UPDATE! Halt retirement to pay off debt- more complicated now

[ariahsmum]

Greetings, I am new to this forum, but have been reading for weeks now and am completely inspired and ready to begin anew with our money situation.  I've already cut our food budget from 1,000 to 650 a month! I'm feeling super proud and hopeful.  DH is a school teacher in VT (read: $35K gross) and I am SAHM who earns an extra, say, 10K annually. DH works a bit extra also, but we usually cover car repairs and fuel with that.  Suffice it to say, things are tight around here.  I'm trying to figure out where to put our money... how to attack this budget and debt.

I'm open to any sort of discussion here cause I can really use any and all help, but specifically I am curious what you all think of Dave Ramsey's advise to halt retirement contributions while paying down debt?  We only contribute a *very small* amount per paycheck for dh, and I have no retirement at all.  We put the small amount in, b/c we are worried that if we don't, we will never get anywhere.

We have 21K borrowed in a HELOC for our adoption. It is at 2.7% APR variable.  We also have a CC balance of 5K at 0% for one year.  We own our vehicles, but do also have a educational loan.  We recently got sucked into moving to a really nice house.  We still own our old house, but rent it out to cover the mortgage plus a tiny bit more.  This new house is over our heads, but owned by my folks who intend to sell it to us when we sell the other home.  For this house, we agree to pay a minimum of $600 a month.  The expenses are more than that, and borrowed from a HELOC in their names.  The interest and amounts accru for us but... well... technically, this is my last obligation.  My folks are the bank, but a very flexible one.  Still scary.  We also only have an EF (savings) of 1K.  And we dig into it for expenses not within our budget like car registrations, repairs, garden supplies, etc.  I have NO CLUE how to proceed with saving up EF.  To top it all off, family car #2 is about... to.... fall... apart....for good.

So my plan is to pay everything I can scrape together to my HELOC.  Pay minimums to the CC until it is due, then pay it off with the HELOC. (I'm just trying to knock down the interest first, not paying off less debt all together, just putting it all in the pricier loan at the moment).  I don;t have a clue what I'll do after that, but I guess I have time before that.

In the meantime, do I really cease the contributions to the retirement and put that toward the loan?  I'm guessing I could easily replace the money after the loan is paid since it will free up a ton of cash.  But I have to have a strong argument for dh, as he is NOT GONNA LIKE IT.

Thoughts?  Advise?  Please... fix me up ladies!  I'm super excited to see this money we owe go down.

Thanks!

[CarrieMF]

If you stop paying into retirement you will lose out on the benefit of compound interest on the money you would be putting in.  If  the amount is really small how much faster would you really be paying down the debt?

[VisionaryMom]

Unless the reduction will make a huge difference in 6 months - 1 year, I wouldn't do it. That is one of the worst pieces of DR advice, in my opinion, especially for people who are likely to remain roughly where they are income-wise. You're not going to come into a huge amount of money that you can use to make up retirement funds, so don't lose out on that money now.

[ariahsmum]

Thanks for the reality check.  I was a bit puzzled by the advice on DR to do this, so I'm glad I stopped and double checked.

I think it is important to keep the small contributions.  It would not make a significant dent anyway to the HELOC, and this way at least we feel like we are saving money pretax that would otherwise likely be spent elsewhere.  

I found out today that my 2011 Tax return should be sizable (they changed the adoption tax credit), and if that is the case I should be left with only about 4K in the HELOC by July.  This would be amazing!

Do I try to build savings while I do this?  Or only after? 

[JesKace]

We finally started our 401K this year.  I kept putting it off because I wanted to have our credit cards paid off before we had anymore money coming out of DH's check.  Now I'm kicking myself that we didn't do it sooner.. All that wasted time of being able to have tax free money going for retirement.  DH's company matches a certain percentage of what he puts aside, so even putting a little aside makes a big difference.. If we had started years ago we could have had so much more in there by now... I don't see us having our credit card debt paid off anytime in the next 2 years, so having that little extra in DH's paycheck wasn't even making a difference anyways.  If you could halt retirement and have the debt paid off with the retirement contribution money in a short time like the previous poster said (6mo-1yr) then maybe it'd be worth it.

[lucky_mia]

I was wondering about that DR advice. I'm down to just 5 percent but is pretax and matched so it seems foolish to stop contributing.

[sarafi]

Originally Posted by ariahsmum 

Greetings, I am new to this forum, but have been reading for weeks now and am completely inspired and ready to begin anew with our money situation.  I've already cut our food budget from 1,000 to 650 a month! I'm feeling super proud and hopeful.  DH is a school teacher in VT (read: $35K gross) and I am SAHM who earns an extra, say, 10K annually. DH works a bit extra also, but we usually cover car repairs and fuel with that.  Suffice it to say, things are tight around here.  I'm trying to figure out where to put our money... how to attack this budget and debt.

We have 21K borrowed in a HELOC for our adoption. It is at 2.7% APR variable.  We also have a CC balance of 5K at 0% for one year.  We own our vehicles, but do also have a educational loan.  We recently got sucked into moving to a really nice house.  We still own our old house, but rent it out to cover the mortgage plus a tiny bit more.  This new house is over our heads, but owned by my folks who intend to sell it to us when we sell the other home.  For this house, we agree to pay a minimum of $600 a month.  The expenses are more than that, and borrowed from a HELOC in their names.  The interest and amounts accru for us but... well... technically, this is my last obligation.  My folks are the bank, but a very flexible one.  Still scary.  We also only have an EF (savings) of 1K.  And we dig into it for expenses not within our budget like car registrations, repairs, garden supplies, etc.  I have NO CLUE how to proceed with saving up EF.  To top it all off, family car #2 is about... to.... fall... apart....for good.

So my plan is to pay everything I can scrape together to my HELOC.  Pay minimums to the CC until it is due, then pay it off with the HELOC. (I'm just trying to knock down the interest first, not paying off less debt all together, just putting it all in the pricier loan at the moment).  I don;t have a clue what I'll do after that, but I guess I have time before that.

First of all--Awesome job on the food budget! If you can keep that up you just "found" an extra $4,200/ year!

I am replying b/c I was very much in your shoes a few years ago with the low-income teacher husband and small time income from myself. This is one area I really disagree with D.R.'s across the board cut retirement policy (I do believe he stipulates if you can pay all your debt in two years to cut retirement to do so but don't have the book with me now.) Of course that makes sense if you owe $30,000+ on high interest CC's plus a ton of other debt--in that case you need to do just about anything to pay off the debt!

With your debt load and interest rates, I don't see the need to cut retirement at all.

When I was in roughly the same spot, $30,000 in various student loans at a really low interest rates of 2.75%-3.5% we put around 5% into retirement and could barely make the minimums working with our income--and we had almost no "extra" expenses. This was before I even knew about DR, but I do have a finance degree there was no way I was not going to fund retirement.

We chose to move overseas to basically double our income and pay things off faster. While paying off the loans and funding another $10,000 degree and financing a $5000 car we worked up to 15% pre-tax and 10% in Roths per year. We paid off the loans in two years so I think should have technically stopped retirement, but that made no sense on paper. If we hadn't increased our income I would have had to up my work load and my husband most definitely would have started to work summers to start paying our debt back.

DR works with emotional motivators though and the sense of losing retirement opportunities is a powerful way to motivate many people. It doesn't sound like you need that kind of motivation though. 

IMHO, I would just pay off the CC first even though it is at 0% interest now. CC's are the lest flexible and most unknown of your debts and I would want them GONE! I am the kind of person who gets overwhelmed with a bunch of different plans and have found that DR's advice to KISS by paying off the smallest loan and just to be done with it works really well for me and I got things paid off sooo much faster that way.

Anyway, hope that helps!

For funding the EF or just saving in general, I really like the book "The Millionaire Next Door". None of these people made a ton of money, they just made choices that for some reason our generation don't naturally think of. Very motivating and simple, the premise is to pay your self first--then make your budget for the "other stuff" we all need/use. I do an (OK I am up to six now ) automatic deductions from our paycheck for various things. Two we use regularly but the other four are in hard to get at accounts and they can build up quickly. I only adjust our savings slowly and don't even miss the money as it is not really ever seen as something that can be spent. They all have labels and match goals my husband and I have made together. The one I just started is getting $10/month and is for something we will need in about three years. I will up this amount every few months until what I am putting in will fund what I need in the future.

[ariahsmum]

Thanks for all of your responses.  Sarafi, I am thrilled with the book rec and other info.

I came back here today b/c in the course of figuring out my financial stuff, I found a skeleton in the closet.  A BIG one:

Student loans (for dh 15 years ago!) are $14K @ 3.65% fixed.  I'm floored to say the least... I honestly had NO idea they were that high. I'm just sooo disappointed.  I thought I had a plan to get out from under.  Last week I learned that I was getting all the adoption money in a refund this year and was going to put to the HELOC.  I just got a second job that earns $4k until July so I could dump that to the HELOC.  I'm struggling BIG TIME with the job... in way over my head and feel like I'm breaking with homeschooling and being a housewife plus all these other jobs... and it is HARD!!!  I've had DH and SIL tell me I need to just stop working and pay off the loans LATER when dd and ds are more independent and maybe even in college and I "have more money" then?  Frell, I just need support, not to keep carrying around a ton of debt for lifetime.  Just think what we would have saved if we paid the student loan off before!

Anyway, I'm turning here for support, please help- it is the only place I have to get my head straight and get support.

So now I have:

HELOC $21K- 2.75%

SL $14K- 3.65 %

CC $5K - 0% one year

Savings account $1K

Our grocery budget went WAY down, right?  But I am worried I have done it in part by eating down stores of food.  They are getting really low and now I'm worried if I can stick to the $600/mnth.  

I have this refund (cross your fingers) and the $4K from working that is kept out of the budget entirely.  So do I wipe out the school loan and put that $150 minimum payment a month into my HELOC payments afterward?  It looks like it is difficult to ever touch the principal on that loan otherwise.  It also would be good just to have it GONE after 15 years.  And one less thing to pay. It also has the highest interest rate, so would presumably save me money.

OTOH, I know that the HELOC is scary as they could come after my house if something happened (never would be an issue with default on school loans) but it is sooo easy to just keep deferring the school loans as they are so "risk free".

What to do....?  Thoughts?  Support?  And how much can one work while they have little kids homeschooling?  Right now I'm at about 15 hours a week of work.  Do you think that is doable?  I guess that is another thread.  

I just sooo want to figure this out.

[VisionaryMom]

What is the minimum payment your husband can get on the loans? 

Does he - or could he - work in a field that has a forgiveness clause for student loans? If so, that may be one way to get some of them knocked out.

I would continue with the plan you have re: HELOC and cc debt and just make the minimum on the student loans right now until you can determine what you want to do going forward.

I will say, though, that I think it will be *tough* to expect to work, do all domestic work, and homeschool for a long period of time. 

[GirlBoyGirl]

Are DH's student loans on deferment or something? I'm just not sure how you didn't know they were there. But most I am just wondering if you can put them on deferment now or continue with the deferment. Are they federal loans or private? Federal loans are much more willing to work with you as far as putting them on deferment or forbearance or working out a better payment plan that suits your income. If you can, I would put them on deferment so that you can tackle the CC debt first and then the HELOC. I would pay just the minimum on the HELOC and focus on the CC first (if it were me) because the interest after the one year is going to sky rocket and that could really hurt your efforts to get rid of this debt. Then do the HELOC and then the student loans. SLs do not look as bad on your credit so I wouldn't mind that hanging out for awhile. But if you can't get a forbearance or deferment and you pay late, federal loans cannot give you late fees but they will report negatively to your credit report.

Lastly, I think it is doable to work and HS. I'm sorry if I missed it, but how many hours do you work and when? If you did nights and weekends or even afternoons to evenings and weekends if should be fine.

Check out liveops.com for a WAH position, they usually hire a lot.

[mtm]

DRs advice is to halt retirement spending so that you can get a good snowball going and get some fast wins on your debt. I couldn't get my dh to agree to it so we didn't do it but I would have done it as I think a lot of DRs advice is about the psychological victories. His thinking is not the stuff that necessarily makes the most sense math wise but more about what motivates people. 

I would put away a small bit of money in an emergency fund (I like 2000 in mine so maybe add 1000?) and then I would start paying off your cc with the rest of your tax return. I'm guessing your 0 per cent cc jumps to something crazy once your time is up so if that would be my priority one. I'd defer the student loans for a bit longer to get the cc done and a start on the heloc but I have to admit I don't know about US student loans and how they accrue interest. 

[EmsMom]

I also recommend repaying that credit card first.  That rate could jump up to something like 26% in a heartbeat if a payment is just a day late or something.  Get rid of it and then put the payment you were making towards it to the HELOC.  I would add around $1000 to an emergency fund before hitting the debt, though.  HOw many people are you feeding on that food budget?  It takes a bit of time, but new shopping techniques and cooking skills can be very helpful with cutting food budgets.  I agree with pp on keeping (or starting) the student loan into deferment while you pay off the credit card loan and get started on the HELOC if possible.  And at those interest rates I wouldn't cut the retirement savings either. 

[crazyms]

If the amount to retirement is really small then I wouldn't mess with it. I agree with the pps that if it won't make a real difference in 6mos-1 year than it isn't worth messing with it. 

[ariahsmum]

I'm finally getting back here to respond to all the questions, etc.  First, to be clear... I didn't just find out about the school loans.  I knew about them, I just had zero clue what the principal was, and what the total was now, including the interest rate.  I was just under the impression they were of very insignificant interest rates, and the balance was WAY lower.  We had some major crises in our life that meant dh deferred the loan.  He worked on it with the company, and I was not paying attention to the details at the time.  Since that time, I have tried multiple times to gain access to the info, but dh never filed out the form to allow me access, so I've not had the update until now.  Out of site, out of mind, I guess.

The grocery budget feeds 4.  I'll admit this week we've all gone hungry.  I live in the northeast and we eat organic, so I'm not at all convinced we will be able to sustain a $650/mnth budget.  We already eat on the cheap by cooking all our own food, eating tons of beans and rice, etc.  We drink only farm milk and water... I really don't think I can keep it consistently below $700 and even that is REALLy tight.

I'm surprised everyone feels I should pay the CC first.  To me, I am floated 0% for one year, and planned to pay this off in FULL prior to the year end.  I thought that would save money as I could apply the payments to the HELOC at 2.75%.  Still, I trust you ladies and am giving it thought since you all strongly agreed with paying the CC.

The student loan payment is at $150/month right now, it is not in deferment.  If I killed it with the tax return, I could dump that into the HELOC along with what I am paying now... what are the reasons to pay the HELOC now rather than the SL?  And are you suggesting I defer the loan again to pay down the HELOC faster, then go after the SL?

Thanks a million!

[TiredX2]

Originally Posted by ariahsmum 

I'm surprised everyone feels I should pay the CC first.  To me, I am floated 0% for one year, and planned to pay this off in FULL prior to the year end.  I thought that would save money as I could apply the payments to the HELOC at 2.75%.  Still, I trust you ladies and am giving it thought since you all strongly agreed with paying the CC.

Do you plan to pay it off by the end of the year in that you are sending $500 a month to it right now so it will be paid off?  Or do you mean that you hope to come up with the total by the end of the year?  If it is the first, then financially you are right that paying it off doesn't make a lot of sense.  You *could* be late on a payment--- but would you be?  If there is even a 1% chance, then I would pay that off first.  If there is virtually no chance, then I would pay off higher interest first.

Since you will have a large cash influx, I would encourage your husband to contact his student loan holder (if private) and see if they would take a lesser amount for immediate payoff.  Make sure they would mark it "paid in full" though!  If they would do that, I would pay that debt completely off.

It sounds like you are accruing debt to your in-laws (or their HELOC, whichever).  What interest rate is that at?  If it is higher than that on yours OR the student loan, that should be paid off first.  From a comfort stand-point, I would want to start paying the in-laws the amount that would not be making that grow asap.

Can you post a current budget?  Specifically, how much you are paying to each debt per month?  Have you looked into any govt assistance programs you may be eligible for (WIC comes to mind, but depending on your exact income, you might be over the limits)? 

[sarafi]

Originally Posted by TiredX2 

Originally Posted by ariahsmum 

I'm surprised everyone feels I should pay the CC first.  To me, I am floated 0% for one year, and planned to pay this off in FULL prior to the year end.  I thought that would save money as I could apply the payments to the HELOC at 2.75%.  Still, I trust you ladies and am giving it thought since you all strongly agreed with paying the CC.

Do you plan to pay it off by the end of the year in that you are sending $500 a month to it right now so it will be paid off?  Or do you mean that you hope to come up with the total by the end of the year?  If it is the first, then financially you are right that paying it off doesn't make a lot of sense.  You *could* be late on a payment--- but would you be?  If there is even a 1% chance, then I would pay that off first.  If there is virtually no chance, then I would pay off higher interest first.

Can you post a current budget?  Specifically, how much you are paying to each debt per month?  Have you looked into any govt assistance programs you may be eligible for (WIC comes to mind, but depending on your exact income, you might be over the limits)? 

OK, so I have actually done the whole 0% interest, transfer balances, etc. thing when I was younger and that is why I whole-heartedly agree with TiredX2!!! If you do it, you need to pay early and watch like a hawk that you didn't mess up ANYTHING (computer glitch didn't transfer funds properly, you pay on a federal holiday so they don't credit the payment on time, etc.).

CC companies are not really excited to give you free money, and most of these things are designed so that you are likely to fail and owe all the back interest that you thought you were saving. Not to mention these agreements in the really fine print can be canceled and then you could be stuck paying at a higher rate. If you are fine with the risk, go ahead with your plan.

I think most of us are in agreement with the idea of paying the HELOC next, b/c it is a variable rate and you CAN put your student loans into forbearance again in you need to. 

If we look at just the numbers, your plan works well, but when you factor in the differing risks in the type of debt you are holding the interest rates don't seem quite as important.

[MacroMama]

I actually have different info and recommendations.

Student loans can never be dismissed if you declare bankruptcy so that would be what I would pay off first.

Then the HELOC and  the credit cards which can be dismissed in bankruptcy if you ever get to that state (hope not!) so I would pay these off first. I would do the HELOC second since your house is tied into that and then the credit card. 

Good luck!

[ariahsmum]

Sorry for the delay in responding. I really do want support and help, but I kinda dropped off the earth for a bit.  I got super excited to be saving money- found a pair of Uggs and a great lined wool dress coat at Sal's Boutique (Salvation Army) for $10 total and a whole bunch of things for my ever growing dd for super cheap.  Committed to nothing new for a year, was doing great on the budget, but then I notice that after I do great, I get a case of the "I wannits" and right now I'm eyeing a pretty new Boden Jersey Dress and Garnet Hill bathing suit which would cost me a freaking month's student loan payment if I do it.  I feel like a yo-yo!

Anyway,

I can post a budget, as I do have one, but not today, lol.  It will take some time, but I'd be happy to if you think it would help.

The rental agreement for our house is complicated.  It is not my in-laws, it is my own parents we owe the money to.  They bought the house on short sale as we did not have the cash.  The agreement was that we would pay them expenses (loan/interest/taxes/insurance) and when we sell our other home, we will then get a real mortgage for this property and the deed will be then in our names.  Right now, we don't cover the expenses as agreed, however.  We pay $600 a month which is a deal and agreeable as a gift from my folks so we can pay down our own HELOC first before paying them.  My folks make the added payment to their HELOC which paid for this house, and so essentially, as far as I can figure it, we are getting ahead since they are making up the difference and then not charging us the interest.  In other words, if I paid the full loan amount monthly it would include the 3%interest. Instead, I pay only about half of the payment, they make up the difference and in the end I only owe my folks what they covered me for.  So they pay down the interest for me, and don't charge me interest on the amount I accrue in debt with them. Ugh.  I don't have a clue how to make this understandable! Sorry...

I think right now, I'm going to first get 2K in my emergency fund.  I've got $600 to go though.  I'm going to have this large tax return coming soon and I still don't know what to do with it.  We had a HUGE credit card scare today (we thought we missed the payment, but actually didn't- we had just filed the bill forever ago as we had paid early) so I get what you mean about paying it off so as not to make a mistake.  I thought I was about to pee my pants when I thought we had messed up.

Jury is still out on what to pay first- the HELOC or the student loan.  Everyone brings up good and valid points.  I can see the David Ramsey thing where I just want the smaller balance ($14K in the student loan) wiped out.  That would be one less things to think about and a extra &$150 a month toward the HELOC.

I think I did decide to commit to an extra mortgage payment a year regardless.  I think the amount we pay in principal per year with all our regular payments equals what we would pay in with one extra annual payment.  So we essentially double our annual amount to principal.  I get excited just thinking about it, so I think I will do it... it is only $50 a month and we do have it in our budget.  The mortgage is at 5% so I do feel it will be money well spent- thoughts?

Gotta go plan the Disney Trip!  I know I know... but it is paid for and I've agreed to not touch the budget for all my incidentals!

Thanks for your continued thoughts and responses.  It helps so much!

[ariahsmum]

Replying to my own post since no one else did, lol.  Pretty sad, eh?

I've now progressed to paying off the HELOC.  Reason being that if for some reason dh and I split, I'm thinking that the Educational Loan is *his*.  The HELOC is ours.  I don't really want to pay off something of his first.  I have no clue if it would pan out like this in reality.. that the school loan would clearly be his responsibility if we split, but I feel better about it anyway.  At the very least I wouldn't be left with a huge home equity balance.

Can you tell it's not so harmonious over here?  Sigh...

[MacroMama]

Originally Posted by ariahsmum 

Replying to my own post since no one else did, lol.  Pretty sad, eh?

I've now progressed to paying off the HELOC.  Reason being that if for some reason dh and I split, I'm thinking that the Educational Loan is *his*.  The HELOC is ours.  I don't really want to pay off something of his first.  I have no clue if it would pan out like this in reality.. that the school loan would clearly be his responsibility if we split, but I feel better about it anyway.  At the very least I wouldn't be left with a huge home equity balance.

Can you tell it's not so harmonious over here?  Sigh...

Sorry things aren't so harmonious over there. With that in mind, I agree with your decision.

Good luck with everything!

Hugs!