New Way Forward?

[ATC Guy]

Hello everyone. I have been an avid follower and occasional poster on the forum. Recently we have had a few life changes and I'm not sure exactly what direction I'd like to go so I thought I'd post here to get the community's viewpoint.

I'm 29, married with 2 boys age 2 and younger. I'm a federal employee eligible for special retirement provisions (I can retire as early as 50 but no later than 56). I will have a pension and TSP assuming big governmental changes don't whipe that out.

Stats about me:
- Current salary makes things tight on a family of four and we have accumulated some debt because of that

- I'm scheduled to transfer in the next 2 years to a new position with a 75% pay increase

- I was recently approved for VA disability for an injury incurred during active duty which should easily close our current pay gap. No further debt accumulation expected.

- Contribute 5% to TSP with 5% match

Current Debt:
- $11,000 auto loan
- $14k credit card due to some medical issues with my son and also us not quite being able to make ends meet each month
- $20,000 student loans (spouse)

We just bought a house and our mortgage should be $200-300/Month less than we pay in rent now plus with the added VA pay we should be fine until the transfer. I also received an inheritance of $9,000.

Question: What is the best way forward? I've thought about using the $9k to payoff the car loan and open up another $300/month of usable income to payoff CC. But the auto loan is only at 2% while the credit cards are at 15%. I was able to move half the balance to a 0% balance transfer card for 21 months so at least that balance isn't accruing interest in the meantime.

The auto loan doesn't bother me but the credit card debt stresses me out everyday. I just want it gone ASAP but I worry that the remaining 5k in cc debt will be difficult to payoff until I get my job transfer.

I also irrationally love seeing that $9,000 sitting in my account and I feel like that's part of the reason I'm paralyzed with this decision.

Help!

 

[pb4uski]

Pay off the 15% credit card debt. Keep the rest in an emergency fund (only $2k if I understand correctly but $2k is better than nothing). Pay down the zero balance as you can ($100/month would be a good start) and keep the auto and student loans current.

 

[target2019]

We just bought a house and our mortgage should be $200-300/Month less than we pay in rent now plus with the added VA pay we should be fine until the transfer. I also received an inheritance of $9,000.

Question: What is the best way forward? I've thought about using the $9k to payoff the car loan and open up another $300/month of usable income to payoff CC. But the auto loan is only at 2% while the credit cards are at 15%. I was able to move half the balance to a 0% balance transfer card for 21 months so at least that balance isn't accruing interest in the meantime.

The auto loan doesn't bother me but the credit card debt stresses me out everyday. I just want it gone ASAP but I worry that the remaining 5k in cc debt will be difficult to payoff until I get my job transfer.

I also irrationally love seeing that $9,000 sitting in my account and I feel like that's part of the reason I'm paralyzed with this decision.

CC debt is the worst. Pay that off first. It's evil.

You have other funds in cash available, I assume, and the amount fits your situation.

 

[Gumby]

The $7000 in credit card debt that is still at 15% is costing you $82 month in interest. I would use the inheritance to pay that off now and direct the $82 per month toward the credit card debt on zero interest, because free balance transfers are a rare thing and the likelihood is that, in 21 months, you'll be back to paying 15% on that part of the balance. However, if you do pay $82 per month from now until then, you'll have knocked $1722 off the balance.

With respect to the mortgage savings over rent -- have you considered the additional cost of homeowner's insurance? The taxes will likely be an escrow payment included in your monthly payment to the lender, but the insurance probably won't be. You probably should get the homeowners through your auto insurance carrier so that you get a multi-line discount. I've had USAA since 1980 and been happy with them. I'm sure you qualify for them as well.

As pb4uski says, keep the auto and student loans current, and don't incur additional debt.

 

[Walt34]

You don't mention an emergency fund for such things as a new A/C, furnace, roof, water or sewer lines breaking, car transmission falls out onto the pavement, etc. Stuff happens and sometimes the only fix is a large wad of cash.

If you don't have that emergency fund I'd suggest keeping a good chunk of that $9k (at least half) in an immediately-available savings account. Use the rest to pay on that 15% credit card debt.

At only 2% I'd let the auto loan ride (but keep the payments current!) and aim any money you can at the credit cards, the 15% one first and then the one that is now at 0% because when the 21 months is up that one will probably also go to 15% or nearly so.

Long term things look good for you because of the impending raise but for right now things are going to be a bit tight until you pay off the credit cards.

 

[Bestwifeever]

I agree with the above suggestions to pay off the high interest cc debt right now. Then pay the same monthly amount you had been paying for that card and pay the zero interest account with that plus any other $ you can scrape together. If your transfer comes through before the zero rate card is paid off, throw any raise at it too. I think it's a very good sign for your future that you like having a chunk of change in savings.

Hang in there--you are doing really good to get on top of your finances now. You are in the middle of one of the most stressful and expensive times with two babies (wait til they're teenagers ) and you are young and still not near your peak earning years. Your distant future looks good financially and your present is going to look better every month.

(I would also keep enough of the inheritance out to pay for a babysitter a couple of times a month or so, and go out for a cheap dinner and a walk around the block or two with your DW as the two of you are in this together.)

 

[Walt34]

One other thought on that 0% balance credit card. What happens to the interest rate after 21 months? Do you have to retroactively pay interest on the 21-month period if it is not paid off by then, and if so what is the interest rate? Sometimes the companies zing you with 21+% rates retroactively, so take a hard look at the fine print on the agreement.

 

[Sunset]

.....If you don't have that emergency fund I'd suggest keeping a good chunk of that $9k (at least half) in an immediately-available savings account. Use the rest to pay on that 15% credit card debt.
......

I disagree with this, it's better to pay off credit card debt at 15%, and if an emergency arises, then use the credit card to pay the bill, even if it was just 6 months of no emergency, then you have saved 6 months of paying interest on the credit card debt, vs paying it while the emergency savings earns zero.

 

[Closet_Gamer]

Without knowing the details, I am concerned about credit card debt as a result of "not being able to make ends meet."

Be careful you don't experience lifestyle creep when this 75% pay raise arrives. It would be very easy, particularly with a new home to furnish, to accidentally inflate your lifestyle to accommodate this new cash and wind up right back where you are.

My suggestion: bank all of it. Literally. Every $ of this raise should go to debt reduction and savings. After that, split future raises 50/50 to savings and life style improvement so you continue to live further and further below your means.

 

[Walt34]

I disagree with this, it's better to pay off credit card debt at 15%, and if an emergency arises, then use the credit card to pay the bill, even if it was just 6 months of no emergency, then you have saved 6 months of paying interest on the credit card debt, vs paying it while the emergency savings earns zero.

Well there is that and if a credit card can be used you're right. But the reason I wrote that was in the event that the person he's paying does not accept credit cards, although in the 21st century that is increasingly rare. Might be my age showing....

My suggestion: bank all of it. Literally. Every $ of this raise should go to debt reduction and savings. After that, split future raises 50/50 to savings and life style improvement so you continue to live further and further below your means.

Funny you mention that 50/50 split between spending and savings. I sort of did the same thing with raises. One-third went to mortgage principal, one-third to savings, and one-third to lifestyle creep. Or the increased cost of groceries, etc. I did the same with unplanned-for income like working overtime. Most of the time anyway.

Much later, when I mentioned to a niece who at the time worked for Ameriprise (hey, it happens in the best of families) that the house was paid off she was astonished and asked how I did it. When I told her she said "Nobody does that!" Well, nobody who invests at Ameriprise....

 

[Closet_Gamer]

Funny you mention that 50/50 split between spending and savings. I sort of did the same thing with raises. One-third went to mortgage principal, one-third to savings, and one-third to lifestyle creep. Or the increased cost of groceries, etc. I did the same with unplanned-for income like working overtime. Most of the time anyway.

Much later, when I mentioned to a niece who at the time worked for Ameriprise (hey, it happens in the best of families) that the house was paid off she was astonished and asked how I did it. When I told her she said "Nobody does that!" Well, nobody who invests at Ameriprise....

Funny and sad all at the same time.

Simple approaches in life are usually the best...easy to follow and easy to repeat.

 

[Lakewood90712]

Pay off the 15% CC debt and relax. No need to overthink things.

 

[chris2008]

And start tracking expenses in detail and writing.
You need to know where your money goes and stay within your means. There is 'some emergency' every month. If you cannot master this no raise nor pension ever will be enough.

 

[2Pizzas]

Assuming your new housing expenses are in check and the VA benefits have closed the spending gap I would pay off the 15% credit card and use the remainder for an emergency fund. Going forward look for places to cut back to pay off the other credit card as much as possible before the 0% expires. Will the new position be local or require a move?

 

[ATC Guy]

Thanks everyone! I just paid off the nearly $7,000 on one card and have started automatic payments to have the 0% interest card paid off in full before the end of the 21 month promotional period.

Having everyone here agree that that was the right move pushed me enough to do it. Now I see that $0 balance and I feel amazing! Thanks again!

 

[kgtest]

Thanks everyone! I just paid off the nearly $7,000 on one card and have started automatic payments to have the 0% interest card paid off in full before the end of the 21 month promotional period.

Having everyone here agree that that was the right move pushed me enough to do it. Now I see that $0 balance and I feel amazing! Thanks again!

You did the right thing, congrats.

I've had to dig myself out before. Hoping to set myself up so when kid2 comes we don't need to dig.

 

[king smoothie]

We just bought a house and our mortgage should be $200-300/Month less than we pay in rent now plus with the added VA pay we should be fine until the transfer.

Depending on how and what you were renting before, don't forget to factor in paying for water, sewer, garbage disposal, etc. Plus possibly higher utility bills. All that could eat up the $200 - $300. Plus pest control, lawn care, and house maintenance could all be new expenses you are picking up.

Get those kids out of diapers! That and formula is so expensive. If money is tight, if those student loans are federal ones, then you may qualify for income based repayments (they look at disposable income, not just total income), which may reduce the burden - but then you are taking 10 years to pay them off- and I believe they will forgive the remainder after that (but that gives you "income" that year and a big tax bill). Consider carefully if you can choose this option. Personally I'd rather knock out those loans if I could.

Sounds like you are on a great journey, I wish you well.

 

[king smoothie]

Stats about me:

- I was recently approved for VA disability for an injury incurred during active duty which should easily close our current pay gap. No further debt accumulation expected.

If you are only a few months from transitioning from active duty, you may still be entitled to free financial counseling - they could look at your budget and financial plan and look for any holes. Plus, sometimes it just takes another set of eyes to find a couple hundred dollars.

Also, in the past two years, there has been several programs pushed to help veterans with financial counseling and education. Financial counselors have been positioned all over the US at certain job centers and VA centers and provide free financial counseling for veterans - there are some qualifications, but at least one program focuses on disabled veterans and another for veterans within 3 years of transitioning-I believe. This isn't my area (I have a couple of part time gigs in financial counseling and education), so I'm not sure of the details. But I can look closer and inquire if you are interested.

 

[ivinsfan]

Depending on how and what you were renting before, don't forget to factor in paying for water, sewer, garbage disposal, etc. Plus possibly higher utility bills. All that could eat up the $200 - $300. Plus pest control, lawn care, and house maintenance could all be new expenses you are picking up.

Get those kids out of diapers! That and formula is so expensive. If money is tight, if those student loans are federal ones, then you may qualify for income based repayments (they look at disposable income, not just total income), which may reduce the burden - but then you are taking 10 years to pay them off- and I believe they will forgive the remainder after that (but that gives you "income" that year and a big tax bill). Consider carefully if you can choose this option. Personally I'd rather knock out those loans if I could.

Sounds like you are on a great journey, I wish you well.

Diapers and Formula really? They are still infants and toddlers for pete's sake.Life is busy enough without worrying about the cost of formula and a few extra diapers.

 

[DrRoy]

Pay off the 15% credit card debt. Keep the rest in an emergency fund (only $2k if I understand correctly but $2k is better than nothing). Pay down the zero balance as you can ($100/month would be a good start) and keep the auto and student loans current.

+1

 

[ExFlyBoy5]

A word of caution on the VA disability. Many Vets look at this as "forever" and in many cases, it is NOT. Unless you have a static disability (or disabilities), you could very well lose it (or a portion of it) in 5 or 10 years (it won't magically stop, there is a long process for it). The specifics are much too complex for a posting here, and there are forums that are much more useful in determining these things (such as Hadit).

Congrats on the CC debt...that's awesome! When I was 23, I was quickly getting myself into dire financial straights that wouldn't be corrected for some years. It's good that you recognize that you need to control this NOW and not later. Your 40 year old self will thank you!