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Paying off credit card debt advice needed

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mikeemerder
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Paying off credit card debt advice needed  Reply with quote  

Greetings, first post.

My wife and I currently have $6K and $10K of credit card debt on two cards. We are paying roughly 12% interest on these. We are making more than the minimum payment and using the payoff calculators online to determine how much to pay each month.

Recently we started debating taking a loan for $5K from each of our 401K to pay off the higher card. We have roughly $10K in savings and my wife is suggesting that we use that to pay off the $6K card. I'm ademently opposed to taking that much out of the savings but we keep going back and forth on all of this. I'm in favor of the 401k loan for the $10K card and rolling that payment into the $6k card to pay it off even sooner.

We are in our mid 30s, and make slightly less than $100K/year combined and have 1-$400 car payment and 1-$900 house payment per month among regular expenses. We just happened to have that debt because of the wedding, and some large legit expenses. We are not frivelous spenders.

We need some legit advice.
Post Tue Mar 19, 2013 5:30 pm
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littleroc02us
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What I find interesting is how casual you are about debt, meaning you stated that besides your credit card debt, your regular expenses are a $400 car payment and a $900 mortgage. Personally, the $400 car payment would drive me crazy. Do you realize that if you invested $400 a month for 30 years in the S&P 500 and get historical returns you'd have 868k. I would sell the car and pay off the difference and buy something used with cash.

As for the CC's, take 8k from your savings and pay down the cc's so that all you owe is half of the original debt and then work like crazy to get that paid off.

Risk comes from not knowing what you're doing. (Warren Buffet)
Post Tue Mar 19, 2013 6:45 pm
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mikeemerder
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Casual or not it is what it is. The point was what to do about current state, not what we could do with an ideal state. We have that cash in savings as a reserve. My wife was laid off for in 09 and we needed it until she found another job. I can't empty everything but $2k out of it, if we had an emergency we would end up having to borrow money again one way or another. As far as the car goes, we have what we need. We have certain vehicle requirements.
Post Tue Mar 19, 2013 7:10 pm
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oldguy
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quote:
I can't empty everything but $2k out of it, if we had an emergency we would end up having to borrow money again one way or another. As far as the car goes, we have what we need. We have certain vehicle requirements.


I agree with littleroc - ie, casual. Credit has been so easy over the past 25 yrs that young people tend to perceive it to be the 'normal' answer to daily inconveniences - and why wouldn't you, it's been the norm for your adult lives?

It is costing you $1200/yr to borrow the $10k that you keep in savings at 0%. You could be using that money - close that savings account an retire $10k of your debt.

And borrowing from a 401k pulls that money out of an 11%/yr investment, interrupts the power of compounding - I would pay the 12% before I would stop the 401k progress.

And then apply intellectual honesty to your transportation analysis. Modern cars provide 200,000 miles of troublefree service (note that odo's are now 6 digits, they no longer roll at 99999). And car safety/reliability is mostly a function of brakes, tires, battery, belts. Youca renew all of them for about $1000. A pair of late-model cars depreciate at about $8000/yr, fuel/tags/maintenance is about $8000/yr. That $16k/yr net represents about $20,000/yr of your $100k gross. Ironically, cars are behind most familly financial problems.

However, another way to raise the remaining $6000 is to put a note on the other car - maybe you can convert the 12% loan into a 5% credit union loan.

On the plus side - if you are putting 10%, $10k/yr of your income into the 401k's and if your employer is matching with $5000/yr, that $15k/yr for 25 years will be $2,000,000 (using 11%/yr investments). That's where most of your wealth will be at age 60 - it's an important decision for you to avoid derailing that plan. That $10k/yr costs you about $7000/yr out-of-pocket after the tax break - it's pretty hard to beat getting $15k/yr added to your accounts at a cost of $7000/yr. Very Happy
Post Tue Mar 19, 2013 9:32 pm
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mikeemerder
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I see. You two bring up some good points. I was certain the 401k loan would be the advice I receive. I was always skeptical of consolidating credit card debt but I suppose that would be a better option. I guess my upbringing and our recent situation of one of us being jobless has me trying to keep our savings intact. We have other money assests out there, but they are for our child and our future past our 401k(s).

I think about what we have in our retirement accounts and talk to people in our age group that have never contributed anything because they want that money in their take home pay. That makes me thankful for my 15% contribution. And my employer matches up to 6%. Makes sense not to screw with that.

Thanks to both of you for the input.
Post Tue Mar 19, 2013 11:15 pm
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coaster
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quote:
Originally posted by mikeemerder
... it is what it is. The point was what to do about current state...

It is what it is .... but .... you're asking what to DO. So, it isn't what it is, it's what you do to make it what it is, and you're getting some thoughts on the subject. Exactly what you came here for. The views you get may not be what you expected. But the views are the viewpoints of independent minds thinking logical, rational, thoughts, and so what you get is worth paying attention to, whether it's the answer you were looking for, or not. Sometimes it's the answer to a different question; the question that should have been asked in the first place. What you do with that answer is up to you.

Best wishes and good luck.

~Tim~
Post Tue Mar 19, 2013 11:18 pm
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coaster
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quote:
Originally posted by mikeemerder
I see. You two bring up some good points...
... Thanks to both of you for the input.

Ahhh, wise man. Thanks for saying that. It makes their time and effort worthwhile. Smile

~Tim~
Post Tue Mar 19, 2013 11:19 pm
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oldguy
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quote:
We have other money assests out there, but they are for our child and our future past our 401k(s).


In your planning consider that it will be fairly easy to get student loans at low interest rates, but impossible to borrow money for your retirement, you will have no means to repay. So, as a general rule, always give priority to your retirement funds rather than college funds. Sounds selfish at the outset - but it's more selfish to saddle your child with your care about 60 yrs from now.
Post Wed Mar 20, 2013 12:47 am
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Dodger52
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Re: Paying off credit card debt advice needed  Reply with quote  

quote:
Originally posted by mikeemerder
Greetings, first post.


We are in our mid 30s, and make slightly less than $100K/year combined and have 1-$400 car payment and 1-$900 house payment per month among regular expenses. We just happened to have that debt because of the wedding, and some large legit expenses. We are not frivelous spenders.




My advice is going to be a little different... You have told us where you spend $1300/mo that leaves somewhere between $2,500 and $3,500 per month Its time for some belt tightening. You can probably cut back a little here and there and free up an extra $1k a month dump that on those cards in addition to what you are already putting on them and that debt is gone in ten months or so. After that you can go back to spending that $1k and take what you are paying on the credit cards now and knock out the car loan.

Turn that thermostat down a degree, cut out the phone you never use, drop the movie package off your cable, Go out to dinner one less time a month. Brew your coffee instead of going to Starbucks every morning. There are at least a dozen places you can cut back a little without making your life miserable. Right now you are focusing on the big monthly expenses and I bet if you look at it you will find its the little ones that are really doing the damage. You can not get rid of debt by borrowing from some place else.

It may sound a little harsh but if you don't go through a little pain you will find yourself back in this situation.
Post Wed Mar 20, 2013 6:03 am
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littleroc02us
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quote:
Originally posted by mikeemerder
The point was what to do about current state, not what we could do with an ideal state. We have that cash in savings as a reserve. My wife was laid off for in 09 and we needed it until she found another job. I can't empty everything but $2k out of it, if we had an emergency we would end up having to borrow money again one way or another. As far as the car goes, we have what we need. We have certain vehicle requirements.


My advice is based on the reality of your state. The question is are you willing to to what it takes to get out of debt? The reason I mentioned taking out your savings to immediately pay down your cc debt to half is because 2k can cover just about any emergency in the short term that may come up. Later on when all of your debt is paid off then you can bump that back up. If you plan on letting this debt hang around foerever then I guess I'd agree with keeping your EF fund high because your then not motivated to eliminate your debts in a quick manner.
As for the car, what does certain vehicle requirements mean?

Risk comes from not knowing what you're doing. (Warren Buffet)
Post Wed Mar 20, 2013 1:30 pm
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littleroc02us
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quote:
Originally posted by mikeemerder
I was certain the 401k loan would be the advice I receive.
Thanks to both of you for the input.


Isn't it interesting how since the recession you are hearing more and more people who are touching their retirement savings to pay off debt. In all of my life I don't remember times like this. Personally, I would never touch my retirement except to avoid bankruptcy.

Risk comes from not knowing what you're doing. (Warren Buffet)
Post Wed Mar 20, 2013 1:32 pm
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Publius
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quote:
Originally posted by littleroc02us

Personally, I would never touch my retirement except to avoid bankruptcy.

I would even be wary of touching it in the case of near bankruptcy unless it guaranteed that it would bring you back from the brink. If taking monies out of a 401k only delayed bankruptcy, you could find yourself bankrupt and without any retirement savings. 401k funds are almost always at least partially protected from bankruptcy, I believe.
Post Thu Mar 21, 2013 1:46 pm
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marionsawyer
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Credit cards are the leading cause of financial hardship for most people and finding a solution for this type of debt is a high priority for those affected.
Post Thu Apr 11, 2013 10:09 am
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