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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: of 308686  
Subject: Re: DeLurkign for some advice Date: 3/7/2008 7:36 PM
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I have been lurking on this board for about 7 months, getting some extremely helpful advice from the regulars here (Thank you!).

Welcome!

I have been working a debt snowball since July, & have paid approx $11K worth of debt in that time. I have about $34K in unsecured debt left & at the rate I am going, plan on having most of that gone by the end of 2008 & all of it gone mid 2009.

Congratulations on your progress!

Here are some of your numbers, reformatted a bit:
My income     $4700
DH Income $3300
Total $8000

Consumer Debt
Account Rate Payment Balance
CC1 16.00 % $ 40 $ 1,805
CC2 0.00 % $ 60 $ 2,957
CC3 0.00 % $ 60 $ 2,890
CC4 0.00 % $ 75 $ 3,626
Bank loan 12.75 % $ 150 $ 4,900
401K loan 7.00 % $ 368 $ 8,200
Car 1 0.00 % $ 471 $ 2,355
Car 2 3.90 % $ 468 $ 7,428

Total Consumer 5.20 % $1,692 $ 34,161

House Debt
House 6.375% $2,201 $257,000
HELOC 4.99 % $ 194 $ 32,400 (prime -2% after 2 years)

Total House 6.22 % $2,395 $289,400

Total Debt 6.11 % $4,087 $323,561
I can understand why you feel strapped - over 50% of your income is dedicated to debt repayment. One good piece of news is that the rate on your HELOC would actually go down if it reset today, since the prime rate is 6% right now, and may even go down again after the Fed meets later this month.

Anyway - March is bonus month at my company & I am expecting to get at least $5K. In may, I expect to get a $2100 rebate from good old US. CC1 & bank loan are expected to be paid off. In July 08 car 1 will be paid off. This will leave me an extra $661 for my snowball.

Have you confirmed that you are getting $5k? Because spending bonuses, even on debt, before they hit your checking account can be an issue. And have you considered that probably 25% income tax and 7.65% SS/Medicare tax will be withheld from the bonus, leaving you with closer to $3,400 than $5,000? So between the rebate and a $5k gross bonus, you may actually get $5,500, which will not pay off CC1 and the bank loan, at a total of $6,705.

However - I have NO savings. I have been so focused on paying the debts down, that I have not built up any savings at all. There are rumblings at my company about restructuring,& while I feel pretty secure in my job today, in 6 months - who knows what will happen. So my question - do I keep my nose to debt reduction, (my ultimate goal is debt elimination, which will be complete in 2 years, with the exception of my home). Or do I instead, lengthen the time it will take me to get out of debt & put some of the bonus money in savings?
I am a poor saver - I am really afraid of having money in savings, basically I am afraid that we will blow it. We are excellent bill payers - We are good at that. How do I justify putting money in savings when I have cc debt?


The fact that you have a 401(k) loan outstanding and that your company is going through restructuring is very worrisome. Do you know the repayment requirements for your 401(k) loan if you should lose your job? Because the 10% penalty and taxes on that $8,200 will probably run an extra $2,900 that you would owe Uncle Sam come tax time if it's declared a distribution.

Unfortunately, most 401(k) loans need to be paid off all at once, and can't be 'snowballed'.

Here is what I would recommend:

Your first priority needs to be the 401(k) loan, since you have NO savings to pay it off if you lose your job. Assuming you are in the 25% income tax bracket, the 35% penalty and interest that will be charged on that distribution is significantly higher than any of your other debt rates.

So, put both the rebate and the entire net bonus amount into a savings account at another bank - like an online savings bank. That way, the money, while available in emergencies, is less accessible than if you can just transfer it to your checking account.

That will provide about $5,500 to start with. Then, once your car is paid off, add the $471 per month to your savings account. By November or so, you should have enough money to pay off the 401(k) loan, should you lose your job. Leave that money in the savings account, and then start applying the $471 toward CC1. You should be able to pay that off by February. Then work on the bank loan, and the other credit cards.

Keeping the money to pay off the 401(k) loan in savings will give you practice toward the act of saving without spending. If you don't lose your job, when you get to the end of the rest of your debt payoff, then you can withdraw money from the savings account and pay off the 401(k) loan, leaving the rest of the money as the start of an emergency fund.

You can justify keeping the savings account because it is protecting your against a 35% bill for penalties and income tax, which is significantly higher than your credit card rates. (Plus it will get you in the habit of saving money.)

AJ
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