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Managing Debt Before Kids

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Anonymous
Not applicable

Managing Debt Before Kids

My wife (34) and I (31) are going to start trying to conceive and we are in the process of consolidating our assets to get a better understanding of where we are financially. We've always maintained separate accounts, but have been open and honest about our spending. We live a pretty nice life and are fortunate to have good paying jobs. We've worked extremely hard to get to where we are and I still even work three jobs.

 

I was fortunate that the USMC pay for my degree and my wife has only accrued student loan debt (~$20k) to finish her Masters at Georgetown. We have deferred those payments until next year when they need to start being paid.

 

My largest concern is our revolving card debt of 28k/77k (37% utilization). We have pretty decent credit scores (both in the 740s) and each pay $1,000 / month to credit debt. We just recently made a decision to stop using them altogether.

 

We do "own" two homes and one is currently rented out. We owe $330k/370k and $295k/302k on these properties. The rented home has it's mortgage, taxes and insurance covered by the renters.

 

Here is our yearly budget after taxes, 401k deposits and health/dental insurance payments. We do tend to take vacations 3-4 times a year which eats up a bit of our disposable income. This will obviously stop after kids arrive...

 

My question is this, should we be saving/investing less and putting more to credit card debt? Or stay on the current course? A baby (or babies) are expensive and we need more savings as a cushion in my opinion, but I don't want a bunch of debt burdening us either.

 

 

Item Yearly
K. Income 62,400.00
N. Income #1 49,440.00
N. Income #2 2,400.00
N. Income #3 5,760.00
SUBTOTALS 120,000.00

Home #1 (23,400.00)
Home #2 (rented-out, HOA payment) (2,796.00)
Audi Lease (5,616.00)
Car Insurance (1,680.00)
Power and Light (2,160.00)
City Gas (360.00)
Phones (2,040.00)
TV/Internet (2,580.00)
Water Bill (960.00)
Lawn Care (900.00)
SUBTOTAL (42,492.00)

Business Expenses (600.00)
Dry Cleaning (1,800.00)
Amazon Subscriptions (1,920.00)
Tolls (660.00)
Netflix (120.00)
Gasoline (est.) (3,600.00)
Groceries (est.) (6,000.00)
Eating Out (est.) (3,600.00)
Entertainment (est.) (1,200.00)
Massage Membership (600.00)
SUBTOTAL (20,100.00)

Credit Card #1 (0k/23k balance) (0.00)
Credit Card #2 (14k/19k balance) (12,000.00)
Credit Card #3 (4k/10k balance) (6,000.00)
Credit Card #4 (10k/19k balance) (6,000.00)
In Store Credit #1 (0k/3.5k balance) (0.00)
In Store Credit #2 (0k/2.4k balance) (0.00)
Student Loan (20k balance) (0.00)
Retirement Savings (post-tax) (4,800.00)
General Savings (3,000.00)
Emergency Fund (3,000.00)
SUBTOTAL (34,800.00)

Remaining 22,608.00

6 REPLIES 6
StartingOver10
Moderator Emerita

Re: Managing Debt Before Kids


@Anonymous wrote:

My wife (34) and I (31) are going to start trying to conceive and we are in the process of consolidating our assets to get a better understanding of where we are financially. We've always maintained separate accounts, but have been open and honest about our spending. We live a pretty nice life and are fortunate to have good paying jobs. We've worked extremely hard to get to where we are and I still even work three jobs.

 

I was fortunate that the USMC pay for my degree and my wife has only accrued student loan debt (~$20k) to finish her Masters at Georgetown. We have deferred those payments until next year when they need to start being paid.

 

My largest concern is our revolving card debt of 28k/77k (37% utilization). We have pretty decent credit scores (both in the 740s) and each pay $1,000 / month to credit debt. We just recently made a decision to stop using them altogether.

 

We do "own" two homes and one is currently rented out. We owe $330k/370k and $295k/302k on these properties. The rented home has it's mortgage, taxes and insurance covered by the renters.

 

Here is our yearly budget after taxes, 401k deposits and health/dental insurance payments. We do tend to take vacations 3-4 times a year which eats up a bit of our disposable income. This will obviously stop after kids arrive...

 

My question is this, should we be saving/investing less and putting more to credit card debt? Or stay on the current course? A baby (or babies) are expensive and we need more savings as a cushion in my opinion, but I don't want a bunch of debt burdening us either.

 

 

Item Yearly
K. Income 62,400.00
N. Income #1 49,440.00
N. Income #2 2,400.00
N. Income #3 5,760.00
SUBTOTALS 120,000.00

Home #1 (23,400.00)
Home #2 (rented-out, HOA payment) (2,796.00)
Audi Lease (5,616.00)
Car Insurance (1,680.00)
Power and Light (2,160.00)
City Gas (360.00)
Phones (2,040.00)
TV/Internet (2,580.00)
Water Bill (960.00)
Lawn Care (900.00)
SUBTOTAL (42,492.00)

Business Expenses (600.00)
Dry Cleaning (1,800.00)
Amazon Subscriptions (1,920.00)
Tolls (660.00)
Netflix (120.00)
Gasoline (est.) (3,600.00)
Groceries (est.) (6,000.00)
Eating Out (est.) (3,600.00)
Entertainment (est.) (1,200.00)
Massage Membership (600.00)
SUBTOTAL (20,100.00)

Credit Card #1 (0k/23k balance) (0.00)
Credit Card #2 (14k/19k balance) (12,000.00)
Credit Card #3 (4k/10k balance) (6,000.00)
Credit Card #4 (10k/19k balance) (6,000.00)
In Store Credit #1 (0k/3.5k balance) (0.00)
In Store Credit #2 (0k/2.4k balance) (0.00)
Student Loan (20k balance) (0.00)
Retirement Savings (post-tax) (4,800.00)
General Savings (3,000.00)
Emergency Fund (3,000.00)
SUBTOTAL (34,800.00)

Remaining 22,608.00


Welcome to MyFICO! Smiley Happy   Some comments below:

 

I agree with you for some of your analysis - you need to rework your savings and debt plans that you have in place right now.

Both your savings and emergency fund need to be increased. Typical emergency funds are 3 to 6 months of your income and your savings would be in addition to that amount. $3k in savings and $3k in emergency is not nearly enough, especially if you are starting a family (congrats!)

 

Where you can see I highlighted in red are very high expenses based on your current income and your goals. It is one thing when you are single, but something else when children enter the picture.  

 

Analyze your "investment" property.  Do you have negative or positive cash flow? What kind of return are you showing on the investment property? Is it rented for market rent or less?  Do you have it simply to mitigate your income tax or for something else?  Not all investment properties are good investments. It may have been a good solution when you converted it to an investment property, but it should be analyzed every year to see if it is worthwhile. 

 

Do you have equity in the investment property?  Sometimes the best thing to do is to liquidate and pay off your debt and put the rest into cash type vehicles - stock purchases or other types of investments that offer a greater return. I am a believer in real estate - but not all real estate is equal. Make sure to pencil out your options here so you don't keep a property out of habit. 

 

I would get rid of the Audi if at all possible. Get something that is affordable on your HH income that allows you to put away more in savings and to accelerate your debt payoff too. The other items in red are also out of line for your income. Look up various budgeting software so you can track your spending and cut out the excess items. It is easier to do if you put it on a spreadsheet (IMO). 

Message 2 of 7
Anonymous
Not applicable

Re: Managing Debt Before Kids

Just out of curiosity, how do you determine $1680/yr for car insurance as high but $900 for lawn maintenance isn't?  I'd kill for $140/mo car insurance and I have a clean record!

Message 3 of 7
iced
Valued Contributor

Re: Managing Debt Before Kids

I wouldn't decrease your savings; if anything, I would be making a concerted effort to increase them. Every $1000 more per year you throw into investments/401k is going to translate into about an eight-fold return around retirement time (assuming about a 7% return annually, which is pretty standard), and that's not counting additional sources like dividends.

 

 

The problem isn't that you need to cut back on saving. The problem is you made your cost of living too high. That's where you should cut back.

 

1. Your phone, TV/internet, and Amazon alone total $6,540 a year. That's over $500 a month. I don't know what you're spending it on, but I already know for a fact it's excessive. 

 

2. The P&L and lawn care seem high to me, though I don't know about your particular area. Can you do some lawn care yourself and save money? Any ways to cut back on electricity usage?

 

3. Dry cleaning is $150 a month. Unless you wear, eat, and occasionally sleep in nice suits and dresses every day, this feels high. Not saying you should/could cut from here first, but if you are going to choose between reducing retirement or reducing dry cleaning, take dry cleaning every single time.

 

4. Gas, groceries, and eating out combine for $13,200, or $1100 a month. Is that realistic? Yes, my wife and I are in about that ballpark, though gas makes up a much smaller percentage. I also know that it's an area where I could realize considerable savings by shifting more eating out to groceries, so you can too.

 

5. The car is a heavy expense, but can also be tough to do anything about once you bought it. I'll let it go for now since you have so many other areas you can fix first.

 

Just from numbers 1 and 4 above should be cable to convert into around $500 a month (or more). That's $6,000 a year more to pay down the CC debt, and once it's clear, that's a big chunk of change you can pivot towards retirement or kids without having to adjust other parts of your finances. It's a win-win. If you do get more disciplined, consider finding a 0% BT offer to send chunks of CC debt to for payoff, but don't send so much you can't pay it off before the 0% ends while still making substantive payments to the other cards.

Message 4 of 7
Anonymous
Not applicable

Re: Managing Debt Before Kids

Just curious but is that before or after tax salaries?

 

As someone else had already suggested, your spendings are astronomical! I would cut back on things you don't necessarily need and do it fast. These things should become a habit if you are trying to have a baby. You mentioned going on vacation 3-4 times a year, well make it a habit of going less because you won't have a choice once your baby is on your way. That is wonderful that your family has already started investing in real estate. That will provide you with a cash flow in the long run but are you currently making any money off the rental? I noticed its costing you money to rent out so is rent not covering the expenses for that property? One last suggestion, try to double or triple your credit card payments. That seems crazy but it is like ripping a bandaid off. The faster you do it, the less drawn out it gets and less painful it will be. Try to be conversative with your money and slowly cut spending until it has become second nature. It is hard to change spending habits. I know first handedly and I have met a number of people who spend more than they make. I wish you the best of luck with your family and hopefully this advice will help you manage your debt!

Message 5 of 7
Anonymous
Not applicable

Re: Managing Debt Before Kids

Are you paying interest on the credit cards? If so I would move the balances to a 0% card. I do agree no longer using to cards is a good option though with the

exception of a balance transfer.

Message 6 of 7
Anonymous
Not applicable

Re: Managing Debt Before Kids

I can't kill a man with my bare hands but I mow my lawn.… heh… yes you are planning in advance which is exactly what you want to do. Dump audi, purchase a high-end model Honda Accord. Honda is not part of rental fleets; the resale value is better on them. The earlier you do your budget like the kid is already here the easier it will be on you
Message 7 of 7
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