Aug 02 2011

Part 2: Dorothy’s numbers

Continued from part 1. Dorothy’s words below, with my commentary at the bottom:
The green
Salary: $39,000 before taxes (net between $1,159 and $1,165 per biweekly pay period)
  • Health insurance/eye is deducted at about $12 per pay period
  • Starting in August, my mandatory retirement payments kick in at 8.5% (I think, will get back to you when that happens.) As bummed as I am to see more of my money go away, I know I’ll be grateful in 40 years.

Savings: $30 ($25 of which is mandatory to open an account) Yeah, this needs work.

The red
Car loan: I finally took over my car from my parents this past April.  My dad sold it to me for $7,000 (KBB value is around 12, so good deal). The remaining balance is $6,549.64, interest rate is 4.5%. $102 per pay period is deducted automatically from my account. It’s a three-year plan. I really want to pay it off much sooner than that.

Chase credit card: $2,703.43 (13.24% purchase APR, it’s killing me), minimum payment around $56 a month, but I pay much more than that – fat lot of good that does, as we’ve learned.

Sallie Mae student loan: Outstanding balance is $11,884.87. I pay $170.33 per month.

Federal student loan: Outstanding balance is $3,395.76. I pay $50 a month.

Victoria’s Secret credit card: $0 as of 7/8/11. Should I get rid of this? Isn’t it more detrimental to cancel a credit card than to just cut it up? I want to get rid of it because they recently threw on a $25 fee when my payment for a $20 shirt didn’t go through on time.

Total debt: $24,533.70

Monthly expenses

  • Rent: $820
  • Car/renters insurance: $79
  • Internet/Cable/DVR: $76.75
  • Gym membership: $37
  • Energy: Between $30 and $140 depending on the season.
  • Groceries: $150 or so – I try to eat pretty healthily so I’m constantly buying new produce. At the same time, I’m one person so it doesn’t get TOO exorbitant.
  • Gas: Around $60

Other: Off the top of my head I’d say I pay for food drinks once/twice a week, never totaling more than $30 (Panera, drinks with coworkers, Starbucks). The shopping thing varies as well…sometimes I will charge a flight to visit friends because I’m so lonely out here, other months Anthropologie will have a sale and I’ll drop $80 on a dress. I probably waste $50-$150 a month this way. Have somewhat curbed it recently though, but it’s a constant battle.

My parents pay my phone bill still, but when my contract expires in January, I will be taking it over.  I also use their Netflix login (shh, don’t tell on me) for streaming instantly, so that’s another non-expense.

Mandatory:
Rent where I live is 700-800 a month, no matter where. I pay $820 for a completely redone apartment, no roommate, free water, brand new washer and dryer, walk-in closet, etc. So reducing my rent/housing costs is not an option. I barely run the A/C, use fluorescent lights, etc. 

I have two friends here, but don’t mind my alone time. My alone time is largely occupied by TV/Internet/DVR ($76). Another nonnegotiable.

Gym membership — $37 is an investment in myself that I feel great about.

Desires:
I would like to save, save, save. I am uncomfortable with the fact that I cannot put money toward a new apartment should I move, or pay for emergencies.

I want to increase my car payments per month, if possible. Three years seems like forever for a 2004 vehicle. I don’t really care about the student loans, I’ve kind of accepted that I’ll pay the payments as they increase, and pay them forever. They’re the good debt…right?

Obviously, I want to obliterate my credit card balance. I am not comfortable enough to tear it up/burn it/etc. because if something sudden happens (medical, car work) I don’t have the money at the moment to cover it.  I can promise you guys though, that I am making an honest effort to not use it. No charging gas or groceries on the fly. Done-zo.

I’m going to try to sell some of my hardly worn dresses on eBay, hoping to net a few hundred dollars for my immediate savings that way. I just totaled up the total debt, including student loans, and the $24,000 almost gave me a heart attack. I want to get on top of my life and this is one of the ways I need the most.

I can’t promise that won’t waste money again, because that’s too much to ask. I need help deciding where the money should go, and how much of it.

Kacie again:

Dorothy asked if she should cancel her Victoria’s Secret credit card. I say yes. Cancel. Your credit score only matters if you are trying to refinance something in the near future or take out a loan. Because getting a mortgage or an additional loan doesn’t sound like something in your short-term plans, I say cancel it. Your other debts will keep your credit score high and you won’t have to worry about those sneaky fees.

I suggested that D read The Total Money Makeover by Dave Ramsey for some perspective of paying off debt and how to do it. His debt snowball works!

Because she wants to be able to pick up and move back to Chicago if she finds a job, I think it’s important to build up savings beyond that $30 as quickly as possible. Sell those dresses on eBay. Cut some expenses for a time. Save $1-2k that it will cost to get home and to put a deposit on your next apartment. This is your freedom fund. Get it filled!

Once your starter savings is in place, tackle that credit card. You’re right, 13+% APR really is brutal. Kick that thing outta here while paying the minimums on all other debts.

Next, I think you can make a choice here. You can keep on with your debt snowball and hit the federal student loan or your car OR you can sock away a bit more into your emergency savings until you have 3 months’ worth of expenses should you need it. That’s somewhere between $5-6k depending on how you look at it.

The car loan seems to be more of an emotional debt than paying off the student loan with the smaller balance. I’m not sure what the interest rates are for either student loan (Dorothy can you help me out with that?). Paying off the car first can be a good idea — it IS an asset that can be sold later if she decides she doesn’t need a car in Chicago. Can’t exactly sell off her student loan.

I think as long as she’s targeting some debt, that’s a positive thing. And I DO think it’s worthwhile to pay off all debts, student loans included, as quickly as possible. The money is eating up monthly cash flow in a big way and once it’s finally gone, there’s a LOT more breathing room in the budget.

The way I see her numbers, she could be completely debt-free in about two years if she hits it hard. Student loans and all. It’s going to depend on how hard she does want to pursue this.

But believe me when I say, it is MUCH easier to stretch your income when you have no debt payments to make. On down the road if some romantic interest turns into marriage, and then if children follow that, just think of how much easier it will be on everyone if this is taken care of now.

Dorothy, you’re paying $480 per month in debt minimums. That’s $5,760 per year you have to earn after taxes just to make those minimum payments. That’s roughly 5 out of your 26 paychecks every year just paying debt minimums. Ten solid weeks of work just for debt minimums. 400 hours. You get my point.

Now throw on all the extra money you’re putting toward debt to accelerate, and just think of how much extra money you’ll have each paycheck once your debts are gone. It’ll be a lot!

You’ll be able to put more toward retirement, but also you’ll be able to pay yourself each check to put toward savings. Saving for another car some day, travel, new clothes, going out…whatever you want. Without stress or guilt.

You know the areas where you can cut back the most. Since you are alone out there basically, I don’t think it’s a good idea to reduce your cable to nothing or cut your gym membership, but do identify areas where you can cut back. Maybe you can just view Netflix for awhile instead of relying on DVR. You can decide what works — just do something.

But yeah, to sum up: Build up your savings asap so you can get to Chicago on a moment’s notice if a job comes along. And then obliterate your credit card. After that, keep plugging away on your savings and debts. You can do this. It is worth doing.



8 Responses to “Part 2: Dorothy’s numbers”

  1. I live 10 minutes from my parents and can only imagine how hard this must be to do all alone. Good luck, Dorothy! It’s inspiring to read about how you are turning your finances (and life) around.

  2. Kacie – some really solid advice for Dorothy to follow…way to go!

    Dorothy – I totally agree with Kacie – Read Dave Ramsey asap and cancel Victoria Secrets. As you begin to pay down your debt, you’re credit score will go up…but as Kacie said…you don’t need the credit score unless you plan on financing something, which it would seem like you are not planning on doing.

    And definitely sell some stuff on ebay or craigslist. The plus with craigslist is no fees…but your selling base is obviously limited. But definitely do that asap to help build up your emergency fund. Once you have $1000 emergency fund you will be able to relax a little knowing you are prepared for any emergencies.

    Try contacting your cc company for a lower rate. Even one or two percent can help lower that outstanding balance. Also, open an ing direct savings account and set up a savings account. Setting it up to automatically withdraw even a small amount will help build the savings quickly. I started mine with $10 a paycheck..but you could even do it as small as $5 a paycheck. It will add up!

    And finally…start clipping coupons for your food bill. You don’t have to buy a newspaper…there are plenty on the internet. You can really impact your monthly food budget this way! What I used to do was anything that was saved that helped lower my weekly food budget went to savings. But you could easily direct that money towards one of your debts. Even $5 or $10 a month helps bring that debt down. It will all add up in the end to be big amounts! You are off to a great start! Looking forward to seeing your journey and knowing you will be successful! You’ve taken the first baby step and that’s the hardest and most important one! Keep up the good work, it will be so worth it!

  3. “That’s roughly 5 out of your 26 paychecks every year just paying debt minimums. Ten solid weeks of work just for debt minimums. 400 hours. You get my point.”

    Excellent illustration! Really makes you feel it. Wish someone had pointed this out to me in my 20s…..

    Read Dave Ramsey–better yet find a class and go! They have scholarships, too. You won’t regret doing it.

  4. Great advice, Kacie! I agree, cancel the VS card.

    I also agree with Kacie that the student loan debt shouldn’t be thought of as loans that you’ll “pay forever”. Get rid of them now while you’re single and have few obligations! Your future self will thank you big-time :)

  5. Kacie, you’ve given some great advice! Dorothy, I would also say that top priority is look for areas to cut back and save up some money ASAP before paying anything extra to your debts. Definitely cancel the VS card. I’ve heard that having credit cards with a $0 balance is actually a bad sign to lenders because you have a greater potential to suddenly rack up debt and change your debt to income ratio.
    Once you get your savings built, get rid of the balance on the Chase card and close the account. Vow to never spend money on something that you don’t have the immediate funds for ever again. In the meantime, I would look for other credit card offers that might offer 0% interest rate (or something really low) and consider transfering the balance to that card while you’re working on paying it off. My husband and I had over $10,000 in credit card debt at one time, and we made it a point to never pay interest. Once the introductory period was over, we looked for another 0% offer to switch it to. It’s amazing how much faster you can pay it off if all of your payment is going to the balance.
    I’m really impressed that you’re committing to turn things around for yourself financially! You will love the freedom! Definitely read Dave Ramsey’s book, listen to his radio show or podcast (it’s totally inspiring– especially on Fridays when people call in and scream “I’m debt-free!), and find other money-saving blogs to encourage and inspire you with ideas

  6. I agree with trying to find a 0% interest credit card to transfer your CC debt to. Your credit score seems to be high enough that you should be able to find an offer or two and you’ll be able to pay if off that much faster.

  7. TRANSFER that credit card debt. 0% isn’t always available…and sometimes it’s only 0% for 6 months, but find one that won’t jump to 15% after six months. Moving from one to another doesn’t seem like a good idea to me…but maybe it’s ok. I just know that I’d never be able to keep on top of it. Our credit union is offering 3.4% transfer rate.

  8. Why don’t you take part in Mypoints or Swagbucks to earn gift cards to cover your eating out? We do this and it really does help keep our eating out budget low. Plus you can ask for gift cards to your favorite restaurants for gifts and that could help you cut that expense.

    Definitely cancel the VS card.

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Hey! I'm Kacie, wife to Shane and mother to Jonathan (7), Vivienne (5) and Amelia (2) . I write about my family's finance: how we save money, improve our spending, and plan for the future.

I hope I can inspire and encourage you to improve your situation. See disclosure.

I'm adopting a much slower-paced posting schedule, and treating this as a hobby blog now.

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