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Author: IslandFoolin One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 308722  
Subject: Debt Paydown Plan Help Date: 9/15/2010 9:55 AM
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Good morning all,

I've managed to rack up a small amount of debt since quitting my full time job and going freelance. Up until this point I had it managed fairly well, with low interest rates and 0% APR balance transfers on various cards. However, due to those unforeseen events you're always being warned about I have fallen behind on my own payment schedules and now those 0% APRs are about to expire. Below are my current debts, the corresponding dates highlight when the 0% APRs expire.

For what it's worth, some of this debt (about $7,000) was incurred for equipment that I use to run my photography business. However, it was incurred on personal credit card accounts and before the creation of the sole proprietorship which has since become an LLC.

I have no guaranteed weekly income (again, freelance) but by month's end will have $8,500 in liquid assets to go towards both living expenses and debt repayments.

My thinking is to pay down the highest balance on the current interest bearing account first. After that....? New 0% APR balance transfer offers :( ?

Card A
$8,334 @ 13.24%
Card B
$1,664 @ 0% until 10/17/2010
$398 @ 18.99%
Card C
$2,288 @ 0% until 3/7/2011
Card D
$3,906 @ 0% until 12/28/2010
Loan A
$2,168 @ 6.99% on auto pay @$223/month

Living expenses generally run about $1,200/month.

If you've read this far, I thank you. I have few people with whom I can discuss this and frankly it has started to cause undue levels of stress. Any insight, opinions, ideas, would be warmly received.

Cheers.
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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 299136 of 308722
Subject: Re: Debt Paydown Plan Help Date: 9/15/2010 10:40 AM
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Living expenses generally run about $1,200/month.

I presume that 'living expenses' don't include the debt payments?

You don't list your minimum payments on the debt other than "Loan A" - I am going to assume that the credit card minimum payments total in the $350 range.

have no guaranteed weekly income (again, freelance) but by month's end will have $8,500 in liquid assets to go towards both living expenses and debt repayments.

I presume that's after this month's living expenses and minimum debt payments?

So the first thing that you need to do is set aside next month's living expenses and minimum debt payments. That would be about $1800 ($1200 + $350 (credit cards) + $223 (Loan) = $1773)

Then, I would suggest keeping at least 1 month's worth of 'living expenses' and minimum debt payments in a savings account as an emergency fund. So that's a total of $3600.

So, out of the $8500, you have $4900 left

Card B
$1,664 @ 0% until 10/17/2010
$398 @ 18.99%


I would suggest paying this card off now, presuming that the 'go-to' rate on the expiring balance is going to the same 18.98%, as it's your highest rate listed, part of it is already at that rate, and the promo rate on the rest expires in a month.

That leaves about $2800. Since you don't list the 'go-to' rates on the other cards, you need to look at what those are. If the highest 'go-to' rate is higher than the 13.24% rate on card A, then I would suggest putting that $2800 in a savings account to use to pay the high rate down/off before it expires. Otherwise, use it toward Card A.

AJ

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Author: SeattlePioneer Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 299137 of 308722
Subject: Re: Debt Paydown Plan Help Date: 9/15/2010 10:50 AM
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Personally, my bias would be to hold onto a substantial pool of cash to finance the costs of your personal and business life. I'd rather have a cash backup for that rather than rely on credit.

Paying interest is a cost of your current business and personal finance plan. I'd rather pay the interest charges and have the cash on hand and available against unexpected problems and difficulties.




Seattle Pioneer

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Author: Gingko100 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 299138 of 308722
Subject: Re: Debt Paydown Plan Help Date: 9/15/2010 11:03 AM
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I have no guaranteed weekly income (again, freelance) but by month's end will have $8,500 in liquid assets to go towards both living expenses and debt repayments.
Set aside at LEAST 25% of this for quarterly taxes. probably more. The last thing you want to do is have an IRS lien on top of everything else.

I am also self-employed, and while managing an uneven income stream is very challenging, you need to be careful not to mix personal and business funds. The money you mention should go into your business account. From there do the tax set aside (as I mention above), and keep a reasonable amount in hand for ongoing business expenses (phone, fax, supplies, etc), and to pay business CCs. Then decide how much you need to reserve for retained earnings to "float" you over the bad times (this is essential, not optional unless you like racking up large debt on an ongoing basis).

After all that, you can take a draw to pay your regular bills and address debt. And if you are doing really well, then set aside some for your SEP-IRA.

So, this is my long, rambling way of saying you may not have $8500 to pay debt, and will need to decide priorities for addressing payback. I would probably pay off "B" completely, to avoid interest rate jump, then start addressing "A".

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Author: IslandFoolin One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 299199 of 308722
Subject: Re: Debt Paydown Plan Help Date: 9/18/2010 2:20 PM
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Thanks for all of your thoughtful responses.

Aj845 your assumptions are correct, thank you.

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Author: IslandFoolin One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 299200 of 308722
Subject: Re: Debt Paydown Plan Help Date: 9/18/2010 2:32 PM
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Gingko100:

Thanks for your advice from the small business perspective. I have a call in at the local SBA for a free consultation with an accountant to ensure I don't get the IRS on my back as well to ensure I'm operating legally.

One question though; The money in mention (~$8500) has come from the sale of a personal vehicle and also a side job I'm doing under the table for a friend. When depositing this money into my business account, should it just go in as owner equity?

Also, retained earnings are new to me. My business has little to no overhead and no recurring debt. What should these retained earning be saved for?

Thanks again all.

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Author: SeattlePioneer Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 299201 of 308722
Subject: Re: Debt Paydown Plan Help Date: 9/18/2010 6:49 PM
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<<One question though; The money in mention (~$8500) has come from the sale of a personal vehicle and also a side job I'm doing under the table for a friend. When depositing this money into my business account, should it just go in as owner equity?
>>



In my opinion it's a mistake and impolite to inquire on a public message board how to commit tax fraud. You make yourself vulnerable to anyone who cares to report you, and it's insulting to people to ask for advice on how to do it.


That's my opinion anyway.



Seattle Pioneer

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Author: Gingko100 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 299202 of 308722
Subject: Re: Debt Paydown Plan Help Date: 9/18/2010 11:24 PM
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There is no "under the table" work. You need to report that income. Period. If you run tax fraud long enough, you will eventually be found out. The car has probably lost value so the net is a loss, which is different.

Retained earnings are to hold you over during slow times to prevent taking out debt to keep you afloat. For example - this year I made less than 25% what I did in 2007. It is my retained business earnings that allow me to continue to live without running up debt or cashing in my investments.

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Author: IslandFoolin One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 299228 of 308722
Subject: Re: Debt Paydown Plan Help Date: 9/22/2010 3:21 AM
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Well, horrible choice of syntax on my part. The "job" is aiding in a glorified yard sale, my role of instructing an older friend in the technical aspects of using the internet to sell personal effects are being compensated more as a gift than anything else. And yes, gifts should and will be reported to the IRS as income. By under the table, I was trying to convey that I didn't have a pay check/salary/W2/etc...

I'm no fan of tax fraud, nor of perjuring myself. I guess some people would be brazen or ignorant enough to do such things. My apologies and thanks for openly standing up for the tax code.

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Author: IslandFoolin One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 299229 of 308722
Subject: Re: Debt Paydown Plan Help Date: 9/22/2010 3:36 AM
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After re-reading my own reply I feel like I sound a bit brazen now. I never had any intention of committing or attempting to commit tax fraud. I've been a member of this community for about 10 years and had no intent to offend anyone or the respectability of this community. Again, my apologies.

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