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September 14, 2010

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Given your situation, I would say definitely beef up the dedicated emergency fund. You don't want to use all your cash reserves for emergencies, those accounts with ING have a purpose of their own and shouldn't really be used for emergencies if they don't have to be.

So yeah, I would say at least spend a few more months adding to that e-fund since you are on one income for now, then when your wife gets back to work you guys can look into paying down the debt next.

First, I'm very sorry about your situation and hope that everything is going well with your son. God bless. I don't have to tell you, but health is more important than any financial decision you can make right now. So here's to encouraging everyone in the blogosphere to say a little prayer for his health tonight.

Second, there is no perfect answer to your question. But what I would do if I were in your situation would be to pile up the extra cash into reserves. I would bump up the emergency fund until your situation stabilizes. Then you can work your way back into your "normal" savings mode and you'll have another lump sum you can use to pay off debt or save.

Best of luck!

Nick is right - no perfect answer. If I were in your shoes, back when I was in my early 30's, I would have socked away the excess in an emergency fund, as the other have suggested. If I were in your shoes now, I'd probably boost my foreign currency holdings a bit (take that extra cash and buy swissie or loonie for a year) or look at expanding my land holdings another few acres (that amount per month can float a loan for a few years for about 5-10 acres depending on where you buy and the quality of the land).

I suppose the safe thing to do would be sock it away. The slightly riskier thing would be to begin diversifying away from your - what appears to be - heavy dollar-denominated holdings.

Sorry to hear about your child...he is in my prayers.

I agree with everyone else, put it in the emergency fund and build that up some or if you have a medical/health budget line-item/account put it in there. Sounds like the medical costs can fluctuate so putting the excess in e-fund or med-fund would allow you to have something to draw from if costs are really high one month instead of pulling from another source.

When things calm down (and I pray they do) then you can use any excess you saved to pay some nice size large sums on the debt.

Hope that helps!

You regularly referenced previous unexpected and unpredictable expenses. Your current situation is too uncertain. Until that changes every spare penny should go to cash.

And you should take a little bit of that extra money and do something enjoyable for you and your wife as well so that saving and budgeting doesn't feel like a financial prison sentence.

I agree with everyone else...cash, cash, cash as a buffer for the unexpected is what you need. I'd say don't bother with the retirement accounts at all until you have a huge emergency fund. I'd also say stop the charitable giving for now--in my opinion you need to focus on getting your own family's situation more stable.

You've received excellent advice above, and I can't really add anything to help with your question.

I would like to offer a different tip to help keep your costs down. Your income is not too high, so you might qualify for some help with your son's prescription medicines. Please check out http://www.needymeds.org and see if you qualify for any of the free/discounted pharmacy company programs. Even if your income is too high for a specific program, their discount card may be of some help - it is available to anyone without limitation.

Good luck to you and your family.

While I am thrilled you are stable at work, nothing is ever 100%. Efund all the way, reasons already given. You also might consider a second bank. I would say that it is unlikely, but with ing being electronic, i like to have some cash at a local bank i can walk in to if there is an emergency as well as a small stash in the house. With interest rates low, i think that the liquidity risk might be rather high for you to have all your money at ing. Fwiw though, i also use ing and really like them and keep most of my savings there too.

Given the current situation with your child I'd agree with others and put your money into emergency fund savings. You don't know if you'll get more unforseen medical bills and such or when your wife will get back to work.

Also I wouldn't over estimate the security of your job. No job us really totally secure.

Can you get a temporary part-time job during the evenings and/or weekends? If so, you could knock out the car loan and the loan to your relative (that would free up another $300/month). After you get those taken care of, then quit the part-time job and focus on paying off the student loans.

You current home loan is a time-bomb waiting to go off. With record low interest rates, you need to get a fixed loan asap. At the rate you are paying, you can get a 15 year loan that is close to that rate.

As to your formula's and medicines, you need to talk to your doctor. Many times they can help you get patient assistance programs, free samples, etc. At $300/month, it is worth asking.

One last thing. Given your lower household income, you might be getting a larger tax refund at the end of the year if you have kept your same deductions. Run your taxes and see. If so, you may want to change withholding to get more monthly take home pay. That would give you extra to tackle the debts.

If $18,000 is what it takes to live bare bones, then I would suggest cutting back even further on expenses. As everyone's said already, building the emergency fund is the smart thing to do with excess money. Cut the charitable giving and reduce (if not entirely eliminate) family trips until you and your family have built a more stable financial situation. It's tough, but it needs to be done.

I wouldn't touch the retirement accounts unless it was absolutely necessary. That 8% employer contribution sounds very nice.

$1,600 in your emergency fund would barely last you two weeks. That's definitely where your priority should be.

I'd say it depends on how much credit you have available. I'd kick up the emergency fund a bit, but also pay down your higher-interest debt if you have enough credit (on reasonable enough terms) available that you can fall back on it if something blows away your emergency fund and then some.

Debt: $226000+$8200+$2700+$37000 = $273,900

Looking at the numbers, you have an very large amount of debt for an income of $60,000/year. If it was me (and assuming the medical payments are only going to get worse because they tend to) I would look at selling the house and downsizing. I don't know what you can rent in your area, but I would look into that to try to try to free up cashflow in order to make additional debt payments and/or save for emergencies.

Another couple of things to consider is that you are also facing an adjustment on the mortgage which could eliminate the left over money in an instant. You are also going to be in a very big pickle if you would happen to loose your job/or not be able to work (I know a lot of people who thought they were in very stable jobs and/or were too valuable to be left go who are now out of work).

Not much more than I can add on the advice front, since emergency fund seems to be the wise consensus. I do hope everything goes well with your son, though. My wife and I have two kids and both have had health challenges. Sounds like you have the financial side covered, so all you have to deal is the emotional side.

One thing you mention is that you are paying COBRA of $400/month for health insurance. Since you are working, why are you paying COBRA? Is that because your wife and son were on her policy? Does your company not offer health insurance? If they do, you should check with your HR dept because I believe that because your wife lost her plan, this counts as a "life event" so you can add her and your son to your coverage immediately. That might save you some money on health insurance premiums.

First, prayers and thoughts are with your family.
To answer your question put money into cash reserves. I'd also like to offer some unsolicited advice:
1) If you can afford to pay medical bills as they come in call and ask for a discount. If you cannot afford it call and set up a payment plan and ask for a discount.
2) Contact the manufacturer of anything your son takes on a regular basis (formula, medicine, diapers, etc.) explain your situation. In many cases you will get a stack of coupons and some free samples.
3) Drive around to price your son's medicine at various stores. Talk to the pharmacist about your situation and see if you can get the price reduced.
4) Look into joining a medical discount plan on top of insurance (OptumHealth allies etc) or a county, city or state program, check your insurance and the plan to see if they will work together.
5) Take the time to apply for Medicaid. Don't waste time researching qualifications (they don't always mean what they say) just apply.
6) You may need to cut your expenses.
7) If you can qualify and their isn't a financial penalty defer your student loan. If you defer put the $230 into a separate ING account so you earn interest. That way when you have to start paying the loan off again you have the money and can drop a lump sum on the student loan or car loan (whichever will save you more). That being said if you need the money you have it.
8) Shop your insurance around and save it's simple and fast.
9) Enjoy your time with your son and wife.

Emergency cash.

I'll agree with HenryT on charitable giving only with a qualification. Don't cut your tithe, but if you're doing a lot above and beyond that, it might be the time to cut it. There are times when you need to give to help others, and times when you need to focus on helping your family. You know the difference.

I also agree with Lucas on the house. Scaling down is something to seriously consider.

First, a big thanks to FMF for posting this and to all the kind words and prayers offered above! We will take them in with thankful and grateful hearts.

It seems like a resounding vote for the Emergency Fund, and I think that's where we will focus our efforts. I will do my best to respond to everyone who had a question below, and if there is other advice you have, we are most open to hearing it.

@MC- we have recently stopped the charitable giving for now, and are simply leaving the money in that account for extra resilience in our cash reserves. Still want to build that primary EF up, though.

@KaseyD- thanks! Looking into needymeds now.

@Easychange- point well taken and we have savings accounts also at a credit union and our primary checking bank. Maybe we will put funds there as well for quick ATM access.

@JimL- My wife is picking up some extra work as a tutor on nights/weekends, which she enjoys. While far from a big windfall, it is helping and I watch the baby while she is working with students. I have run the numbers on refinancing and we could not handle a 15-yr mortgage on the monthly payments. I also am not sure that we will live here more than 5-7 years, so that also makes me wonder if we would recoup the transaction costs of the refi. I have run the withholding analysis and increased my take home pay this spring, because we got a big refund last year even when my wife was working, had health insurance, and we made closer to $84k. Good suggestion to do the analysis again.

@HenryT- I hear you. Trying to take the bus to work as often as I can, not renewing subscriptions, we are looking for everything we can find to trim.

@David- we have 3-4 credit cards with combined lines of about $27,000 available to us. We carry no CC debt and pay our bill in full each month. Our credit score is near 750.

@Lucas- worst case scenario on the ARM is an additional $128/month starting in July 2011, lasting for two years. While your scenario may be the biggest financial improvement, the stress of moving the family right now seems harder to deal with than finding another $130 in income per month by next summer, or creating additional savings/efficiencies.

@MBTN- we ran cost analysis for 18 months of COBRA versus adding my wife/son to my workplace plan, which is run by the same company. It was $700 cheaper to go the COBRA route, and we knew we could keep working with the same doctors.

@Meoip- Good tips! We will contact the special formula manufacturer tomorrow.

Again, it's good to see a strong consensus here. This clarity is helpful to me as we figure this out. If anybody has any additional suggestions, we're all ears. Thanks for your compassion and your critical thinking. The kindnesses of strangers are things of beauty.

Perhaps I am in the minority here, but I think you are in pretty good shape!

1. A new baby (even an excellent health) generally causes a bump in expenses. That should stabilize. We were happy when we no longer had to pay for diapers (but now there is college!).

2. I am more optimistic about your emergency fund than most other posters. You have $16,000 in accessible liquidity. Do your 6-month costs of $18K include medical bills, car repairs, etc.? If so, I think you can consider most of the $16K as your emergency fund. If you are tithing 10%, then you could quickly bring your 6-month costs to just over $16K, so you are very close to having a decent emergency fund.

3. I don't think your debt is excessive. You have good interest rates on everything, and some flexibility via your cousin if you need it.

4. As already noted, no job is truly secure, but at your age, you can probably anticipate salary increases, and could probably find a new job if you had to.

5. I also do NOT think you should consider moving. The costs of selling your home can be quite high. At worst, your interest rate moves up to 4.75% next summer, and 5.75% two years later. But your car loan comes to an end before the next reset, so you will free up some cash that way.

6. Even with the health challenges, hopefully your son can go to daycare if your wife has to go back to work to make ends meet.

Two small points:
1. Medical: When COBRA runs out, is the ANNUAL difference $700, or is taht monthly. (I assume annual.)

2. Your 11 accounts at ING suggest to me that you may be over-complicating things. Do you really need separate acocunts for every goal? Are there other areas where you could simplify? I'm not saying "reduce costs", but "simplify" - which might help you mentally.

Having said ALL that, I think you should fund the Roth IRA, NOT the emergency fund. You can withdraw your own contributions with limited consequences if you have a true emergency, and if there is no emergency then you have the money in there for later.

I hope that your son gets better. Also, there will be a day when he no longer needs formula and diapers, so this is hopefully a temporary financial issue. I like the idea about deferring on the student loan.

I am praying for a quick recovery for your son, and equilibrium for you and your wife.

It is clear you are extremely savvy, and know all the ins and out of finances. In times like these, I always try to think out of the box so to speak. The problem is: not enough income to generously cover current expenses. Therefore more income would be the ultimate goal, right? Two thoughts came to mind:

1. Ramit Sethi from "I Will Teach You To Be Rich" loves to reiterate we should also focus on raising our income which can yield more than cutting back, because potential income is unlimited depending on our passion and motivation. He recently launched a program called "Earn 1K On The Side" which I think the free portion of the program might be all that you need to kickstart a viable idea. He loves tapping into his readers for opinions and case studies and I’m sure would love to hear from you if you wrote him, he has personally written me back a few times. I am sure your talent in finances and business could lead you towards an income generating hobby/business that would produce more than your wife's tutoring. I always think of the highest rate of return on time and effort. If your free time spent on an income generating hobby will make more than your wife, it might be something worth considering.

2. An article I read on MintLife blog written on 09/14 "Finding Higher Yields In Unlikely Places". At the moment regulations on cashing out early on CDs are somewhat limited. Given that the % is higher than a standard high yield savings account, perhaps it might not be a bad idea to move a chunk of your cash and yield a higher interest, modest as it would be?

So sorry to hear about your son and this financial situation. In the short term save cash for that future rainy day that is sure to come. Even though I know its raining on you now you have to hold on to each other because these strains on your family can really take its toll, sometimes on one spouse more than the other. I can't offer you much financial advice but more family advice. You will get through this time and prosper, eventually.

If you would like to save for retirement but are concerned about needing additional funds in case on an emergency, the Roth IRA is the way to go:

a) Amounts contributed can be withdrawn tax- and penalty-free (you've already paid tax on the principal when you contributed this money).

b) Qualified withdrawals are tax- and penalty-free. Qualified withdrawals that may apply to you are:
1) Unreimbursed Medical Expenses: If they are more than 7.5% of your adjusted gross income for that year.
2) Medical Insurance: If you lost your job, received unemployment compensation and paid for medical insurance for yourself, your wife and your dependents, then you may be able to withdraw from your IRA the amount you paid for the insurance.
3) Disability: If a doctor determines that you are not able to do any substantial gainful activity due to physical or mental illness or condition.
4) Higher Education Expenses: If you paid expenses for higher education during the year, part or all of the distribution may be a qualified withdrawal.

While you may not meet one of the tests for qualified withdrawals, you can always take out your contributions from a Roth IRA. Withdrawals from a Roth IRA are treated as contributions, to the extent of contributions, and only after that treated as withdrawals that can be subject to the 10% penalty.

To summarize- any amount you actually put into the Roth IRA (but not the growth) can be withdrawn essentially for free, no penalties (and no charges if your investment company doesn't have a fee for this). You can therefore save the money for retirement (if the money does stay in the account until 59 1/2, all withdrawals are tax-free), but have the luxury of withdrawing contributions and possibly appreciation tax- and penalty-free.

Best of luck.

Thanks again for the additional responses! Bigbartha's points on the Roth are good and we will probably stop contributing to my 401k and move contributions to the Roths for now for those advantages.

I have some good news! JimL's comment inspired me to go check out refi options at our credit union for the 2-year ARM. Here's what I found:

While we are 15 months into the first 2-year piece of the 2/1 ARM, the credit union continues to offer that 2/1 ARM with an introductory rate of 3.75%. The CU has a mortgage modification program where they will allow a member with an existing 2/1 ARM to get whatever the lowest introductory rate for new ARMs is for a 0.75% of the loan balance fee. Better still, they allow the 0.75% fee to be added to the loan balance, though you can make an extra principal payment out of pocket if you like to not increase the balance by all or part of the fee.

What this means is that if the current intro rate is still in effect (I know this could change, but the rate has held steady at the CU for almost 2 years now. Their entire mortgage pool is their internal portfolio, with not FHA/FNME/FRMC elements so they are less beholden to rate changes at the Fed than regular banks) then for $1660 we could keep our 3.75% rate for two more years, saving us up to $120/month on the potential max ARM reset in July 2011. $120 x 24 months = $2880. Net of $1220 to the bottom line over the two years, and more money to equity rather than interest.

Of course, if the ARM was going to reset only to 4.0 instead of 3.75%, this may not be cost effective. Still, when we get to month 22.5 of this 2/1 term, I'll be putting a call in to figure this all out.

In the meantime, thank you again for your prayers for our little man. We are working with doctors to close in on a diagnosis of some acute food allergies or EE (Eosinophilic esophagitis) which are likely driving his gastro-intestinal challenges. Once we really know what is going on, we can get a treatment plan focused on the right things. The little guy, for his part, remains cheerful most of the time and has learned to wave, point, clap his hands, stand without help for 10 seconds, and say "mama" in the last two weeks.

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