I'm in pretty bad shape...

[jessica617]

Hi everyone. I have been lurking on this board for a while and figured I might as well register.

My name is Jessica, I just turned 27 and I have always dreamed of retiring early enough to really enjoy life. My problem is that I got a late start in growing up and being responsible, and it's kicking me in the pants now. I have about $11k in credit card debt, $10k in an auto loan and about $25k in student loans. Yes, I cringe when I actually have to face those numbers.

Between my 401k and Roth IRA, I have less than $2500. I contribute 6% to the 401k, which is the minimum to receive the max employer contributions. I can't afford to contribute anything to the IRA at this time.

Right now I am paid very little for what I do right now, but in October my job code will be changing, and with it, a new salary. I am expecting a $10k raise and I'm not sure where I should put the extra money.

Should I go back to contributing to my Roth IRA (and/or bump up the % on my 401k), or if I should be aggressively paying off my debts first? Or should I treat each with equal importance? I know that the earlier you start saving, the better, but I also know that the longer I drag out my debt balances, the more money I'm losing in interest over time.

I'm in bad shape and it stresses me out on a daily basis. I'm dying to start actually saving money and learning about investing, etc. Any advice would be greatly appreciated. Thanks in advance! :confused:

[TromboneAl]

It's good that you're aware of the problem and ready to fix it.

One step you can take is to reduce your expenses. You'd be surprised at how much less you can spend if you know how. Go to your library and get a book called "Your Money or Your Life."

[cute fuzzy bunny]

Pay off your debt. Anything that doesnt have a favorable interest rate or special terms. Most likely that credit card debt is pretty expensive. If that car loan is over 4-5%, that oughta go too.

So what are the interest rates and any special terms on the debt?

And dont be too tough on yourself...I imagine a fair number of people here were in pretty bad shape financially in their 20's.

Another thing to consider is a second job or other sources of income. When I was in my early 20's and found myself with a little extra debt I went and worked at a hardware store 2 nights a week for 4 hours a pop, and worked the midnight to 8am shift friday and saturday nights at a convenience store.

That sucked by the way...but I made a lot of money, learned a lot at the hardware store, and met some interesting people at the convenience store job...

[citrine]

Jessica:

The first part of any problem is admitting that you have one!
And to have found this site at the age of 27...you are definitiely headed in the right direction!
Since contributions to the 401K is before tax....I would increase it to 10%. I would work on paying off the credit card debt first since it probably has the highest interest rate. I actually kept mine frozen in my freezer to avoid impulse purchases! I also got rid of cable, ate ramen noodles, and stopped shopping to get out of 10K in debt. It took me a couple of years, but I did it.
The secret is living below your means and not using credit cards to subsidize a lifestyle

[Rich_by_the_Bay]

Jessica, you can't be in that bad a shape because you're 27. You just have to start thinking long term. Go to Borders book store, personal finance section. Avoid the whacky ones that promise to make you an instant millionaire. I like the books by Lucia, Ponds, Jane Bryant Quinn as well as the one Al mentioned.

If you set a goal to pay off your existing debts of $46K over4-5 years you'll still be only 31, with plenty of time to make amends. I'd contribute to the 401K up to the employer match (that's too good to give up), learn to live below your means, and set up a monthly automatic transfer to your credit card and other debt balance accounts. Any job raises or promotions that arise, take half for yourself and use the other half to pay down debts.

Biggest advantage you have: you woke up while still young.
Biggest disadvantage: you've gotta get going on a plan now.

Good luck and keep us posted.

[cute fuzzy bunny]

What? You're suggesting she go to borders rather than the public library? Oh shame....shame, shame, shame...

[Rich_by_the_Bay]

She can browse, then collect unfinished coffee cups, bagel pieces, and scones: lunch.

Don't mind us, Jessica. Most of us have been where you are now, and it's always good to remember that some day you'll be able to look back and laugh at what things used to be like.

[pj86]

Quote:

Originally Posted by jessica617 I can't afford to contribute anything to the IRA at this time.

The truth is: Yes, you can. Are there people living in the same city and earning more than 25% less than you do? (Of course there are.)

Well, imagine you are on of those people and start acting like it. Move to a neighbourhood with all such people if needed. The nice thing: You can spend the same amount as they do monthly, and you will save. A lot.

Also: No car. No TV. Outlet shopping. Buy the cheapest studio in town. Be a travel guide instead of paying for the group travel. If you are female, lower the criteria and have more males pay for your evenings. Only hobbies that pay you instead of being a cost (poker, website about your passion, blog about getting away debt, ...).

I am sure you can reach 10 million by the time you turn 60. It's up to you to convince yourself.

Good luck!

EDIT: I would pay off debt first. Highest interest first, no matter what size the loan is. Selling the car is a good start. Pay raises go 100% to debt. You don't have the luxury to give yourself 50% of the raise.

[Sam]

Quote:

Originally Posted by jessica617 My name is Jessica, I just turned 27 and I have always dreamed of retiring early enough to really enjoy life. My problem is that I got a late start in growing up and being responsible, and it's kicking me in the pants now. I have about $11k in credit card debt, $10k in an auto loan and about $25k in student loans. Yes, I cringe when I actually have to face those numbers.

Welcome Jessica,

Let me also disagree with you.
1) At 27, it's not a late start.
2) You're not in a bad shape. More likely you are in a very normal shape, financially speaking.

The fact that you're planning at 27 tells me that you'll do very well. As for your questions:

- I would keep contributing that 6% to the 401K to get the full company match.
- I would use the upcoming raise to get rid of the credit card loan asap.

What's the interest rate on your student loan and car loan?

Good luck.

[maddythebeagle]

If you have good enough credit, you could apply for a balance transfer on to a new card...and then pay off the debt as quickly as possible...if you are talking about 20-30% interest, I would pay that off before messing with your investments...

[Webzter]

Here's my recommendation... for what it's worth

Your biggest issues right now are that you're going to need to feel like you're accomplishing something. Spreading your money all over the place isn't going to help that. Focus on one task and knock it down.

To start, you need emergency money in case something happens. However, in your case, it doesn't need to be a big pile of cash in CDs or a money market account. You can get the same flexability just by freeing up your credit cards. So, focus on paying them down. Put so much money on them that it's painful and you need to sacrifice. That'll pretty much gaurantee that you won't be tempted to charge on them again unless you need to.

Once you get them paid down, start badgering your CC company for better rates. If it looks like you're on the move to drop them, they'll tend to be more accomodating. If your credit scores can afford it, then start shopping for a better card. Be careful, though, if you do a balance transfer and then start using the card, your balance transfer will be caught behind your higher interest purchases.

And, look at it this way, if your cards have an average interest rate of 15% right now, then every dollar extra you pay on principal is earning you a 15% return.

Next order of business, and maybe you're doing it already, make a spending journal. For a month, record every expense. Be it a mocha, a lunch out, groceries, cable bills, whatever. It only makes sense to cut back on spending if you have a crystal clear picture of where that money is going.

Keeping a journal helps with two things. First, it tells you if you have a huge problem somewhere you didn't know about it (extra large coffee every morning at starbucks) or if you're actually doing ok. Second, it makes you accutely aware of how you spend.

Armed with knowing how you spend, you need to sit down and decide, line by line, if it's a necessary expense or not. Your life is your life and no one else can decide for you on each expense... Personally, I can't stand TV and so going without cable would be no big deal to me at all. However, I spend my money on expensive cheeses when I'm cooking. What sounds silly to one person is essential to the next.

Just remember, it's all one day at a time and it's going to take a while to get to where you truly want to be. It's like changing your life through modifying your diet and exercise... no miracle pills here.

[Coach]

Jessica, welcome! It's always a pleasure to see smart people joining in. I know it feels bad now, but actually you're in better shape than most of the population in your age bracket.

When you're at the library checking out finance books, look for something by Dave Ramsey. He has his faults, but he really addresses people in exactly your situation and has a good set of steps for getting out of debt and investing in the future.

It's not easy, and it takes sacrifice, but it sounds like you want it enough and you're smart enough to get there.

Do keep us informed about how it's going. We're kindred souls.

Coach

[Fool_working]

Jessica,
I am 26, and it looks like you are in almost the exact position I am in right now! I started the year with $50,000 in debts, and at the end of June I had that paid down to $43,000. I now have $3000 in credit card debt, $10,000 in car debt, and $30,000 in student loans left to go.

I also don't make a lot - I'm just two years out of school, and still at a little over my entry level salary. However, according to the calculations I made at the start of the year it will take me 1 1/2 years to pay off my debt.. and I just checked, and so far I am three months ahead of what my original plan was.

I am working on paying off my last Credit Card right now. I agree with other posters. Read Dave Ramsey to see how to pay off your debt, read 'Your Money or Your Life' to see how to live below your means and not ever realize it.

Once you get started paying down your debt it feels so freeing that it becomes a game to see how fast you can make it go down! I made a big wall chart with all my debts and its fun to see the lines dropping down towards ZERO each month!

I know it also helps to talk to other people in your situation. You might look around your city for a Simple Living group or a financial group for people to talk to and support you.

[Darryl]

Jessica, it looks like a lot right now.

But it is very manageable. I would suggest Dave Ramsey's Total Money Makeover. Very conservative advice and once you get focused you will be amazed how fast you can eliminate your debt. Once the debt is gone you will be amazed again at how easy it is to invest with your new and improved cash flow.

Your focus on this subject is all I need to hear to be convinced that you are going to successfully work through this and be on some very good financial ground in short order.

[Goonie]

Jessica, I know how you feel, I had $50k+ in CC debt. I learned to live way below my means, and paid roughly 70% of my net income per month to pay down the CC debt. It took about 2 years, and it was a HUGE load off my mind!

It was kinda hard at first, but my goals helped to ease the pain. Then it kept getting a little easier, especially when I started to see the debt dwindling little by little each month!

Once the debt was paid off, I went back to saving and investing again. Now the CC gets paid in full EVERY month...NO exceptions!

I continue to LBMM, and even though I net about 12% less in retirement than while I was w*rking, I sock away about 60-70% of my income each month. I had learned to live on about 30% of my net income before, and I just continued that into retirement, also. Although I do splurge when I want to!

So take heart, Jessica, it's not really as bad as you think! Especially since you're young and time's on your side! Also check out some of the books the others have recommended, and take it one step at a time! You'll do OK!

[laurence]

I too, was in about the same position at age 25. Ditto from me on the credit card being paid off first. Can I intrude a bit?

Single? Serious B-Friend? Fiance? Husband? What are his spending habits like?

What is your annual salary right now?

Is this car paid for? What's the car payment if not?

Of all the bills we cut, cutting cable was the most painless, we went from uber-cable with HBO and a bazillion other channels down to basic, and we don't even notice what that extra $50/month got us. I would also say, cut back all your monthly bill services drastically, and if you find after six months you are just dying without one of those services, I'm sure the company will love to have you back.

A gimmick I used for my retirement funds was to knock up my automatic distribution each time I got a raise. Kept the salary the same and quickly hit the max (then started to have kids and had to pare back, but hey).

EDIT: Duh, saw the 10k loan on the car now. So 1st CC debt, 2nd car loan, then just pay regular on the student and read up on a well diversified, low expense portfolio for your 401k. Take all the money you were sending to debt each month and immediately start socking it into retirement funds so you don't miss a beat and get used to spending it.

[lets-retire]

I'm a bit contrarian, so here's my take. Is all of your credit card debt on different cards? If so then I'd probably suggest doing as the others have said, only because it will allow you to free up cash sooner. If the balance is mostly on one card then I'd figure out which loan gives me the best return. What percentage of the balance are you paying each month on your credit card and car loan. If one is larger than the other pay the larger one off first. Here's the reasoning. If you are pay $600 for your car on 10k, and you are pay $350 on you credit card for about 10k, you will free up an extra $250 for paying off the car loan. In essence receiving a return of an extra $250 for investing 10k in your loan. Obviously, if you have several small credit card balances you would be better off paying them first, because you'd free up the smaller payment amounts quicker.

I would not concern myself with increasing savings right now. Work on getting rid of debt, then increase savings.

[GatorBuzz]

I agree with others in that you shouldn't be hard on yourself. It doesn't do you any good, and the truth is you're really not in as bad a shape as you feel. I know that seems like an "easy for you to say" situation, but I was in almost your EXACT shoes at your age. I'm now almost entirely debt free and put away 40% of my income. If I can do it, anyone can. Here is what I'd do if I were in your situation (and this is pretty much what I did):

1. Read Your Money or Your Life.
2. Read The Only Investment Guide You'll Ever Need by Tobias
3. Up your 401k to 10% (I know, I know, some would argue you should use that extra money to pay down debt, but I don't necessarily agree). I wouldn't start contributing to the IRA right now, though.
4. Ditch almost all spending unless it is an essential to living. I don't agree with the idea of eating bad/cheap food, though. Your health is more important than anything and can save you money in the long and short run. You can, however, lose DSL, cable, maybe even the car?, lunches out at work, beers during work happy hour, expensive clothes from the mall or other pricey stores.
5. Pick your highest interest debt and pay it down with every dime you have left after all essentials are paid. However, I actually paid down my car payment first b/c I only owed about 4k and that freed up $450 a month to apply to other debts after it was paid off. The interest rate actually wasn't that much lower than my two CCs...
5. Repeat with the next debt, etc.
6. After you've got your debts manageable, you can start applying some of the knowledge you've gained through reading investment books.
7. This step should actually be up there with the first thing you do: Document your spending to the penny and look back over a couple months and see where you can trim. Often we don't even realize where our money is going until we see it on paper. All those seven dollar lunches start adding up quickly when you see the tally at the end of the month.

[wildcat]

Jessica -

Who hasn't been in bad shape at some point or multiple points in their life? Judging from the 6 millions polls DT has conducted, there don't seem to be too many people here that were born with a silver spoon.

Come up with a plan of attack, stick to it, continue to save and you will be amazed at the results. I also reco that you look at things in periods to assess your progress -- 1 yr, 3 yrs, 5 yrs, etc. Baby steps...

You will do fine and as TboneAl pointed out, the most important part (the starting point) is to realize you need to change.

[samclem]

Jessica,
Welcome to the board. You are ahead of 90% of the US because you 1) appreciate your true situation and 2) are young enough to do something about it. Congrats.
Also, don't be too hard on yourself re: the student loans. If you used the money responsibly and your education helped yopu get a better job, then that should be considered "good debt." But, as you realize, you still need to pay it off.
Not much to add to what the other posters have said. Consolidating your CC debt might lower your payments and also make it easier to track your progress in paying it all down.
- Get in the habit of investing a portion of your paycheck in your future, and in my case the key was to assure I never had to see or touch it. For example, you could set up a separate checking account at your bank and have a big chunk of your paycheck sent there every month. Then, have that account automatically make your CC and student loan payments. Important: When these loans are paid off in a couple of years, then re-allocate that autopay from the same account to your IRA and other investments. Also, whenever you get a raise, allocate at least 50% of the money to savings (you are used to living without it anyway, right?). Over the course of your working life this will put you in excellent shape.
- On the personal side-if you marry someone with a similar attitude to getting your money to work for you, you'll have taken a big step toward a harmonious future. So, I'm not sure it makes much sense to date folks who will take you out for expensive meals--that guy who wants to have a picnic lunch in the park might be a better long-term partner. (Anyway, I don't know if you could be cheap enough to just date somebody for the meals--and I think there's a word for doing that . . . ).