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Trying to Get It Right

February 20th, 2014 at 02:58 pm

Now that I've detailed all the ways I've done it wrong, both getting into and getting out of debt, it's time to talk about what I'm doing now to try to get it right. I'll still be doing some things wrong, because I'm just not willing to make the massive sacrifices I'd need to in order to do it 100% right, but I have a plan, and a goal, and have made a lot of progress already. So, here are some of the things I've done right:

Stayed Current on Payments
Except for a handful of late payments when I just got disorganized and forgot to pay the bill, after the fiasco with my college credit cards I've pretty much always paid at least the minimum, on time or within 30 days of being late. (They don't ding your credit report for being 25 days late! Still get hit with late fees, though.) Of course, two of the three times I was more than 30 days later were on the same card, so that doesn't look so great on my credit report, but those are starting to fall off now, finally.

Negotiated With Credit Card Companies
When hubby was living in another state, I contacted all of my credit card companies and asked for assistance. A couple of them wouldn't do anything since I was paying the minimum. (How strange is that, I call to try to make arrangements to keep paying in good faith and they won't do anything to help me until I've defaulted with them.) The others -- Citi and Chase -- put me on a 'hardship program', which lowered my interest rates, closed the cards, and put me on a 6-year repayment plan. Both offer auto-pay options so that was a one-and-done deal. Interest rates are 7.24% and 6%, down from 19-22%.

Found Ways to Earn Extra Income
I haven't been utilizing it much lately, but I now have a handful of options for some extra income if I need it. It's very dependent on how much time I put in, but at the peak of my production I was bringing in an extra $400-500 a month, while still working full time and enjoying free time on the weekends.

Took Advantage of Lower Interest Rate Offers
For some reason, credit card companies still wanted to give me money, so I've done a handful of balance transfers to lower interest rate cards (including the transfer fee in the calculation -- an interest rate decrease of 2% when there's a 3% balance transfer fee doesn't always make sense!). We also got an unsecured personal loan from Discover that knocked out some higher rate cards (that has since been paid off with one of the 401(k) loans, for 1/3 the interest and 1/3 the monthly payment), and I recently got a personal loan from Lending Club that, if I use the full amount of time to pay it (I plan on paying it off earlier), will save me three years of payments and about $12,000 in interest.

Started Snowballing Debt Payments
Once I rearranged all my debt, my payments decreased quite a bit. While I'd like to say I'm putting all of that decrease toward paying off the debt, the reality is that a significant portion of it is going toward our monthly expenses. The upside is that I can afford our monthly expenses now! I have dedicated a specific dollar amount per month to credit card debt, and a nifty Excel spreadsheet to keep track of it. (Seriously, if I could get paid for the time I've spend making Excel spreadsheets for my various budgeting/financial uses, I could retire now!) I subtract all my minimum payments from that amount, and whatever is left over goes as an additional payment to my highest interest rate card. Once that's paid off (right now on track for January 2015) I will snowball to the next card, etc. I'm also increasing the dedicated amount by $200 per month each year, assuming COLA increases at work (or additional side jobs, if need be).

Faced My Financial Reality
I finally sat down and calculated my total assets, liabilities, and net worth. It was pretty sobering. On paper it doesn't look all that bad, really -- we have a positive net worth, at any rate, and it's over $50K. That's not including the family loans, though -- add those in and we're very negative in net worth! Granted, if we don't get these family loans paid off -- and we are paying on them every month, with interest -- it will eventually come out of my inheritance, but part of owning up to what I owe includes even those debts that no one other than my family and I will ever know about.

Created a Realistic Plan With an End Date
One of the reasons I'm starting this blog is that I've finally got a plan to get out of debt, and it's sooner than I honestly thought it would be. There is a light at the end of the tunnel, but I want to be sure to keep on track and be accountable to someone, even if it's only faceless strangers on the Interwebs. (I can't admit to my family how in debt we are. Even hubby only has a vague idea, mostly because he tends to over-react and get all doom and gloom about things. He knows we have a lot of debt, and he knows we're working toward paying it off and what the basic timeline is; the details are a little fuzzy, but we talk about big spending and how we're going to afford things.)

Left Commissions (Mostly) Out of the Budget
One of the biggest mistakes I made at first was counting on hubby's commissions as part of our income. That was great until he changed to a job that didn't pay commissions! Now that he's getting commissions again, I'm only counting on a portion of them as income. I took the average monthly commission he's made over the last four years, not including his year-end bonus (which has ranged from $0 to almost a full year's salary), and figured we could safely count on half that amount as part of our budgeted income. (That amount is also not completely beyond the realm of my ability to make up with side jobs, if need be.)

Finally, the biggest thing I've done right is...

Stopped Using Credit Cards
Well, sort of. I do use my Kohl's charge for the discounts, and sometimes Bill Me Later for the six-month interest-free financing, but those are amounts that I plan for and know I can pay off when the bill comes due. Other than that, we pay for just about everything on our Chase Freedom card, which is a rewards card. Technically I "carry a balance" on the card, but it's always new debt -- I'm not paying in March for the gas I put in my car in January. I pay a chunk on it every week or two, and there aren't any interest charges, because I pay off the statement balance throughout month. (For example, if the February statement closing balance was $2300, I'd be sure to pay at least $2300 on the card before the March closing date. I generally pay well more than that, because I want to keep the balance manageable and at a level where I could pay it off entirely, if I needed to.) Meanwhile we average about $75-150 in rewards every month; we've used those in the past for a new vacuum cleaner (sorely needed), TV (total want), movie tickets ($100 gift card should last a year or so, we don't go to the movies often), our anniversary dinner, etc., but this year I might let the rewards build up and use them for birthday and Christmas gifts instead.

I am happy to say that, other than the exceptions above, I haven't used a credit card in well over a year. That is a huge improvement for me! I was a little leery of the Freedom card, given my past history with building up credit balances, but I've made a real effort to keep it paid off and it's working.

Barring any catastrophe, I was on track to have all of my credit cards and the Lenders Club loan paid off by May 2016 ($50K) and the 401(k) loans paid off by August 2017 ($56K). The family loans should be paid off by June 2020 ($135K). Then I could knock out my mortgage by February 2024 (19 years early!). That's also assuming only COLA increases; I'm actually looking at a possible large bonus and salary increase this year, which could accelerate things exponentially, but I don't want to count on that until/unless it actually happens.

However, that was before I realized (last night) that the HELOC on our main home will be coming due in a year and a half. (I'm glad I thought to check the paperwork -- the whole balloon payment thing was not made clear to me on closing!) So I will need to make some adjustments and/or shift that loan to somewhere else if possible. (Hubs has good credit and most of the cards we've paid off were in his name, so he could probably get a loan from Prosper or Lending Club if we need to go that route. I had the HELOC scheduled for payoff in April 2018, but it will be due in full in October 2015.) A new loan will probably have a higher interest rate, but we'll be able to throw lots of extra at it within the first year, so it should be paid off fairly quickly.

Mistake In The Making?
Remember in my last entry when I said a potential mistake might be coming up that will end up better for us in the long run? There's a home up for sale that my husband is itching to buy -- it's where we're planning to retire, and it's right next door to his cousin. It's a bank-owned property, so from the looks of things is listed at 3/4 to 1/2 of its market value. Of course we'd get an appraisal first, and an inspection, before we even seriously consider it. Taking on more debt is one of the last things we need to do, honestly, but it is a pretty good opportunity. What's more, my mom has been wanting a 'vacation home' and we have talked about getting a family home in this area. The ideal -- though I'm not sure how on-board my mom will be about it -- would be for her to pay cash for the home (easier to get the offer accepted, I've heard, with a bank-owned property when you pay cash), and then we would finance it, taking some additional (assuming it appraises high enough and there's some equity there) to pay off the credit cards and HELOC. The monthly payment would come out of the currently assigned credit card payment, and the rest of that would go to the Lender's Club loan (paid off July 2015). That would let us pay off the 401(k) loans in February 2017 and the family loans by November 2019. Then we'd tackle the 'vacation home' loan, paying that off by July 2022, and our primary mortgage paid by October 2025. While it's an extra 18 months on the primary mortgage, it's also an additional $125K (or more, by that time) in assets with the vacation home. (This is all assuming hubs and I take on the entire cost of the vacation home; mom might offer to pay 1/4 of it herself, since she'd be free to use it whenever she wanted.)

Again, more debt is the last thing we need, but the long run is looking more and more attractive. I know you're not supposed to tie up unsecured debt in your home -- and I've made that mistake many times in the past! -- but the interest rate is still considerably lower and again, we'll have a nice increase in assets when all is said and done. The home undoubtedly needs some work (paint job, new floors, I'd like to add a bathroom at some point since there's only one), but since it will be a vacation home for the next 10 years or so, at least, it's not anything that we'll have to do right away. With a cousin next door to keep an eye on the place (a cousin who, I might add, is very motivated to get us to move down there!), and lots of "kinfolk" in the area to help with any projects -- and a new roof in the last year or two -- on the surface it seems like a reasonable fixer-upper over time. (It will all depend on the appraisal and inspection, really.) While we'll still ideally buy a larger piece of land and build our ideal retirement home someday, this will give us a vacation home in the mean time, a place to stay when we do first retire and are building, and ideally an appreciable asset (that we can live in for two years before we finally sell it and avoid capital gains taxes). Hubs is down in that area every year, as well, for family reunions and his 'fun stuff time', so having a place for him to stay will ease the burden on family and hotel room fees! (Oh -- and the property taxes? $400 a year. Not even a consideration, really.)

Anyway, that's where we are at this moment in time. I am working on building up an emergency fund -- I had $4700 but then we ended up owing $2800 to the IRS (bad planning, but it shouldn't happen again this year). We will have property taxes due in the fall, about $3700 between the two houses (home and rental), and the rental will probably need a new air conditioner this year ($3500) -- it's losing freon, and apparently the new units don't use that type of freon so it's hard to find these days. (Still, I'm going to see if I can get it recharged one more time to get another year out of it, but if I can't I'm saving up for that expense now.) I'm allocating the rest of the $4700 as $1000 in an 'emergency fund' and $900 for the a/c, but honestly in an emergency I could probably use the Freedom card and with commission/side jobs pick up the $1000 during the 25-day grace period. Still, by the end of this year I'd like to have at least $5000 stashed away until I get the debts paid off, and then work toward increasing it to 6 months of expenses. Hubby's commissions and any 'leftover' from the checking account at the end of each pay period will go toward all of that -- a/c, taxes, and emergency fund. We'll get there, I know it!

4 Responses to “Trying to Get It Right”

  1. CB in the City Says:

    When you're getting out of debt, I would be wary of the "great deal." I've seen others go down that path, and they get in deeper. The great deals seem to lead to more expenses that were not expected. Just a friendly caution.

  2. doingitallwrong Says:

    Very valid point, and one we will be sure to consider carefully as we're wading through this decision. Thanks!

  3. PatientSaver Says:

    I did not read your post in full, but just want to point out that being in your 40s, you're pretty much in your peak earning years. Doing a juggling act with all that debt and just paying the minimums is all well and good (well, not really) but how would you keep juggling if something unexpected happened? Like a job loss or illness? You're living on the edge, paycheck to paycheck, and all it would take is one Big Bad Thing to happen.

    You never really know what your future holds. I've had plenty of twists and turns in my own life that have made me very, very grateful that I always took the frugal route and planned for a rainy day. Yeah, I know, sounds boring. But hey: reducing your spending or paying off debt doesn't have to be an all or nothing thing as you have portrayed it. So if you can't muster up enthusiasm for going at it full throttle, do what you can, keep plugging away. Myself, I'd have that that in my scopes for sure because it does have a way of snowballing and catching up with you.

  4. doingitallwrong Says:

    Oh, yes, you're quite right. Smile I am on a 'snowball' plan that has me set to have all of the credit card and P2P loan debt paid off in just over 2 years. A Big Bad Thing would still be a disaster, certainly. I'm building up an EF and I could stop payments on the family loans for a while (and borrow more, if it came down to it) but I really don't want to do that. Once the credit cards are paid off I'll probably use that money to beef up the EF, and then start tackling the other debts. So I am working on it, and we are much more conscious about what we spend these days. I'm just not up for the extreme cost-cutting thing -- I'll cut back, but I'm not ready to cut out, if that makes sense.

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