wanna pay off your own debt

Edwards Finance > Debt Help

Q. I have a few related questions concerning debt, my 401(k), and buying a home. First, let me give you some background on me: Age: 22 Job: IT Consultant Employment: Full time (2 years), $60,000/year 401(k) Contribution: 15% (about a year in the program) 401(k) Current Value: $9,542.59 401(k) Employer Match: 3% Here is my current debt: Visa: $3200 @ 13.65% APR Visa: $3000 @ 14.7% APR Discover Card: $1900 @ 9.9% APR, $450 @ 22.99% APR (1 card, 1 is balance transfer w/ low rate) MBNA Line of Credit: $4400 @ 19.99% APR Student Loan: ~$4500 @ ~6.something% or 5%, I can't recall at the moment Car Loan: $14,000 @ 7.5% 9first car, kind of high APR, I know) Total Debt: $12,900.00 How I pay my debt: I typically pay double the minimum payment on everything, then I usually send in an extra $50-$100 on the highest APR% debt. Except the student loan and the car loan, I pay the minimum always. I should probably pay double too, since I can't deduct the interest (my salary is too high I think). My "life style": I am not extravagant, I don't buy many clothes or luxury items. I use to buy a lot of electronics, computer stuff, etc, but I have stopped. That is how my debt got so high, mostly. I have stopped eating out. I do not use my cards. I use a VISA "check card" which debits straight from my checking account and is accepted anywhere VISA is accepted. If I need to order a text book for school (I am finishing my degree) I use my check card online, not my "real" credit cards. I always make my payments on time, and I don't struggle to make them, which is nice. I guess I am just lucky at 22 to have a good job. I need to translate this "luck" into a means to pay off my debt. That is where you come in. Now my questions: 1) Given my present debt situation, should I stop contributing to my 401(k) and divert that money to paying off the debt? I am not favorable to this, but if it is better, then I would do it. 2) I currently rent, but have considered buying a house in the range of $120-140k. Should I pay off my debt first, or buy and try to some how use the purchase to help reduce my debt (via a 2nd mortgage or something)? I was approved for a loan up to $165k, but never went through with the details because I thought I shouldn't buy while having this much debt, but the loan guy seemed to think it was fine. He seemed very smart, and was reccommended by two home owners I am friends with (one 22, the others in their 40s). 3) What other options should I consider to get rid of my debt? I REALLY want to be debt free, but I would like to stay with my 401(k) for the future. 4) Should I just stick to what I am doing? Any help is appreciated. I want to be debt free. I'll be honest, I am not so much worried about my car or student loan, there is no way I could afford those things with getting the loans because I don't have a huge savings account, I have no emergency fund so to speak; whatever is in my checking account at any given time is it. I am more concerned with getting rid of all but one VISA card, and having it paid off too. Any thoughts?

A. _Stop up to the match. If you don't have the cr cards pd off in 6 months, stop it all together. This will give you the emotional incentive you need since you mention that you "really" want to stay with it. OK, take some math classes- Doesn't add. List the debts highest to lowest and attack the lowest. When paid cancel credit card. Then attack the next one. Repeat process. Pay off student loan last since it is deductible. _I am not a professional, but I have been in similar circumstances to where you are today. Here's what I would do: Pay off the credit cards first before even thinking about buying a house. You'd have to save up some money anyway to afford a down payment and the closing costs, so get into the habit of putting a chunk of change aside each month, first to pay off the cards, next to put into a savings account or some other stable savings plan in order to build the money you will need for the house or other purchase. Pay off the higher-interest credit cards first. Some might suggest that you stop contributing to your 401(k) in the meantime and direct that money toward your debt; and it is true that you might be able to save some money by doing that in the long run (and maybe not; depends on how well your investments do for the next 40 years). But I myself would not do this, because: (1) that money gets removed from your paycheck and you never see it, and so it's easier learn to live within your means AFTER that bit of savings is deducted, every month on a regular basis; (2) I just feel better having some money socked away, even if it's in a retirement fund, and even if I have outstanding debts, too. It's a morale booster for me. Buying a home is probably a smart idea, as opposed to paying rent, but at your relatively young age you can afford to wait a few years before you do. For all you know, you might want to move somewhere else in the next couple years, if you switch jobs or something, particularly since you are still working on a degree. Houses take up a lot of time in maintenance; I wouldn't want to own one while still taking classes. A house purchase also isn't typically a financially winning situation unless you plan to stay there for at least five or seven years, generally speaking. A lot of people also forget how expensive houses are to repair and maintain, which of course is taken care of for you if you rent. Maintenance can run into BIG bucks for older homes. If I were giving advice to myself, I'd say you don't really need a house until you start thinking about having kids. If you can afford one beforehand and if you want one badly, fine, but for myself, we didn't NEED one until we decided to start a family. Especially since you are so intent on paying off your debts, I would wait on the house. You may have "borrowed the interest as well as the principal" when you borrowed money for the car, depending on the terms you agreed to, so it may not do much good to accelerate the payments on that loan. Compared to the other loans you have, this is a fairly low interest rate anyway, as is your student loan. The credit cards and credit lines should definitely get paid off first. I would also put two or three hundred dollars away each paycheck to build up a fund so that you aren't tempted to pay for stuff with a credit card when you run out of money between paychecks or whatever. You can do this easily just by creating a new account in Quicken or whatever you use and call it "invisible reserve." Each paycheck, the first thing you do is transfer $300 from your main checking account into the invisible reserve. It's just a "paper" or "personal" transaction--your bank doesn't know anything about it, of course. You'd be surprised how quickly you can build up a reserve this way, and then when an unexpected expense comes along, you can just borrow from yourself instead of the credit card. Since it's already in your checking account, you don't have to go through any real pain to access the money; but since it's hidden, you more or less forget about it, too, and aren't tempted to spend it. When your next paycheck comes, the first thing you do is pay off the loan to yourself and replenish your invisible reserve. This works very well for me as a means to keep from using credit cards. I know you don't use your cards anymore but I thought I would point out this technique anyway, since it's also a method to start seeding an emergency fund. Don't listen to the "loan guy," even if you think he is very smart. It's no skin off his back if you go bankrupt. What they are willing to give you in terms of a loan and how much you can afford to borrow are two very different things. Consider getting a part-time job if you can afford the time and energy (which you probably can't since you're still in school) to pay off the debts more quickly. The faster you pay off the debts, the less money you lose in the long run. But remember, pay off the high-interest loans first; once they are paid off, redirect the same money (or more) toward the lower-interest loans. Finally, go out and get a copy of "Personal Finance for Dummies," by Eric Tyson. Despite the title it is a good overview of what one should do to become financially secure and sound. You need to live a lifestyle which will prevent you from going into debt into the future--or if you choose to go into debt, have it planned and manageable. You seem to be on this path now, but you might want to study up a bit to systemize your planning. Once you get the debts paid off, learn about Roth IRAs and begin contributing the maximum per year to that. Knock down your 401(k) contribution to the point where you still are getting employer match, but fund your Roth IRA to the max; then when that's maxed out, up your 401(k) contribution again. But this is stage two, after you get the debts under control. Build up a separate and larger emergency fund in addition to your invisible reserve. _You've outlined $31,450K of debt here, not $12.9K. You need to get yourself on a rigorous budget, and not make the assumption that an extra $100-$200 a month is going to get you out of hock anytime soon. You need to be paying those debts down at more like $2000/mo, and if you establish a rigorous living budget of around $1500/mo., should have that kind of a surplus on your salary. You cannot afford further debt for anything----your indebtedness is around 2/3rds of a year's take-home pay after taxes, with no tax breaks for carrying it. Make your regularly-scheduled car and student loan payments. These are the lowest-interest parts of your debt. Pay each of your loans, except the highest-interest one, $100/mo. This will give you some reduction, but when you calculate it, that $100 is only about $67 of reduction on each of the Visas. Losing 1/3rd of your payment to interest on your lower interest loans ought to get your attention. Take the remainder of your $2000/mo. and use it to pay down the top-rate loan. That's the high "Discover" rate, followed by the MBNA line of credit. Retire those high-interest lines of credit and keep them retired (i.e., don't use them, and when they are paid off, close the accounts). As those high-interest lines are paid off, move the "remainder of $2000" amount to the next one, adding the $100/mo to it. Once you are down to the car payment and student loan only, you can start putting money into savings. If the interest on the car loan is "method of 78's" or "sum of the digits," make a supplemental savings payment into a simple savings account until you've reached payoff amount, and pay the whole thing off in a lump sum---the only way you get any interest off this type of loan. Once the car is paid off, you can establish a one-year schedule for paying off the student loan. The remainder of your "payment surplus" can be put into savings of some sort---a brokerage account, where you can buy securities that pay a lot more interest than the 1.5% the commercial banks are offering these days. You are not in "financial health" until you have reached the following: $0.00 in unsecured and secured consumer debt. Six months' running expenses ($9K, if running expenses are $1500/mo) in readily available cash. You are not ready to even think about buying a residence property until you have also accumulated 20% of the purchase price (that's $50K for a $250K property) in savings and investments that can be readily liquidated for a down payment on a conventional 80% mortgage. If necessary, you can cut back the 15% 401K contributions to the 3% needed to obtain full employer match, to gain more cash for debt reduction. I'd consider that only because of your age, and the fact that the tax break you are getting on those contributions now is offset by the interest you are paying on those top-interest loans. I'd consider this strictly temporary, with every dime of the added take-home pay going directly into debt service. Once your unsecured debt is paid off, you can return to the 15% schedule. Get yourself on a budget, and live within that budget. Keep that budget reasonable once the debt is paid off, and build investments so that you can buy the house you want, etc. Don't be fooled by people who are willing to "approve" you for other loans. They'll "loan" you right into bankruptcy. Indeed, I'd be inclined to say that if all you have is a used car and some household possessions, you've got a fairly substantial negative net worth right now, and are well on your way to spending the next 40 years of your live living by that Latin motto, "In Hoc I Am." Get a budget and payoff program in place, stick with it, and stick with the rigor, and you'll live a much better life. _Personally, I would cut back on my 401K contributions and start to get rid of the high interest debt. You are only 22 and you are young enough to cut back a little on your retirement for now. Later on when the debt is paid, you can max out again. One thing you do not want to do is mess up your credit at such a young age, especially when you are considering buying a house.

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