Monday, June 24, 2013

A Reader Question about Becoming Debt-Free

Here is a lightly edited question from a reader who calls himself or herself “Debt Free”:
I've read over a bit of your blog, and I enjoyed it. I'm on a mission to pay off HUGE debt. I need some help (support – not asking for money). I need to be accountable to someone for my daily spending to keep me on track so to speak. This is my situation:

Credit card #1 Balance $6500, Int. Rate 19.99%
Credit card #2 Balance $11,800, Int. Rate 19.99%
Credit card #3 Balance $3600, Int. Rate 28.99%
Credit Line Balance $14,000, Int. Rate prime plus 5% (currently 8%)

Car Loan balance $17,000, $177 biweekly
Mortgage balance $114,000, $163.08 weekly
Child support $500 per month (this is likely to change end of this year)

Income:
Full time job $2926 (net) per month
Part time job $1700 (net) per month

Do you have any suggestions? I would like to have this paid off in 2.5 years from now.

Any advice you can pass on would be greatly appreciated.
Thanks!
Debt Fee, I’m glad you’ve enjoyed the blog. I’m happy to give you some thoughts. Maybe other readers can offer suggestions, too.

To start with, the only way I know of to become debt-free is to spend less than you make. The gap needs to cover all the interest plus some principal to make any headway. We need to crunch some numbers to where you are.

I need to make a few assumptions. Let’s assume your line of credit and credit card minimum payments are 2%, except for the higher interest rate card which is 3%. That makes the total minimum payments $754 per month. Your mortgage, car loan, and child support average about $1593 per month. This totals $2347 per month.

However, if you just make minimum payments, it will take decades to pay off these loans. If we add in $500 per month in additional principal repayments, you’re up to $2847 per month. This leaves only $1179 per month for food, gas for your car, insurance, and everything else.

This is very tight. You need to look at some changes. Can you expand your mortgage to pay off the high-interest debts? If not, can you expand the line of credit to pay off the credit cards? If you do this, do you have the self-control to not just run up the credit cards again?

Do you really need your car? Cars are not only expensive to buy, but they are also expensive to operate. If you have some equity in your home, you might consider selling it, paying off debts, and renting until you get some savings again. Another possibility is to take on a renter in your home.

I think it would be very difficult for you to maintain your current minimum payments and come up with additional cash to repay some principal each month. You may be forced to make some tough choices.

6 comments:

  1. Though I technically agree with all financial recommendations they will not work for this person. No matter how much the person will work and how little eat.
    The very first recommendation: "Get real, adjust your expectations and behavior to your financial abilities. Your financial standing is a reflection of your life, not your life itself. Therefore, if life has brought you to this situation, then life has to be changed and the situation will change accordingly.

    Until this is done - the rest is child play." Problems (and solutions) reside between ears.

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    1. @AnatoliN: You may be right. However, because this person is paying child support, there is some chance that he or she is in this situation as a result of a split and possibly the ex-spouse's financial habits. If this is right, then there is hope.

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    2. @Michel, your valid argument does not stand the reality test: a rational person with 3 maxed out credit cards will not carry a house and 17K car. Refinancing house and changing the car will make him/her debt-free (except mortgage) in a couple of weeks, it's a no-brainer (pan intended).

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    3. @AnatoliN: It's quite easy for a man who is quite good with money to be in deep debt after splitting from his family and getting soaked in the divorce. However, I have no idea if that's what has happened here.

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  2. Cut the guy some slack. He at least is trying to look for some help here. I agree - he needs to consolidate the high interest debts into one that is as low as possible. Possibly a visit to a mortgage broker and paying a penalty to break his exsisting mortgage and renegotiating one larger loan at todays lowest rate he can get. Then his monthly payment will pay off more then just the interest on his loans. Secondly go to a "leasebuster" type car place get rid of that car and find a nice used car for $6000 or $7000. They are out there. People need to stop being afraid of a car thats a little older that's well cared for.

    I don't see anywhere that maybe he would be willing to try to sell his home? Rent maybe? Does he have a basement or room he could try to rent out for a $500.00 a month even? When you put your mind to things you can turn a bad negative into a positive with some light on the horizon. But he does have to cut up his cards after he consolidates.

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  3. I hope Debt Free keeps on his/her quest to pay off these debts. The fact that they recognize they are huge and the fact that they have a part-time job to try to help the situation shows a lot of strength and determination. It can't be easy to hold two jobs.

    I wonder if the vehicle is necessary for the jobs? I know sometimes you need a big vehicle for work, for instance a truck or van if you work as a renovation contractor. If it's not needed for work, that's about the only obvious place to try to cut costs from the list. $17,000 is a lot of debt for a vehicle if it's just transportation to get from here to there, and not carrying payload.

    Good luck Debt Free. You deserve to make some progress given your apparent dedication to the task.

    re Paul's comment. Actually he can cut up the cards anytime (and probably has). You don't need the plastic card to make re-payments.

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