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Paying off Debt - Budget advice
Here I am again. Always feeling buried. We just moved for the military in June. Still adjusting to the change of COL, now have more debt from the move and seem to be digging ourselves deeper instead of climbing out of the hole.
We have one CC with a balance of $4k. (10.15% interest)
We have one car loan with a $7k balance and $190 a month payment (2.75% interest)
E-Fund $32k.
Expenses: $7195 (includes $1500 towards CC)
Income: $9050 (I put 16% of my income into my company match 401k)
I'm debating taking the $4k out of the savings to pay off the CC but I'm terrified we'll just end up adding to it again with Christmas around the corner. And I'm also not liking seeing our efund dip under $30k. Ugh! I know this is all based on us fixing our spending habits, and we're working on it. Just wondering WWYD? Or should we continue to pay the $1500 a month to the CCs and have that paid off by the new year. Then start building back up our efund and begin working on paying down the car payment too? My original plan was once the CC is paid off then we'd do $750 to efund and an extra $750 towards car.
Re: Paying off Debt - Budget advice
Given the numbers I would take $4000 out of the e-fund and pay off the CC bill since you're paying interest on it. Instead of splitting the $1500 between the car and e-fund I would put half towards the e-fund until you repay the $4000 back and ear mark the other half for Christmas if you're concerned you will over spend. Having a specific amount of money set aside has always helped me personally to keep from overspending. Once Christmas is over and the e-fund is repaid you could just put that towards the car or split it to save some for regular expenses like gifts, clothing, eating out, etc. that are unaccounted for.
Also, just looking at the numbers where is the extra $1850 going a month? I would start tracking that, that's a good chunk of money that isn't accounted for in the numbers here. (Unless the $9050 figure is your gross pay versus net pay after 401K, taxes, etc.). It may help with overspending if you earmark that for a specific category.
Just as a recommendation and what I've found has worked for me in the past - I would cut up the credit card(s). I have the same problem that as long as I have a credit card I will spend more money, so I know for myself to be successful at debt payoff and money management I cannot have a credit card. You have a good sized e-fund so you shouldn't need the credit card for an emergency.
But I would actually take $11k from the efund and pay off both the credit card and the car. Then cut up the credit card and never have one ever again. Since you stated that you're afraid you'll use the card again and rack up a balance when Christmas comes, then don't allow yourself the opportunity to even have that as an option. If the card/credit isn't there, then you won't use it to fund Christmas, which isn't a need.
Then I would use that extra $1,698.08 of found money that's now in your budget, to cash flow Christmas, then re-build the emergency fund.
Then your expenses would be $5,885.08 each month. Leaving you with $3,164.92 to play with each month.
Since you said that you are always feeling like you're trying to dig out, then maybe your budget needs to be revamped. Are you missing things? What about clothing, insurance, entertainment, etc?
If some of those are annual expenses then maybe you will want to start a sinking fund to put into each month so when Christmas comes you aren't scrambling and tempted to use a credit card to pay for it.
Another recommendation, for us, our budget is never the same 2 months in a row. There's always something. A birthday dinner out, gifts for a couple weddings, going out for an anniversary dinner, the pumpkin patch, a weekend away visiting family, etc. So we have to do a new budget every month. Obviously the basics are the same or similar, but everything else fluctuates. We plan according to what is on our schedule. If we get done doing the budget and we're in the negative, then we look through and see what we can cut for that month so that our budget balances.
I also go in and reconcile our categories as we go through the month. I use the app Everydollar and use a cash envelope for groceries since that's where I always go over.
TTC since 1/13 DX:PCOS 5/13 (long, anovulatory cycles)
Clomid 50mg 9/13 = BFP! EDD 6/7/14 M/C 5w6d Found 11/4/13
1/14 PCOS / Gluten Free Diet to hopefully regulate my system.
Chemical Pregnancy 03/14
Surprise BFP 6/14, Beta #1: 126 Beta #2: 340 Stick baby, stick! EDD 2/17/15
Riley Elaine born 2/16/15
TTC 2.0 6/15
Chemical Pregnancy 9/15
Chemical Pregnancy 6/16
BFP 9/16 EDD 6/3/17
Beta #1: 145 Beta #2: 376 Beta #3: 2,225 Beta #4: 4,548
www.5yearstonever.blogspot.com
Also set a Christmas budget and start shopping now so you can spread it out. I honestly have come to hate holiday presents - I spend half the month of December away from my family so I can shop for them. Seems backwards to me.
I guess we've always sorta had the savings so it felt like we were doing good. Plus, we don't own a home yet so we'd expect to use some of that for down payment/closing costs/etc when the time comes. But we're still 2+ years away from buying a home. Hubby has 6 years left in the Coast Guard. But I do agree that we may need to pay off all those debts with our savings, cut up cards and start using a cash system.
With your husband being in the military, I'd assume that means his income/job security is pretty reliable, right? So, I also agree with the others that you could use some of your E-fund to pay off the credit card. The car loan... eh, it's pretty low interest and not a huge payment, I think you could just pay extra every month on it and pay it off over time versus taking out more from your efund to pay that off, especially since you have kids. And, once that credit card is paid off, you have $1500/month to put towards Christmas and rebuild your efund pretty quickly.
Also for your budget, I think you need more spending categories since it's pretty clear you don't know where your money goes. You might benefit by using an app or website to help you track this, at least at first. I use Mint, and I know others use You Need a Budget and some other apps out there.
So our efund is pretty much our entire savings besides our retirement accounts. I just lump it all into efund. So do you guys have separate non-efunds for things like down payments and such? We also put money away monthly into the kids savings accounts (not a ton).
Since you have some time before you're going to try and buy a house, I would take this opportunity to get aggressive with savings.
I'm pro-Dave Ramsey's principals, but he has a really good way of keeping people motivated and set on their goals in a step by step process. I'd pick up his book Total Money Makeover if I were you and let it help you get a different thought process on money.
The biggest difference is going to be giving every dollar that comes into your account, a name. What will it be spend on? Will it be saved? If so, what is that savings for?
It sounds like the savings goal is so far out that you're losing motivation to focus on 1 thing at a time and give focused attention toward it.
TTC since 1/13 DX:PCOS 5/13 (long, anovulatory cycles)
Clomid 50mg 9/13 = BFP! EDD 6/7/14 M/C 5w6d Found 11/4/13
1/14 PCOS / Gluten Free Diet to hopefully regulate my system.
Chemical Pregnancy 03/14
Surprise BFP 6/14, Beta #1: 126 Beta #2: 340 Stick baby, stick! EDD 2/17/15
Riley Elaine born 2/16/15
TTC 2.0 6/15
Chemical Pregnancy 9/15
Chemical Pregnancy 6/16
BFP 9/16 EDD 6/3/17
Beta #1: 145 Beta #2: 376 Beta #3: 2,225 Beta #4: 4,548
www.5yearstonever.blogspot.com
(1) Irregular expenses. This includes savings for expected annual bills (like car insurance) as well as home and car repairs (I don't consider the water heating blowing an emergency - if you have things you know they will break so that needs to be accounted for). This is also where we save up for big projects and vacations. I know many people break these down even more, but we're lazy.
(2) Emergency Fund. The world needs to basically end before we touch this money. Life or death situations. We have only used it once thankfully, but it was a whopper! I can't tell you how thankful we were to have it - a bad situation would have been much worse if we were stressing about how to pay for it.
(3) Taxable investment account. This is where we stash our extra long-term savings. I like to keep it simple and invest primarily in index funds (we have one mutual fund we bought when we first started, but it sucks so I'm just riding it out - all new money goes to the index funds). We'll probably use some of this on our one-day kitchen renovation. Or maybe a once in a lifetime trip. Or college if we have kids. Basically it's a rainy day fund that earns more than just the basic emergency fund.
ANYWAY, I get the feeling of needing to maintain a large savings. Our e-fund right now is technically 6-months of expenses, but the number it's at makes my H and I nervous so we're working on saving up another 6 months of expenses so we have an entire year put away. Some people are comfortable with $1,000 in savings, others need to see a bigger number and that's ok.
With that said, I DO think you can take at least the $4k out and get rid of your credit card debt. Then you can start putting all that money you were using to pay off your cc back into savings rather than using it to pay for all that interest.
At the end of each month I total the three to see where we stand with "savings."
Because we have a little bit of risk with H's job I want to have a $20K buffer as our total for efund and to help pay the bills if we go down to one income. This is the amount that gives me peace of mind.
Then we look at long term goals such as take a vacation in 2017 with a budget of $3K and buy a car in 2021 with a budget of $25K. Based on these goals we will let the savings pot grow to $23K and then spend $3K on vacation. Likewise in 2021 the total pot should be $45K so that we have $25K ready to go for the new car.
Now, earlier this year we decided to pay off H's SL. To get rid of that debt we needed to dip into savings by about $5K. I was ok with our balance going below $20K because H has a steady job until at least the end of this year so we should be able to pay it back soon enough and we keep a big enough buffer in savings that we should be able to have that kind of swing when we think it is appropriate.
After that is done I would sit down and take a look at your credit card statements and bank statements and try to find out where your money is going for real (not where you think it is going).
Assuming your income level is after 401(k), taxes and benefits you have plenty of money to work with as long as you have a plan in place.
Everyone is a little different, but I have a budget category for a lot of different "pots" including multiple savings accounts and sinking funds. The important thing is that you take the time to figure out what works for your family.
Our budget areas:
Gas for cars
Groceries/Toiletries/Cleaning Supplies
My Fun Money
DH Fun Money
Entertainment (concert tickets, restaurants, sporting events, movies, etc.)
Church/Charitable Giving
Mortgage/Utilities/Cell Phones
Car Payment
Lawn/Landscaping/Membership Fees (sinking fund)
Clothes (sinking fund)
Home Improvement (sinking fund)
Car Insurance/Car Repair (sinking fund)
General Savings (it's own savings account)
Vacation Fund (it's own savings account)
Christmas/Birthday Presents (it's own savings account)
ROTH (it's own savings account)
All of our sinking fund accounts stay in our main checking account, the savings accounts are funded by auto transfers throughout the month.
We track our spending on the Good Budget App (free for basic account). This tells us how much money we have left in each category at any point in time and the money rolls over from one month to another if we have money remaining. If we go over we transfer money from an envelope with extra money to make up the difference (but this rarely happens anymore now that we are used to the budget).
Our e-fund is in a mutual fund and non-retirement stocks. Easy enough to get to if we really need it but it is creating more wealth for us until we need it.
When we were saving for a DP, we kept that money in a separate account, and we split our monthly savings between DP and e-fund savings. That's the only separate bucket we've ever had. In your case, since you're a couple of years out from buying a home, I would 100% take the cash out of savings and pay your credit card. I'm not debt averse, so if you're uncomfortable paying the auto off, I get that. But with stable jobs, you'll have that $4k paid back to yourselves in no time.
Then I would at least borrow from the emergency fund to pay off the credit card. The interest rate and monthly payment on the car is low enough that it wouldn't really bother me, but you'd be saving enough by paying off the credit card that you could always put extra toward it to pay it off faster. If you choose not to put extra toward the car, you can replace the money you borrowed from the E-fund in less than 3 months (minus the amount that you should budget for Christmas).
There's three months until Christmas, which is plenty of time to make a budget for presents and set aside the money for it, especially if you have the credit card paid off. If you think you'll be tempted to spend beyond your budget, then pay for the gifts in cash or put the money on a prepaid card if you want the convenience of not carrying the cash around.
I personally separate our down-payment fund and emergency fund. Maybe take a look at medical deductibles, and consider the costs of emergencies that might happen that you couldn't realistically cash-flow or plan for. Then take the rest and move it to a separate account for the down-payment.
We have a $28,000 e-fund, which is about 7 months worth of expenses. We own a home and are paying off two vehicles (interest rates are 3.5% and .9%). We are choosing to keep the e-fund because of the home liability wanting to protect that asset in the event of job loss. Otherwise, our e-fund would be much smaller.
Once you have paid off your debt (especially credit card debt), then work on building up a down payment and e-fund.
I'd take the $4k and pay off the credit card. Unless you found the deal of the century in your savings account, there's no way you're making more in interest than way the 10% on the credit card is costing you.
I'd leave the car loan. It's relatively cheap, although, you could accelerate payments with the money you're now not putting toward the credit card and also use that money to put back your efund.
You also need to find the money gap in your budget as well as get a handle on your Christmas spending. Sit down and decide on a budget and stick to it. Decide on exactly what you're going to buy instead of just roaming around the stores and ending up with 10 gifts for aunt Joan.