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Hello all. Let me all just give you all a quick snapshot to paint the picture:

- I'm 26, finished my BS last year and work full-time (8 years at my current job)
- After graduating last year, I was promoted and earn approx $53k/year
- Currently still living at home with my parents, more or less to help them with the house payments but also to help save on rent
- I put myself through college, putting the bulk of my tuition on credit cards. Not the smartest thing to do, but they were locked in at 2.9%
- Credit utilization is at 40% ($30k)
- Rainy day savings ($10k)
- Company profit sharing + Roth IRA ($50k)

My main goal is to pay down my debt while saving for my own house. I think maybe due to a mental block, I've been adding to my savings while I know I should probably use it to pay down my credit card debt. I think it would be wise to keep at least $5k in the savings while using the other half to pay down a chunk of my debt. Also, $4k of my debt is actually a "loan" to my parents (cash advance check) which I tell myself I will pay, if they give me the money for it, great. If not, no big deal.

I've made a point of fully funding my IRA, so that part is set. The past year, I've also put a small amount into individual stocks each month ($200). This I can cut out and put it towards paying down my debt.

In the next year, I'd like to focus on paying down my debt. Forcasting my cash, I can pay almost $2k a month towards my cards. I will pay down the highest interest cards and then the locked in 2.9% ones last.

So, I'd just like some opinions on my current plan of attack. Does it look sound?
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Didn't see an edit button, so I'll add this bit of info:

I don't have an issue paying my bills each month and I've never missed a payment. But when I did a recent damage assessment, I was surprised to see a 40% utilization and how much debt I had.
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- Currently still living at home with my parents, more or less to help them with the house payments but also to help save on rent
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My main goal is to pay down my debt while saving for my own house.


Do you have an idea of how much a house in your area will cost? How much are you paying in rent to your parents, compared to the amount that you would have to pay on the mortgage?

Are your parents paying the bills for food/cable/heat/water/electricity/etc.? Or are you contributing toward those expenses?

I ask, because you later say Forcasting my cash, I can pay almost $2k a month towards my cards For someone who is living at home, and making $53k, 'almost $2k a month' toward debt seems like it's a bit on the low side, unless you have other expenses that you haven't mentioned.

$53k/year ~ $4400/month gross. Assuming 25% for taxes, medical insurance premiums and other payroll deductions leaves you with $3300 a month. Funding the Roth at about $400/month, you're down to $2900/month.

So, where is the other $900/month going?

The other reason I ask is because if the reason that you can save enough for the downpayment for a house is because you are living at home, you may not be able to afford to pay mortgage, property taxes, insurance, utilities, maintainence and repairs on a home. The expenses that come with buying a home can be rather astounding, especially if you've been living in your parent's home.

I would suggest that you "play house" while paying down your debt.

Figure out what a house in your area would cost, including all of the expenses above. Then subtract the similar expenses that you are paying now. That monthly amount becomes the minimum that you need to pay toward your debt and/or house downpayment savings each month, while still maintaining all of your other financial goals, like contributing toward a Roth.

If you can do that long enough to pay off your debt and save up for a downpayment plus closing costs, then you should be fairly comfortable in affording a house. If you need to, for instance, stop funding your Roth, or are not able to pay the minimum difference between your current costs and your debt EVERY SINGLE MONTH, then the house is likely too expensive for you, without making some other changes to your lifestyle.

AJ
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Take $4K out of your savings immediately and pay your parents back.

The rest - well if it were me, I'd pay it all off in lieu of savings ASAP. You don't know if the 2.9% rate may end up changing due to outside events (late check in mail, etc), but since it's low to me you could balance savings and paying down debt.

But for sure pay back your family. You have the $ to do it, and they deserve to be made whole.
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Whoops! Sorry about that - I misunderstood. You meant it's a loan TO your parents. In which case, treat it like the rest and assume you won't get it back.
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Also, $4k of my debt is actually a "loan" to my parents (cash advance check) which I tell myself I will pay...

Is that cash advance also at a fixed low interest rate on the card? They are usually much higher.
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Take $4K out of your savings immediately and pay your parents back.

Actually, it's money his parents borrowed from him......

Also, $4k of my debt is actually a "loan" to my parents (cash advance check) which I tell myself I will pay, if they give me the money for it, great. If not, no big deal.

AJ
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I would definitely pay off the cash advance check (loan) to your parents, and forget about it. Use the funds from savings, and that's one debt knocked out and finished. I wouldn't even mention to my parents if it was me, (and I don't like my parents much right now) and forget about it.


Use the money currently going to stock purchases towards debt. You don't give a percentage going to savings each month, so I'll assume it's currently 10%. Cut that in half, and use the other 5% towards debt. You obviously know it's important to have cash available for emergencies, but savings shouldn't be funded to the detriment of debt reduction.


Track your spending (every cent!) for the next couple of months to determine where the remaining $900.00 mentioned by another poster is going... then find ways to cut some of that cash outflow, so it can be put towards debt.




MH 1
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Your quite far along in getting ahead

You have a lil debt but saving alot of money thats a good thing


Your taking advantage of living @ home

You could hit the sweet spot on housing if you can have a nice downpayment saved up 3yrs from now to buy @ the bottom tuff to call the bottom
Hopefully you have a good fico score the 40% ultization rate is a lil high SOMETHING I LEARNED ON THIS BOARD

But you have a couple years to get it lower

Last cycle even after prices stopped going down around 1992 they did not go up much at all for the next 3 yrs

Id expect a similar pattern this time lower prices for the next yr and flat for 2 to 4 yrs (depending on your location)

2.9% rate on the school debt is great just about a free loan will be a free loan after the rates moveup

The mother of all inflation jumps is comming because of this pos bailout those who are ready will makeout fine
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My main goal is to pay down my debt while saving for my own house. I think maybe due to a mental block, I've been adding to my savings while I know I should probably use it to pay down my credit card debt.

No, since your saving is (hopefully) getting better than the 2.9% rate you pay on your loan you are earning the difference in rates on the money you have borrowed. Only if a late payment or whatever cause that rate to climb above what you earn on your savings should you maximize your payoff rate. Until then you should continue to add to your savings.

When it comes time to improve your mortgage loan situation you can accelerate your loan payoff at the expense of "excess" savings to cut the credit utilization if desired.



I think it would be wise to keep at least $5k in the savings while using the other half to pay down a chunk of my debt.

on most of these boards we call that an e-fund (for emergency fund) and usually rec keeping around 3 to 6 months' living expenses. from your comments on your income and available cash 5K$ is just over 3 months and maybe more if some of your income is being spent on discretionary stuff that you'd do without in a pinch. You get thumbs up from me on this.


I'm possibly missing something about the cash advance loan to your parents. I'm envisioning that you've underwritten a loan at one of those legal loan-shark operations. In case I'm off on that, ignore this comment but otherwise that's likely carrying a much higher rate than your savings and should be paid down ASAP (before adding more savings but not by depleting your e-fund below the 3-6 month level where you're comfortable).
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50K is an enormous amount of savings for someone age 26, good job.

Assuming that of your 30K credit card debt not ALL of it is at 2.9%, you should stop putting anything into savings, unless company matched, until all the high-interest debt is paid down.

In your situation you don't really need an emergency fund except to make sure you can service your debt and possibly maintain your insurance policies in case you lose your job. You live with your parents, are not going to be suddenly diagnosed with cancer, have no children or family to support (apparently), have no risk of sudden major home repairs and basically you just have nothing that can suddenly appear and cost you $10,000. You are one of the people that should consider your credit cards to be your E-fund and put the rest of the money to something useful, probably debt reduction.

It's not clear from your post whether your credit card debt is 40% OF 30K (12K), or 30K out of a limit of 75K. 12K is a manageable amount of debt, but 30K is almost a whole year's take home pay at your salary.
Your credit cards at 2.9% are unlikely to stay that way forever (credit card companies can't make money at 2.9% so presumably something will happen soon that raises the rate).

When the interest rate goes up, you will suffer pain. Since you currently have few expenses you'll be able to handle it but that doesn't mean you want your single biggest expense to be interest. Lower credit utilization will also improve your credit score but that is not an issue until you actually apply for a mortgage. If I were you, I would not be super excited to do this, as housing prices are likely to continue falling for some time yet.
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InvalidUserID:

Your description of your post college life sounds almost exactly like where I started after college. Hopefully I can pass on a few tips which will help guide you away from some decisions I wish I had done differently.

1. Don't get spend-itis or lifestyle-upgraditis. You are used to living on a college student budget at a lower salary. Since you are currently living with your parents, you should not have too many expenses. If you pretend you still make your old salary and save the rest, you won't know the difference and will be out of debt fast.

2. You DO NOT need a new car even though your salary might indicate you can afford one. If you buy a new car too soon it becomes more of a burden than a blessing. $350 a month can go a lot farther in paying off debt right now. When it is time to buy a car, get a 2-3 yr old used car and pay cash. The money you save by not paying car payments will be put to better use elsewhere.

3. Get out of debt fast. Make that your current focus. Don't buy stocks right now, put that money into the debt. You might consider dialing back on the IRA and pay debt instead. Remember, you have until April 14th of the next to fund your IRA so you could be close to out of debt by then. If you can find more than $2k per month to pay on debt, you can erase it in less than a year. Also, I would recategorize the $4k for the parents as a gift to them for helping you out. Turkey dinner tastes much better when family members don't feel they "owe" each other something.

4. Once the debt is gone, MAX OUT your Roth IRA and also MAX OUT a 401k if available. I always maxed out the IRA but only put in 5% for the match in my 401k. If I had maxed out while single, I would not have missed the money (wasted it anyway) and my account balance would be double what it is now. Not that I have done poorly, but once you have a wife and kids you look at life differently.

5. Now you are ready to start saving for a house. It is easy when you live with mom and dad and they don't charge you rent. Research the type of house you want to buy and figure out what the payment will be. Don't forget about taxes, insurance, repairs, etc. Put that amount in savings each month as if it were one of your regular bills. Next thing you know, you have a nice down payment and are ready to buy.
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Thanks for the replies. It appears my post wasn't super clear so let me clear some stuff up and add a few more points:

* Almost all of my debt (30K, 40% of available credit) is locked in at either 2.9% or 3.9% balance transfer checks for the life of the balance. There is $6K which is at 10.9%, this is my first priority to pay off

* The $4K to my parents was me using a balance transfer check (3.9%) written to them as an emergency. So, technically it is under my name but was signed to them. I'm just assuming I'm going to end up paying this off and not expecting a dime back.

* I only pay my parents $300 in rent as we have an agreement that while I don't burden them with any of my own expenses, they don't hinder my own savings (We live in a 20+ year old home, with their monthly payment being only $900).

* I pay my own expenses (gas, insurance, food, cell phone,etc) along with the water & electricity bills here at home (these utilities equate to about $100/month).

* Here in the Bay Area, California housing is cheaper but still very expensive. A one story home down the street is selling for $550K while the foreclosed house next door just sold for $630K. Three years ago the house next door sold for $890. So, prices are falling pretty hard.

* I allocate myself about $240 ($60/week) of "going out" cash for weekends, hanging out with friends, etc. Pretty much the rest is spent on food for the week, lunches for work.

So there you have it. Unless the credit card companies go against their word and raise the rate on the "locked in" balance transfer checks, my only high interest debt is $6K at 10.9%. I'm tempted to take this out of my savings (by savings, I mean online savings account earning 3.25%) to pay that down.
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I'm tempted to take this out of my savings (by savings, I mean online savings account earning 3.25%) to pay that down.

As long as that savings is not your eFund.

Fuskie
Who instead would suggest trying to reduce the $60/wk spent on food and fun and throwing that savings against your high interest rate debt...
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In your situation you don't really need an emergency fund except to make sure you can service your debt and possibly maintain your insurance policies in case you lose your job. You live with your parents, are not going to be suddenly diagnosed with cancer, have no children or family to support (apparently), have no risk of sudden major home repairs and basically you just have nothing that can suddenly appear and cost you $10,000. You are one of the people that should consider your credit cards to be your E-fund and put the rest of the money to something useful, probably debt reduction.

Mostly a lurker but hopping out to say everyone could use an e-fund. Cancer strikes at any age and quite suddenly at that, unfortunately. These days a broken leg could be a burden, financially speaking. Maybe the car will need some major repairs and conveniently at the same time the creditors lower the card limits for no apparent reason. Perhaps $10k is overkill with those expenses, especially with $50k in a Roth IRA, but $5k couldn't hurt. On the other hand, if $10k helps a person sleep at night and the worst debt is $6k at 10.9%, I'd be tempted to let it be with the progress the poster is making..
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Mostly a lurker but hopping out to say everyone could use an e-fund. Cancer strikes at any age and quite suddenly at that, unfortunately. These days a broken leg could be a burden, financially speaking.

That's an excellent point. Years ago I worked with someone who managed to injure her knee playing frisbee. She was covered medically, but she had an expense she hadn't counted on. Instead of taking a pair of buses from her apartment to a stop near the job, she had to drive across Boston and pay to park in a local parking garage because she couldn't get on the bus with her crutches and the leg in a cast. It seens a minor point, but it really cost her something until she got the cast off her knee. Yes, there's a service that supposedly helps people who can't get on the bus, but she learned that the service was extremely unreliable, and if she wanted to get to the job she had to drive.

Strange little expenses can happen. It's best to have some money set aside, rather than rewriting a budget and trying to find space for $10.00 in parking expenses daily instead of a monthly bus pass.

Nancy
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That's an excellent point. Years ago I worked with someone who managed to injure her knee playing frisbee. She was covered medically, but she had an expense she hadn't counted on.

******************
And I had a friend who recently had a heart attack while on vacation and the doctors decided he needed bypass surgery asap. Well, their medical coverage is great, but his DW and DDs plus assorted other family members had an unexpected 10 day stay in a motel plus meals out.
Then after being at home for about 10 days, he had to travel back for follow-up visits with the doctors. So more travel expenses.



Molly
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BTW - instead of creating a new ID, you could have changed the 'InvalidUserID' name to 'CA2NY2CA' instead.

* The $4K to my parents was me using a balance transfer check (3.9%) written to them as an emergency. So, technically it is under my name but was signed to them. I'm just assuming I'm going to end up paying this off and not expecting a dime back.

* I only pay my parents $300 in rent as we have an agreement that while I don't burden them with any of my own expenses, they don't hinder my own savings (We live in a 20+ year old home, with their monthly payment being only $900).

* I pay my own expenses (gas, insurance, food, cell phone,etc) along with the water & electricity bills here at home (these utilities equate to about $100/month).


This is a really good deal for you. I am concerned, however, if you had to write them a check for $4k for 'an emergency' if they are counting on the $300 rent plus $100 utility payment from you. What's going to happen when you move out?

* Here in the Bay Area, California housing is cheaper but still very expensive. A one story home down the street is selling for $550K while the foreclosed house next door just sold for $630K. Three years ago the house next door sold for $890. So, prices are falling pretty hard.

Unless the prices drop a lot further, it is unlikely at your current $53k salary, that you will be able to afford much of a home in the Bay area. Lenders are likely to be sticking a lot more to fixed 30 year mortgages and the guideline of no more than 35% of your gross income in housing expense (PITI - Principal, Interest, Taxes & Insurance), even if you have no other debt. At your current salary, that's about $1550 a month.

Assuming that the property taxes will be 2% of the home's value annually, the insurance will be 1% of the home's value annually, and you are able to save up a 20% downpayment, so you don't have to pay PMI, with 6% interest rate, you could probably afford around a $210k home. That would be a $42k down payment, a $1007 monthly PI mortgage payment on a $168k mortgage, $350 a month towards property taxes and $175 a month toward insurance.

It is likely in the Bay area, in the $200k price range, what you will find is a condo, which would likely entail HOA fees - generally these take care of most of the insurance payment, but may be higher than $175/month, so your purchasing power may go down a bit.

At a rate of saving/debt paydown of $2k/month, and using $6k of your savings to pay down the $30k in debt, it will take you a year to pay off rest of the debt, and another 2 years to save up the downpayment and closing costs, if you want to keep your e-fund at $4k and you have 3% ($6.3k) in closing costs.

* I allocate myself about $240 ($60/week) of "going out" cash for weekends, hanging out with friends, etc. Pretty much the rest is spent on food for the week, lunches for work.

$60 a week is $3,120 a year. That's almost 6% a year of your gross income. Is that really what you want to be spending 6% of your gross income on? Does that spending mesh with your other financial goals?

So there you have it. Unless the credit card companies go against their word and raise the rate on the "locked in" balance transfer checks, my only high interest debt is $6K at 10.9%. I'm tempted to take this out of my savings (by savings, I mean online savings account earning 3.25%) to pay that down.

Just remember, between CA state taxes and Federal taxes, that 3.25% is probably a lot closer to 2.2% - 2.25% after-tax - which is lower than what even your 'low-rate' debt is costing you after-tax.

And if you mess up by making a payment late or something, you may lose those low rates. So be very careful to make your payments on-time every month.

AJ
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On the other hand, if $10k helps a person sleep at night and the worst debt is $6k at 10.9%, I'd be tempted to let it be with the progress the poster is making..

That is a reasonable point - Invalid is in good enough shape that he does not have to worry about optimizing every little thing. Currently, saving $2000 a month he will have more money than he knows what to do with in short order.

And I had a friend who recently had a heart attack while on vacation and the doctors decided he needed bypass surgery asap. Well, their medical coverage is great, but his DW and DDs plus assorted other family members had an unexpected 10 day stay in a motel plus meals out.

This is a great example of somebody who needed an e-fund. On the other hand, his situation has essentially nothing in common with Invalid here. That is the difference between "nobody needs an e-fund" and "this particular person does not need an e-fund."

E-funds are not free. They are money that comes out of real investments you could have made and real debt you could have paid off. Money is money and when it comes to emergencies, what's important is that you have fast access to it and don't spend it. Keeping it in some special cash account you call an e-fund is just a really expensive way of giving yourself extra discipline. But Invalid is obviously not someone who has the problem of spending every dollar in sight, so there's no reason he should pay this particular kind of tax.

Over a period of 40 years, keeping $10,000 in a 3% savings account e-fund vs real investments (or debt reduction) at 10% will cost you many thousands of dollars (it's difficult to put an exact number on it, but it's $30,000 at minimum, probably much more). That is very expensive peace of mind.

I looked at what I considered to be beyond the worst case scenario (15K in unexpected expenses, spontaneous 50% reduction in credit limit, 1 year loss of job, ignoring all stock and IRA savings) and frankly it works out just fine with about $1000 in the bank, an amount you'd generally have anyway. The key is that Invalid has almost no expenses and no responsibilities. You need less cushion in these cases. But it was windy enough that I did not bother to post it. I am happy to of course.

Onto the subject of real debt you actually have to pay:
As you've probably noticed your 2.9% card is costing you less in interest than you can earn in a safe investment elsewhere. So just pay the minimum on this and don't even bother to ever try to pay it off. The only time you would ever want to pay this off is if utilization is hurting your score - but with 75K of total credit it probably won't.

The 3.9% card is almost as cheap and while you can't get 4% in a conservative investment right now, you ALMOST can. The spread is barely enough to notice. So don't worry too much about this one either. Once your annual IRA contributions are maxed out, though, it wouldn't hurt to pay this off. The biggest reason you have to pay it off is that your total minimum debt payment is fairly high. This increases your risk if you have one of those emergencies that are so popular nowadays, and can hurt you when you try to apply for a mortgage.

With your income, in California, you may not be able to afford a mortgage unless housing prices sink considerably further. You don't have enough for a down payment, so you are looking at a couple of years of saving before you do anything anyway. Financially speaking, you should just continue to live with your parents until either they throw you out or you can't handle it any more (for instance, getting married has a way of making living with your parents impossible, or vice versa).

As for the 10.9% debt, with $6000 owed on it it is costing you some money, though less than $1K per year. So make getting rid of this your priority (and obviously, I advocate taking $6K of your savings and doing it immediately).
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aj's point about tax is a good one.

I may be the only one, but I don't feel that $250 a month is an unreasonable entertainment budget for someone in your situation.
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