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Monday, November 26, 2007

Reader Asks About Getting Debt Free

I recently received an email from a reader. An email, that I have struggled with an answer for. I am not a professional financial adviser and so I don't provide specific financial advice to someone. Still I can sympathize with him. Like him, when my bills are paid, I often have less then $50 for food and gas. Considering that he makes more then 4 times what I make, it would seem that I would be happy to be in his boat. Then again, the fact he makes more then I do is why he has a greater amount of debt.




Currently I'm a single father raising my two boys (3 &
7) 50% of the time. I'm a teacher by trade and a High
School coach by choice (football/volleyball). While
married (divorce is nearly final) we made a choice to
purchase a house when we couldn't afford one. When I
got behind I took out loans to pay the mortgage
thinking at some point the equity would help pay the
loans. Eventually, I had to refinance because the
2,800 mortgage payment was too high. Although I got
the payment down to 2,600 I was still struggling.
Finally, after refinancing again we had a mortgage
payment of 2,200/month. We did our finances separate
and it cost me dearly. My wife left for a co-worker
and I found myself paying a full mortgage payment and
utilities for 8 months until the house sold. Upon
selling the house I found my loan was not only
interest only, but a negative amatorization loan as
well. When the house finally sold in a dying
California market I walked away with $1,400. (about
40,00 less what is was worth 6 months previous).

Fast forward to the present. My school district
decided to cut back and I lost an "extra" class I was
teaching (approx. $1,300 a month).

I am filing 9 on my taxes (with no mortgage interest
as a deduction - I'm not looking forward to April) and
take in $4,400. a month. When all the bills are paid I
have less than $200 for food and gas for the month. I
feel I'll never get caught up.

Bills:
Rent - $1,200
Personal Loan (10% interest) - $1,000 ($36,000 left)
Bank Loan (12% interest) - $210 (7,000 left)
Valic - (12% interest) - 160 (9,000 left)
Daycare - $420
Pre-School- 145/2 - $75
Son's ride to school - $90
Car Payment - $160
Car Insurance - $130
Health Insurance - $120
Life Insurance - $35
Garbage - $30
PG&E - $150
Phone/Internet - $50
Cell Phone - $85 (2 years under contract)
Direct TV - $65
School Lunch (son) - $70
Misc credit card debt ($2,500 left).

Is there a way out?


My answer to him:


While I am not a professional financial adviser and I don't give specific advice, I can give some general thoughts.

You have refinanced your mortgage a couple of times. While that may have lowered your monthly payments, you had to start all over again. What I mean is that you pay more interest at the front of the loan. That translates into less principle being paid. When you refinance you again begin paying almost 100% interest. That is not what you want to do. You want to get the principle paid off, so refinancing isn't a smart move, when you look at the whole picture.

As for your question, is there any way out. The answer is yes. You just have to remain focused. Be gazelle intense. Throw everything you can credit cards to get them paid off as soon as possible. Once they are paid off, add that money to the Bank Loan payments you are already making. Then snowball all that money into your Valic payments and so forth until everything is paid off. It may mean eating nothing but beans and rice while you are doing it. Not to mention no movies or dinning out during this time. But if you stay focused, you can be debt free.
Posted by Kevin Surbaugh at 11/26/2007 11:48:00 AM
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5 comments:

  1. Could he find other areas to cut down on? Like the son's ride to school. He has a car payment so I am thinking he has a car, then he could take the son to school on his own and reduce or eliminate that.

    He might also look at cancelling the cell phone. $85/month for two years will cost him $4080. If he has to pay an early termination fee of $200 then it will be cheaper for him to just do that now and free up the $85 monthly.

    Shop around for car insurance to get a better rate. I cannot understand how the insurance is that high when the car payment is relatively low.

    Cut out the Direct TV and use the internet to use free services like Joost to watch shows.
    ReplyDelete
  2. Things I would do:

    1. Cancel Direct TV
    2. Call Cellphone company and shrink my package.
    3. Stop paying for school lunches, pack a lunch instead.
    4. Cancel home phone service in conjuction with #1 then look into a cable/phone/internet deal - currently comcast is offering this by me for $33 a piece for 12months. Could save some.
    5. I would also look into a part-time job, like Starbucks, where for 20 hours you get medical insurance. Sweet deal.

    Then list your debts, not bills and pick the smallest one - all extra money saved, slam on that baby. When it is gone, move to the next one.

    Each step providing more breathing room.

    Also, could you get a room-mate? Offer a service in exchange for day care? Tutor?
    ReplyDelete
  3. Something similar happened to me. I didn't have reverse amortization, but I did take 13 months to sell a house.

    My response to him is to count his blessings.

    He's living with that $54.5k debt at over 10% interest.

    Is any of this going to improve? Will the Daycare/pre-school costs change with kindergarten at a public school? When does the cellular phone contract expire? Is it possible to find a cheaper living situation? Does he need DirectTV? Consider Netflix?

    There's not much magic to the equation: Raise income and lower costs.

    Focus on your well-being (exercise, time with friends and family), focus on cutting costs to the bone, use a spreadsheet to have a solid understanding of your position (Google has a free one with gmail), make sure you'll make minimum payments, focus on finding additional employment options, and see where you are in six months. You're not sinking like a stone here. If you find yourself in debt, but living a stable no-frills lifestyle, you might then attempt to negotiate the payoff sums down. It would hurt your credit score but that might be a worthwhile tradeoff. Give yourself some time and focus first. And count your blessings. I'm sure you have some.
    ReplyDelete
  4. I was about to leave some advise, but the others here said it all: cut the direct TV, cancel the cell phone and take the hit on the cancellation fee, and start making the school lunches. You might want to shop around for alternate day-care. Also, why are you paying for pre-school? I lived in San Diego 7 years ago and didn't pay a dime for it, it was free. Get a job delivering pizzas at night until you get those loans under control.
    ReplyDelete
  5. I have to add, pay the minimum on debts until you have 3 months emergency money. Otherwise as soon as you have an emergency how will you pay for it? Mary Hunt has a great website debt proof living.
    I am also a single parent of 2 boys 100% of the time with very little child support. I know emergencies happen very often. To get out of financial bondage we need to start planning for these emergencies. I only have $200 a month for food for myself, my 2 kids, plus the 2 children I watch (I run a daycare from my home.) It can be done. Read the book Miserly Meals, it is very helpful.
    Eating out is fun, but too expensive so instead we find fun ways to eat food from home. Picnics outside, eating in living room, eating dessert first.
    Also check into the school lunch program at school, it helps low income families. Also we do not have cable at all. We watch dvds from library.
    Also with Christmas approaching let everyone know no gifts this year. Make cookies as gifts or gifts of time. Offer as a gift to rake someone's leaves, clean there gutters, etc. As for your kids with Christmas I spend $40 each on my two boys. I buy gifts that focus on Jesus. They do not miss the hundreds my friends spend on there kids. But we do special activities every Dec. Go see lights, bake cookies, read the Christmas story from the Bible, visit different churches to see nativity scenes. Christmas eve at church. The kids look forward to these things not really the gifts. I hope things look up soon.
    ReplyDelete

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