This isn't debt I should pay off - is it? - Page 2

[LifewithSage]

I agree with the others.  I would pay the car off and then work on rebuilding your EF.  I would also adjust your withholding amounts because there is no good reason to have a tax refund that large.  That's money that you could be socking away in your savings account or using to pay off your car.  What are you planning to do with your refund this year?  Or have you already used it?  If you haven't, then I would put that large refund against the car payment and then pay the rest off with EF.  I would also start whittling away at the student loans.  The less debt the better.   

There is also no way that I would take out more than one mortgage at a time.  If you only have $100-$300 "extra" in a month, then how do you plan on paying for two mortgages?  Also, if you're unable to save that additional $100-$300 on a monthly basis, then this technically isn't "extra".  It's just unallocated.  I would take a hard look at your budget and see where these funds go on a monthly basis and see if you can't tweak your budget to ensure that these funds can go against paying off debt. 

The last thing you want is to get over your head.  It can happen so quickly and without even realizing it.  With some really good planning, your family will be in a very good spot to trade up to a larger home within a few years.

[chely7425]

One note on the taxes... I don't know if this applies to the OP but depending on income vs. exemptions for children it is possible to have no/very little tax liability and still get a sizeable return.

[number572]

On taxes too - make sure you are deducting all that you can.  We went to a tax specialist and were shocked at some of the things that are legal deductions... that we hadn't ever deducted prior to knowing about deductions.  It's worth the $ to go to someone good, at least once, to find out how to deduct and file appropriately, and in your own best interest.  It really is amazing how much $ a good tax specialist can help you recover from taxes taken.

[taubel]

Wow, thanks for more thoughtful responses. DH and I will be giving this all a lot of thought.

Here are some answers to a few questions:

Our 10K EF would only pay for two months if DH lost his main job! I have a part time job and DH has a second job. Those part time jobs are way more secure than his main job, though. Unfortunately.

We both contribute 10% of our salaries to 401(k)s so that is something we could discontinue in an emergency.

The "extra" money we have each month is mostly extra. I anticipate that some (but not all) will go towards potential car repairs, holiday gifts, etc. We use the money from our tax return to fund any home repairs.

If we were to buy another house now (and we probably won't after reading all these posts!), we would use up our cash as a downpayment (and be borrowing from a relative). That's true. But once we sold our house, we would be able to put all that money back. Our agent gave us a range of what our house is likely to sell for. We base all of our calculations on it selling at the very bottom of that range. So worst case, after realtor fees we would have $88K towards another house. (Of course, it's always possible that our house would not sell quickly, but we feel it would at a low price.) For the house we'd buy, 20% down would be $50 to $55K.

We will probably sit tight for another year or two. In which case, I guess we should go ahead and pay off the car!

Thanks again for everyone's help. I'm sure I'll be back on with more questions once I re-read all the posts.

[VisionaryMom]

Originally Posted by ChristyMarie 

If you currently have an extra $300 a month + maybe an extra $300 a month if you pay off the car (which will leave you with no downpayment?), how will you afford two mortgages and the upkeep/insurance on two homes?  I'm not seeing that working.

Okay, I thought maybe I was mis-reading because that's what I'm seeing, too. You have $10,000, which is a fine cushion but isn't enough for a downpayment for a house. You have $100-300 a month right now after bills & (I'm assuming) modest discretionary spending. Even if you paid off the car payment, I don't see how $400-600 a month is enough to float 2 mortgages. It seems like you're walking into a bankruptcy with this plan.

You said first that your current house needs work and second that you'd run into these problems (not enviro-friendly building materials) in any house. Then why are you buying another house? Maybe I'm misunderstanding, but that doesn't make sense to me.
 

[VisionaryMom]

Originally Posted by taubel 
If we were to buy another house now (and we probably won't after reading all these posts!), we would use up our cash as a downpayment (and be borrowing from a relative). That's true. But once we sold our house, we would be able to put all that money back. Our agent gave us a range of what our house is likely to sell for. We base all of our calculations on it selling at the very bottom of that range. So worst case, after realtor fees we would have $88K towards another house. (Of course, it's always possible that our house would not sell quickly, but we feel it would at a low price.) For the house we'd buy, 20% down would be $50 to $55K.

I'm writing this out to see if I'm following all of the numbers correctly. 

Okay...so you're looking to buy a house for around $250,000 assuming the $50K down payment is 20%. You said it would be $75,000 or so more than your current home, which means you bought your current home for $175,000.

You also said you would have $88K to go toward another house when you sell your house. Add in realtor fees, assessment fees, etc., and you're talking somewhere around $95K above your mortgage depending on your area. So, you owe only $80,000 on your current home? ($175,000 purchase price - $95,000 "towards another house") If that's the case, would it be possible to make modifications to that house and continue to pay down the mortgage while building more equity in it? That seems the safer bet to me wrt the house.

[crazyms]

Okay I don't want to be too nosy/pushy but you did ask for opinions and thoughts to help you work this out so....  If the 10K emergency fund would only cover 2 months of expenses that is $5000 a month in bills. I definitely wouldn't be comfortable buying a new house until that budget is wayyy down. You don't need to share your actual monthly budget here if you don't want to I'm just throwing out some thoughts here) I would definitely try to get rid of that $300 mo car note. It may be possible too to find cheaper service providers for some services. I just (for me personally) would not be comfortable buying a more expensive house with that kind of budget. I would also consider what the real issues are with your current home. Is it just too small? Bad area? Needs repairs? If the repairs needed are the only thing wrong with the house I would reconsider doing the repairs as you can and keeping the home. If it is a house then you will be gaining equity with the repairs. I know if you choose to do eco friendly repairs it may cost more than you would recoup but you would still be investing into the equity. At least once repairs are done then they are finished and you know that one thing is fixed now. A new house could still have many issues that need to be replaced. I would put some thought into what is really wrong with the current home and if it's necessary to get another house or if it would be possible to make the current house better for your family over time.

[EmsMom]

Originally Posted by taubel 

Wow, thanks for more thoughtful responses. DH and I will be giving this all a lot of thought.

Here are some answers to a few questions:

Our 10K EF would only pay for two months if DH lost his main job! I have a part time job and DH has a second job. Those part time jobs are way more secure than his main job, though. Unfortunately.

We both contribute 10% of our salaries to 401(k)s so that is something we could discontinue in an emergency.

The "extra" money we have each month is mostly extra. I anticipate that some (but not all) will go towards potential car repairs, holiday gifts, etc. We use the money from our tax return to fund any home repairs.

If we were to buy another house now (and we probably won't after reading all these posts!), we would use up our cash as a downpayment (and be borrowing from a relative). That's true. But once we sold our house, we would be able to put all that money back. Our agent gave us a range of what our house is likely to sell for. We base all of our calculations on it selling at the very bottom of that range. So worst case, after realtor fees we would have $88K towards another house. (Of course, it's always possible that our house would not sell quickly, but we feel it would at a low price.) For the house we'd buy, 20% down would be $50 to $55K.

We will probably sit tight for another year or two. In which case, I guess we should go ahead and pay off the car!

Thanks again for everyone's help. I'm sure I'll be back on with more questions once I re-read all the posts.

In this economic climate, I would absolutely not assume your current house will sell or that it will sell at the expected price.  There are just too many unsold houses floating around.  And an agent has a vested interest in making this deal so I wouldn't believe the realtor about selling.  There is just no harm in waiting a year or two until you are in a more financially stable place.  The peace of mind is worth it, I swear.

[phathui5]

I would not spend the 10k that you have in your emergency fund. Not paying off the car, not a bigger house, nothing. I'd let it sit for if there is an emergency, like if you lose an income and need money to tide you over until one of you finds a new job.

Since you do have the emergency fund there, I would put as much as you can (from your income) towards paying off the car.

[lmonter]

We paid off a 2008 car by spring 2009 (we bought it fall 2007).  It's so, so, so nice to not have a car payment, and since your vehicle is fairly new, unless it's a bad one/lemon, you shouldn't have to worry much about major repairs for a while.  ;)  If your car payment is a few hundred a month, there's money you can just sock back away into your emergency fund after paying off the car.

My concern would be, if I'm understanding you correctly, that you may have two mortgages at the same time.  I know my family/budget sure as heck couldn't handle that.  If we decided to move, we'd sell and rent while looking, have won the lottery, or our house would be entirely paid off and we'd have just the one mortgage on the new place while the old was on the market (if that makes sense).  Hubby worked an entire state away for almost a year, and I can't tell you how many people told us to just buy another house or rent in that high COL city and float two entire households and bills.  Luckily we were not that stupid, the kids and I stayed here while the house was on the market and he rented a single bedroom in a house down there.  When he ended up quitting that job and finding a fabulous one that we didn't even have to move for?  Priceless.  :)  And much easier on our finances.

And if you technically can't afford a bigger house, um, you can't.  Hopes are well and good, but until you have an actual paycheck in your account to pay the bills... yeah.  Sucks when you get laid off with 5 minutes notice.  Ah, good times the last few years.  Sigh.
 

[ilovemygirl]

How big is your current house and how big are you looking to buy? I'm not understanding why you would want to do this. Unless I'm not reading correctly, you are working 3 jobs between the two of you to come out with only 300 extra a month??? That's a lot of work ... a whole lot of work for very little return. Is working that much sustainable in the long run for you and your dh? I'd also assume that you would have no extra time to work anymore to make more income if necessary. With no potential to make more money .. other than taking funds from your retirement I'd be terrified to get into something so costly and unpredictable as floating two mortgages.

I hope I'm making sense ... what I'm trying to say is that if you've already reached the top of your earnings potential per month and it's only leaving you with $300 a month "extra" not only are you financially unprepared to upgrade but you are more than likely not in a great place money-wise even where you are now. I'm not saying that to be mean, it's just how it seems with the info you have given. There are a lot of what if's here that make me nervous ... like your current house being able to sell at all, the new house having unexpected issues and the money taken from relatives. It's wonderful for you that you seem to have a very generous relative but I wouldn't want to count on someone else's financial stability either. What if this relative gets sick or injured and needs those funds? What would you do then? It's sad but people have catastrophes every day. As much as I love my mother or sister or whomever, if I was diagnosed with cancer or my home burned down I wouldn't be able to turn around and lend my savings to them to upgrade their home even if I promised to.

As far as the car goes, if the 10k is your only savings, I wouldn't deplete the EF to pay the car off whether or not you are buying the house. 

[ChristyMarie]

Originally Posted by lmonter .... float two entire households and bills. 

.......
 

This is what most people don't think about when looking at carrying two mortgages.  It is not JUST the mortgage.  It is two bills for:

gas

electric

water

insurance

taxes

upkeep (because things seem to go wrong in an empty house)

Also, depending on the distance you may be paying for a cleaning service and a lawn/snow service at the old house.  Dead bugs multiply in an empty house like crazy.  And lights burn out constantly.  Even empty we had it cleaned every 3 weeks.

We had two houses (NOT two mortgages) for a year while waiting for our old house to sell.  During that time we were still maintaining that house, keeping the lights on, keeping it cooled/heated, paying to have it cleaned, the lawn done then snow removed, etc etc etc.  Plus organizing having someone check on it (us, the realtor and our cleaning lady rotated) and even then we had a theft from the garage.  Just bifold closet doors but, really?  But you can't have an alarm set when the house is being shown.

It was a hassle and we only moved 15 minutes away.  And I'm not sure I'd count on the realtor's bottom dollar figure.  We ended up dropping our house almost 40% to sell it.  There's a lot of homes and the markets and mortgages are getting harder to obtain.  I don't think you can count on anything in regards to sale price and timing right now.

[taubel]

Thanks for more replies. Sorry, I don't want to list all of my finances and personal info on here. So it's hard to give you guys a complete picture of what's going on. Our monthly bills are around 4K/month. That includes everything. Well, everything but the unexpected.

In addition, DH and I each get paid biweekly. But I was only figuring in our income as two pay periods per month, when in fact some months there are three pay periods. So basically I was "forgetting" a month's worth of salary. Or at least I think I was. Can you tell how new I am to budgeting?! It's only been two months. So that will give us a few hundred extra each month if I spread it out through the year  - which gives us $400 to $600 extra a month.

I work part time now (10 to 15 hours a week). I anticipate working double that amount in a few years. I have been with my employer a long time, and my job is secure. So we do have the potential for more income once I can bear not to be home with my kids! :)

It's not that our current house is too small. We're only looking for something slightly larger. We'd even buy a house that was the same size if they layout were a bit different. We like our house and yard, but it will not work for us long term, for many reasons, which are too numerous to get into here. 

I was thinking we'd be able to get a good deal right now on a larger house, since more expensive houses have lost more value than less expensive houses. I also wanted to take advantage of the low interest rates. Of course, those have already crept up so much to not make buying another house so appealing anymore.

Our area is not as depressed as some. Our community is very popular, and most houses do not sit on the market for very long. I do not think our house would be on the market for more than two or three months. But of course I don't know that for sure, and you're all right, that is a BIG risk.

We can and will make the necessary repairs/upgrades to our house. I just wish this money were going into a house we planned to stay in long term!

I am going to keep learning about budgeting and stick to that for now. I'll probably pay off the car loan and bank the $300/month we were spending on that.

Thank you to everyone for your opinions and ideas. And the "meaner," the better! I came here looking for honest advice. That is what is most helpful. 

[crunchy_mommy]

I only skimmed the replies so I'm sorry if I'm repeating things others have said...

It doesn't sound like $10k is a big enough emergency fund considering how much you spend per month. I would work hard on building that up. IMO, the emergency fund should be at least 6mos (ideally a year) of 'necessary expenses' should job loss/short-term disability occur, plus enough to cover major home repairs and/or the cost of a new car -- any major, unexpected expenses (and prepare for the possibility of several of those things happening at once!)

I would try to pay off the car loan, but I wouldn't pay off school loans, if they are federal loans, because the interest is low & it's relatively easy to get deferments or whatever if you hit on hard times.

I would not buy a new house, unless you have other reasons that make it necessary (i.e. if you need to relocate for work or whatever). I would wait 'til you've paid off everything else & have saved up enough to pay most of the difference outright -- so if you want a house that is $75K more, I would save up at least ~$50K to put toward it before buying said house, and then your monthly mortgage shouldn't change drastically.

I guess I would take a much more cautious approach overall, because you never know what life will throw at you. DH's car (was only 8-9 years old) suddenly went up in flames one day & was totaled. Completely unexpected expense, and we were very glad to have enough money saved to buy a (used) new car without getting a loan. TWO WEEKS LATER, he got laid off, again another completely unexpected thing. It takes a while in our state for unemployment benefits to come through (and they are less than he was making, obviously). In the past several months we have also had fair-sized medical bills ($800 echocardiogram, for ex!), car repairs (on the car that's now totaled), etc. Things just keep happening all in a short time span, and I am very grateful we were financially prepared, with a savings fund of about a year's worth of expenses, which we tapped into for the new car as well as to tide us over while we're waiting for UI. I am disappointed that our savings are getting cut into, because I had been planning to quit my job in a couple months and that was our cushion -- so now I will likely have to continue this job at least until our savings is rebuilt, once DH finds another job. I guess I'm just trying to say, things don't always go as we plan or expect, so I'm not saying run around paranoid & scrounge every last cent, but just don't put yourself in a financial position that could wind you up in bankruptcy or something if disaster should strike. IMO, you SHOULD have a couple of hundred bucks leftover every month, because that means you are living well within your means.

[redvlagrl]

Originally Posted by taubel 

In addition, DH and I each get paid biweekly. But I was only figuring in our income as two pay periods per month, when in fact some months there are three pay periods. So basically I was "forgetting" a month's worth of salary. Or at least I think I was. Can you tell how new I am to budgeting?! It's only been two months. So that will give us a few hundred extra each month if I spread it out through the year  - which gives us $400 to $600 extra a month.

But *do* you spread it throughout the year or do you end up spending it on some expensive items that month? If you have a month to month mentality and spending habits then it is all well and good to think you'll allocate it throughout the year, but in reality it is difficult.

Also, if you bought a new house I presume you'd still want to make some upgrades to make it more eco friendly etc. If you spent $95k (the difference between the old and new house cost) plus some extra that you'd have to spend on the new one to bring it up to you standards, say $10k...a total of $101k, on your current house, would it fix your problems with it? That would be enough for an extension, a kitchen and bathroom reno.
 

[treeoflife3]

Honestly, I think you and your husband need to sit down and SERIOUSLY go over your finances to be sure you are saving every penny you can and not spending frivolously.  It does NOT sound like buying a house anytime soon would be in your best interest so you need to be sure you save wherever you can.  I'd also really consider whether it would be worth it to move into a house that has no green upgrades when that is clearly important to you vs staying in a house with some upgrades and trying to make it work.  Really consider whether you NEED a different house or if you just need to be more creative with what you have.  Are you buying a new place for NEEDS... or are they just wants?  Are you sure you are seeing the full potential of your current house?

I also agree that if you have 4k in expenses and only have about 100-300 a month extra then 10k in EF is absolutely not enough.  Buying a more expensive house with more expensive upkeep will hit you HARD in 2 years when you buy and you aren't more prepared.  Even if you sell off the car and build that 10k back up in the next two years, you'll still only have 10k when your 4k a month expenses are going to go up.  600 extra a month is nice but you need to be beyond certain that it will be MORE than enough.

Jobs are only secure until something happens.  Two of your jobs might be secure now, but you can't count on them long term if you are going to barely be making it each month.

[sunnysandiegan]

One thing I would do is pay off the car, BUT I would NOT use your EF to do it. You need that cash for an emergency, especially since it is only 2+ months worth of expenses. I would go over the budget several more times and cut things wherever possible and pay extra on the car every month until it was paid off. Call companies and negotiate better rates; let some services go; DIY some things; etc.

Your "extra" 100-300 per month is really unallocated expenses. Great for you to recognize this! (In your very first post you stated what this money was used for.) We leave that in our checking account each month (interest-bearing) to cover those expenses when they do come up. Once the checking account is consistently $500-1000 more than we need to sustain our monthly expenses, I move the excess to the savings account linked to the checking account (free automatic transfer if checking account were to go negative). Other folks set up special short-term savings accounts for these types of expenses.

Your tax refund is an interest-free loan to the government. Depending on what is creating that $6,000 refund, you may wish to alter your tax withholdings to earn interest on the money and have more control over when you use it. What if you need/want to make a home improvement in November? We have a short-term savings account and use it one year for a vacation and the next year for home improvements. We contribute monthly and adjust the amount based on our plans. We had a major flood on May 1 one year. That was our year to celebrate our ten-year wedding anniversary (mid-June) with our first ever family vacation (those living in our house) NOT visiting other family members. When all was said and done, the insurance payout was greater than all our repairs. However, we had to pay for several large expenses that very day (May 1) and didn't get reimbursed until early-mid June....and we ended up doing a lot of repairs/upgrades ourselves in order to keep the costs lower than the payout. We didn't go on that vacation (didn't lose any money by not going) and used our short-term savings to cover immediate home expenses instead. We continued our savings plan and went on the vacation the following year. If we didn't have the money available, life would have been even harder than a major flood already causes.

Keep in mind, too, when people speak about an emergency fund, they are typically talking about how many month's worth of ESSENTIAL expenses. How would the picture change if there was no main income? My DH drives 55 miles per day four days a week to commute to his job (works at home one day). Our fuel costs would drop substantially if he were unemployed. We currently allocate $100 per month for dining out each month. That would drop to $20 (in the event of a business lunch or something related to job-hunting). These are just examples of expenses that would change.There is nothing wrong with overestimating. As you get more skilled at budgeting (allocating spending/savings), however, you may find it more helpful to plan with specifics.

[taubel]

We are going to wait a while on the house. I may pay down 5K on the car, and the pay the rest of within the next few months. I am afraid to do anything drastic right now!

DH and I are actually very frugal people. We never eat out, aren't involved in any expensive activities, don't have cable, etc. Of course, we do own a home, do have a new car, do live in an excellent school district, and do eat lots of organic foods. So that is why our expenses are so high. We always have "enough" money; we just are not very good with budgeting and knowing what to do with our money. That is why I'm spending so much time learning on this board!

As far as "greening" a house, this is not our intention. We try never to repair or remodel anything unless absolutely necessary. It's just that when we HAVE to put in a new floor, for example, we're going to want to put down natural linoleum instead on vinyl (even though vinyl is far less expensive). This is why we are spending a fortune on repairs and upgrades to our current house and won't get that money back when we sell.

It would be difficult for us to remain in our home long term with the current layout and some other factors. We do love our lot (we have woods and trails behind us) and our neighborhood, though. We have had numerous contractors and even an architect come to our home to discuss possible additions. Everyone tells us to fix our house up and move. Our house is not easy to add on to, and it will be very expensive (like $65K for one room, 90K for a two-storey addition, not including any bathroom or kitchen renovations). We can only add on to the rear of our house, so any upgrade would not increase the curb appeal of our home. Also, our lot (though large) goes back at a slant, so we cannot add on directly behind the house. We'd have to go in about 10 feet or build at an angle, which would also increase the expense.

Thanks again for everyone's help. I have learned a lot!

[crunchy_mommy]

If you are going to be paying extra on repairs/renovations anyway, why not try to find options that WILL increase your home's value, as well as be 'green'? Especially if you almost definitely plan on moving... So around here, for ex., something like bamboo flooring would be a much better selling point than linoleum (natural or not).

[NewBeginnings1]

In addition, consider changing your tax withholding. On a monthly basis you are loaning the government $420 INTEREST FREE. So lets say that you changed your withholdings to allow for a 1k return ( that way you have a little cushion and don't end up owing). That's an additional $333/month that you could be using to pay down debt or invest.