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We Are Making Ends Meet But Looking Forward to Doing Better. What Should We Do With Out Tax Refund? – Maggie

“Dear Steve,

Thanks in advance for answering our questions and having your help available for free! I am thrilled to be able to discuss this with an expert and get a third objective opinion about our finances. My husband and myself were thrilled to find our dream home but it was probably a year to soon. We are now house poor and are really trying not to use our credit cards for any purchases. The bad news is we used almost all of our savings to buy the house and make fixes and added more money to our already existing credit card debt.

We have $12,200 in credit card debt over 5 cards, $53,000 in combined student loans, 30 year fixed 4.25% mortgage for $344,000, and a home equity line of credit 15 years interest only at a variable rate (currently 5.25%) for $43,500. We have $1750 in savings (which is what really scares me). We have combined $73,500 in retirement saved. We just recently paid off both of cars. We have $6700 saved in 529 for college for our toddlers!

My husband is a teacher with a pretty secure job and will get a $950 net raise in the fall and I am a per diem therapist with very consistent hours. My paycheck varies and I do not get vacation or sick days so I don’t take many. We are in our late 30s and really want to get on track with our finances. We both have good credit scores currently and do not pay our bills late.

Our net pay per month is $6260
Mortgage #1 $2160
Mortgage #2 $200 (with paying a bit extra)

I pay the bills by putting aside $600 every week for the mortgage and $550 a week all other bills. Is this a good system? Do you recommend any of that financial software programs (you need a budget or quicken)?

Here are our questions

  1. We got a large tax return and my husband will be teaching summer school which will give us large sums of money. Should be put half towards credit card debt and half towards savings?
  2. For savings that are for emergency only what type of account do you suggest?
  3. We have been moving our credit to get a zero balance transfer rate… is this a good idea? Is it a good idea to close out the old accounts or keep them open for awhile?
  4. My husband would like to use some of his 403b to pay off some of our credit card debt to get a fresh start and we disagree about this, what is your take?
  5. What type of account is best for money that will be used within 6 months to a year for house repairs?
  6. My husband has also suggested putting one of his school loans into forbearance for a few months until his pay raise so the we do not use our credit cards? Your thoughts?
  7. Our plan was to pay down the home equity line of credit after the credit cards are under $5000, your thoughts?

THANKS AGAIN!!!!

Maggie”

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The Answer

Dear Maggie,

It’s so nice to have someone reach out to me when they are not totally against a wall. Kudos to you for looking ahead.

At this point my primary concern would be to build up that emergency fund. Having the cars paid off and money in retirement is excellent but you don’t have any emergency money in case you need it.

While paying off the credit card debt pronto might feel like the first move I think postponing that until you can get $10,000 in savings is a better idea. Sure, the credit card debt can be expensive but without the savings account to fall back on any unexpected expenses will land back on the cards anyway. So the cost of not having an emergency fund will be the same as what the cards are now.

Additionally the larger emergency fund will give you something that a lower interest rate can’t, piece of mind and that has a tremendous value to it alone.

I don’t know what the interest rate is on the credit card debt, but if it is high I’d suggest you look into an unsecured debt consolidation loan from LendingClub.com. That loan will both lower the overall debt repayment on those cards, keep your credit score cruising along and looking good and allow you to stash the cash in the emergency fund.

If the big tax return is due to something unusual, great. But if you are expecting this to be the norm then you should look at adjusting your tax withholdings so less tax is taken out of each check and you get closer to breaking even at the end of the year. This will put more cash into your hands on a monthly basis and you’ll lend less money to the government for free.

You can then save that extra cash each month to help build that fund. Once you get to $10,000 then you can focus on paying off some of that other debt.

The one debt that concerns me the most is the interest only second mortgage. I know fifteen years seems like a long time but it can fly by with a balloon note. Your current monthly payment has you treading water and that $43,000 might be a lot to deal with later. Besides, it is an adjustable rate mortgage and interest rates will be going up in the next few years. They are artificially low right now.

Let me tackle your questions:

  1. Answered above.
  2. I prefer an account you can get to quickly. A boring old savings account is always a good idea but I’ve been impressed with Betterment.com where you can transfer your money out in a day or so. Betterment.com allows you to set your investment risk level between conservative or aggressive. In the early stages of building your emergency fund you can set your target investment very conservative and as your balance builds you can adjust your level for what you are comfortable with.
  3. Playing the zero percent transfer game is akin with playing Russian roulette. You never know when you will get stuck on a card that will have a very expensive rate when the teaser runs out. Besides, that game does not help your credit. You are left with no aged accounts and a string of open accounts that can hurt you because of too much open and available credit. I’d close all but your three oldest accounts and use them from time to time to show activity. The long history on a card shows stability and really helps to boost your credit score. Rather than playing the transfer game I’d go for the LendingClub.com debt consolidation loan and gets those debts on a program to stop moving them and start eliminating them.
  4. Leave the 403(b) money alone. It is so hard to get the cash back into the account to return you to the same place. People are constantly mislead that a retirement account loan is cheap but if the stock market rallies before you get the loan repaid you lose both the increase in the market plus the rate on the loan. Additionally if he was to change jobs the loan would probably be due and payable. My belief is that once money goes into a retirement account, it stays there. You might want to play around with how it is invested but leave it alone.
  5. See response above.
  6. I hate forbearance. The only thing is the interest continues to build. It’s not a payment holiday, it’s a balance growing party.
  7. See above.

It looks like you guys are motivated and want to tackle the debt. I applaud you for that.

What I am concerned about is the approach to just treading water on some of the debts. For example, the interest only mortgage, balance transfers and forbearance. I guess you could even toss the 403(b) loan into that boat.

Don’t be mislead into things which appear to only be low cost and cheap solutions. All of those approaches don’t resolve or eliminate the underlying issue, they just push it out into the future.

It’s time to stop doing that and tackle this debt now so we can put it behind you but get you in a safer position first.

As far as what software will work best for you? It’s not the software that’s the critical part it is if you use it. I’d evaluate your recording options and even consider a ledger book and a pencil. Sometimes simpler gets used more than fancy, especially if you have to wait for the computer to boot.

So what do you think, does this approach sound reasonable?

Please post your responses and follow-up messages to me on this in the comments section below.

Big Hug!

We Are Making Ends Meet But Looking Forward to Doing Better. What Should We Do With Out Tax Refund?   Maggie
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About Steve Rhode

Steve Rhode
Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.
  • Steve Rhode

    My vote is do what you feel works best with you based on all the ideas presented.

    The best solution is the one that allows you to achieve your goals, reduces your debt and allows you to save.

    As the economy improves interest rates will rise. I dob’t know anyone that has a crystal ball to know when and by how much.

    Let me know what you decide to do.

  • Maggie

    Hi Steve,

    Okay, just called about HELCO…we can pay lump sum and it takes it off the principle and changes our monthly payment. However, taking 30,000 from lending club would be a 13.43% interest rate so that doesn’t work with monthly payment of $689.

    So either we stick with original plan

    1) pay off cc debt with lending tree in 3 years meanwhile adding any lump money 1/2 to HELOC and 1/2 to savings and then after 3 years take another lending club loan and double up on monthy payments towards HELOC

    or

    2) take out a bigger loan from lending club but not 30,000 maybe $18,000 which is 11.11% with payments of $392 a month and add lump sums towards HELOC

    I think my husband and I are both leaning towards option 1 because it seems more clean or simple….by tackling cc in 3 years and then focusing on HELOC. However, it all depends on what happens to interest rates.

    Your thoughts?

    thanks again,
    Many question asker Maggie

  • Maggie

    Hi Steve,

    Our interest rate for $12,000 is 7.29% not sure what it is for 30,000 (which is the max). My husband is under the assumption (but not sure) that not matter what the balance on the HELOC we have to continue our current payments which are $200. If that is the case we could not do the lump sum. What would be a good rate for the 30,000? We would have to pay off credit cards and then put the rest $18,000 toward HELOC leaving a balance of $25,000 on the HELOC. I am going to call about HELOC and find out more info.

    Thanks,
    Maggie

  • Steve Rhode

    The HELOC allows you deduct interest as long as the loan does not exceed the value of the house so that’s a positive. But the HELOC also encumbers the house and if you fail to make the payment for some reason it can result in a lien or an unlikely foreclosure.

    While an unsecured Loan from LendingClub may carry a higher interest rate than the HELOC it also have value in that it would not result in a lien against your home in case you wanted to sell the house, for some unexpected reason, before the loan was repaid.

    Also, I don’t know what your credit looks like so I have no way to predict what your LendingClub interest rate would be. After you look into that let me know the rate they quoted you and then let’s decide.

    Steve

  • Meghanspeech

    Hello Steve,
    Great to hear from you again, thanks! Okay one more question what about combining cc debt and HELOC into one loan from lending club for their max limit? Or should we do our original plan as outlined in my last response of just putting the cc debt on the loan and keep the HELOC separate?

    THANKS THANKS THANKS
    Maggie

  • Steve Rhode

    Maggie,

    I think that is a reasonable plan that will tackle the debt and leave you safer. Keep your oldest three credit cards open to boost your credit score.

    I think the LendingClub.com limit at the time is $30,000 but it is unsecured so you won’t have to put your home up as collateral.

    Some people really love Mvelopes.com. But ultimately it is really important for you to find a software solution that you like best to use the most often.

    Keep me posted.

  • Meghanspeech

    Hi Steve,

    Thanks for your speedy and very helpful response. Here is our plan.
    1. Put most of large tax return into savings
    2. Pay off existing cc debt with loan from lending tree, which will be finished at the latest in 36 months.
    3. In 36 months, get another loan from lending club if rate is low put lump sum into HELOC and
    pay that off in chunks. Good idea?
    4. Large sums from extra jobs, gifts etc will be divided half to HELOC and half to savings.
    5. Look into “you need a budget” software, is there any other software you like?

    Your thoughts?
    MANY THANKS
    Maggie

  • Meghanspeech

    Hi Steve,

    Thanks for your speedy and very helpful response. Here is our plan.
    1. Put most of large tax return into savings
    2. Pay off existing cc debt with loan from lending tree, which will be finished at the latest in 36 months.
    3. In 36 months, get another loan from lending club if rate is low put lump sum into HELOC and
    pay that off in chunks. Good idea?
    4. Large sums from extra jobs, gifts etc will be divided half to HELOC and half to savings.
    5. Look into “you need a budget” software, is there any other software you like?

    Your thoughts?
    MANY THANKS
    Maggie

    • http://GetOutOfDebt.org Steve Rhode

      Maggie,

      I think that is a reasonable plan that will tackle the debt and leave you safer. Keep your oldest three credit cards open to boost your credit score.

      I think the LendingClub.com limit at the time is $30,000 but it is unsecured so you won’t have to put your home up as collateral.

      Some people really love Mvelopes.com. But ultimately it is really important for you to find a software solution that you like best to use the most often.

      Keep me posted.

      • Meghanspeech

        Hello Steve,
        Great to hear from you again, thanks! Okay one more question what about combining cc debt and HELOC into one loan from lending club for their max limit? Or should we do our original plan as outlined in my last response of just putting the cc debt on the loan and keep the HELOC separate?

        THANKS THANKS THANKS
        Maggie

      • http://GetOutOfDebt.org Steve Rhode

        The HELOC allows you deduct interest as long as the loan does not exceed the value of the house so that’s a positive. But the HELOC also encumbers the house and if you fail to make the payment for some reason it can result in a lien or an unlikely foreclosure.

        While an unsecured Loan from LendingClub may carry a higher interest rate than the HELOC it also have value in that it would not result in a lien against your home in case you wanted to sell the house, for some unexpected reason, before the loan was repaid.

        Also, I don’t know what your credit looks like so I have no way to predict what your LendingClub interest rate would be. After you look into that let me know the rate they quoted you and then let’s decide.

        Steve

      • Maggie

        Hi Steve,

        Our interest rate for $12,000 is 7.29% not sure what it is for 30,000 (which is the max). My husband is under the assumption (but not sure) that not matter what the balance on the HELOC we have to continue our current payments which are $200. If that is the case we could not do the lump sum. What would be a good rate for the 30,000? We would have to pay off credit cards and then put the rest $18,000 toward HELOC leaving a balance of $25,000 on the HELOC. I am going to call about HELOC and find out more info.

        Thanks,
        Maggie

      • Maggie

        Hi Steve,

        Okay, just called about HELCO…we can pay lump sum and it takes it off the principle and changes our monthly payment. However, taking 30,000 from lending club would be a 13.43% interest rate so that doesn’t work with monthly payment of $689.

        So either we stick with original plan

        1) pay off cc debt with lending tree in 3 years meanwhile adding any lump money 1/2 to HELOC and 1/2 to savings and then after 3 years take another lending club loan and double up on monthy payments towards HELOC

        or

        2) take out a bigger loan from lending club but not 30,000 maybe $18,000 which is 11.11% with payments of $392 a month and add lump sums towards HELOC

        I think my husband and I are both leaning towards option 1 because it seems more clean or simple….by tackling cc in 3 years and then focusing on HELOC. However, it all depends on what happens to interest rates.

        Your thoughts?

        thanks again,
        Many question asker Maggie

      • http://GetOutOfDebt.org Steve Rhode

        My vote is do what you feel works best with you based on all the ideas presented.

        The best solution is the one that allows you to achieve your goals, reduces your debt and allows you to save.

        As the economy improves interest rates will rise. I dob’t know anyone that has a crystal ball to know when and by how much.

        Let me know what you decide to do.

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