“Dear Steve,
My husband and I have incurred a huge amount of debt ($44,000) and desperately need assistance with identifying strategies to help us pay it off. We have enough money coming in to pay the bills each month, but we are getting nowhere near paying the debt down.
How can you help us figure out how to pay this debt off within a reasonable amount of time?
Karen”
Dear Karen,
OK, we are going to have to take this in stages since I’ll need some additional information from you to best answer this. Just post your answers in the comments on this question and I’ll spot them there and reply.
From what you’ve shared so far I’m not certain what the interest rates or types of debt is.
- Can you please provide me with some additional information on the debt?
- How old are you and your husband now?
- Are your currently able to save money each month to protect yourself in case of a financial emergency.
- Do you think your employment situation is stable?
Please update me on your progress by posting updates here in the comments section of your question. I’m very interested in how this works out for you.
Big Hug!
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Karen,
You are very welcome.
Steve
Thank you so much – you have given me a starting point as well as some ideas on what may work for us. I truly appreciate the time you have devoted to assist us in trying to find a workable solution!!
It has been such a pleasure corresponding with you and again –
Many Thanks!!
Karen
Karen,
Don’t try it if you feel you are going to come up short at the end of the year though.
While the interest rate on the other cards is low I’d rather you save up the case to pay the card off in full. While you are holding on to the cash it gives you more of a safety net.
Your situation is incredibly problematic because you are not doing well enough to really get ahead nor poor enough that bankruptcy is a logical solution.
The reason I suggest paying off the card with the $9K is because if your situation was to get really bad and bankruptcy became an option then the cash on hand would be a problem for you in bankruptcy. Might as well use it and try to dig out now.
If you are not tracking your spending now, start doing it with some online or offline tool. This will help to put some more found money in your pocket. You might want to look at the site of my friend Adam Baker at ManVsDebt.com for some really good money management tips to find missing cash in your budget.
My only concern is the adjustment of the withholdings. Because I am a contract employee and receive a 1099 at the end of the year, we allow maximum withholdings from my husband’s check to try to offset the difference. However, I am willing to try this. When you say we should save $6,000, are you thinking that we should apply this amount monthly to another card, or should we just save it in an account?
Thanks for the nudge. I missed the last answer.
The safest play would be to adjust the withholdings and use the $9K to payoff the highest interest rate debt. That should free up enough cash to allow you to start saving $370 a month and if you start tracking where your cash is going then that awareness will probably free up another $130 a month.
This way you still have an emergency fund and you can save $6,000 in the next year. Alternatively you could cut back on monthly savings and let your husband participate in the 401(k) up to the maximum matching level. If he contributes in pre-tax income it can still result in extra cash in your pocket.
What do you think about that approach?
Steve
Hi Steve,
I was just wondering if you have any advice for us in an effort to get us out of this situation.
Thank you,
Karen
The balance of the card with the 15.55% is 9700 and the monthly payments are around 220.00/mo. I do not know what the 0% rate will be, but the balance on that account is 4600.00. The card with the lowest rate (4.74%) is 9164. as of today.
Interesting. Hum, what is the balance of the card at 15.55% and do you know what the 0% card is going to rest to and what’s the balance on that one.
Steve
Approximately 9G (certainly not enough to get us out of this debt). Can it help?
Karen,
How much cash is in that account?
Steve
I sold a rental unit a few years ago and it is in an account (earning very little interest). I have been holding on to it “in case of a rainy day,” but am not opposed to using it. My thought would be to pay the highest balance, but honestly have no idea.
Karen,
Where would this cash come from and when you say the “highest” card. Do you mean highest interest rate or balance?
Steve
I am not sick of you asking questions at all – I truly appreciate your time in trying to help us to solve this. I feel like the more you know about our situation, the better you are able to direct us.
To answer your question, I do feel that I have a huge responsibility to take action so that I can make the future better for my family. However, depending on what you see as options, I think we can manage treading water for the next five years in an effort to clean up the mess if that seems to be the best option. And one more thing…I do have access to almost enough cash to pay one of the highest cards or loans off, but am very hesitant about using that just in case we do encounter an emergency. Do you think it would be wise to use it or would it help at all?
Thank you,
Karen
Karen,
The reason I asked about the tax refund was to see if you could adjust the withholdings and put more money in your pocket each month instead of giving it to the government to hold. It sounds like you could do that and have an extra $150 a month to use.
The 401(k) issue is an important one. Even though you are still young, if the employer is willing to provide matching funds up to a certain contribution level then by not participating he is simply throwing away free money that someone wants to give him.
The $4K of savings is great but what concerns me is that if you had to use it you would probably not be able to refill the used amount easily. Things just sound really tight.
I asked about the previous consolidation loans to see if this was a repeating cycle and it does not seem to be. That’s good.
What makes this issue a bit tough is your interest rates on the debts are pretty good already and something like a LendingClub.com debt consolidation loan would not help at all. So absent any sort of “consolidation” as a tool to use the ultimate answer is going to come down to reducing expenses to give yourself more money for debt reduction, increase income or a combination of the both.
But even focusing on debt reduction you still need to have enough of a margin to save even $200-$300 a month to keep building that emergency fund. A $4K fund is good but it’s not good enough in the face of a 6 month loss of work.
Your situation is like a worst case scenario. You have enough to make the minimums but not enough to do more than tread water. You are in the banker sweet spot.
You’re probably sick of me asking questions but just one more. Do you feel you need to fix the past and keep treading water for the next five years or do you feel as if you have a greater responsibility to take action to make the future better from this point forward?
Steve
Neither of the personal loans were from debt consolidation, and one will be paid off in 21 months. My husband has an option to contribute to his 401K, but has not done so in the past year due to obvious reasons. We do not count on having a big income tax refund due to the nature of my job (contract); however, in the past we have received a couple thousand dollars. I don’t think it is safe to count on getting a refund, though.
Karen,
We are getting closer.
Were either of the personal loans for a previous debt consolidation?
Do either of you contribute to a 401(k) or such at work with your current income and is there such a matching contribution plan that you could participate in if you don’t now?
Do you typically get a big tax refund back each year and if so approximately how much do you anticipate coming up next year?
Steve
Debts include 5 credit cards totaling $28,596.00 and 2 personal loans totaling 13,800.00. One card has an interest rate of 15.55; one has a 4.74; one has 0 until Nov.2011; and one has 7.0. The other one has 0 until Jan. 2011.
My husband is 39 and I am 40.
We do have a small amount of savings that we could tap into in case of an emergency (around $4,000.00). However, at this point, we are unable to save anything after everything is paid.
I think that our employment situation is stable at this time, but I’m sure that could change at any time.
Debts include 5 credit cards totaling $28,596.00 and 2 personal loans totaling 13,800.00. One card has an interest rate of 15.55; one has a 4.74; one has 0 until Nov.2011; and one has 7.0. The other one has 0 until Jan. 2011.
My husband is 39 and I am 40.
We do have a small amount of savings that we could tap into in case of an emergency (around $4,000.00). However, at this point, we are unable to save anything after everything is paid.
I think that our employment situation is stable at this time, but I’m sure that could change at any time.
Karen,
We are getting closer.
Were either of the personal loans for a previous debt consolidation?
Do either of you contribute to a 401(k) or such at work with your current income and is there such a matching contribution plan that you could participate in if you don’t now?
Do you typically get a big tax refund back each year and if so approximately how much do you anticipate coming up next year?
Steve
Neither of the personal loans were from debt consolidation, and one will be paid off in 21 months. My husband has an option to contribute to his 401K, but has not done so in the past year due to obvious reasons. We do not count on having a big income tax refund due to the nature of my job (contract); however, in the past we have received a couple thousand dollars. I don’t think it is safe to count on getting a refund, though.
Karen,
The reason I asked about the tax refund was to see if you could adjust the withholdings and put more money in your pocket each month instead of giving it to the government to hold. It sounds like you could do that and have an extra $150 a month to use.
The 401(k) issue is an important one. Even though you are still young, if the employer is willing to provide matching funds up to a certain contribution level then by not participating he is simply throwing away free money that someone wants to give him.
The $4K of savings is great but what concerns me is that if you had to use it you would probably not be able to refill the used amount easily. Things just sound really tight.
I asked about the previous consolidation loans to see if this was a repeating cycle and it does not seem to be. That’s good.
What makes this issue a bit tough is your interest rates on the debts are pretty good already and something like a LendingClub.com debt consolidation loan would not help at all. So absent any sort of “consolidation” as a tool to use the ultimate answer is going to come down to reducing expenses to give yourself more money for debt reduction, increase income or a combination of the both.
But even focusing on debt reduction you still need to have enough of a margin to save even $200-$300 a month to keep building that emergency fund. A $4K fund is good but it’s not good enough in the face of a 6 month loss of work.
Your situation is like a worst case scenario. You have enough to make the minimums but not enough to do more than tread water. You are in the banker sweet spot.
You’re probably sick of me asking questions but just one more. Do you feel you need to fix the past and keep treading water for the next five years or do you feel as if you have a greater responsibility to take action to make the future better from this point forward?
Steve
I am not sick of you asking questions at all – I truly appreciate your time in trying to help us to solve this. I feel like the more you know about our situation, the better you are able to direct us.
To answer your question, I do feel that I have a huge responsibility to take action so that I can make the future better for my family. However, depending on what you see as options, I think we can manage treading water for the next five years in an effort to clean up the mess if that seems to be the best option. And one more thing…I do have access to almost enough cash to pay one of the highest cards or loans off, but am very hesitant about using that just in case we do encounter an emergency. Do you think it would be wise to use it or would it help at all?
Thank you,
Karen
Karen,
Where would this cash come from and when you say the “highest” card. Do you mean highest interest rate or balance?
Steve
I sold a rental unit a few years ago and it is in an account (earning very little interest). I have been holding on to it “in case of a rainy day,” but am not opposed to using it. My thought would be to pay the highest balance, but honestly have no idea.
Karen,
How much cash is in that account?
Steve
Approximately 9G (certainly not enough to get us out of this debt). Can it help?
Interesting. Hum, what is the balance of the card at 15.55% and do you know what the 0% card is going to rest to and what’s the balance on that one.
Steve
The balance of the card with the 15.55% is 9700 and the monthly payments are around 220.00/mo. I do not know what the 0% rate will be, but the balance on that account is 4600.00. The card with the lowest rate (4.74%) is 9164. as of today.
Hi Steve,
I was just wondering if you have any advice for us in an effort to get us out of this situation.
Thank you,
Karen
Thanks for the nudge. I missed the last answer.
The safest play would be to adjust the withholdings and use the $9K to payoff the highest interest rate debt. That should free up enough cash to allow you to start saving $370 a month and if you start tracking where your cash is going then that awareness will probably free up another $130 a month.
This way you still have an emergency fund and you can save $6,000 in the next year. Alternatively you could cut back on monthly savings and let your husband participate in the 401(k) up to the maximum matching level. If he contributes in pre-tax income it can still result in extra cash in your pocket.
What do you think about that approach?
Steve
My only concern is the adjustment of the withholdings. Because I am a contract employee and receive a 1099 at the end of the year, we allow maximum withholdings from my husband’s check to try to offset the difference. However, I am willing to try this. When you say we should save $6,000, are you thinking that we should apply this amount monthly to another card, or should we just save it in an account?
Karen,
Don’t try it if you feel you are going to come up short at the end of the year though.
While the interest rate on the other cards is low I’d rather you save up the case to pay the card off in full. While you are holding on to the cash it gives you more of a safety net.
Your situation is incredibly problematic because you are not doing well enough to really get ahead nor poor enough that bankruptcy is a logical solution.
The reason I suggest paying off the card with the $9K is because if your situation was to get really bad and bankruptcy became an option then the cash on hand would be a problem for you in bankruptcy. Might as well use it and try to dig out now.
If you are not tracking your spending now, start doing it with some online or offline tool. This will help to put some more found money in your pocket. You might want to look at the site of my friend Adam Baker at ManVsDebt.com for some really good money management tips to find missing cash in your budget.
Thank you so much – you have given me a starting point as well as some ideas on what may work for us. I truly appreciate the time you have devoted to assist us in trying to find a workable solution!!
It has been such a pleasure corresponding with you and again –
Many Thanks!!
Karen
Karen,
You are very welcome.
Steve
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