I wanted to get an idea of peoples opinions on paying debt off vs. retirement savings.
I currently got a new job that is paying quite a bit more than I was making before. So my goal is get my debt paid off and out of the way. I know mathematically it makes more sense to pay off an 18% credit card than invest at around 8-10%, but I read several things on this subject. A great book I read “The automatic Millionaire” suggests putting half of your extra money into debt and the other half into retirement. He says logic would say to pay off the higher interest debt first than save for retirement, but in his experience most people pay all to debt eventually get frustrated and give up.
I am looking for what opinions are here on the this board are.

<<He says logic would say to pay off the higher interest debt first than save for retirement, but in his experience most people pay all to debt eventually get frustrated and give up.>>


Are you one of those people? If so, I'd follow that advice.


Personally, nothing motivates me like staying out of debt.



Seattle Pioneer

I know mathematically it makes more sense to pay off an 18% credit card than invest at around 8-10%

Unless you are guaranteed a return that is greater than your credit card rate, like a 50% or 100% match on your money in your 401(k) plan, yes, you will come out ahead by paying down debt.

but in his experience most people pay all to debt eventually get frustrated and give up.

We have a lot of people here on this board who have put off retirement savings to pay off debt, and have not given up.

I am looking for what opinions are here on the this board are.

Your opinion is probably the most important. So what do you think for your personal situation?

AJ

For years I deferred making any contributions of my own to my 401k (my employer does make a contribution each year not dependend on whether I contribute). I kept saying I was going to pay off my debt first and then contribute. After all that made the most economic sense.

The only problem was that I didn't. I didn't pay off the debt or if I did (and I did a few times) I ran it back up again. So that is how I ended up in my early 50s with about $95k in retirement savings, almost all from employer contributions and earnings on them.

So, this time, I'm doing it differently. In September I started contributing 5% of my salary to my 401k. This is sort of a compromise. 5% is not close to the max I can contribute but I feel it is better than nothing and I can still make a reasonable debt repayment.

Of course, you may be different than I am. Also age is a factor. For me, I don't have many years left to contribute so don't feel I can pass up too many opportunities. If you are 25 and a very disciplined person then paying off debt first probably works best.

I was like determinedmom for years... didn't save for retirement because it seemed to make more economic sense to pay the debt, but the debt never got paid off an the retirement never got funded.

When I finally got serious on January 1, 2000, my plan included maxing out all the retirement vehicles available to me. I also aggressively paid down the debt. How? By making massive cuts to current spending. I figured it made more sense to sacrifice TODAY's lifestyle in order to both pay off the debt and fund the retirement.

I'm very happy with the way its worked out. Retirement accounts are in good shape, debt is paid off ($137,932 in 40 months), birds are singing, all is right with the world.

I wouldn't give up free money like a match on a 401K.

I also choose to fund a ROTH as it is a 'use it or lose it' situation--if it is not funded for a particular year, you can never go back and make it up in future years. Therefore, I max out the ROTH even while paying off debt.

Other than these, I'd knock out the debt.

Good luck,
Polywilliams

I also choose to fund a ROTH as it is a 'use it or lose it' situation--if it is not funded for a particular year, you can never go back and make it up in future years. Therefore, I max out the ROTH even while paying off debt

Technically this is also true with a 401K. Practically is may not be depending on your contribution level, but if you expect to ever get to the max amount, then there is a use-it-or-lose-it factor there too.

I also choose to fund a ROTH as it is a 'use it or lose it' situation--if it is not funded for a particular year, you can never go back and make it up in future years.

But that applies to regular 401k contributions either. If I miss a year I can't go back and make it up (assuming that in future years I contribute the max regardless).

I would say unless you are in dire straits (about to lose the house - eating ramen...) fund the retirement at least minimally (401K match). You won't get the chance again.

My opinion and situation.

I just started making a push to get my debt paid off. I have about $25k in credit cards and a 2 mortgage on my home for about $45k (used for pool/yard and pay down some of my credit cards.) The good thing is housing around here went crazy the last three years so I am sitting on about $250k in equity.

As for investing my first company would match what I my put in my 401k up to 8%. So of course I always put at least that amount in each year. My next job contributed to my 401k with a match so I kept at the same level. I never saw that money before so I never missed it. When I left my job a few months ago so when I rolled my 401k over to an IRA it was worth around $100k.

I just started a Roth IRA last year. I have always wanted to put in a Roth so I can manipulate the taxes after retirement between it and my 401k/IRA. I have about $6k in mine and about $5k in my wife's. I have $8k set aside to put into them next year. I have to thank my severance package for that.

I also have about 3 months salary cushion in a money market incase something happens on the job front (once again thanks to the severance package.)

I like the idea of putting money towards both debt and retirement. Yea the interest is high on debt but I wouldn't take out the retirement money because of the penalties.

The biggest problem in our house is not running the debt back up again. We usually don't by big things that run up our debt it is a lot of little things (eating out, shopping, and don't even mention Christmas :( .) All of our bigger purchases we pay cash (furniture, remodeling, etc.) I even bought my last car with cash (yea it is a beater but it gets me back and forth to work.)

This is my plan for next year on not running up the debt and actually paying it down. Let me know what you guys think. I am telling my wife about this sometime before Christmas.

I just got a big pay increase with my new job, so my cash inflow is pretty good. I have 250 a week deposited into one checking account. That is the cash we are going to use for all the little things like: Eating out, meals at work, entertainment, and shopping. I know $1k is a lot a month for those things but with wife in a full time job and four kids it can go real fast. The other thing is if we keep our bills the same with the new income we will have a pretty good chunk going towards debt, while still putting money in retirement.

The trick for my wife and I is keeping track with the little things. I have even thought about letting my wife manage the spending account (250/week) hoping she sticks to it a little better. I have always done the bills in the house so this would be a little of a change for here. She worked in corporate accounting in a large company so she should be able to manage a checking account :).

Any other ideas would be greatly appreciated. Remember my biggest problem is not running debt back up.

As for a budget it has never worked for us. I track all the spending in quicken. I have tried to budget but there are so many unexpected things with a full house and 4 kids that the numbers never come out as plan. What I did for my budget is keep it real simple. Average all my spending last year on everything minus everything that is going to come out of the spending account ($250/week account) and divide it by 12 for my monthly budget.

I am only 33 years old so if I get my debt paid off and put the rest towards retirement we should be doing pretty good.

< i > I also choose to fund a ROTH as it is a 'use it or lose it' situation--if it is not funded for a particular year, you can never go back and make it up in future years. Therefore, I max out the ROTH even while paying off debt

Technically this is also true with a 401K. Practically is may not be depending on your contribution level, but if you expect to ever get to the max amount, then there is a use-it-or-lose-it factor there too.
< -i >

I agree completely. This has a big part of why I am choosing to do both.

You look like a prime candidate for the 60% solution:

http://articles.moneycentral.msn.com/SavingandDebt/LearnToBu...

My approach to budgeting was to carefully track my spending during the month and to adjust my budget targets up and down in each category, so that my total expenses never exceeded my income.

Useful? Sometimes.

Anal-compulsive? Probably.

After two decades of this, though, I started to wonder if there isn't an easier, more effective way to budget. I realized that the hardest part about keeping a budget is getting useful information from it. There's too much detail and not enough bottom line. My answer is "the 60% solution," a faster and easier way to structure your budget without having to account for every penny.

What you're trying to do with a budget is to prevent overspending, which ultimately leads to piling up debt. Contrary to the way most people budget, however, it rarely matters what you're overspending on -- dining out, entertainment, clothes. Who cares? It's still debt, right?

Looking at my own spending history, I realized that it wasn't the little luxuries here and there that got me in trouble. It was the large, irregular expenses, like vacations, major repairs and the holidays that did all the damage. To avoid overspending, I had to do a better job of planning for those.



Basically he advocates a pay yourself solution, where a defined percentage of money goes each pay period:

60% committed expense - bills, taxes, basic and essentials needs and those things not really needs but you've committed to them (music lessons for a child, private school...)

10% retirement

10% long term savings

10% short term savings for irregular expenses

10% fun money

Of course, your specific percentages might be different. Right now we have more on committed expenses since we are paying debt and less for fun money and I do detail my budget and spending as that works for me. But I do think that this is an interesting way of looking at it if you don't want to do individual budgeting.

From what you say, you need to get a handle on the unexpected expenses so putting a percentage into short terms savings for them would seem to work for you.

He says logic would say to pay off the higher interest debt first than save for retirement, but in his experience most people pay all to debt eventually get frustrated and give up

Time is your biggest ally in building up a retirement fund. If I waited until I had all my debts paid off, then I would be working till I was 80, so I split the difference. I put in 7% into my 401(k), and devoted the rest to paying off debts. I'm not quite 2 years into serious debt paydown, (as opposed to debt build up), but I have the beginnings of a good retirement fund. I'm on track to reach 65 debt free (mortgage included) and about 1.5 million in retirement funds. The main thing was to turn around my debt picture, which I did 2 years ago. If I hadn't, I would be carrying debt into retirement, which is not the way I want to go.

Could I pay off my debt faster if I didn't save for retirement? Of course! But like everything in life, you have to find a good balance that meets your needs and goals.

foolazis

"It depends" struck again!!

I don't think posters had factored in this additional data
As for investing my first company would match what I my put in my 401k up to 8%. So of course I always put at least that amount in each year. My next job contributed to my 401k with a match so I kept at the same level. I never saw that money before so I never missed it. When I left my job a few months ago so when I rolled my 401k over to an IRA it was worth around $100k.

I just started a Roth IRA last year. I have always wanted to put in a Roth so I can manipulate the taxes after retirement between it and my 401k/IRA. I have about $6k in mine and about $5k in my wife's. I have $8k set aside to put into them next year. I have to thank my severance package for that.

I also have about 3 months salary cushion in a money market incase something happens on the job front (once again thanks to the severance package.)


BTW, can you adjust your 401k contribution percentage at any time with your new company?

Just my thoughts-
1. You do have an emergency fund
2. You have money set aside to fund Roth accounts next year
3. You already have 100K in retirement in a rollover account
4. You understand the idea of contributing at least to a company match.

If you have 25K in CC debt, start paying it down (I suspect you already knew that).


Hohum

You look like a prime candidate for the 60% solution:

I like that idea. I think I am somewhat following something like that. Like you suggested I need to put some away for short term savings. As for long term savings I will probably hold off on that until my debt is paid off.

BTW, can you adjust your 401k contribution percentage at any time with your new company?
Yes. I am currently at 10% but can adjust it at anytime if needed.

If you have 25K in CC debt, start paying it down (I suspect you already knew that).
That is my plan. I also paying off my 2 mortgage as quickly as possible. After my CC of course.

I see a fairly large discussion looming here, because I see the challenge of living frugally so there is money for debt repayment and retirement.

"Wifey, you konw I'm making more money now. Let's make sure we're on the same page about what we're going to do with the money...No, I don't think this means we can buy Susie a horse...Maybe we can take a trip to Europe eventually...My first priority is paying down debt...Yes, I think we need to keep our everyday spending down to $250 a week, can you help by monitoring the checking account..."

YeilB

<<As for a budget it has never worked for us. >>


Don't be so hard on yourself. Your plan of having savings deducted from your paycheck IS a budget ----you are budgeting to make these investments off the top, and it's a plan that is working for you.


The trick to controlling expenses will probably be to have your wife on board with that goal and then to track whether various methods work or not. Keep the methods that do work and discard the one that don't. That's pretty simple to say, anyway.


Good luck!



Seattle Pioneer

BTW, can you adjust your 401k contribution percentage at any time with your new company?
Yes. I am currently at 10% but can adjust it at anytime if needed.

That's more flexibility you have to your paydown plan. First, work on the budget. If that causes too much of a strain, or does not change debt paydown, then reduce your 401k percentage for a while, and allocate that money to paying debt.


Hohum

I put a greater percentage in my company's retirement plan than just the match, while I was still paying off debt because my thinking was to get out and stay out of debt I would need to get used to living without that percentage as part of my take home. But my cc debt was under $10K and I was able to pay it off within a year.

determinedmom:

Congratulations on making this step! If you employer matches 100% of your contributions, I strongly urge you to reconsider not making the maximum contribution, as no debt paydown will equal the 100% free money you get from their match.

Well done!

d'man

If you employer matches 100% of your contributions, I strongly urge you to reconsider not making the maximum contribution, as no debt paydown will equal the 100% free money you get from their match.


I am fortunate that my employer's contribution is not dependent upon what I contribute. That is, employer contributes a profit sharing amount that is the same regardless of what, or even if, I contribute.

I wanted to get an idea of peoples opinions on paying debt off vs. retirement savings.

My opinion will be a bit different from most here. I think that behavioral and psychological aspects of money management are more important than the technical management of best rates and best return.

IMO, it is important to do both. Even when in debt repayment mode, put something (possibly not much) toward a 401(k) if you have one available, into a Roth IRA if you're eligible, or into a traditional IRA if you're not eligible for a Roth. The 401(k) contribution might be as much as you need to max out the employer match, or the minimum amount you can contribute if there is no employer match. The IRA contribution could be as small as you can make it to avoid custodial fees on the account, and you might pick the custodian more for the lack of fees on small accounts than for great investment choices. That's OK; you can transfer the account to a different custodian when your situation change.

The point of having a contribution, however small, to the 401(k) and the IRA is to make it a habit to be putting something away. When the debt gets paid off, there are the retirement accounts just waiting to take a large percentage of your debt snowball payment. It's kind of a nuisance to set up the retirement accounts, but it's very easy to increase contributions to existing accounts. I'm very much in favor of making it easy down the road when it's time to shift from heavy debt repayment to heavy retirement savings contributions.

In my case, the big adjustment was when the mortgage was paid off. I had a bunch of cash flow to allocate to various savings goals, and I wanted it to go to savings instead of spending. With no change in lifestyle, it didn't hurt at all.

I currently got a new job that is paying quite a bit more than I was making before. So my goal is get my debt paid off and out of the way.

Your new job may come with some implied spending obligations. In your position, I'd want to minimize my additional expenditures and maximize the amount of increased pay that goes toward debt and various forms of savings. The best way to allocate it between debt payments, retirement savings, and non-retirement savings depends on your precise situation and your temperament; but I would recommend putting something to each of these three categories. Then when the debt is gone, you get to decide how to allocate the former debt payments between retirement savings, non-retirement savings, and enhanced standard of living.

Patzer

I am fortunate that my employer's contribution is not dependent upon what I contribute. That is, employer contributes a profit sharing amount that is the same regardless of what, or even if, I contribute.

But then isn't this dependant upon whether or not the company earns a profit, and if it doesn't, or in lean years the sharing amount would be small, in which case the retirement savings would be small. My company also has a profit sharing program that's paid out as an annual bonus. But I don't make any retirement or lifestyle decisions based on this. So if it happpens to be $0 one year (which so far has never happened) it won't effect any of my plans/savings/etc.

But then isn't this dependant upon whether or not the company earns a profit, and if it doesn't, or in lean years the sharing amount would be small, in which case the retirement savings would be small.

FWIW this has always been a consistent percentage that has varied slightly but not in large amounts (this is over a 10 year period). I agree that having a set percentage would be nice (my husband's company matches 100% of his contributions up to 6%). OTOH, for *me* it has worked out well that the contribution by my company is not dependent on contributions by me since I usually wasn't making any.

Hi colombo,

I haven't read the rest of the thread yet, but I'll give you my take on the subject.

I have ALWAYS funded retirement to at least the company match, even while paying down high-interest credit card debt. When my debts were at the worst terms (highest rates) I generally would ONLY fund the match, but there was a period of time when I had very low CC interest rates on my debt that I put in much more than just the match amount.

The primary reasons I do this are a) any time I pass up to saving in my 401k is a missed opportunity I can't get back and b) I want to always maintain the habit of saving for retirement. I can't maintain the habit if I suspend contributions, now can I?

At the moment, I am only putting 6% (max match) in my 401k because I am dealing with many life changes in the next few months. As soon as the dust settles from my April wedding and especially when I get my house sold, I shall be increasing my 401k contributions, as will my DF. We will likely NOT max them right out of the gate, because we have some CC debt of his to pay off, but even upping them to 8% is a significant increase in the amount being saved so we'll do something.

Colombo,

My story is similar to DMs. During the worst years, I only funded up to the maximum company match.

Starting next year, the cost of my debt is so low, I'll be fully funding both of our Roth IRAs AND the up to the maximum company match. I think we'll put the balance of the money into various savings account as freedom funds, e-funds, & reserves in anticipation of paying off the various credit cards.

Jim

Colombo,

I'm in the "do both" camp. Of course, my CC debt is being paid off at less than 7 per cent interest. How's your credit rating? Maybe you can BT to get a better interest rate. That would make the math more palatable.

W.r.t. retirement savings, yes both the Roth and the 401(k) are "use it or lose it" opportunities. But doing both gives more flexibility. If you need cash but want to avoid paying taxes, you can take money from the Roth. I think the advice I've seen to put enough in the 401(k) to get the match, then fully fund the Roth, then go back to the 401(k) make sense.

And, as others have said, bottom line it's what makes sense for you (and what lets you sleep at night).

Best of luck,

Guby

Yea the interest is high on debt but I wouldn't take out the retirement money because of the penalties.

The biggest problem in our house is not running the debt back up again. (emphasis added)

(Note: the following needs to be read with a sarcastic tone to it.)
So, in other words you're funding your retirement so that you can continue to make your minimum payments on the credit card.
(End of sarcasm)

Whether you fund your retirement while paying down debt isn't nearly as important an issue as getting your spending under control.

Having said that, I recommend not funding your retirement for a brief period of time (no more than two years) if (and only if) you are going to be serious about getting your debt paid down.

I wanted to get an idea of peoples opinions on paying debt off vs. retirement savings.

IMO, it depends on what your debt is costing you to carry.

I'm contributing heavily towards retirement, despite being in debt (to the tune of ~$25k in CCs). However, the interest rates are very low - the highest CC rate I'm currently paying is 2.9%, and our total interest cost is only $15/month. Debt payoff a line item in our budget, and I'm satisfied with our current cash-flow situation and projected payoff date. In this situation, I can't see any reason NOT to contribute to retirement.

DW and I put a combined $20k pre-tax into our 401(k)s in 2006. In doing so, we picked up another $5700 in matching contributions (I get 3%, she gets 4%). On top of that 28% instant return, the fund selections in my 401(k) returned about 15% this year. I don't know DW's offhand, but I expect it also returned 10%+. We ended 2005 with $63k in our retirement accounts, we'll end 2006 with about $98k. I think we made the right decision.

If my interest rates were in the double digits, I might look at things differently.

I wanted to get an idea of peoples opinions on paying debt off vs. retirement savings.

--Do both.

I currently got a new job that is paying quite a bit more than I was making before. So my goal is get my debt paid off and out of the way. I know mathematically it makes more sense to pay off an 18% credit card than invest at around 8-10%, but I read several things on this subject. A great book I read “The automatic Millionaire” suggests putting half of your extra money into debt and the other half into retirement. He says logic would say to pay off the higher interest debt first than save for retirement, but in his experience most people pay all to debt eventually get frustrated and give up.
I am looking for what opinions are here on the this board are.

---

1. First, you must sharpen the pencil and figure out what your monthly cash-flow "nut" is for break-even. That is, your fixed living expenses, plus debt service. Do not include groceries, eating out, entertainment, etc. as part of your fixed expenses, as they are not fixed.

Your primary fixed expenses will be your first and second mortgages, and health insurance. All else is secondary. I will assume health insurance is not an issue and is provided for by your employer.

Next, you must pay at least the minimum on your CC's to stay current. This I believe is ordinarily 2%/month.

The next item would be your auto insurance, maintenance, and gas. These items are somewhat flexible from a cash flow perspective but you need to come up with a realistic monthly estimate for these expenses.

Your utilities for your home come next. Again, these are flexible from a cash flow perspective. Come up with a monthly estimate by looking at your past twelve months of bills.

2. Note I did not include groceries and all that other nonsense because for the most part, those numbers are extremely flexible and most people spend way too much discretionary money on those things. The items other than what I have listed in No. 1 (unless I've forgotten something) represent the "holes" in our budgets where all that money has magically disappeared to.

3. Next, figure out your net income. Subtract the number you have arrived at in No. 1, above, from your net income. This is now the money you have to work with in terms of investments/retirements vs. debt pay down.

4. The above assumes you will not have any new charges on your CC's. This will probably be the hardest part: getting out of the habit of using CC's for the everyday expenses--groceries, etc. It's much, much easier to spend with a CC than when you are counting the dollar bills out of your pocket. Using cash for day to day expenses makes the expenditure tangible in a way that using CC's does not. You can actually see the money flying out of your wallet/purse.

5. O.K. The next part of your plan is to MAXIMIZE your 401(k) contribution. I am not just saying to the employer match, I am saying beyond employer match to the maximum contribution level.

There's a couple of reasons for this. The game you are playing is financial but it is also emotional/psychological. Financially, you will be unable to catch up if you miss 401(k) contributions. Psychologically, the money you invest in 401(k) is money you never see. It's like any other deduction from your paycheck. It's not part of your net in hand each pay period. Therefore, psychologically, you don't feel as if you're actually "spending" it. You don't feel the loss of it.

Also, again emotionally, if you don't have it available, you're unable to waste it. It's as simple as that.

So, max out the 401(k) contribs, even beyond employer match. That's an absolute no-brainer.

6. You must also commit to investing the maximum amount for yourself and spouse in a Roth IRA. Assuming your income is not too high, this would be $4,000/year, each, or $8,000 total. These contributions are much more flexible as, for example, for tax year 2006, you have until April 15, 2007 to make the contribs. for 2006. I also believe that if need be, you can file an extension to file your tax return and the contribution date for the Roth will also be extended. [Check this out w/your tax advisor.] So, from a cash flow perspective, your contributions to the Roths are much more flexible than 401(k) "if you don't lose it you lose it." Ideally of course you would fund the Roths on January 1 of the contribution year, [i.e. Jan 1, 2006 for tax year 2006 if you had the available funds to do so.]

7. Since we are almost in tax year 2007, ideally, here is what you should do:

1) designate maximum contribution for 401(k) with your employer, i.e., not just the employer match, but the FULL amount you are legally allowed to contribute from your pay.

2) fully-fund your 2006 Roth IRAs ASAP, and fully fund the 2007 Roth IRAs as soon as possible after Jan. 1., 2007. (I believe if you are over 50 it's 5,000/spouse/year.) So, the total target for your Roth IRA contributions for 2006 and 2007 is: $16,000 if under 50; $20,000 if over 50; with the 2006 contribs due no later than April 15, 2006, or perhaps Oct. 15 2006 with a six month extension.

8. I will assume that you will feel most comfortable both psychologically and financially by engaging in CC paydown, because of the high interest rate, simultaneously with Roth contribs, rather than
fully funding the Roths first to the exclusion of paying down the CC's. A lot of this depends on the actual amount due on the CC's.

But regardless of the amount due on the CC's, you must commit to fully funding your Roths.

9. Therefore for starters we will put you on a payment plan for the Roths. In order to fully fund for 2006, you have about 4 months until April 15, 2007. That means that to hit the deadline, you must pay $2,000/month to your Roths. By April 15 you will be fully funded for 2006, and you can start on 2007's contribs.

10. Assuming you can get a four month tax filing extension, until August 15, 2006, which I believe the IRS gives as a matter of course if you apply for it; and assuming this also extends the Roth contrib deadlines, you would have eight months. In this case, you would then budget $1000/month towards the Roth Ira contribs for 2006.

11. AFTER you have squared away all of the above, and gotten your plan in place, you can now address the existing CC debt.

First, figure out what you owe, and the interest rate. Stop accumulating more charges on your cards. Pay cash for day to day items--groceries, etc.

Second, try to see if you can get one of those transfer deals for a low fixed interest rate or zero rate for a period of time from another card issuer.

Third, call your current CC issuer and ask them to lower your existing interest rate. Tell them if they do not you will take your business elsewhere via a transfer deal.

Fourth, ask your CC issuer if you can have a forebearance on any further interest charges or late fees/penalties on your card, and see if they will set up a payment plan for you for the existing balance. You might have to make a few phone calls to swing this. Make sure that if you can get them to agree to such a deal, they will not put a derogatory report on your credit report.


12. NOW comes the "fun" part. This is where you cut all discretionary expenses "to the bone" and pay down that CC balance ASAP. This may involve eating lots of spaghetti for a few months. Cut out all [or mostly all] of junk food, etc. This is where you want to be "frugal"/tightwad. In other words, you don't want to be "frugal"/tightwad with your retirement savings, because that's simply self-defeating and counterproductive.

It will take several rounds of budget cutting and behavior modification on your part, over several months, but you will soon be amazed at how much money you have been wasting and how much you can save.

13. Only AFTER you have fully funded your tax-advantaged retirement vehicles, and only AFTER you have fully paid your CC's, do you worry about then paying off the second mortgage. But, once you have this plan in place, paying off the second mortgage will seem "natural" after you have paid off the CC's. That's because once the CC payments have ended, you will free up the additional cash flow which has already been dedicated to debt repayment.

14. The above plan can perhaps be modified if you are not eligibile for ROTHS [or in the alternative, if you are not eligibile for tax deductible IRAs.] If you are eligible for tax deductible IRAs, follow the above plan.

In the case that you are NOT eligible for Roths or tax-deductible IRAs, while still eligible for non-deductible IRA's, you would probably be better off foregoing non-deductible IRA contribs and just paying off high-interest CC debt ASAP.

15. Depending on your level of CC debt, envision the above as a 16 month plan, i.e., until April 15, 2008 (deadline for contribs. to 2007 tax year IRAs [without extension]).

16. Once you have fully funded all tax-advantaged retirement vehicles, to the MAX; paid off CC's; paid off the second mortgage; then you will have a lot of extra cash flow which can then be used to fund non-retirement investments.

17. Note I do not put much commentary concerning your day to day discretionary-item budgeting. That's because quite simply, necessity is the mother of invention. The easiest way for you to stick to whatever budget you end up with is to keep the money out of your hands. The best way to keep the money out of your hands is to MAX out your tax-advantaged retirement account vehicles. If it's not there, you won't spend it.

However, please note, if a REAL emergency ever crops up, you can withdraw money from retirement accounts. Obviously this would have to be a last resort. However, the availability of your retirement funds, if necessary, is good to know as it provides you with psychological peace of mind.

18. Emergency fund: since you have a regular income, unless you are pretty insecure [like myself], you could probably get away with 2-3 months for now. Really, from a cash flow perspective, exactly what type of emergency can be expected to arise, for most people, that will require immediate expenditure of 2-3 months' income, all at once? I would not wait to build up the emergency fund to start the above plan, however.

You asked for my two cents, you got twenty cents.

Looks like we got the attention of Fool board:

http://www.fool.com/personal-finance/retirement/2006/12/28/a...

What happens to 401k's in a bankruptcy? If they're exempt, then there's another reason to put something into retirement. That way, if complete financial disaster befalls you and you have to declare bankruptcy, you'll have a little something from your prior earnings for your future.

(I am *not* advocating maximizing contributions while running up debt with the intention of going bankrupt.)

Sorry for the late reply, but I wasn't around during the holidays ... :-)

There are other aspects to retirement investing other than comparing interest-rate percentages. Regardless of your earnings amount or debt levels, you should be saving 10% of your income REGARDLESS. You will likely always have some amount of debt going on, whether it is burdensome CC debt, or mortgage debt, or ... so if you wait until you are quote unquote out of debt, you will never start KEEPING YOUR OWN MONEY.

I have read the Automatic Millionaire, and his plan is the same echoed in many other books, like The Richest Man in Babylon, or The Ten Percent Solution ... his point being that you need to "protect yourself from yourself", because if given the chance we would all (most of us anyway) spend 100% (or more) of our income.

A good rule of thumb is 10% of your earnings to long term savings, 30% of the remainder to debts, and then to live on the rest. Tithing or other expenditures can also figure into the formula, but that speaks to someone's personal religious beliefs. Once you read 90% of the self-help finance books out there, you realize they are all selling various flavors of the same system.

So, while I would postpone investing in stocks, or many other financial activities while in high-interest CC debt, I would NOT put off a regular, "automatic" 10% investment in 401K or IRA funds in the meantime. If you can't start out with 10%, start at 5% or 6% and work your way up.

I am not out of debt either, but through regular contributions over 6 years, my 401K balance is now triple the balance of my outstanding debts. It is easy for me to imagine never having started my 401K investing, and still having my current debt level. That would have been a tragedy. I implore you to start today.

~dswing

dswing

I just got done reading "Automatic Millionare" myself. That is what inspired all of the changes I am currently planning. That book suggests only paying half towards CC debt and half towards retirement. I am doing pretty well in putting money away. Not so well at gathering debt.
The wife agreed on the new budget and planned on following also. Well she made it almost 3 days before braking it. I guess it is going to be interesting to see how this is going to work.

colombo

The wife agreed on the new budget and planned on following also. Well she made it almost 3 days before braking it. I guess it is going to be interesting to see how this is going to work.

So it looks like we found at least 50% of the problem. You need to listen to determinedmom and soccerdad about getting your spouse on board. If you don't you're screwed. Both debt payoff and retirement savings is a JOINT effort.

Spouse sabotage is a big problem. This list has a number of folks who can help you prevent this.

Welcome aboard.

On the wife issue... What part did she have in developing the new budget? Does she see the same urgency that you see in paying down debt?

A couple of things in an earlier post of yours make me feel a little uneasy:


This is my plan for next year on not running up the debt and actually paying it down. Let me know what you guys think. I am telling my wife about this sometime before Christmas.

This is saying that you have developed a plan and you are telling us about it before you've talked to your wife about it. That sure makes it sound like she isn't a part of developing the plan.

People tend to work harder on a plan if they are invested in its development rather than when they take part in developing the plan.

Truthfully, I have the problem myself of developing these brillaint plans and then telling my DH about them. This tends to not result in much enthusiasm from him. He agrees to the plan usually but does have much ownership of it and doesn't tend to follow it very completely.

Regardless of how much better I think my plan is it usually works out better to develop a plan together that is perhaps sub-optimal but get better buy-in from DH (of course, I'm sure he thinks my plan is sub-optimal and maybe he is right).

The other thing you said:

The trick for my wife and I is keeping track with the little things. I have even thought about letting my wife manage the spending account (250/week) hoping she sticks to it a little better

I hope this was a just an inopportune choice of words. If I said to my DH that I might let him manage an account he would become angry. He might think I was implying that I made all the decisions and that he was more a child than an equal partner. It would not be likely to get his buy in.

Now, it may be that none of this applies to your situation with your wife. And it may be that nothing you do will make a difference. But it might be worth thinking about.

This is saying that you have developed a plan and you are telling us about it before you've talked to your wife about it.
My wife and I have been living together for about ten years. This hole time we have had one joint account which both of our paychecks go into. In the past I have always done the bills. When I have tried in the past to get her involved she wanted nothing to do with it.

People tend to work harder on a plan if they are invested in its development rather than when they take part in developing the plan.
This was what I was thinking about when I was debating about her running the spending money account.

I hope this was a just an inopportune choice of words. If I said to my DH that I might let him manage an account he would become angry
I think you misunderstood me here. I was debating on having her run it or not. I would never say to her, "I might let you run the account." When I told her I asked her if she would run the account. That way she knows exactly how much money we have and when we run out. This also helps me from doing impulse buys.

Does she see the same urgency that you see in paying down debt?
For the last couple of years I have always been saying we need to get spending under control because we were going x number of dollars in the whole each month. I myself didn't realize how bad it was until I got a significant pay raise and we still didn't make ends meet.

Determinedmom
I really appreciate your post. It defiantly got me thinking in a different light. I sat down with my wife and talked about some of the things you brought up.

She wants the actual numbers (from the inflow and outflow) broken down and printed. She doesn't like reading them on the computer. When she saw the actual numbers broken down and how much we are going in the hole each month I think it really surprised her. When I told her of my worry she thought I was always exaggerating the numbers in the past.
She wants to run the spending account but run it her way. She wants no input from me and wants me not to be looking over her shoulder. I think that is a good idea. I think it might be tuff at first (been quite a while since she did anything with the bills) but it will come back to her fast.

Don't get me wrong we are in this finical problem by the decision we both have made in the past. I had to take a look at my own spend and really cut back. We have dug ourselves a hole to work out from. I just want to get it under control before it is a canyon.