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January 06, 2012

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Sounds like you have the priorities right. I would forget about a new home for at least two years while you work on your other non-mortgage debt. As you have realized, debt is a killer, especially at double digit interest rates. Consider trying to get a personal loan on prosper or lending club to improve your interest rate, then pay that loan off early as possible. Tell anyone that gives gifts to your family that you have debts to pay and ask for help when holidays/etc roll around. Consider whether your husband could either do intermittent child care for another child at the same time as yours for extra money. Also consider part time/at home work. Then throw all extra cash at the high interest debt. Good luck!

The debt is holding you back, for sure, and it would benefit you greatly to do what has already been said: see about reducing those interest rates. Definitely kill the debt with the highest interest first. Maybe call the banks and ask about lowering the rates (even a few percentage points makes a difference given the amount of the loans). Is there a family member who might help you by lending you funds at a more manageable rate, like a simple 5% interest?

Also, be careful about spending too much time apart from your husband. Lean on each other for support. The first few years of marriage with a young child can be fairly stressful, esp. where child-rearing responsibilities are concerned. Good Luck and thanks for sharing!

Can you get rid of the car and buy a $2000 vehicle for cash? Also, call the credit card companies and try and get your rate reduced. If you free up cash from those two items and find a way to increase your income a bit, you could have everything but the house paid off in about 18 months.

Have you thought about selling some unneeded personal belongings? I have begun purging items and it serves a dual purpose. It frees up cash and declutters the house! It is quite liberating.

One other thing. Don't give up on trying to refinance the mortgage. If you have been making your payments on time, I would just keep asking.

Thank you everyone for your advice!

So far as the car; that car has a long, frustrating story. Don't get me wrong, we love our car - it suits our needs perfectly. We hate the payments (as anyone could imagine). Currently, the car is not worth what we have remaining on the loan, and, in my area at least, it's really hard to find a reliable used car for much less than a new car. Because I have a longish commute to work (and it's our only car) it's really important to us to have a car that will run and not cause more problems. This is why we're tackling that debt as soon as the high interest credit card debt is gone, effectively reducing our interest rate.

Holy crapoli, that's a lot of high-interest debt.

Past an emergency fund, I wouldn't do anything else except scrimp and pay down your CC, car, and personal loans.

After emergency funds, pay off you debt, start Roth IRA's for you both, start college fund for your son, and is your husband interest in any training for another career? That must be budgeted as well. I'm with one of the former responders who said to tend to your marriage. That's more important than any money advice, or having a second child.

I will disagree with both your plan for an emergency fund and those here saying to tackle the debt after the emergency fund.

I presume you have credit cards that have available balance left on them. If not then that is different but since you only have 2300 in debt on the CC then I suspect you have a few thousand or more of available balance on the credit card yet.

If that is true then what is the advantage of having an emergency fund in cash paying you nothing while carrying 2300 on a CC costing you 30%. That number is crazy! If you have any money in an emergency account now you should take all of it except for maybe a few hundred and put it directly towards paying down that CC balance. Any future money should all go to paying down the CC. If an emergency happens you can always put the funds back on the CC. Get that CC paid down immediately. Once that is paid down then maybe you can build up a small emergency fund before tackling the other debt.

But be clear about this, if you have a line of credit (which a credit card is), there is no reason to hold money in cash at zero percent while paying interest on a credit line at 30%. The two are interchangeable and it is nothing more than a psychological warm fuzzy to have that cash sitting over there. The debt crisis has passed. As long as you are paying your bills the CC companies are done lowering people's credit limits now.

You best and SAFEST move is to paydown that CC before building any emergency fund.

JN, I think you analyze your situation well and your aims sound right on to me. As you rightly point out, the debt is "the scary part," mainly because of the high interest rates.

I think you should defer any use of any 'extra' cash for anything except debt repayment until you've retired all three of the high-interest loans. Go into 'battle stations' mode in paying off this debt. Once you get to the point where you have only the mortgage and student loan, you'll have the flexibility in your budget to further fund retirement accounts, save for a down payment, etc.

You don't mention this, but in case you consider it, one thing I would not do is further leverage your house through refinancing or a home equity loan to pay off the high interest debt. In general, it's a poor idea to substitute secured debt for unsecured debt. Once that's done, if you run into trouble (a layoff for example) then the asset you've borrowed against is at risk. In a real crisis, you could stop paying on the unsecured debts for a while if you have to, but you wouldn't have that option--without risking losing your house--if you use home equity to pay off the unsecured debts.

Good luck.

Its good that you are focused and committed to paying off that debt. Right now you are paying just over $11,000 per year in interest. That is about 30% of your take home income. Thats a lot of interest.

I agree with apex that paying off the 30% and 20% debts should be the #1 priority. If you have an emergency you can just re-accumulate the debt.

I agree with you about the Roth IRA. I say that because given the numbers I assume you pay little IRS income taxes. You're probably in the 10% bracket and its possible you pay $0. Not sure on the exact details but its safe to say you're in a very low bracket. So it makes sense to lock in a very low tax rate today. Especially if you are in fact paying $0 taxes which is feasible.
Also if your joint income is under $55,000 then you should also qualify for the Savers Credit. In your case it would likely be 10% credit of the first $2000 you save in an IRA or 401k. That could be $200 free money from the IRS. Refer to form 8880.

JN replied :

"it's really hard to find a reliable used car for much less than a new car."

No it is not that hard.

Sorry but I think you and some others have too high standard for cars and a exaggerated fears of used car reliability.

There are currently 65 cars on Autotrader in Raleigh that are under $5000 and have less than 100k miles. I'm sure you can find an acceptably good car among those. A dealer has a 2000 Nissan with 91k miles for $3k. Far cheaper than new and should be plenty reliable enough.
I'm driving a 2004 Toyota with 120k miles on it. It hasn't failed to start in 4 years and never stopped running. Eventually it will break down... all cars do, even the new cars you pay more for. I found a 2004 Camry with 128k miles for $5000 in North Raleigh on Craigslist. Its not hard to find used reliable cars for far cheaper than new.

You may have had some bad luck with used cars in the past that turned you sour on them. Thats just bad luck. Even the best cars break down including new ones. My friend bought a new Honda and the transmission crapped out 2-3 times. (basically a lemon) Modern cars are very reliable in general. Find a good brand with a good reliability history and get the car checked by a mechanic before you buy.

Think of it this way is paying the $2500 annual interest on your car loan really worth avoiding an occasional $50 tow truck bill or $500 mechanic bill??

I know that you're stuck in a car worth less than your loan right now but in the future you should buy cheaper cars that you can afford.

Sorry for the lecture. But you can't afford the car you bought and can't afford to buy similar cars in the future either.

Jim is right about the cars. Unfortunately she is trapped in the current car due to the upside down loan unless she could come up with multiple thousands of dollars of cash.

Many people have an irrational fear of cars breaking down. I don't know if this is caused by 30 years of crappy cars from Detroit or what. But modern cars are very good especially the Japanese brands. Unless you get a lemon which can happen to any car, The Japanese brands will all go up to 200,000 miles with very little trouble most of the time. Many will go far beyond that too.

Consider Jim's advice for your next car. Whether it's 5K or 8K or even 10K. You can buy some great cars for far less than new.

I will give you two examples from my most recent experience. The last two cars I purchased were both in 2006. One was a Honda van after our second child was born. In March 2006 I bought a 2002 Honda Odyssey with 70,000 miles for 14,800. It currently has 195,000 miles on it. Have never had a single repair done on it. Oil, tires, breaks. That's it. In December 2006 someone totally my then 1996 Nissan Maxima that had 180,000 miles on it. I had just recently put a new starter in it for $400. Before that I had never done a single repair to it (I did buy that one new for 24K in 1996). I replaced that car with a 2002 Nissan Maxima with 100,000 miles for $10,500. It currently has 150,000 miles on it and I have also never done a single repair on that car. I have owned 4 Japanese vehicles and had well over 100,000 miles on all of them and the replaced starter on my 180,000 mile 1996 Maxima is the only mechanical repair I have ever had to do.

I have a net worth easily into 7 figures. I could easily afford a 30K new car. I am sure in the future when I feel like I am 100% financially free I probably will. But the point is I am in very good financial shape yet I bought a 10K used car with 100K miles on it. And most people making 1/4 of what I do with no savings buy brand new 25K cars. That's a lot of money spent simply on transportation that many people are simply vastly overpaying for. It's just a means to get from point A to point B. There are thousands of very reliable vehicles that will do that for you for 1/3 to 1/4 of what most people are paying especially when they finance it. If you can break it down to numbers it's one of the most irrational money things that most people do.

The good news is, you have a lot less debt than many other Americans. This is doable. Just take one bite at at time and resist any further temptations.

I second the poster who said to see about getting a new loan with Prosper or Lending Club to lower your interest rates. I know your credit rating may not be that good, but look into it anyway. Lending Club will give you an instant online quote, I believe. Any opportunity you have to get a lower interest rate on any of the debt, you should take advantage of that. I lend money on Lending Club -mostly to people trying to refinance their existing high interest rate debt.

The greatest assets you have are the most important ones - a loving family and a good head on your shoulders about your debt. It sounds like you've made mistakes financially and learned from them. That's the best way to learn. And take heart - you're doing better than a great many people.

I would seriously recommend taking out another 401(k) loan to pay down your cc debt at 30% (yikes) and your car debt at 20%. The disadvantage of doing that is that you forego market gains on your 401(k) and you are also paying it back in after-tax dollars. But I think both of these are outweighed by the crazy high interest rates you are paying on existing debt. I don't foresee the market coming back massively anytime soon (if anything, you might do well to get your money OUT of the market for the next year or two). And your tax bracket is not that high to where the repayment in after-tax dollars is that big of a deal.

If there is any chance that you might lose your current job, then I would not do the 401(k) loan as that will come due in 60 days from that time. But if it's stable, as you say, I would pull the trigger and do it.

As others said, prosper.com might be another solution, if you are not comfortable with the 401(k) loan option.

If your company (or his) matches any 401(k) contribution, you should contribute that and only that. Any extra cash, as others pointed out, must go to paying down that debt. Even before building an emergency fund.

With your plan to be debt free in 3 years, you are headed in the right direction.

Others have made excellent suggestions, so I'll just add one thought:

Pets are a luxury, not everyone can afford them.

Look at the silver lining, when you have interest rates that high any prepayment of principal is going to massively reduce the repayment term. $400 a month in extra debt repayment is going to show up very clearly in your repayment projections which gives you a needed psychological boost.

Just as an aside what has happened to society that this statement doesn't shock everyone who reads it it. "I don’t think money should be a taboo subject in the home, especially when parents are expected to also talk to their children about the dangers of drug abuse and reinforce sex education."

It's a parent's responsibility to teach their child EVERYTHING about how to live and function in the world. Public education is only for "book learning" or reinforcing the parent's teaching not the other way around.

Can you borrow against your 401K? There may be some that would be against this, but I think your facts and circumstances would necessitate such actions. I would much rather see you pay interest to yourself then see those huge interest rates on your consumer debt. Also, do NOT even consider this unless you are certain that you have the self discipline to avoid all debt until your loan is paid in full.

Okay, well I guess what I should have said about my car is this: In summer 2010, my previous car was totalled in an accident that wasn't my fault. There was less than a year left of payments on the totalled car, but even still the settlement (after the remaining loan was paid off) was less than $1,000. We had no savings and no way to take out a loan for a beater car at that time (we were in an even worse position then). I looked for cars that we could have paid for out right and I couldn't find anything that I consider safe. We didn't choose to buy our car - but living where we do I have to have a car to get to work. We were stuck. It's this exact event in my life that really flipped the switch on where we were heading financially. I now realize the importance of emergency funds and maintaining healthy credit. It's an expensive lesson, yes, but not invaluable.

The first thing I would do is look for a better paying job. As a chemist with your background you should be taking home much more especially in the Research Triangle area. No new home or baby for at least three years.

The debt is scary, but it can be overcome if you and your husband are both determined and willing to do some work and make some sacrifices.
I have to agree with Apex – keep a very small emergency reserve in cash so that you don’t get overdraft fees. Don’t wait to build up an emergency fund, start paying off that debt as soon as possible.
Your interest rates are sky high, see if you can do anything about lowering them:
Call CC companies and just ask for a lower rate- the worst they can do is say no- I believe the book I Will Teach You To Be Rich has scripts for this purpose, as well as scripts for asking for lower insurance rates etc.
Join a credit union and see about refinancing- at the least they should be able to do better than 19.99% on the car loan using the car as collateral.
Also check out lending club or prosper- there are a lot of debt consolidation loans, your rates are so high that I would be surprised if you couldn’t do better.
Utilities/cell phone seems high at $300/month- If you are no longer in contract consider switching to a pre-paid cell plan. I spend about $100/year for minutes on a pre-paid t-mobile phone. I spent ~$50 for the phone several years ago- it isn’t fancy but it works very well for making phone calls and has very good battery life too.
I wouldn’t raid the 401K money - you will lose something like 40% with taxes and penalties, plus you will need that retirement savings once you get rid of the debt.

-Rick Francis

JN,

I don't want to beat you up about a mistake you made in the past. And I recognize you see that you overspent on your current car and are basically trapped in that loan for the time being.

But my point is that instead of feeling you HAD to buy a car for $12000 (or more) that you could have instead found a perfectly good $5000 car. I don't expect you to buy a $500 beater with cash. But financing a $5000 car instead of a $12000 car is still much much cheaper and certainly a very good car.
Its not hard to find reliable and safe used cars for a fraction of the cost of new. You can always finance such cheaper used cars too.

Sorry I'm not sure if we're in agreement here or not, but you seem to be arguing that you had no choice and needed a safe and reliable car so you had to spend what you did. I think you could have spent far less.

I agree you need to also tend to your marriage. Don't lose track of that. As for the emergency fund, I think you're better off paying the CC first. What about your career? Are you pushing that forward to invest in making more in the future? What about a small home business that might make more money? Unless there were many large bankruptcies etc that rate seems very high. Are there no other options for lower cost loans? Furthermore, are you doing all you can to cut expenses? Carpooling/no charity/cable/cheaper cell phone etc?

Thanks again everyone for the advice. I think I will pay off the credit card first and put a small reserve of cash in the bank. My instinct was to get that paid off ASAP, but the general advice I've heard is to build a small emergency fund then tackle debt.

@Jim - Don't worry about it. We're in agreement about the car being too expensive, but it is what it is. My husband and I have every intention to not go down that road again. We have no problem driving a good used car, but we were in panic mode at the time and couldn't figure out a better solution.

I was a little apprehensive to submit our story to FMF, since our situation is embarrassing to a degree, but I'm glad that I did. Thank you everyone for the encouraging words and advice!

JN, you're on the right track, and focusing on paying off the credit card first is an excellent strategy. Are you a NC government employee? If so, please check into joining State Employees' or Local Gov't credit union to see if they can help you reduce the interest rates on the cc and personal loan. If you're not eligible for those, see if you can join another credit union. They have different lending standards, and if they see you have a plan to get out of debt, even with your currently lower credit score, they still may be able to offer you a loan.

It's not clear what kind of cooking your husband does. Is he able to do any catering jobs on the side to earn extra money? I know you said he'll start classes soon, but even if he did only a couple of jobs per month, that would speed up your debt payoff or building the emergency fund.

Good luck with your efforts!

I'm a great believer in visual aids, Design a wall chaart, put it in a prominent place and every cent you pay off is marked off on the chart. Make it something you do together every week. Doing this together gives you both the incevtive to work harder. I agree with other comments about the CC, while ideally you do not want to use the CC you will still have the funds availabe for an emergency, but paying off the CC is a great psychological boost and may help with getting better rates on some of the other debt.
Good luck,

I applaud you for overcoming your embarassment, asking for advice, and deciding to take some progressive actions to remedy your financial situation over time.
You are both young enough to overcome your past mistakes, move into a good financial position, and never look back. There's an old English proverb I learned as a child, that says, "If you look after the pennies, the pounds will look after themselves." It has worked for us.
I wish you the best of good fortune.

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