“Dear Steve,
I am a 36 year old single mother of 1. By single, I mean no dad to even help with child expenses. I work FT and contribute 4% to my company’s 401k which is matched 100%. My monthly mortgage is 52% of my take home and I’m currently looking at refinancing from the 5.25% interest rate I currently have. The initial estimates from Wells Fargo show me saving about $160/month by doing so (over time of course, I would still have to pay up front fees like an appraisal, which would set me back for awhile). I realize my mortgage is way too high of a percentage of my take home, but selling my home or getting out from under this mortgage is not an option right now.
I do not have any car payments. I am in the process of rolling my old company’s 401k from Vanguard to NY Life into an annuity (about $17k). I do not have any other real assets.
My major concern is the $10k I have in credit card debt. I am constantly reviewing and tweaking my budget (I have a monthly budget through 2013!). I have plans to continue to increase payments as I can to my credit card, but would love to get this paid off. But then I use it again and rack up twice as month per month than I just paid. It’s a vicious cycle!
I am using part of my tax refund next spring to get that down to $7k. I am considering using my Roth IRA with Ameritrade to help get this lower, down to about $4k by next summer. I would feel much better I think.
I’ve read all about the cons of using my Roth IRA. Won’t the penalty fee of 10% be waived if I have medical expenses over 7.5% of my take home? If so, my co-pays, out of pockets, etc. would qualify I think?
If not, I guess I would be dinged the $400 or so. Is this really such a terrible idea?
PS – I would never borrow from family, also not a consideration!
Jennifer”
Dear Jennifer,
Before you touch the IRA, which is protected money from creditors, why don’t you look at an unsecured debt consolidation loan through LendingClub.com or Prosper.com.
That could lower your monthly payment and give you some additional breathing room.
I agree, it looks like things are tight with you falling back each month trying to make ends meet. But between this as a possible solution and the possible debt consolidation loan for the credit card debt, that might make the difference.
Before you invest all of your tax refund in the debt reduction I want you to think about two things. First, if you are getting that much back it sounds like you are overwithholding each month when you need the money the most. Second, don’t use it all for debt reduction if you don’t have an emergency fund in a savings account. You need a safety net.
You might also want to look at ReadyForZero.com to help automate your debt reduction plan. It’s a free service.
Please post your responses and follow-up messages to me on this in the comments section below.
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Alex Taal.
Good advice, I will review your ideas. Thanks!
Good advice, I will review your ideas. Thanks!