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Originally Posted by scarglitter
Hi NoSoup,
Thanks for offering your advice.  Would you mind assessing my current situation, and offering any advice regarding getting out of debt?
I am 22 years old, my annual income is roughly $30,000. I have almost no savings, and am contributing a matched 5% of pretax income to my company's 401K plan.
1) Student loans: 18,000 in consolidated student loans at 4.75% fixed interest.
2) Auto loan: $19,500 at 5% interest over 60 months (about 54 months remaining @ $367.30/mnth)
3) Health financing: Due to poor dental health, I am financing braces ($6300 at 10% interest over 60 months). I also need to finance extractions/other dental care, probably charging up to $1000 on my one major credit card (special 4.5% offer for the life of the debt).
4) Credit cards: I have one major credit card ($2300 limit, $700 used, 15% interest), 3 retail store credit cards ($3000 total, no balance on any). I just requested an increase on the major credit card so that my debt ratio will not be too high with the extraction/dental maintenance debt.
5) Miscellaneous expenses: Gym membership ($35), cell phone ($55). Car insurance ($330 every 3 months). No rent, utilities, etc.
I have mostly stopped eating out and buying lattes (or going out for fun for that matter), and have been living off peanut butter and jelly sandwiches, eggs and tortillas, and some other cheap stuff (lots of fruits and veggies). I do not spend much money, just on the necessities (and the occasional indulgence - like a book, sushi or shoes). While the gym membership is probably something that can be cut out, I would prefer not. It has become an important part of my daily regime, and is my opportunity to go out, release tension, and be healthy. When I can, I pay my bills twice a month.
Over the past couple of years, some bad decisions were made. For example, my old car started to fall apart, and I panicked and purchased a new car (I went with the '06 Honda Civic, which is very reasonable and reliable, but now it is clear I should have looked for a used car instead  ). I was able to pay down most of my credit debt, but it is still there and about to become greater due to the braces. I guess where I am right now (income wise) I feel okay paying off this debt as soon as possible, but I worry about what might happen (what if I lose my job, etc...). I would like to pay everything off as soon as possible so these fears will not be so invasive. Because of this way of thinking, there is nothing in my savings account.
Looking at this situation, what are your initial impressions?  Sometimes I feel like if anything else comes along (i.e., unexpected costly events  ), I will drown. Other times I feel like everything will be okay as long as I continue pay these items down as fast as possible. Please let me know what you think.
Thanks for your time!! |
To be honest, it looks like your fine - at least, it appears that way on paper. For now, anyway.
However, I commend you for wanting to pay down your debts as quickly as possible - you'll thank yourself in the long run.
Let's see what we have here...
Approximately 30k a year, so $2500/month. So, we'll call it approximately $1750/month net. Hopefully that's at least relatively accurate, as it depends on the area you live in and your tax bracket, ect.
Your monthly expenses total approximately $767/month
Student Loans - $50.00/month
Auto Loan- $368.00/month
Dental - $134.00/month
Credit Card - $15.00/month
Gym Membership - $35.00/month
Cell Phone - $55.00/month
Car Insurance - $110.00/month
Obviously, this is only including your fixed expenses, and not taking into account gas/food/entertainment. However, it does tell us that you should have approximately $1000.00 left each month after your fixed expenses.
Although I wouldn't go crazy, don't be afraid to treat yourself every once in a while. Often times people hold themselves under rigid control over their finances, and forget that life is meant to be lived, not just rack up dollars in their savings accounts. However, moderation is key
I would definately start off by paying off your credit card (make the minimum payment you can on everything else, put all your extra money toward the credit card)
Once that is paid off in full, I would start paying down your Dental Financing, using the same strategy as before.
It looks as though you should be able to pay both those off in approximately 9 months, although it will depend obviously on how much you spend on food/entertainment.
Here is where it starts to get a bit tricky, and what I would recommend will depend on market conditions as well as your future plans. Both your auto loan and your student loan are at pretty low interest rates, and so providng rates continue to increase, you may actually want to pay just the minimum payments on those and stash the rest in a savings account or Certificate of Deposit(s). Keep in mind, though, that you will be paying tax on additional interest you earn. However, also keep in mind that generally student loan interest is tax deductible.
Providing you aren't in any hurry in leaving your current living situation (I assume you live with your parents, with no rental expenses or utilities) saving the money may be the course of action you would want to take. If your situation changes, you can always use the funds you have saved to pay off your debts if your situation should change.
However, if you are planning on moving out and living on your own, you'd probably want to continue paying down your debts to free up additional income for the extra expenses you will be incurring (rent, insurance, utilities) If that's the case, I would pay down your vehicle loan next and then pay off your student loans.
For future referance, although I see you may have learned your lesson
- I would recommend purchasing a used vehicle next time. The good news, though, is the vehicle you have will typically hold it's value relatively well and Hondas are usually very dependable.
One other thing - is 5% the max that your company will match? If it isn't (normally it's 6%) I would recommend you bump that up to contribute the maximum amount the company will match.
Hopefully this helps and my figures aren't grossly off.
If you have any more questions, please let me know!