Over the past month or so, I have received quite a few Reader Questions. The readers below asked for my help, but they also asked if I could publish their questions on my website because they want to hear multiple opinions.
I’m not sure if either of these two readers will reply (because they want to remain anonymous), but they just might.
I know that they will read your responses though, so please try to help these awesome readers out. I have changed some of the wording in order to protect their identities and to compact their questions. I have also changed their names.
Past Reader Questions include: How to Split Bills Without Resentment and We have $200,000 in Student Loan Debt.
1. I’m drowning in debt. This reader question is from Joe:
I have a lot of debt and I don’t know what to do first. I make around $55,000 a year before taxes. Here are some of the facts:
- I have $16,000 in credit card debt, and it’s climbing.
- I have $14,000 in car debt, and it’s not even a new car. I made a huge mistake and the car is already having major problems.
- I also have $44,000 in private student loans.
- The interest on everything is high (all above 8%).
I guess I just want overall help. What should I do? I have extra time to work, but not a whole lot of time.
2. I’m getting a divorce. This reader question is from Katie:
I have a 401K, a small business, and rental properties that my ex-husband and I split. We both put the same amount of work into everything, and we are splitting everything right down the middle.
We have decided to cash everything in and sell it all, so that we can each just get cash and go in our separate ways.
Besides those three things (401K, a small business, and rental properties), I have nothing else saved except for a small emergency fund. I have no debt except for the mortgage on each property, and I will be making money from the sale of each property.
I’m not sure what my very first step should be. Should I invest it all? Look for an advisor to help me out?
So what would you do if you were either of these people?
Let us know in the comments below. You can help them both or just one. All help is appreciated! Also, please be kind. Keep in mind that this is a person who is seeking help.
Dear #1: You need to start at the very beginning – track your expenses and draw up a budget. Then see what you can cut to add towards the debt snowball you need to use. Dave Ramsey has a good system, I started far too long ago with the basic Mary Hunt book and understanding the need to budget and especially to budget for irregular expenses was life changing for my debt ridden self. It gave me control – it’s a short book and I’d recommend it as a simple place to start. THAT should be what you spend your ‘little extra time to work’ on right now – reining in your spending and gaining control over the money that IS coming in. Next you can start to investigate what extra money you can earn by working or by spending time selling your stuff. You can do this – one step at a time.
Dear #2 I think you need to be more stable and take some time before you make decisions with this money – am I correct in assuming you’re working and don’t need it to live on? Right now I’d invest it in something you can access without giving blood – you should be able to move the retirement account into a similar vehicle, and should. Six months from now think about it again and see if you feel like you have a definite idea of what you should do with the other money – if not wait till a year out – and then definitely make some decisions. I’m not sure what your emotional state is but I’d hate to see you make decisions you regret with this money because you’re not thinking as clearly as you will be in the future- good luck!
Joe, we were/are in a similar situation. My advice to you would be just to sit down, write down all debts, all monthly expenses, eliminate frills, and get cracking. It will be tough, but you can get rid of this debt if you’re willing to hunker down and live frugally for a few years. And it’ll be worth it when all of that debt is gone. Dave Ramsey’s Total Money Makeover book is a great place to start, and is available at most all libraries. Good luck!
Katie: I would first make a list of your short and long-term goals so you know what you want out of life. Then you can make your money work for you to match those goals, either by trying to find a decent and trustworthy financial planner, or by doing LOTS of PF and investment blog reading. Good luck to you!
1 – I’m really surprised that the interest rate on your private student loans are above 8%. Is there any way you can consolidate them at a lower rate? I would look into that. Additionally, is it possible to get a 0% transfer on some of the credit card debt? If you could transfer a chunk of it to a 0% card and pay down as much as possible that would probably really help. I’d definitely focus on that first and pay the minimum on your student loans and car payment. I would also consider working a part-time job. Side hustles are great but can take some time to get off the ground. If you can work on Saturdays that could help knock out your credit card debt faster.
For Joe – This advice may seem a little harsh, but you are in a harsh situation. The good news is, you can do this! You can get out of debt FAST!
Step one, sell the car! That thing is terrible. Step two, see if you can move close enough to work that you don’t NEED a car for a while. Sure, not having a car will suck, but you can get a car when you can actually AFFORD one.
Then, cut back on everything: never go out to eat, or out to drinks, don’t go on any vacations, buy exactly ZERO new clothes and make do with the ones you have and SCOUR your credit card statements for things you spend money on and spend a good HOUR brainstorming ways that you can cut those expenses down, category by category.
That all may sound harsh, but it’s the situation you’re in and if you attack your debt HARD, it actually won’t be very long before you can ease off the gas and start taking a little more relaxed approach to personal finance. But for now, you need to go full throttle!
For Katie – My condolences, but good for you for thinking about these tough things like personal finance. I don’t know the details of your situation, but generally, I would see how much money I have and see how much money I need, day to day. If your current employment situation covers your expenses, then I would look for ways to invest the money you have. It might be easiest to just put it all in a low cost Vanguard index fund (Just put it all in the Vanguard Total Stock Market Index, for instance). See JLCollinsnh.com’s stock series for more research on strategy.
For Joe:
If your credit card debt is climbing, it sounds like you currently spend more than you make. So I would say the first step is to go back over maybe 3-4 months of bank/cc statements and categorize all spending and make a spreadsheet. Where is all your money going? Then if you want to really turn things around, you will likely need to find ways to make DRASTIC spending cuts. Go read some Mr. Money Mustache blog posts! He would say your situation is a “your hair is on fire” emergency! It will be difficult, but you will need to make big changes (cheaper housing, less driving, control electric bills, stop going out to eat, cut off cable TV and luxury services, stop or slow saving for retirement to min…) in order to get the debt under control. When you are in a surplus situation (spending less than you make), personally I would take care of paying down the highest interest first or the smallest balance. I think focusing on one category at a time (while making minimum pays on others) will make you feel you are making good progress.
Since I was in Joe’s shoes at one point, I would go after the car first. Why? Because if you don’t get it paid off, you can’t sell it. That monthly payment is fixed until it is paid off. Credit card minimum payments fluctuate. First car payment, then credit card, then student loan. See if you can cut your monthly expenses by taking things that you don’t need out. If you don’t NEED it, then get rid of it.
Am i the first to comment? yey. Well my thoughts is that Joe needs more of your help ASAP as he is getting clobbered by debt interest. He should really get a side hustle to get additional income then cut his expenses. That one needs your consulting Sir, on what is not needed in his life. As for Katie, taking katie’s side, get the best laywer in town and alimoney your husband dry hehe. Retirement plans for dummines, get a pre-nup signed before marriage.
I have some thoughts for Joe: can you sell your car and either not have a car for a while or get something cheaper? If you could just ditch the car that would help eliminate some of the debt right away, but obviously if you work far from home that may not be possible. If you have extra time to work, it would probably be a good idea to get a part-time job and start throwing all your extra cash at the credit card debt (since that’s probably the highest interest rate debt you have) while you make the minimum payments on the other debt. Why is the credit card debt climbing? Are you still spending on the cards or is it going up because you are only making minimum payments and losing ground? Stop spending on those cards! If your expenses total more than your income you’ll have to rely on a part-time job or side hustle to help make up the shortfall, but continuing to spend on credit cards is only going to exacerbate the problem. Also, have you tried to call your credit card companies to ask for a lower interest rate or consolidate onto a card with a lower rate? Those are just a few of the things that pop into my mind that you could try to help get out of this debt. Good luck Joe!!
This is for Joe:
First I have to ask why your credit card is climbing? Is it because you don’t have enough cash to live, or you have a spending problem? The first thing that needs to happen is to stop using the credit card. If you are paying expenses like rent, utilities, food, etc, you need to examine how you are living and reduce expenses immediately. The simple math is you need to spend less and try to earn more to get started on your debt repayment. I would also try and negotiate a smaller interest rate with your creditors. Over 8% on a car loan? Geesh! Is your credit OK? I would also consider selling your car and getting a cheaper option and try to get a lower interest rate, or better yet, pay with cash. Fix the car JUST enough to sell it.
None of these are easy steps, but it comes down to simple math sometimes. Best of luck to you!
Joe,
Everyone is right. You can save yourself from increasing your current debt, but it is going to take some effort. I’m not sure where you live, but I make the same amount and I live in DC which is just behind NYC in cost of living. In general, become cheap.
Let me consolidate and add to what has been posted so far:
Cherie gives you the information to get yourself together. Do not BUY the books. Go to a library and rent them or to a bookstore and take notes. Also, Mint, Excel, and other similar websites will help.
DC notes that you have very high loans. I want to ensure you know of some places to do that because if you have decent credit you may be eligible for a decent consolidation. I’ve noticed sofi(dot)com has given us decent rates, but we are looking still and not jumping yet as there are credit unions and other banks that may give a better offer after a bit of research.
Multiple people point out selling the car is important. And yes, I agree and live this life without a car right now. I’m assuming your next question is where? Search for places that will buy your car even if you don’t buy one of theirs. Or talk to a local auto mechanic. At least that’s where I’d start. Sadly, you may still have to pay on the car though.
Finally, I’ll leave you with my personal advice.
At coffee shops, stop buying coffee. At bars and restaurants, start drinking coffee. Forget alcohol away from home.
Katie – consult with a tax advisor before you do anything. There will be tax implications of cashing in your rental properties & small business. Your tax advisor will be able to help you plan and minimize the tax bill.
It’s really hard to give solid advice w/o a lot more info (more detailed monthly expenses, income, savings, etc).
Joe: Work the side income whether it be consulting, tutoring, music lessons, whatever. Then, other than turn *really* frugal until you get things under control, hard to give detailed advice w/o more details. Another site to check out (ok to promote another blogger? … check out Mr. Money Mustache). Try to live close enough to work/grocery that you can walk or bike or transit, buy used, buy cheap (some grocery stores are a LOT less expensive than others) and other belt-tightening strategies have already been mentioned. With summer coming up, it’ll be easier to entertain yourself at parks, free concerts, etc. Look for free days at museums, use the library, etc.
Katie: I think the answer depends in part on your age and income and monthly expenses. How are your retirement savings? Can your emergency fund use a boost? I would check in with a CFP or PFS (which is a CPA with financial planning credentials, iirc).
In both cases, take ALL of my and others advice with a huge dash of salt because there simply is NOT enough info provided here to give really good feedback.
Joe, I feel your pain…I have a lot of similar debts as you (though not quite as high). I find that tracking every single cent I spend and reviewing it weekly really helps me keep myself within a budget that I give myself and keeps me aware of where I waste money and how I could save some money as well!
Joe – have you tried refinancing your car with your current lender or with a new lender? You may be able to get a better rate and/or lower payment. A lower payment and better rate would mean putting more toward principal and paying it off faster. Similar question with your credit card. Call the CC company and ask them to lower your rate. It may only come down a percent or two but every little bit helps. If you can qualify for it then you can do a balance transfer to lower interest card. Another if you qualify for it item, get a loan to pay off the CC and then close the CC. Again, that suggestion and the balance transfer are only worth it if you can get a lower rate and payment. Also, sells anything and everything you can then put that money toward your debts. Have a yard sale, take cloths to a consignment shop, sell old movies/video games/etc. you aren’t you it anyway so put it toward your debt! If you don’t budget and aggressively work to pay off your debts then none of these suggestions will matter.
Joe, it’s not the end of the world. If you have your health, you can do something about all this. Get on a budget ASAP – the rest, you should throw into debt-repayment. I would also try to negotiate the interest rates on your credit cards and student loans. I would downsize your car and get a beater – something to get you from point A to point B. Work overtime, if you can or find additional part time work on weekends. I would find anything in your closet with value and sell it on Craigslist/Ebay. Most of all, surround yourself with positive, reaffirming people who will encourage you along the day (like the PF community!)
Katie, count yourself lucky that you are coming out of the divorce intact and avoiding total financial ruin. I would pad your e-fund to a healthy amount and re-invest the rest! 🙂
Good luck to you both!! We’re all pulling for you!
Katie – I think the best thing you can do right now is just the save money. Speaking from experience, getting divorced is such an emotional time in your life and your decision making process may not be at its best. I would recommend saving the money (keeping it liquid) for about a year until you find out what your new life is going to look like. This will give you plenty of time to start the healing process and you can always invest in later.
For Joe I would first and foremost say get rid of the car. 14K is just way to much to finance on a car when you have 60K in other debt. Sell it and get a better than decent clunker for 4-5K cash and then BAM you are 10K less in debt than you were with the expensive car. The only way to get rid of debt is to budget, cut back on your lifestyle as much as possible, and put all extra money towards the debt.
You have a good enough income to get on top of it but you have to cut back on all extra expenses! Cable, eating out, etc. You can make it! Don’t get discouraged. I know it is hard in the beginning when you realize what you’re up against Wishing you the best of luck!!!
#1 – what’s your credit like? If it’s good, apply for a new credit card (or two) that give you zero balance transfers, transfer over what you have on your current card, and close it out.
Do you NEED a car? If there is any sort of viable public transportation where you live, sell your car. You’ll be saving money not only on the car payment, but also on insurance, gas, and maintenance.
For the student loans, visit http://www.loanconsolidation.ed.gov/ to see if you can get a lower interest rate.
If you do decide to get a second job, make sure you change your W4 at your main job! Otherwise you’ll end up paying a lot more come April 15.
Good luck!
For #1, I would say some type of debt consolidation program could be helpful. Another option is to get rid of that car and try to payoff that loan ASAP. It is likely Joe will have to become more frugal and watchful of his spending. Another option is to get a second job or some type of freelance employment to help him payoff those bills.
For #2, I would suggest low risk investments. Working with a financial adviser can be tricky. She would need to find someone who is trustworthy and looking out for her best interests.
Joe – Cut up the credit cards today & start living on a written budget – you’ll be surprised once you write everything down & plan out your spending how much money you have left over (or where you need to cut drastically to get some left over money). If you are no upside down on the car – sell it & get a cheaper one, and use the difference to start paying down on the rest of your debt. And even if you are upside down on it, you can get a note for the difference, owing $4,000 instead of $14,000 is much more manageable. When you start paying down on your debts (cut your lifestyle down for the next 2-3 years and you’ll make serious progress) focus on one debt at a time, otherwise you never feel like you are making progress. Since they are all high interest, I like the method of doing them in order of smallest debt to largest debt, paying off the small ones in the beginning helps you gain momentum. Good luck!
For Joe:
(1) Track your spending – it sucks, ya, but you gotta do it. It gets easier. Later you will love it. Paper, excel, MINT, whatever… every penny. DO IT!
(2) Stop buying stuff… everything… nada. Ask yourself.. do you really need it? If you do, buy used, on sale, cheap… and by cheap, I mean inexpensive, not crappy.
(3) I mean it… stop buying stuff. This includes services. Have you renegotiated your cell phone, internet yet? Cut the gym, cable? You think you can’t but you can.
(4) Now you put that extra money you’ve saved buy not buying stuff towards your debt. Track you debt and repayments using a snowball/avalanche calculator on excel. Here’s what I use from vertex42.
http://www.vertex42.com/Calculators/debt-reduction-calculator.html
(5) Still not making it (fast enough)? You gotta get brutal. Sell your car. Take the bus. Take in a roommate/boarder. Get a second job. Sell your crap (stuff).
(6) It’s not rocket science. It’s emotional science. Your lip will stop quivering. Just do it and you’ll feel a whole lot better. You’ll look back and say it was the best thing you did. Plus there’s lots of support in the PF blogger world. Take it. You deserve it.
Found this google doc spreadsheet for tracking for Joe
http://www.theweightofdebt.com/2014/04/10/sharing-my-basic-budget-spreadsheet/