I am a 40-year old single mother of one. Currently, I have $22K in credit card debt among 3 creditors: American Express $16K (9.99%), Home Depot $3K (12%), and Furniture Express $3K (zero interest and payment until March 2010).
I have $35K in student loans (6.2%) with Wachovia, who is also the holder of my employer-sponsored 401K plan. I currently contribute 6%, and my employer matches my contribution up to 4%; therefore, my current 401K contribution totals 10% of my current salary of $75K annually (gross) and $47,847 annually net (my current 401-K balance is $45K give or take a few thousand).
The student loans are for undergraduate and graduate degrees in business which I just completed this year; therefore, the first payment is deferred until March 2009. I just purchased a home valued at $190K, and I’m carrying a 30-year 6.375% fixed interest rate mortgage for $169K. And I have a $400 car note with a balance of $14K is about 2.5 years remaining on the note.
My daughter is a Junior in High School, and I feel an intense need to get out of debt as quickly as possible to ensure I can fund her college expenses (I have no savings for her college and no expectations of scholarships being offered).
I will readily accept part-time work as an adjunct teacher or preparing taxes during the tax season to help eliminate the debt.
Which debt do I target first (I assume the Am Express), and what other measure should I take to get out of debt the quickest?
Once the debt is eliminated, should I contribute more to my 401K, and if so, how much more?
Thank you so much for writing and asking for a little bit of friendly advice.
I can sympathize with the college-bound worry, and the reality is that based on the path your daughter elects, no matter how much you can save right now, it might not be enough.
Luckily there are still some affordable ways to obtain an undergraduate degree by doing the community college and transfer to a state university path. You need to make sure that the community college courses will transfer to the state university, so you don’t have to pay again for classes. Some states offer a guaranteed path for this approach.
It’s all the extras that kill the budget for the school. Between books, room, meals, etc., it can be significantly more expensive than anyone expects.
The 401(k) question is an excellent one. On the one hand, some might say to back way off on the 401k contributions and save that money towards college expenses, but in this uncertain economy, it makes much more sense to put the maximum matching contribution in now. It sounds like you might be able to reduce your contribution slightly just to the point where they provide a matching contribution.
Your 401k investments are a bankroll for the future. It is much better to invest money right now than later. I get many emails from people nearing retirement or unable to retire because they don’t have any savings or investments to fall back on. You don’t want to wind up in that situation if you can avoid it.
On paying off the debt, I love the debt snowball approach, where you would pay off the lowest balances first. However, in your situation, I would pay the minimum payment to the Amex and Furniture Express and then use all your available debt repayment dollars to pay off the Home Depot card. Once that one is paid off, you can then use the now freed up money and double down on the AMEX card.
However, the huge gotcha here is the Furniture Express account. While it is 0% interest and no payment right now, you need to look at your paperwork on that financing. I bet you’ll find that if the balance is not paid in full by that due date that you will then get socked with all the interest that would have been due between your purchase date and now. You’ll also have to look to see what interest they will charge you.
If I’m right about that furniture debt, it will make more sense to pay off Home Depot and then focus your double-down efforts on the furniture bill.
It often makes more sense to pay off the lower balances first because, with those out of the way, the minimum payments that were once due on them can be really powerful debt reducers when applied to the remaining larger balances.
If you follow this approach and the extra effort you are willing to make to generate extra income, you should be able to get debt-free by the time your daughter heads to school. Now, don’t fret. Even if you have not managed to save enough after paying off your debt, your daughter can still apply for student loans that you can pay on her behalf. She just needs to be smart about not going too far into debt for college.
It might not be money you had saved, but it will be cheap money you can use to help her get through school.
You are not alone. I'm here to help. There is no need to suffer in silence. We can get through this. Tomorrow can be better than today. Don't give up.
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