Here's an email I recently received from a reader:
My budget is really tight and despite slashing costs as much as possible, I still find myself gradually seeping further and further into debt each month by a couple $100s. Which of course is bad in itself but if there is a large unexpected expense, it will put me further in the hole.
My current debt situation:
- Lending Club - Monthly Payment: $368, Interest Rate: 7%, Outstanding Balance: $5,019
- Credit Card - Monthly Payment: $100-$200, Interest Rate: 16%, Outstanding Balance: $3,500
- Student Loan - Monthly Payment: $272, Interest Rate: 7%, Outstanding Balance: $23,049
- Car Loan - Monthly Payment: $1834, Interest Rate: 2%, Outstanding Balance: $5,500
- Total - Monthly Payment: $924-1,024, Outstanding Balance: $37,069
I changed jobs last year so I don't see myself getting a new job (and a raise) anytime soon, have tried starting a side business for the last two years (with not much success yet) and am starting to grasp at straws. I have considered taking out the 401k money from my previous job ($21,000) to pay off some of the debts and increase my cash flow. After taxes and the penalty the amount would be around $12,500-$13,000. I could pay off the credit card debt, lending club loans, and almost all of the car loan, and be left with an additional $650-750 cash flow per month for wiggle room.
What do you think? Is this a good strategy?
Some more information about me:
- I am in my early 30s and live in a suburb of Washington, DC. I rent a two bedroom apartment with my wife and daughter. Our rent includes utilities ($1,655) and is on the mid-to-low end for the DC area...
- I work full-time and my wife works part-time watching another child in addition to our daughter.
Below is what we have earned and spent on a monthly basis in 2012. One thing that will probably jump out to you is the $1,000 a month for church donations. That is tithing and other donations. Right now that is not on the table for possible cuts.
Thanks for your help!
MONTHLY INCOME - $6,200
- Rent & Utilities - $1,655
- Auto Insurance - $61
- Internet - $38
- Phones - $125
- Debt Repayment - $824
- Interest Payments (when credit cards get out of hand) - $35
- Donations to Church - $1,000
- Daughter's College fund - $50
- Gym & Fitness (2 adults+childcare+random races) - $120
TOTAL FIXED EXPENSES - $3,908
- Food - Groceries - $680
- Food - Eating Out - $165
- Gas - $180
- Car (oil changes/repairs) - $144
- Business (web design, video production - $230
- Entertainment/Dates - $85
- Gifts - $155
- Clothing - $235
- Travel/Transportation - $74
- Parking/Tickets/Tolls - $54
- Home Supplies - $260
- Shopping/Target - $440
- Personal Care - $40
- Medical - $5
- Crafts - $40
- Postage - $25
- Misc - $135
TOTAL VARIABLE EXPENSES - $2,947
TOTAL EXPENSES - $6,855
NET - $-655
What's your advice for him?