Ask The Money Coach

Posts Tagged ‘budgeting’

A subscriber to AskTheMoneyCoach.com wants to know how to keep their finances in order and avoid financial ruin. Click now to hear Lynnette’s answer.

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The main types of programs that will help you eliminate student loan debt include:
* service-based work activities, such as becoming a police officer, firefighter or social worker
* volunteer work, such as joining VISTA or the Peace Corps
* working for the federal government and taking advantage of the Federal Student Loan Repayment Program
* working in the medical arena as a doctor, nurse or other specialist, in places where there is a critical shortage of healthcare experts
* enrolling in the armed services (i.e. Army, Navy, Air Force or Marines)
Read this post on how to pay off student loans fast, including getting help from student loan assistance programs. Also, refer to my book Zero Debt for college Grads for an extended list of specific programs to help you tackle student loan debt.

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Question: We live in a home appraised years ago at $80,000 and owe $44,000. We have a home rented out which appraised at $65,000 years ago too and we owe $22,000. We have never taken a home equity loan on either house. I have been drawing unemployment and paying bills with this money for 16 months but my credit card bills are driving me crazy. I have 3 cards which total $10,000 and all are maxed out. Is there anything I can do to pay off these credit cards?

Answer: Sorry to hear about your job loss and your extended period of unemployment. It’s hard to rid yourself of credit card bills when you simply don’t have any earned income coming in because your unemployment benefits, naturally, have to just pay all your current bills. You said “we” several times in your message. So I assume that you have a spouse or a significant other. Hopefully, that person is earning W-2 wages or self-employment income. Your rental home may turn out to be your saving grace. You said that the appraisals on both homes were done “years ago.” Was that two years, five years ago or something else? Whatever the case, that’s an eternity in the real estate market. So do yourself a favor and get an up-to-date market analysis of your house. You don’t have to pay for a full appraisal at this point. Just get an experienced realtor or real estate agent to check out your rental (and your home too) to tell you what the current market value is for those properties. If you do have to sell one of them shortly, at least you’ll know how much money you can expect to net. Those funds may be sufficient to pay off the credit card debt. Meantime, read this post about tips for getting out of debt and managing your finances when you’re out of work or have reduced income. And this one too for advice about debt management plans and a referral to the National Foundation for Debt Management (http://www.nfdm.org). Good luck!

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Q: I am a 53-Year-Old Single Woman Who is Medically Retired. Between Disability and Retirement Income, I’m Living on About $24,000 a Year. I Have a Little Over $90,000 in Retirement Accounts. This is My Only Savings. I Have a Balance on a Business Credit Card of Close to $14,000. The Business Has Been Dissolved and I Want to Clear Up the Debt and Close the Account. My Only Way of Doing This is Selling Some Investments. Do You Recommend Doing This?

A: No, I don’t recommend taking $14,000 from your retirement accounts in order to pay off that business credit card. I would be wary of doing so for three reasons. First, you are medically retired, so you will not likely have any source of earned income for the rest of your life. Frankly, $90,000 is not a lot of retirement income to live on until death. You could live another 30 or 40 years. Also, if you sell some of those retirement assets, you’ll have to be capital gains taxes on them. Sure that’s just 15% (and possibly as low as 5% for people in the two lowest income tax brackets). But I want you to realize that your money will be taxed, meaning you may have to give over to Uncle Sam as much as $2,100 of the $14,000 you’re considering cashing in. Lastly, I’m not convinced that you can’t pay off this debt over time by making some adjustments to your budget. I know that $24,000 a year is not a lot to live on. But have you considered if you can cut any of your existing expenses (namely any luxuries you may be spending money on) and using that money instead to knock out the business credit card debt? I just don’t want you to tap into an already modest retirement nest egg and later regret not having that money to fall back on if times get even tougher or if you need the money for other purposes later in your retirement.

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Q: I Had to Take out a Very Large Loan to Pay for One Year of My Son’s College Education. I Anticipate it Taking a Minimum of 5 Years to Repay. I am Also Repaying a HELOC loan. What is the Best Way to Handle This Debt? Should I Try to Pay Them Off as Quickly as Possible Reducing the Money I Would Put Aside for Savings, or Do I Pay What I Can and Make Saving a Priority? I Have a Bit Put Aside for Emergencies, but Nothing Substantial.

A: This is a classic case of “which should I do first – pay debt or save more”? The answer isn’t really a matter of either/or. It’s a question of how to do both simultaneously because that’s the best approach. You need savings to avoid going into debt. After all if you don’t have a cash cushion, the slightest emergency – like a flat tire or a leaky roof – will send you heading for your credit cards. Also, you should pay off debt as soon as possible because you don’t want to pay unnecessary interest charges and be prevented from saving money for other future goals. The good news for your situation is that both of the loans you’ve taken on – school debt for your son, and a home equity line of credit – carry relative modest interest rates. You didn’t say when you got your HELOC, but I assume it’s in the single digits (i.e. less than 10%, and probably significantly less if you got the loan in the past couple years). Ditto for that student loan. So divvy up the available cash you have and work at meeting both objectives: knocking down that student loan balance and your HELOC and also adding consistently, month after month, to your savings nest egg. If I had to prioritize, I would say slash that HELOC debt first and put more emphasis on that than the student loan debt. If it’s a federal loan, the student loan debt may be subsidized (meaning the government is paying the interest on the loan while your son is in school). Lastly, because the healthcare reform bill recently signed into law by President Obama includes student loan reform as well, you can expect college loan costs to come down significantly. For instance, starting in 2014, student loan repayments will be capped at 10% of a borrower’s income. That means even if you can’t pay off that loan in five years, your son can start working on it — and it’ll be relatively affordable for him to do so.

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