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Managing Debt before Kids

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registereduser
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Managing Debt before Kids  Reply with quote  

My wife (34) and I (31) are going to start trying to conceive and we are in the process of consolidating our assets to get a better understanding of where we are financially. We've always maintained separate accounts until now and my largest concern is our credit card debt (22k). We've lived a pretty nice life and were always lax with our spending habits. We've only gotten serious about paying off debt in the past year (was previously 32k in January).

We have pretty decent credit scores (770 and 730) and I'm considering taking a loan to pay off the credit cards, but I don't know if we're at that point yet. I could to a home-equity loan or from a 401k. Any thoughts?

Here is our joint financial profile:

Salaries - 160,000 gross/year
Checking - ~1,500
Savings - 6,000
401ks - 151,000
Traditional IRAs - 43,000
Roth IRAs - 23,000
Home 1 - ~38,000 equity built on a $370,000 loan (currently rented and mortgage is being paid by renters)
Home 2 - ~4,000 equity built on a $302,000 loan (1,950 monthly mortgage payment)
Credit Card Debt - ~22,000
Student Loans - ~20,000
Car lease - 429/month (other car is owned outright)
Post Mon Aug 15, 2016 4:37 pm
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oldguy
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Looks like about a Net Worth of $224,000. That's $266.6k of equity/assets minus $42k of loans.

That's a very solid NW for your ages - and the $160k income stream is great.
DW & I have always kept the longterm investments in 11%/yr funds, and optimized them. Eg, you have about $217k invested. At 11%/y, that is almost $5,000,000 when you are age 61 - ie, you have already done the work to build your family wealth, if you never invested another dime, you are on track to $5M. But be careful not to derail the $5M plan just to prepay a small $42k loan.

quote:
I'm considering taking a loan to pay off the credit cards


That would be taking a loan to pay off a loan. I do that sometimes - but apply intellectual honesty, don't think of it as "paying off debt". I often refi our rentals, remove all equity, and invest it elsewhere. I move shortterm, high rates into 30 yr, Fixed Rate, low rates loans. And invest the money into the 11%/y fund.
In your case, you might wait a couple yrs, let the $408k Home#1 grow to $450k, then refi to 30 yrs, FR, 5%. Use the equity to prepay the shortterm, higher rate loans (especially the revolving consumer loans) and add the excess to the 11%/yr fund.

quote:
We've lived a pretty nice life and were always lax with our spending habits.


Life is about to go from 'pretty nice' to 'really nice', babies are life changers - enjoy!
Post Mon Aug 15, 2016 6:46 pm
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Paul@GFS
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quote:
I move shortterm, high rates into 30 yr, Fixed Rate, low rates loans. And invest the money into the 11%/y fund.


You must have gained a much detailed knowledge on various forms of investment. Optimizing your investment benefits is possible when you understand the tricks of trading and when you're aware of the national investment regulations and state norms.
Post Mon Nov 14, 2016 6:19 am
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ken-do-nim
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Credit card debt can be at well over even oldguy's 11% amazing funds' interest rate. Be sure to aggressively pay off your credit cards before you invest further into the market.
Post Mon Nov 14, 2016 8:22 pm
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oldguy
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Not really "detailed knowledge", it's very well summarized in "The Litte Book of Common Sense Investing " by John Bogel, the founder of Vanguard. Costs about $15 on Amazon.
Post Tue Nov 15, 2016 12:18 am
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littleroc02us
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I'm now 45 and my wife is 36 and we have two wonderful boys, 5 and 8 months. In our early 30's we had 30k in student loan debt and some credit card debt. Immediately when we were married at age 35 we combined our finances and debts because I believe that we were considered one and my debts were hers and vice verca. That was the first important thing I learned.
Using the premise above, my wife had 20k sitting in a savings account making 1%. We immediately took that out and paid off the student loans along with other cash. That freed up $500 a month. Then we put cc's in order from smallest to largest and paid those off. Lastly, we took 40k that we saved up and paid off a substantial amount for our primary mortgage. We even bought a rental duplex in South Minneapolis that cash flows after all expenses $700 a month.
Lastly, when we had no debt on anything except a small mortgage on our home, was stock away thousands of dollars in savings for emergencies for our first child. We also contribute to our 401k's, max out our Roths and save money. Still to this day I look back at those decisions and thank God we stuck to it.
As for your situtation, 42k is a lot of debt when having children. Do you realize what daycare is on 2 kids these days. 26k in most places. Our daycare was more then our mortgage payment, so my wife went part time with raises and now she works only 3 days a week. We can do this because we are finanancially sound. I'd pay off those debts asap and temorarily postpone the Roth IRA contributions. As for your investments, I think you're doing alright, but with a salary of 160k a year, unless you live in an area that is very expensive, your networth should be much higher. Keep pushing on.

Risk comes from not knowing what you're doing. (Warren Buffet)
Post Tue Nov 15, 2016 3:23 pm
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ken-do-nim
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quote:
Originally posted by littleroc02us
I'm now 45 and my wife is 36 and we have two wonderful boys, 5 and 8 months. In our early 30's we had 30k in student loan debt and some credit card debt. Immediately when we were married at age 35 we combined our finances and debts because I ...


Just a little chuckle. You are 9 years older than your wife, so when you say "in our early 30s" that's probably from your point of view, so she was still in her mid 20s.

Wow on being a dad again at age 45!!!
Post Tue Nov 15, 2016 7:38 pm
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littleroc02us
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I use to get that a lot when we married I was 35 and she was 26. craddle robber right. The truth is men are typically delayed in maturity compared to women, so it works quite well. At least when I'm 80 and she's 71 it won't look so bad.
45 and a father with my second boy. Couldn't be happier.

Risk comes from not knowing what you're doing. (Warren Buffet)
Post Tue Nov 15, 2016 7:45 pm
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