No. of Recommendations: 3
Hello fools,

We have had some problems in the past year. Most of which 
have been softened lately.

My wife was injured last Nov and was out of work for six months, 
(no short term disability insurance) then when she announced 
she was ready to go back to work, they laid her off. Then the
unemployment office challenged the claim because they saw in 
the claim write up that she was injured and thought it was my 
wife that was refusing to return to work.

We appealled and won.

So now, although wife is not yet back at work, at least we have 
her unemployment. Time to get back to a more normal budget.
She is looking for work, but had been unsucessful. She blames
her limp. Who wants to hire a nurse with a limp?

We used to get our Health insurance from her job. After it became 
obvious that she would not be able to get back to work very quickly, 
I decieded to become an employee and give up my contracting gig. 
This will result in a preiod of two months were I get paid twice. 
Once for the contracting that is on a 60 day delay and once for my 
new employer which is on a 7 day delay.

Here is where we are now:

Debts:

Citi Card:           $0      11.49%  Recently paid down
Credit Union CC:     $0       7.24%  Recently paid down (today)
Chase Mortgage $106,400       4.75%
Wife Car:         9,800       3.99%
My Car:          12,136       2.85%
BoA HELOC:       20,600       2.49%
BoA CC:          12,300       0%    (til Aug next year then 12.99%)
Medical Bills     8,000       0%

Assets:

Emergency Fund:  10,000      recently replenished.
Retirement A/C: 401,000
Cash/Checking:    2,000

I currently expect to be able to apply an extra $500 per month above 
the min payments to my outstanding debts.

I have 11,000 due to me above my regular salary between now and 
the end of the year due from the contracting job.

I would like to use this to pay down debt. The question is which 
account?!

Simple snowball rules say you pay off the next higest APR, but that
is our primary mortgage. Also the BoA CC will not be 0% forever.

This is what I am proposing. Pay down the HELOC. Just prior to the
0% going away, pay off the BoA CC with a check from the HELOC.

What is the conventional wisdom of the board?

Thanks,

Mark

p.s. If there is other info you need, please ask.
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No. of Recommendations: 9
Glad you have gotten closer to being normal and congrats on paying off some of your debts! Good luck to your wife in finding a new job.

I have 11,000 due to me above my regular salary between now and the end of the year due from the contracting job.

Is the $11k for the contracting net of taxes? If not, how much do you need to set aside for your quarterly payments out of that $11k?

I would like to use this to pay down debt. The question is which
account?!

Simple snowball rules say you pay off the next higest APR, but that
is our primary mortgage. Also the BoA CC will not be 0% forever.

This is what I am proposing. Pay down the HELOC. Just prior to the
0% going away, pay off the BoA CC with a check from the HELOC.

What is the conventional wisdom of the board?


In general, I would lean against planning to pay down the HELOC and then writing a check to charge it back up. For starters, you are paying off your lowest cost loan. Assuming you can write off the interest on the HELOC, your net interest cost is probably in the 1.75% range. Even if you can't write off the interest, you are still only at 2.49%, at least for now. Additionally, you may be taking on several risks when you plan to use a HELOC in the future:

- What is the value of your home? You currently have $127k in loans against your home. If your home is not worth in the $160k range, so that your Combined LTV (CLTV) is less than 80%, you run the risk of BoA cutting your HELOC credit line as you pay it down, since many HELOC lenders don't allow additional borrowing above a CLTV of 80%. If this is the case for your loan, you may not be able to draw money from the HELOC to pay off the credit card.
- How old is the HELOC? Are you approaching the end of your draw period? After the initial draw period (often either 5 years or 10 years), a HELOC will enter a repayment period where you can no longer draw additional money from it, only make payments. In some cases, it remains a variable loan, in other cases, you may have the option to change it to a fixed rate loan. But in either case, your HELOC is no longer an available line of credit for you to draw from - you would need to refinance into a new HELOC to be able to continue to draw money from it. So, if your draw period will end before Aug of next year, you won't be able to get the money from the HELOC to pay off the credit card.
- If house valuations, either local to you or nationally, take a big dive between now and next August, BoA could decide to close your HELOC to new draws. During the financial crisis, a lot of HELOC lenders cut or closed HELOC lines, so it's not unheard of that this could happen.
- I assume the HELOC is a variable rate loan? Do you know what the index is, and if there are any caps on the loan? If there are no caps and the prime rate ends up north of 15%, as it has in the past, you could be paying some pretty high interest rates on your HELOC. (Yes, it's probably going to be less than credit card rate, but it still might be pretty big.)
- It's a loan against the place you live, which means if something really bad happens, you could be out on the street. If something really bad happens and you can't pay your credit card, you may end up in court or with lots of collection calls, but you won't end up on the street.

If there is other info you need, please ask.

What are the minimum payments on each of your debts? Is the medical debt at 0% for life? Or will they start charging interest on it at some point, too?

Without knowing the minimum payment amounts, the terms on the medical debt and assuming that the $11k is net of taxes, and that you are pretty solid on being able to have a $500/month snowball for the next 9 months over and above the minimum debt payments, I might suggest the following strategy:

First, I would examine your emergency fund strategy. I know you just refilled it, but would you be comfortable with less money in the e-fund - say $5k - while you are paying down your non-mortgage debt? If you would, I might suggest the following strategy:

Your minimum payments on the BoA credit card will probably mean you will need around $11k - $11.5k to pay it off next July - before it starts charging interest. I would take $5k from your emergency fund, plus $4300 from your contracting payment, and pay off your wife's car. That will free up the car payment you are making to add to your $500 snowball.

Then I would set aside the other $6700 from the contracting payment, plus another $550/month ($500 from proposed snowball, plus $50 from your wife's car payment) into a savings account to pay off the BoA credit card. By next July, you would have $11,650 in the savings account, which should be enough to pay off the credit card. (Until you use this to pay off the BoA credit card, this could potentially serve as a back up e-fund, if things get really bad). In July, pay off the BoA card from the savings account. Put any additional money back into your e-fund or towards another debt.

In the meantime, take the rest of your wife's car payment and put it towards either your car payment or the medical bills - partly depending on whether the medical bills are always going to be at 0% or not, and how much you want to pay off the medical bills vs. paying off your car. Snowball those 2 debts until they are both paid off, then put that snowball toward the HELOC.

Once your wife gets back to work, you can put the amount of her paycheck (over the unemployment that she was getting) towards the HELOC.

If the HELOC rate starts to increase in rate, you can re-evaluate your snowball strategy. But assuming that you are able to deduct the interest on the HELOC, the HELOC rate would probably need to get above 3.8% for the net interest rate to be higher than the rate on your non-deductible car loan.

AJ
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AJ, this is gold! Thanks.

Is the $11k for the contracting net of taxes?

Yes, I already considered the taxes.

What is the value of your home?

Purchased for $156k in 2002; current value near $210k as assessed in 2010 when we refinanced the primary.

The refinance was with two banks different than BoA and BoA had to approve letting a newer loan be primary to their HELOC.

How old is the HELOC?

This was something I did not consider. However in looking at the loan documents I see:
Draw expiration date: 08/01/2017

I assume the HELOC is a variable rate loan?

It is variable, but I don't know what it is indexed to, nor what the cap is, but I do recall that there is a cap. However I don't see interest rates going up much from here, but that boarders on Economic/Political so I won't go any further on this board.

What are the minimum payments on each of your debts?

Chase Mortgage: 1,324.49 (includes escrow)
Wife Car: 433.84
My Car: 305.00
BoA HELOC: 50.00 (intrest only, I have been sending $100)
BoA CC: $120
Medical Bills: 500 (over 24 months; 16 payment remaining)
-------------------------------
Total: ~2735 per month

but would you be comfortable with less money in the e-fund - say $5k

I am. I did not mention it, but part of my retirement money includes $40,000 in a Beneficiary IRA, which I now own after my mother passed. I am taking the min witdraw most years.***
I consider this as a back-up of last resort to our E-fund.

I would take $5k from your emergency fund, plus $4300 from your contracting payment, and pay off your wife's car. That will free up the car payment you are making to add to your $500 snowball.

Good.

Then I would set aside the other $6700 from the contracting payment, plus another $550/month ($500 from proposed snowball, plus $50 from your wife's car payment) into a savings account to pay off the BoA credit card. By next July, you would have $11,650 in the savings account, which should be enough to pay off the credit card. (Until you use this to pay off the BoA credit card, this could potentially serve as a back up e-fund, if things get really bad). In July, pay off the BoA card from the savings account. Put any additional money back into your e-fund or towards another debt.

The only pitfall I see with this is we have not been very good with a lot of money in our checking/savings. The e*fund I have set up is at a different credit union (I never turned on the on-line feature); that way it is always available, but we have to drive to a branch to get the money; but we would also have to drive to a branch to deposit money. I could do that on a monthly basis for the deposits. I hate to admit I am weak, but I have had > $5000 in savings before and eventually I feel rich and the budget starts to slip :$

Would it be ok, if I put this snowball savings in the e*fund account till the BoA payment is due?

So to review:
The only modification I did was I am going to deposit the snowball payment into the e*fund to pay BoA just prior to the rate rising; Otherwise I am going to pay off my wife's car; then apply snowball to E*fund until BoA payment is due.

Next my car; Then HELOC; Since Medical Bills will be paid in full at 0% after two years I will target it last for snowball;

An added advantage to paying off my wife's car is that I can drop the coverage to just liability....checking with Geico...that would only save me $187 per six months. I will have to think about if it's worth dropping comprehensive for just a $31 per month gain.

footnotes:
*** incase any one was concerned, and I know you are because it's what we do: after her accident I sold a big chunk of what was in there, because I did not want money I might need stuck in NFLX, APPL or other stocks that we all know could get cut in half with no warning. We did make a significant withdraw in Feb after our E-fund was drained. Now that we are back on a budget, this fund is back to 100% stocks.
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hrse: "I did not mention it, but part of my retirement money includes $40,000 in a Beneficiary IRA, which I now own after my mother passed. I am taking the min witdraw most years.***
I consider this as a back-up of last resort to our E-fund.

. . .

footnotes:
*** incase any one was concerned, and I know you are because it's what we do: after her accident I sold a big chunk of what was in there, because I did not want money I might need stuck in NFLX, APPL or other stocks that we all know could get cut in half with no warning. We did make a significant withdraw in Feb after our E-fund was drained. Now that we are back on a budget, this fund is back to 100% stocks."


First, my condolences on your mother's death.

Second, you did not mention when your mother died, but from what you have written, I am concerned that you may not understand the rules with respect to inherited IRAs.

For any IRA inherited from a non-spouse, the beneficiary must withdraw all the funds from the IRA within five years after the year of the death of the deceased, unless the non-spousal IRA heir withdraws a minimum amount each year (based on the age of the heir), starting by Dec. 31 of the year after the IRA owner died (regardles of traditional IRA or a Roth). See, IRS Publication 590, “Individual Retirement Arrangements (IRAs)".

It makes me nervous to read "I am taking the min withdraw most years". The "stretch" rule (for withdrawals over lifetime of heir) requires RMDs every year, otherwsie you default to the five year rule.

I am doing this post largely from memory, but I know that I have the gist of it correct.

Good luck, JAFO
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First, my condolences on your mother's death.

Thank you.

Second, you did not mention when your mother died, but from what you have written, I am concerned that you may not understand the rules with respect to inherited IRAs.


She died in 2005. I had the very good fortune to work for a CPA during the tax season for a couple years after college. I went back and received a very detailed lecture on the rules for Bene IRAs. The period between when Mom died and I rolled it over took almost nine months.

My broker credits me for the reason why Scottrade now offers a Bene IRA. They had not when my mom passed, and I coplained to my local broker, to corporate phone line and I wrote a letter to the president. Six months later while still trying to find a broker to put the IRA, my broker called me and asked if I wanted to open one there :)


It makes me nervous to read "I am taking the min withdraw most years". The "stretch" rule (for withdrawals over lifetime of heir) requires RMDs every year, otherwsie you default to the five year rule.

Poor choice of words on my part.

I take the min withdraw most years.
Some years I take more than the min.
I always take at least the min.



Thanks for watching out for me :)
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AJ, this is gold! Thanks.

You're welcome :-)

Purchased for $156k in 2002; current value near $210k as assessed in 2010 when we refinanced the primary.
.
.
.
Draw expiration date: 08/01/2017


Okay, so it appears that you would be reasonably safe from BoA either cutting your credit line as you pay down, due to a low CLTV, and from having the draw expire before you need to write the check. So, your original strategy would likely work - but given the stories I saw about people's credit lines being cut, I still get concerned whenever anyone says 'and at a future date, I'll write a check from the HELOC to pay off xxxxx', especially when not being able to pay off xxxxx has the potential to cost them a lot of money if they can't write the check. And given that your HELOC is your lowest interest rate other than the medical debt - I'd probably still opt to go with the plan of paying off your wife's car and then saving to pay off the BoA card.

What are the minimum payments on each of your debts?

Chase Mortgage: 1,324.49 (includes escrow)
Wife Car: 433.84
My Car: 305.00
BoA HELOC: 50.00 (intrest only, I have been sending $100)
BoA CC: $120
Medical Bills: 500 (over 24 months; 16 payment remaining)
-------------------------------
Total: ~2735 per month


So, paying off your wife's car not only pays off your highest rate non-mortgage debt, but it also frees up a pretty good size payment that you can apply to your snowball. That's a bonus!

The only pitfall I see with this is we have not been very good with a lot of money in our checking/savings. The e*fund I have set up is at a different credit union (I never turned on the on-line feature); that way it is always available, but we have to drive to a branch to get the money; but we would also have to drive to a branch to deposit money. I could do that on a monthly basis for the deposits. I hate to admit I am weak, but I have had > $5000 in savings before and eventually I feel rich and the budget starts to slip :$

Would it be ok, if I put this snowball savings in the e*fund account till the BoA payment is due?


If keeping the money in your e-fund account is what will work for you, then that's the way I would suggest you do it.

As far as putting money into the credit union account - Can you do direct deposit into the credit union account? I know my employer allows me to deposit into multiple accounts, so I have money going to 4 different accounts for different reasons. It's a lot easier than having to try to make special trips to make deposits. It's also easier for me to just have the money taken out of my paycheck before I see it - it's also less tempting to use it for other purposes that way.

The only modification I did was I am going to deposit the snowball payment into the e*fund to pay BoA just prior to the rate rising; Otherwise I am going to pay off my wife's car; then apply snowball to E*fund until BoA payment is due.

Next my car; Then HELOC; Since Medical Bills will be paid in full at 0% after two years I will target it last for snowball;


Yes, that sounds like it will work. Since the medical bills are on a fixed repayment plan at 0% - leaving them for the last item to snowball is pretty reasonable.

An added advantage to paying off my wife's car is that I can drop the coverage to just liability....checking with Geico...that would only save me $187 per six months. I will have to think about if it's worth dropping comprehensive for just a $31 per month gain.

Yes - you need to balance the risk of having to replace your wife's car if something bad happens vs. the savings. While you are paying down debt, you may not have the resources to replace the car without having to add to your debt or take a big hit on your debt repayment plans. If you think that replacing her car would not be necessary, it might be a risk you are willing to take. If you absolutely need both cars, then it may not be a risk that you are willing to take. It all depends on your risk tolerance.

Good luck, and let us know how it goes!

AJ
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AJ, this is gold! Thanks.

Everything AJ contributes to this board is gold. She is a genius. So is JAFO. You got two of the best contributors responding to your issue. It was a well presented question and fantastic working through of the options. I hope this thread gets read by tons of people in the future. It's the kind of short and sweet thread that opens the eyes and minds of anybody keen enough to see the value therein.

xtn
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Everything AJ contributes to this board is gold. She is a genius. So is JAFO. You got two of the best contributors responding to your issue. It was a well presented question and fantastic working through of the options. I hope this thread gets read by tons of people in the future. It's the kind of short and sweet thread that opens the eyes and minds of anybody keen enough to see the value therein.

xtn


I agree. And joelcorley is also a great contributor.

Andrea
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FiddleDeeDee,

You wrote, I agree. And joelcorley is also a great contributor.

Thanks! Actually aj485 is the smarter of the two of us. She is also more PC and her written communications are clearer.

- Joel
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xtn: "Everything AJ contributes to this board is gold. She is a genius. So is JAFO. You got two of the best contributors responding to your issue. It was a well presented question and fantastic working through of the options. I hope this thread gets read by tons of people in the future. It's the kind of short and sweet thread that opens the eyes and minds of anybody keen enough to see the value therein."

xtn, thank you for the kind words. I think that AJ contributes way more than I do, especially on this board, and Joel, too.

Regards, JAFO
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And joelcorley is also a great contributor.


Yup. I don't think it's coincidence that great minds find each other.

xtn
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xtn, thank you for the kind words. I think that AJ contributes way more than I do, especially on this board, and Joel, too.

You're welcome. You aren't as prolific on this board, but just as valuable. Props where they are due.

xtn
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Great conversation! Thanks for posting this publicly... not only do you get good advice, but youngins like myself (under 30, no mortgage yet, etc) get to learn a bit.
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Please...learn a lot! The only saving grace to screwing up is that someone might be wise enough to learn from my mistakes.

If I had practiced financial wisdom from age 30...those numbers would have quadrupled. Except for the credit cards.

I learned these two things: 15 years goes by in an instant.
Money invested and continually invested over that same 15 years
will grow and grow.

And oh yeah, at 45, you will still feel like 30 but you will have the financial responsibilities of your parents age with all the same concerns.

It went by way too fast.
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