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May need to sharpen your pencils!

Need advice on how to best tackle CC debt and prepare for retirement at the same time. Presently no funds in retirement & 20-25 years is maximum time left before I "officially" retire.

Due to industry-wide downsizing two/three years ago, I have been under-employed and I currently work 2-3 jobs "to try and keep my head above water." During this same time, I experienced additional financial hardship due to medical bills. Please note, these credit cards were not used for "shopping sprees" or big-ticket items. Only medical bills and emergency type items were charged on the cards.

GOOD NEWS is I've been offered a full-time job which includes health insurance, 401K company match, and other benefits. We are still negotiating salary/bonus structure; however, the base should run in the 70's with potential earnings of 100K.

Here are the numbers:

MBNA CC: $14,770.00 @ 8.9% (Closed by MBNA)
Visa CC: $ 6,000.00 @ 8.9%
Discover: 10,145.00 @ 24.99% Universal: 9,000.00 @ 15.99%
Office Depot: $685.00 @ 22.00%
BFC: $4,400.00 @ 24.00%
Student Ln: 1,098.00 @ 9:00% Deferment ends 11/05; Balance: $123,530.00

QUESTION: Can I realistically eliminate my CC debt and student loans in a reasonable amount of time, plus prepare for retirement with the above mentioned earnings?

Selling my house and should make $60,000 from the sale. Thought this money should be applied to Student Loan in one lump-sum payment. Comments/feedback?

Is there any hope for me to enjoy a Foolish Financial Future?

I don't want to declare bankruptcy, as was suggested by a reputable consumer counseling agency. It is my moral obligation to pay these debts, no matter if the circumstances surrounding these events were unfortunate or "ill-timed."

Notes:
**Discover: Closed by Discover after successfully completing reduced payment plan. Even though my payments continue to be on-time and above minimum, the Supervisors will NOT negotiate for lower rate.

***Universal: Successfully completed a one-year reduced payment plan; however, they closed the account.

Your assistance and insight will be greatly appreciated. Please accept my thanks in advance.

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No. of Recommendations: 5
Discover: 10,145.00 @ 24.99% Universal: 9,000.00 @ 15.99%
Office Depot: $685.00 @ 22.00%
BFC: $4,400.00 @ 24.00%
Student Ln: 1,098.00 @ 9:00% Deferment ends 11/05; Balance: $123,530.00

Selling my house and should make $60,000 from the sale. Thought this money should be applied to Student Loan in one lump-sum payment. Comments/feedback?


forget the student loan--pay off the credit cards!

high interest debt gets paid first.
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Well, this is definitely an interesting one. Sorry to hear about your life troubles. Just know that it's not always bad.

First, take a deep breath and relax. You are in debt, but it's not crushing because there is a way out. I commend you for not taking the BK route.

How close are you to selling the house? How realistic is that 60K? Since you are not over 55, if you do not invest that money back into another house within I believe a year you will pay capital gains, so don't forget to add that into the equation.

My advice would be to pay all the CCs off first. Right now a significant portion of your income looks to be tied up in payments. Payign those off instead of lowering the SL balance will allow you to have more flexibility in your cash flow, not to mention that they have significantly high rates and are in default/closed. Pay them off to start the clock ticking on them falling off your credit report.

Then, depending on how much capital gains you will need to budget for, put the amount equal to the captial gains tax into a high interest account like ING or Emigrant. Anything remaining put into another account as the start of an efund.

Build your efund up to at least 1K if it isn't there already.

THEN find ways to accelerate the paydown of the student loan. With a salary between 70K and 100K you should be able to afford a good paydown as well as your normal living expenses and retirement savings. You don't mention where you live or how much your basic expenses will be so I can only assume that. The main point is to free up as much of your monthly cash flow as possible so that you will be able to make choices. That is why I recommend paying to zero what you can instead of throwing it all at a high balance where you will still have all those monthly payments.
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How close are you to selling the house? How realistic is that 60K? Since you are not over 55, if you do not invest that money back into another house within I believe a year you will pay capital gains, so don't forget to add that into the equation.

This option was eliminated over a decade ago.

Current rules are $250,000 tax free for qualifying primary residence.

Debra
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Where are you going to live? Are you buying a smaller home, moving or renting?

If you are going to rent for awhile, pay off all the credit card debit and do not use the credit cards. Then split your resources between paying off the student loan debit and investments. Start with 401K to the limit of company match and then a ROTH IRA.

Debra
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Ahha! Thanks Debra. My mind is obviosuly still in the 90s. Can you tell I'm a first time homeowner? :)

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Need advice on how to best tackle CC debt

Fool1Day:
Boy, have you ever come to the right place!
I guarantee you will receive good advice from these experts.
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I don't want to declare bankruptcy, as was suggested by a reputable consumer counseling agency. It is my moral obligation to pay these debts, no matter if the circumstances surrounding these events were unfortunate or "ill-timed."

Congratulations, you have earned my respect. With a positive attitude, and responsible spending, you can accomplish anything.

I'm sure the members of this board will have great advice for you. The first step, of course, is to eliminate the highest interest debts. The snowball calculator is your friend.

Steps I would take:
1) Set up the Snowball Calculator without committing to a monthly debt-service amount yet. This will give you a nice framework.

2) Mentally commit yourself to living at an amount that is not significantly higher than when you were under-employed. Please note: you MUST give yourself a slightly higher budget. It's like going on a crash diet - if you don't allow for the occasional cookie, you'll go insane one week and eat the whole candy department. Give yourself some extra money.

3) (Actually this is 2A) Make a budget. Be reasonable. Be fair to yourself. Include a clothing allowance if you'll need a new wardrobe for your new job. Include commutting expenses. Include a buffer until you've been doing this for several months and you've fine tuned your budget.

4) (Still part of above) Start an emergency fund. I know, you want to pay off the debt first, but you don't want to have to go further into debt if you get a flat tire or something. Budget this just like any other bill. Pick an amount that will allow you to have 3 months in reserve within a tolerable amount of time. If (heaven forbid) this job falls through, you will need this.

5) Take your free money first. 401k up to maximum that employer will match. With that income level, you are not eligable for a traditional IRA (double check that, but I'm fairly certain), but you are eligible for the RIRA. Since this doesn't get you an immediate tax deduction, I would hold off on that until the debt is either gone, or under 8% interest. No reason to pay more than you can earn.

6) NOW you're ready. You know how much is going to all of your expenses, your savings, and your 401k. The rest can be thrown at the debt, in the order recommended by the snowball, at the rate of nobody's business. DH and I pay off $1000 principal every month. I think you can do much better than that. I'm guessing you can pay $3000, which will be mostly principal. Let's say it's $2,500 principal every month. That's 1.5 years before the CC debt is gone.

7) All of that was assuming that you get nothing for the house. Always dangerous to spend money you don't have. And some of that will have to go to taxes anyway. If you have anything left after taxes, I would max out my RIRA, and throw MOST of the rest straight at the debt. I'd hold back enough to properly fund the Emergency Fund, and a small amount to celebrate.

8) The remainder of your debt (however much that may be) should now be down to a manageable amount. With a much lower debt amount, a good job, and a history of regular payments, you can try to get a lower interest rate. Move debt around. Work all the angles.

9) Once you've done ALL that, you can start balancing out your debt payments with your retirement savings. Again, it's no good to be paying more than you're earning. But if step 8 allows you to reduce your interest rates enough, you can start maxing out your RIRA every year.

10) Retire!!!

Frydaze1

One of the things I have done is create a spreadsheet with rows for every year, and a column each for debt, 401k's (mine and his), IRA's (mine and his) and taxable savings. I have worked out how much I will need to put into each area (assuming a 6% return - very conservative) in order to reach our retirement goals. I have a second tab with an exact copy of the first sheet. This gives me a PLAN and an ACTUAL. The third sheet tells me the difference. I update the PLAN sheet every month. This allows me to see if I'm on track for my goals.
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7) All of that was assuming that you get nothing for the house. Always dangerous to spend money you don't have. And some of that will have to go to taxes anyway. If you have anything left after taxes, I would max out my RIRA, and throw MOST of the rest straight at the debt. I'd hold back enough to properly fund the Emergency Fund, and a small amount to celebrate.

If the home qualifies as a primary residence for the last 2 of 5 years, there will be no taxes due. The first $250K is tax free.

Debra
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Welcome Fool1One

I will go a head and put my $0.02 in. the 45K of Credit cards debt should be paid first and in this order of the highest interest rate.

Discover
BFC
Office Depot
Universal
CC Visa
MBNA

S/L payment ? $1100/month assuming a 20 year payback at 9 %

I have to guess your minimum monthly payments are around $980-$1100. IMHO I would target trying to budget at least $1800 for CC debt repayment since it is entirely possible that CC minimum monthly payments could rise to 4% in the very near future and you should probably try to budget this minimum amount to be safe.

The House sale may quickly take care of all your CC debt but if anything happens you should do all you can to get rid of the 20% and above debt quickly

IMHO I would only contribute to your 401K up the full employer matching percent. I strongly believe in contributing to a ROTH with what you can. However, the 20% and above debt would scare the living crap out of me. For myself I would have to get rid them and then IRA.

You can get out of debt and retire but you are really going to have to get into control of all your cash flow so that you can come up with a budget that works and changes with your income. Your budget is what will get you out of debt and into retirement. Windfalls like your home sale will help bring down the totals but I would guess that someday you will want to own a home again and keeping your standard of living as low as you are comfortable with will get you there the quickest.


Roy (Congratulations on the new Job…)




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Hello there, ClimbingOut~

Thank you for your encouraging words!

You asked: "How close are you to selling the house? How realistic is that 60K?"

If I sell the house myself, 60K is a realistic & conservative number according to my neighbor, who is a Realtor.

I'm preparing the house now to put it on the market as a FSBO by 11/01/05. After we finalize the remaining details about salary, benefits, stock options, I will begin 11/01/05.

The firm has already indicated they'll pay relocation expenses, and they will pay for my rental expenses in the new city until my house is sold. Of course, I'm probably nuts to think a house can be sold "long-distance."

Your suggestion regarding paying off CC debt to zero BEFORE attempting to pay down student loans sounds like a great option. There is no doubt I need to "free up" some cash flow.

Thanks again for your assistance.





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How realistic is that 60K? Since you are not over 55, if you do not invest that money back into another house within I believe a year you will pay capital gains, so don't forget to add that into the equation.

I believe that is the old tax law. If OP has lived in the house 2 out of the last 5 years, he may exclude up to $250,000 in capital gains ($500K if married filing jointly).

foolazis
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Hi Debra,

I'm relocating to another city for this job, and I will rent either a small rental home/cottage or an apartment for at least the first year. In past relocations, I've found it much easier to "take a year and explore" to find places in the city or suburbs where it feels like home.

Am I understanding your statement correctly when you say "Start with 401K to the limit of company match and then a ROTH IRA" AFTER paying off Student Loan debt and investing?

For example, I begin my new job on 11/01/05 and the first check is on the 30th. Do I not put any money toward my 401K?

BTY, No credit cards for me! I only use cash or debit card.

Thanks so much for the assistance. I so want to see the light at the end of this tunnel!
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Hi! Another newbie here. One of your first priorities should be to do a loan consolidation on the student loans and lock in at today's lower interest rates. 9% seems EXTREMELY high as I just consolidated Parent Plus loans at 4.35% and student loans are usually 1% lower than Parent loans.
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Hi! Another newbie here. One of your first priorities should be to do a loan consolidation on the student loans and lock in at today's lower interest rates. 9% seems EXTREMELY high as I just consolidated Parent Plus loans at 4.35% and student loans are usually 1% lower than Parent loans.

okay--this misconception MUST be cleared up.

NOT ALL STUDENT LOANS CAN BE CONSOLIDATED AT LOWER RATES.

You can only do this if your loans had a variable rate--and even then, I believe, you are limited.

Additionally, your loans are consolidated at a weighted interest rate. So, my loan of 1600 at 4.3% and my loan of 30K at 7.75% make consolidation a non-issue. My weighted interest rate would be something like 7.73333333% or some bs like that.

As OP has 9% interest rates, I am guessing those loans are fairly old--my 7.75 comes from 1999 and that was a GREAT rate, back then.

b
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okay--this misconception MUST be cleared up.


uhh. let me apologize for the tone of this remark, but not the content.

I shot from the hip--frustrated by too many flyers in my mailbox urging me to consolidate NOW! to get great low rates.

plus, I'm grading papers.

b
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Hello there, Roy~

Thanks so much for "adding your 2 cents" and providing me with such excellent feedback!

Duh, my brain is not in gear for some reason tonight, so I'm not sure I fully understand what the 20% stands for when you said...."but if anything happens you should do all you can to get rid of the 20% and above"

Are you referring to my Student Loan? If so, I agree that after CC debt is paid, my next step would be to pay down the S/L as quickly as possible. The balance on that loan really keeps me up at night!

Thanks, too, for the congrats on the new job. What a "Happy Dance" that will be!
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Fool1Day,

Sorry, I ment Discover, BFC and Office Depot. They all have interest rates above 20% very dangerous to your heath to keep those around.

House sale should take care of those but if it takes a while to sale the house you will still want to do all you can to get rid of these guys first.

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Couple thoughts.

FIRST, I cannot stress enough the importance of changing the mindset that got you into debt. You got there somehow (by buying stuff you cannot afford!) and if you continue to do that, you will just go right back into debt. A clean credit card bill, eventually, is NOT a reason to charge it up. Debt, spending are addicting. You HAVE to be mentally prepared to not make the same mistakes again. YOU have to change.

As part of that, look around you, all that stuff you own - that is your debt. That big tv, fancy car, whatever it is, whatever you've been spending money on, that is your debt. From the big ticket items to the little, all around you. Sell it. Everything that you can. Sell that huge tv and buy a more modest one, sell a bunch of stuff, you can raise thousands this way and toss it immediately at your cards.


Next, as far as your high rate cards go, consider a balance transfer. As your other cards about this option, what are their BT rates (don't forget to take fees into consideration!).

Then call Discover (and any other higher ones) and tell them that they either lower their rates or you'll transfer the balance. They may get a lot friendlier a lot quicker. If not, transfer.

If you don't have the credit limit to transfer any of it, alright, just pay it down. But it's worth a look.
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Taking a year to make a decision on a new place to live is a good idea. Many who relocate and buy immediately, regret their decision.

If you have the funds from the sale of your home, I would clear all credit card debt. It is at a high interest rate and eliminating it will free you to invest and pay off your student loan.

Obtaining the company match on 401K contributions should be a high priority. Many companies match a percentage on a paycheck basis. Some match on annual or quarterly basis. You will need to read the rules for your 401K plan. My company matches 5%. In this case the maximum company match is obtained by contributing 5% per paycheck.

ROTH IRA would be my next priority.

After these two are handled, then look at how much you have remaining to save for a downpayment or pay down student debt. The student debt will be with you for a long time. It is good to pay it off, but right now not to aggressively.

Debra
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Fool1Day,

Just to reiterate an earlier statement: make sure to put a sufficient amount into an e-fund. Given your previous experience/trouble with unexpected bills, this is exactly the type of protection you need.

Relocating and selling your home will give you an opportunity to fully fund the e-fund NOW, rather than over years. Again, this will protect against any further unexpected occurances in the future, and keep you from racking up more debt.

Be aware that you likely won't qualify for favorable loans for some time to come (assumption made based on your closed CC accounts, which likely affected your credit score). Without knowing the details, or where you'll relocate to, I would abandon the thought of buying a new place any time soon. There will need to be some real short-term sacrifice to get out of the debt burden quickly. Your hard work and attention can and will overcome it!

In the meantime, live well below your means, kill the debt, and stash significant cash for retirement/purchase of new home.

Best of luck with the relocation and debt paydown.


Jon
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Greetings and salutations, Fool1Day! (clever name, and that day will be sooner than you think!)

QUESTION: Can I realistically eliminate my CC debt and student loans in a reasonable amount of time, plus prepare for retirement with the above mentioned earnings?

At first glance, yes, absolutely. A couple of questions for you: is the $1,098 the monthly payment on the student loan? The rest look like outstanding balances, but this one is different.

Selling my house and should make $60,000 from the sale. Thought this money should be applied to Student Loan in one lump-sum payment. Comments/feedback?

That's the natural thing for us mere mortals to do, but it's NOT the Foolish thing to do! The outstanding balance on your student loans is warping your thinking a little bit. What you need to realize is that ALL of your debts are in one great big pot. You're being charged more for some dollars than others. Your student loan is only at 9%, while you have others at 20%+!!! Let's rank your debts by interest rate, from highest to lowest:

Discover: $10,145.00 @ 24.99%
BFC: $4,400.00 @ 24.00%
Office Depot: $685.00 @ 22.00%
Universal: $9,000.00 @ 15.99%
Student Ln: $123,530.00 @ 9:00% Monthly Payment: $1,098.00
MBNA CC: $14,770.00 @ 8.9% (Closed by MBNA)
Visa CC: $ 6,000.00 @ 8.9%

Here's what I would do:
Pay off all debts except student loan. All of the other debts combined is $45,000. That still leaves you with $15,000 to throw at the student loan. That leaves roughly $110,000 in student loans left. That's the size of a mortgage, which people with half your potential salary can pay.

Student loans have special features which give them some advantages over other forms of consumer credit. Such as: tax deductible, can be completely forgiven under special circumstances (namely, disability), and can be put back into deferment under other conditions.

9% seems high for a student loan, but I'm lucky enough to have never had one, so can't comment other than that. (Thank you, Mom & Dad!!!)

Is there any hope for me to enjoy a Foolish Financial Future?

Absolutely! Here's what I would do: plan on renting longer than a year. You're in aggressive debt paydown mode, and the size of the speed bumps that home ownership can give you might derail your cashflow.

Next, set up a budget based on your base salary only (~$70k). Anything you make above and beyond that, a significant portion goes towards the student loan. I didn't say ALL of it, because you need to enjoy the fruits of your hard labor so that you stay motivated. Burn out is your biggest enemy. You must create a plan you can stick with.

I don't want to declare bankruptcy, as was suggested by a reputable consumer counseling agency. It is my moral obligation to pay these debts, no matter if the circumstances surrounding these events were unfortunate or "ill-timed."

I admire you for this, and I feel the same way. Just because it's legal doesn't make it ethical. You earned a spot in my "Favorite Fools" list. The only time I'd consider bankruptcy is if the bills were near ~10x my salary, and there was no hope of ever paying them off. Your circumstance? Not a chance in h-e double hockey sticks I'd declare it.

-Agg97
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Fool1Day,

I'm too late to the party to do anything but "me too" the credit card advice, but what's the deal with your student loans? Who are they issued by? Are they federally subsidized/unsubsidized? Take the advice about consolidation, bur realize the only loans you can consolidate and lock the rate in are federally subsidized.

Also, look at your repayment options and see if you can change them. I have three different types of loans. One I had to start paying back right after I got done with my BS degree. The terms on that suck, but at the time my choices were rather limited. It's not that big of a loan and I can afford the repayment, so I deal with it.

Now, on my other two loans, some of it is federally subsidized but most of it is not. Also, my employer is paying for me to get an MS, so I'm doing that. Just to give you some ideas on how the repayback can be flexible:

I consolidated my federally subsidized student loans. To the best of my knowledge, it requires immediate payback. So, I consolidated it and took a repayback option that allows me to pay interest only for four years. This will give me time to finish my advanced degree and get settled into a new job for awhile before they increase my payments.

My private loans (same lender) aren't eligible for consolidation. However, since I'm in school, I have a defferment option for the time it takes me to finish school. I had the option to do the interest only like I am on my other loans, but I opted not to do so because it would force me into a higher repayback option when I'm out of school. I would rather make "voluntary" interest payments if I so chose while I'm in school and then use the standard paybeck when my school is done.
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Welcome to the boards! I haven't read the other replies yet, but I'll throw my $0.02 out there. You said:

GOOD NEWS is I've been offered a full-time job which includes health insurance, 401K company match, and other benefits. We are still negotiating salary/bonus structure; however, the base should run in the 70's with potential earnings of 100K.

Here are the numbers:

MBNA CC: $14,770.00 @ 8.9% (Closed by MBNA)
Visa CC: $ 6,000.00 @ 8.9%
Discover: 10,145.00 @ 24.99% Universal: 9,000.00 @ 15.99%
Office Depot: $685.00 @ 22.00%
BFC: $4,400.00 @ 24.00%
Student Ln: 1,098.00 @ 9:00% Deferment ends 11/05; Balance: $123,530.00

QUESTION: Can I realistically eliminate my CC debt and student loans in a reasonable amount of time, plus prepare for retirement with the above mentioned earnings?

Selling my house and should make $60,000 from the sale. Thought this money should be applied to Student Loan in one lump-sum payment. Comments/feedback?


I think with that salary that you SHOULD be able to eliminate your debts and prep for retirement. You don't mention how old you are, but with that salary and debt level, plus the $60K lump you will be getting from the house sale, you will be off to a running "start" from this point.

I would take the $60K and pay off all of your "little" bills, totalling roughly $36K. That leaves you $24K.

Interest rates are still low - can you refi/consolidate your loans, or have you already done so? Either way, 9% is a lot better than the 24% you are paying on some of the cards. With your remaining $24K, you should establish an Emergency Fund, as your job situation has obviously been in flux until recently - you don't want to run into the same situation again.

Then, with you sooper-dooper salary, get on a B-U-D-G-E-T that is very tight for the rest of the year, so you can max out your retirement contributions up to company match in your 401K, plus max out your 2005 IRA before April 15, 2006.

Without knowing your other fixed expenses, I can't offer more details on exactly "how" to do this, but I highly recommend this strategy - it's safe yet aggressive. You have to discipline yourself to live BELOW your means to sock the extra away aggressively at least until you "catch up" as much as you can.

Good luck, and keep posting!!!

Julie
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