to every loan. the $400 car payment is probably part of that $2500, as well as all the other minimums. I am throwing a TOTAL (for now) of around 2k at our 99k of debt, but when you subtract all the minimum payments and look at the one that I am attacking - that payment is only around $1k, and I am only looking at 5 accounts and their minimums, not the seven that the reader has.

Of course.. I could be wrong and this could be the extra amount over and beyond the minimums she is paying.. in which case.. Carry on! Make it work! Pay me no mind! :)

Dave Ramsey is great with the motivating - smallest to biggest is definitely motivating.. but it's so easy for him to give this answer and stick to it for every single person whoever calls him - and he HAS to make it easy or no one would do it.. I think real life needs a little varying from situation to situation. So if you're going to go the fiscally better route (which I am doing) - you have to do something to keep you motivated through to the end. My spreadsheet is definitely motivating :) And so is my blog - try blogging to keep you motivated and on track!

And reader (I know you're reading all these comments!) -- if you want a peek at my spreadsheet, just email me (from my blog or from FMF) and I'll be glad to let you check it out. I feel like we're really similar, both with around 100k to pay off!

Good luck! You can do it!

[Matt]

1. Stash $1,000 in a high-interest savings account for emergencies. Then save $100 or so per month in it until it has grown to 3-6 months worth of expenses.

2. Definitely start contributing to your 401(k). A little bit is better than nothing.

3. As for your promotional credit card balance rates, you could get a new card with a promotional 0% rate for a year when the current ones expire, right? As long as you don't have poor credit you should be able to find such an offer to transfer to.

If getting a new balance transfer offer isn't possible, then start saving money immediately to pay off those balances so that you can pay them when the promotional rate expires, and put the rest of the money on the highest interest debt (student loan #3).

4. Selling your house or car and replacing them with less expensive ones would be a wise move, but both involve major lifestyle changes many people aren't willing to make.

[Jake]

My thoughts:

#1 - I agree with your payoff plan. Hit CC#1, while minimum paying on the rest, and once you finish that then go from highest interest rate to lowest interest rate. That is the mathematically optimal way to go. Any other strategy only differs to try to motivate you to continue. If you can stay motivated on your own, then just do what is mathematically optimal.

#2 - You have debt that costs you 3% per year, and debt that costs you 6% per year. I'm a big fan of paying off the expensive debt first, regardless of what you took out the loans to pay for.

#3 - Saving money and paying down debt are both very good ideas. I would certainly save for retirement before paying off debt in the <4% area, because I think your expected return on long term savings is well above 4%. For now though, you have plenty of debt to pay off that has a relatively high rate attached. I would pay that off first.

Emergency fund. I may be in the minority here, but I think you should aggressively pay down debt while having a minimal emergency fund. If you ever have a true emergency, you can "withdraw" the money you've put into your credit cards very easily, whether by balance transfer or spending. In the meantime, having paid down your debt instead of stashing cash in your savings account will have earned you some net interest. The caveat is that if you take my advice, you MUST NOT spend money on credit cards except in the case of a true emergency.

[Jesse]

1) Consolidate that student loan debt, kill that high APR one.

After that honestly Id get rid of the revolving debt first, even though its low interest currently that one can easily spike. It also hurts your credit score the most...

[Minimum Wage]

I have high-interest student loans I cannot consolidate. Hate it when that happens.

[Tom]

I think some of the comments are pretty good, I just want to address you and your 401k. Dave Ramsey addresses the issue of a 401k vs Roth IRA in his Financial Peace University. Basically, if you're not getting a match on your 401k from your employer, a Roth IRA is a much better deal because it grows tax-free. Your 401k grows tax-deferred. When you do the math, that difference could mean over a million dollars more for you come retirement. Once you max out your Roth IRA, then do the 401k. If you get a match from your employer on your 401k, max the 401k first, then contribute to the Roth IRA after that.

[Sarah]

What is sophisticated about the basic principles of maying off debt, living on less than you make, saving and giving.

Sorry, man, there's nothing at all sophisticated about not being able to grasp the idea that it's significantly better for you financially to pay off a 13% loan before a 0% loan (potential situation here). Neither is there anything particularly smart about a "no debt! EVER!!!" approach at the cost of everything else but a tiny emergency fund (unless you are really so catastrophically messed in the head that you can't trust yourself at all, in which case probably therapy is the appropriate investment). The more discretionary income you potentially have (and thus the more margin for error), the less useful that approach becomes. Debt is how businesses make money--it's just not pointless unsecured high-rate consumer debt to sustain inflated lifestyles.

I'll be very happy when I'm debt-free (right now I have nothing but the large student loans), and because of my circumstances I'm willing to trade some potential returns for a rapider immediate reduction in debt, but I know I'm making a trade-off, and I'd be silly to trade off *everything* for that. I'm not going to give up the potential significantly greater return on my 401(k) in retirement just to pay off the SLs that much faster, for instance. When you're broke and drowning in debt, maybe getting rid of the debt is all you can afford to think about, but it's different for other people in different situations, and it sounds like it is for the reader in question here.

[Suze]

Right now, if she has a high enough income, which it sounds like she does, she can't contribute to a Roth. She could start an IRA with the plan to convert to a Roth in the next few years when the income limits are lifted.

[Dan]

I did some quick calculations using the DR method. I made the following assumptions - not entirely accurate

1-2500 is the base amount above minimum payments
2-everything except the 0% loans have half the payment going toward pricipal, other half towards interest
3-you never get a raise - never put more than minimums + 2500 going towards debt
4-you sock away money this month for an emergency fund
5-you begin next month
6-payment amounts have been estimated

Using these assumptions and the Dave Ramsey method you can have CC1&2 and SL1&2 paid off before the end of this year, be debt free(except for housr) in 30 months and have a 20k emergency fund in 36 months....Kind of fun to look at.

You have a big hole (debt), but you have a big shovel (income) to dig out.

My offer still stands for help if they would like it.

[RL]

Hello everyone - I'm the "Reader."

First of all, thank you so much to everyone who responded. No judgments (I was a little worried), and lots of excellent advice and things to think about.

Sarah and Jack are absolutely right - I'm at bigfirm, in a big city, but not NYC. I'm a 2nd year associate making over 150K. I know, it's crazy. Associate salaries have seen a huge increase in the last 2-3 years. It makes me nervous obviously, and I was already thinking of the "salary cap" concept long ago. But I also plan to stay at my firm for the long term (that's the plan now at least). I'm in a smaller practice group (not corporate and not litigation), with a less demanding schedule. I still work a good deal, but no overnighters, no canceling vacations at the last minute, etc. That also means no bonuses (ever), but obviously I can live with that. I consider myself to be very fortunate, and one of my goals is to try to live on the bare minimum so I can save the excess I get now (after debt is paid off) and also live on less later if necessary.

A few answers to questions:

My husband - his income is not included in the above, but the debts are "ours." However, his income is sporadic and unpredictable. He sells real estate, and everyone knows how that's been going lately (he made 10K last year). Our plan has always been to live off of my income (obviously not a stretch) and all of his income goes directly to debt reduction/savings. He will also be the primary caregiver for our children, when we have them.

The house - we just bought in Nov. 2007 for $439K. We put 5% down and made some improvements. Sounds high, but it's within the 2.5x salary guideline (although FMF says 2x only) and the payments are 22% of my gross pay. Still, there's a long story as to why we ended up with this house, but I won't bore you with it. Suffice to say we got it through a foreclosure sale, but we knew the history of this house well. And I beleive we got it for much less than it's fair market value (most homes are $500-700). I want to try to lock in a lower rate, but can't order a new appraisal until we find comps in our area, and nothing is selling right now. Also, our 6.5% rate includes lender-paid PMI, which will come off once we refinance. For now, I love the interest deduction, as it’s basically the only big deduction we can still take (no SL interest deduction for us).

The car loan - started off at $15K last year. Maybe more than we should have spent, but it's a 2004 honda accord and we plan to drive it forever. My husband drives alot for work, and we needed something really reliable, and we couldn’t wait. We have a 2nd car that I drive to the train - it's 11 years old, I bought it with cash, and it should last a few more years.

Other thoughts... yes the $2500 includes the minimums, which are around $1100... I am contributing 2% into my (no match) 401(k) right now, and I plan to keep that for now... credit cards are locked in a drawer, we stopped using them long ago (I've already paid off over 10k from what they used to be), now we only use an AmEx that we payoff in full each month... we have $2000 in savings for emergencies, but we need (alot) more than that for 3-6 months of expenses...

I will e-mail 99kby2011 for his spreadsheet because it looks cool, but (believe it or not) I do have a budget. I track every dollar we spend, and I know exactly where everything goes. It's just a matter of making sure it "goes" in the right pots.

Thanks again for everyone's help. I love hearing other's thoughts.

[Ken]

Are you getting a big refund for 2007? With your high mortgage deduction?

You may want to consider upping your deductions on your paycheck and aim for a smaller refund so you can put that money towards debt now.

[Matthew]

Congratulations for confronting it, RL, and for the progress it sounds like you have made! I'm afraid I have no advice, because my head starts to hurt when I think about money values this large... (Coincidentally, that is why it took me so long to recognize my own debt problem and begin dealing with it)

[LC]

So after the minimums, you have $1400 extra each month for debt. Your modest emergency fund is probably enough until you have the worst debt paid off, as well as the 2% into the 401k.

SL1, SL2, and SL4 are very low rates and I would just pay the minimums for now. You want to pay off the CC’s before the rate resets and also focus on SL3 (the highest and only variable rate). Next you want to focus on the car loan. So here’s what I would do:

Put $1400/mo into an online account earning at 3.75% or more(ING, HSBC, Schwab). Then in May, pay off CC1 in a lump sum. Continue this and then pay off CC2 in Nov or Dec in a lump sum. (There is no sense putting it toward the loan when you can earn more money on it in the bank. However, only do this if you are certain that you will not spend it. This can also serve as a semi-emergency fund in case something drastic comes up.)

Then put the full $1400/mo toward SL3, paying it off around Oct 2009. After that, put it toward the car loan, which should be gone by July 2010.

Now congratulate yourself because you have eliminated close $44,000 of debt in about 2 years. You are only left with your mortgage and 3 loans under 4%. At this point I would beef up your emergency fund to 6 months living expenses, increase your 401k contributions to 10% and fully fund a Roth IRA. If there is still extra money, it’s up to you whether you want to knock out the SL’s just so you have fewer creditors or put it toward the mortgage since it’s the highest rate, or put it in the stock market, which historically has beaten the mortgage rate.

[dogatemyfinances]

I know exactly what Dave Ramsey would say. First he would say you eat out/shop too much, blah blah.

Then he would say your husband needs to get a job that actually makes money/second job/take on a lot more houses. If he made 10K, and spent that in gas and on the car, then he might as well have stayed at home. That's just the math.

You certainly make enough to support him not working. But if he were working, you could have those debts to nothing in no time.

[No Debt Plan]

Ignore (for now):
--Student Loan #1 - 0% -- obviously, keep this as long as possible. Free money.
--Student Loan #2 and #4 -- 3.625%, 3.875% -- rates are so low that this is practically free money. You want to tackle these eventually, but these can wait.
--Mortgage -- 6.25% -- long term commitment, should be last on the list.

That leaves:
Credit Card #1 and #2
Student Loan #3
and the Car Payment.

And I would tackle them in that order. You know you need to knock #1 and #2 ASAP due to the risk of interest rates going through the roof.

Here is what I would do, starting in March, with $1,400 (after minimum payments):
1.) Every dime towards credit card #1. With $1,400 it will take you 4 months and a week (6000/1400 = 4.28) to pay it off. That puts you right at June, so you need to make sure you knock it out first. I wouldn't even bother saving the money first because the interest you earn for four months (while nice) doesn't compare to guaranteeing you knock it out. PAID OFF: June 2008
2.) Apply the three weeks of that 5th month from #1 towards CC#2. Should be roughly $1000. Continue to pay $1,400 extra toward the debt PLUS the minimums from CC#1 and have it paid off in 6 months. PAID OFF: DECEMBER 2008. Just in time before the rate resets, and now you don't have to worry about that.

Carry that momentum forward to pay off the student loan and car. Etc., etc., etc.

Like I said, I don't think you need to find another 0% card for the credit card. I would pay it off, and cut up the cards. I wouldn't fund an emergency fund until I accomplished this -- you can always fall back on the CCs for any emergencies; not the best solution but I would make repaying the debt a priority.

Just my two cents! (Which, just reading, seems to be the same as LC above. Whoops.)

[Seth]

Congrats on getting the job that everyone is competing to get in law school. I am a 2L and have no prospects in BigLaw - whether that is a blessing or curse is yet TBD, however I will come out will less than 55k in debt. but anyways here is my suggestion -

Have you Husband get a second job -
Get serious about the debt - 401k will come later
If you didn't have debt servicing you could have some serious wealth with your income
First, Pay off the CC that reset in June of this year.
There is no solution to your problem other than paying off the debt - no new credit cards at 0% to roll over the balance - that just prolongs the pain.
Finally, I would consider selling the house in the next year or so and renting something close to where you work.

This would be my ordering:

1st: * $6,000 on credit card #1 - 1.99% through June 2008.
2nd: * $9,200 on credit card #2 - 0% through Jan. 2009 (then jumps to 13%)
3rd: * $13,500 on car loan - 7.49%

4th: * $15,000 on student loan #3 - variable rate, currently at 9.825%
5th: * $12,000 on student loan #2 - locked in at 3.625%
6th: * $65,000 on student loan #4, locked at 3.875%
(NOTE: Actually, I'd look into consolidating these three loans at a fixed rate, so long as the fixed rate ended up close to the two low rates.)

7th: * $3,800 on student loan #1 - 0% interest (it should be gone by then anyway)

8th: * We also have a $400K mortgage locked at 6.25%

[bp]

If you make 150K a year, don't obsess about interest rates just suck it up and get it done quickly. You should be able to get everything but student loan 4 and your mortgage paid in much less than a year. Before you get really aggressive on either of those, build a very hefty emergency fund.

Also get serious about your husband's job. You say he made 10K last year. How much time did he spend working? and how likely is for him to make more than that this year? 10K working close to full time just isn't worthwhile, and its not healthy if he is not working full time. I am assuming that you won't be having kids for a couple of years, while you get established in your job? The sooner you help him get started in something productive, the better for everyone.

[Jim]

Hubby needs to step up and do something else for a period of time. With him earning real money, the debt will clear up in very short order. I am sure he doesn't want to hear this, but it is time to face up to it. Knock out the two credit cards as quickly as possible since the rates will jump in short order. The post by Ken is a good plan to follow.