Reader Case Study - PFR - Medical expenses hurt

[Alpen_Geoff]

Background
Age - 26 and 28
Marital Status - married filing jointly
Income - ~$65k
Income - ~$47k (new job starting Monday, previous ~$10k while studying)
Tax Bracket - ?
Residency - I'm a US citizen, wife is PR currently reside in Virgin Islands though wife just moved to California for work (will be moving to follow her some time this fall)
Expenses (Monthly) -
Me
Rent - $1100
Utilities (power and internet) - $210
Petrol - ~$150
Food - ~$220
Phone - ~$140 (2 line family plan)
Wife
Rent - $1400 utilities included
Petrol - TBD
Food - ~$220 (we are working to keep spending to ~$50 a week per person)
Yoga - ~$50
Dog supplies - $50

I think that's the regular monthly - let me know if I missed anything "normal"


Assets

• Emergency Fund $0
• Checking - ~$3000
• Savings/MMA - $100
• CD's/Notes Etc - $0
• Taxable Brokerage Account - $0
• Asset Allocation (Stock/Bond/Cash) - including Fund Names/Stock positions will help identify cost reductions. - $0
• Tax Advantaged Account - ?
• Asset Allocation (Stock/Bond/Cash) - $17,275.xx / vested amount $11,700.xx
  • %47 Fidelity International Discovery K
  • %26 AF Growth Fund America R6
  • %14 Vanguard Windsor II Admirals
  • %14 Spartan 500 Index Institutional
• Home - $0
• Other Real Estate - $0
• Other Assets - vehicles: 2008 Saab 9-3, 1991 Toyota pickup, 2012 Sunny 50cc scooter

Liabilities

• Credit Card Debt - ~$44,000
• Personal Loans - $0
• Student Loans - $0
• Mortgage - $0
• HEL/HELOC - $0
• Other Debt - $0

Goals

Debt free!!! I think in general we're pretty good at managing our finances but we've had a miserable 2 years financially originating when my wife was run over by an underinsured, government employed driver on her cell phone and also on welfare. Due to ongoing complications multiple trips were needed to the states to see specialists, have testing done etc. and ultimately she was diagnosed with MS in addition to her injuries. With the healthcare situation here in the islands we nearly bankrupted ourselves flying to the states so much for treatment. Ultimately this is what led to the decision to leave the VI, CA is where her MS doctor is so that was the natural first choice. Now we are incurring the extra expense of a second house but it will still be cheaper than the multiple trips every few months. I can't relocate until September as we need to maintain medical insurance until my wife gets hers from her new job. We had ~$12,000 total debt before this incident as a combination of school payments, car payments and a couple thousand on credit cards (normally paid off monthly or at least every couple months)

Risk Tolerance/ Financial Savvy

Let us know how you feel about risk, for example, if the market was to drop 20% this month would you:

• Buy More!!!!

I am open to risk, we are still young and have plenty of time ahead of us but need to get our debt under control. Unfortunately my 401k doesn't allow for much selection but I have chosen what I feel are funds that are higher return than the majority offered.

Feel free to ask more questions Matt or whoever, one of my biggest questions is how to pay off our CCs - is it better to pay off the highest interest cards first or pay them all down together?

I much appreciate any and all help, I expect to be flamed for all the CC debt but at the time we didn't have a choice but to pay bills so I can take whatever can be dished out (I think!)

Cheers

 

[Matt]

Thanks for sharing this. It sounds like you guys have been through a rough time and I hope things are getting better for you. I hope nobody would judge you getting into credit card debt in this situation, though it is obviously a very important financial issue to now resolve. A couple more questions:

• For the cards - what are the balances and APRs? Are you able to list them? We are looking for any that might be interest free, or at least lower interest. You simply cannot pay them off all at once, it will be a targeted approach, so yes, we need to isolate the highest APR first and work from there. There is a psychological thing to paying down the smallest balance card first - which might give a feel good factor (and has value) but you would be far better off tackling highest first, and we should also look at some BT offers.
• For the 401(k) do you receive a company match, and are you currently contributing (if so how much) we should't worry too much about asset allocation or fees for that now, it is something to address, but far less important than the big issue of the CC debt. Also on the 401(k) will your wife have the option of one, and will that have matching (is it better/worse?)
• What's the deal with the vehicles - are they all with you? Or some in the VI and perhaps to be sold?
• Are you deducting these medical expenses? There is a good chance you could get some large deductions, medical expenses typically have a 10% floor - meaning for when you were earning anything over $6500 in a year could be deducted - this a CPA area.

 

[Alpen_Geoff]

Thanks for the reply Matt, see below table for current cards / balances:
Card Interest Rate Anniversary Balance
Amex Platinum N/A November 2
Amex Zync N/A March 0
Amex 0% December 5848.01
Amex 15.24% October 10727.08
Chase 15.24% October 2919.26
Citi 15.24% June 4593.38
Citi 15.24% October 3246.48
Citi 15.24% January 7540.91
Barclay 15.24% November 0
US Bank 24.99% February 406.09
Amex 15.24% October 1022.48
Citi 15.24% October 1336.28
Citi 15.24% January 7115.33

- As for 401k, yes I have company match - 100% first 5% and 50% next 3%. I'm currently contributing 9%. She has matching from day 1, I think it's 100% first 3% and 50% next 4%. She's not contributing yet but is still working on HR stuff as this is her first week there.

- All vehicles are here in the VI with me, will sell the truck and the scoot when I leave - possibly the car too but will depend on shipping rates...It's in great shape, paid for and suits our lifestyle well as it's a wagon so we'll see.

- We got a pretty good deduction for our medical expenses last year, unfortunately it's for a rebate from the VI IRB which still owes me my tax refund from 2010 and is beyond broke so I don't expect to ever see this $$ or if we do it will be a long time!

 

[Matt]

OK - here are some initial thoughts on this.

As you recognize, your credit card debt is a serious matter and needs to be eliminated. In order to do this there are a couple of approaches.

1. Dave Ramsey recommends the 'Debt Snowball' his approach is to pay off the smallest amount first, and not focus on the APR. This is a powerful method because it creates milestones and a sense of accomplishment. If this works for you - sort the list by debt size, and start smallest to largest. Your first priority would be US Bank with $406.09.
2. I personally prefer to tackle APR first, because the debt with the highest APR is causing you the most pain each month from a financial perspective. However, this route has less of sense of achievement, as you could be stuck 'paying down' big debts longer rather than paying off low hanging fruit. In either case, US Bank is the first goal, as it is also the highest APR, by quite a margin at 24.99%

So - first decide which is going to keep you 'on plan' and paying things down - if Ramsey's way works better for your mindset then follow it, if you have the ability to follow my approach, then it is better for you as you will pay less interest. Now, in your case, all of your debt is around the 15.24% rate - so either approach would work, and perhaps the Dave Ramsey style would be more rewarding to you - however APR can change, so if one of your cards does change its rate you should consider if that is still the best route.

All vehicles are here in the VI with me, will sell the truck and the scoot when I leave

I understand that you might be busy now, but recognize that these are sitting outside your home, and you are paying at least 15% APR on them as a debt, plus they are losing value every day. If you sell today, rather than 3 months from now in the fall that is 3 months of Interest payments on your credit card that you could save by selling and using the funds to pay down principal. If you are able, sell as many of these as you can, as soon as you can and apply the funds to your debt.

401(k)
I would suggest aiming for the full match for your wife, and keeping yours where it is. You aren't perfectly optimal as you are paying in a touch over where you are receiving a match, but it is a minimal amount so I wouldn't change it around. There is some validity to stopping all 401(k) contributions and focusing all money at your debt, but I feel the combination of matching and tax advantages would outweigh the APR paid. If you want to see some numbers on this, I wrote about it in the past here: Pay down debt or save. For asset allocations, I personally like to balance my own investments with my wife's overall - so if I am heavy international stocks as you are, I would avoid them for her 401(k) my suggestion for her allocations would be to look at building up a broad US market position.
If you are comfortable with risk (both of you) then you might want to consider going 100% equities, you would be exposed to market downside, but with your age and the amounts of savings it might be wiser. I'd suggest looking at a REIT fund for about 20% of her investments (less so if you move into a REIT yourself) and the rest in the stock market.

Emergency Fund/Savings/Cash on hand
It's low, but you have a real emergency in your debt. I would not increase it.

Income Risks
One big issue we have is focusing aggressively at paying down your debt leaves you in trouble if you get halfway through and something happens to income. Are you and your wife currently covered by disability insurance (DI) through work? If so, what are the benefit terms? Some DI won't kick in until after a certain period of time. If you are exposed here we should approach things more cautiously than I am suggesting. Same for Life Insurance - I wouldn't get a lot of it, but it would be great to know if your employers offered a group plan, getting just $100K would make a massive impact should something happen to either of you.

Back to Credit Cards
Your list is currently sorted Alphabetically. One you decide on my approach or Ramsey's approach you need to sort it by APR or by amount respectively, and target that top to bottom. With 44K of debt, meeting minimum payments of just 3% will run at $1,320 per month, and that will be almost entirely interest. You need a two pronged approach to accelerate this:

Pay more than 3% each month. You need to set the minimum payments automatically on all cards, then be paying in more than that on top to the card that you are tackling. If you are correct in thinking that you can move to California and keep your salary then you will easily be able to do this if you put your minds to it. Even now, with two properties due to your frugal approach to groceries etc then you can be paying down more. If your incomes are protected as per the Insurance question then you need to be throwing everything you have at debt payments each month.

Lowering APRs - you can do this in a number of ways. There is a HUGE psychological risk in transferring to an interest free card and thinking you are out of debt. So if you are to use balance transfers or other methods to reduce APRs you must remember that they are a tool to buy you some breathing room, but your payments never reduce during this time.

Of course, you should consider when you last applied for cards, but if you are able to do so I would recommend getting about 4-5 total in order to put as much of your credit onto 0% rates. The one card I would recommend for Balance Transfers are Chase Slate - I would get one each for you and your wife. https://creditcards.chase.com/slate-credit-card/ this card offers Zero APR for 15 months, and does not have a Balance Transfer Fee (typically this is 2% of balance)

I would then recommend looking at other cards that offer 12 months free APR, though they will come with a 2-4% fee for the transfer of the balance, it will be better than paying interest for a year. Some people make a zero(ish) balance transfer by buying vanilla reloads/greendot etc on a 12 month interest free APR for purchases card, then using that money to pay down the high APR cards- this is a valid strategy. If you are able to drop all your APRs to zero you are in fabulous shape- but even if you cannot quite manage that, you can still save a ton of money by dropping as much as you can, applying the minimum payment to those cards, and tunneling all your available money into the debts with high APR.

It's up to you both to commit to this
If you want to make this happen, you can be out of debt in under 2 years. It would be a time of living frugally, but if you can do it your lives will change. Your goal for debt payments will be $3,000 per month. More if you can make it, or get a a raise.

From your current joint salary of $112,000 you would be able to make these payments with your out of pocket expenses being about $2400 per month:

Rent - $1400 utilities included
Petrol - $300
Food - ~$460 (we are working to keep spending to ~$50 a week per person)
Yoga - ~$50
Dog supplies - $50
Phone - ~$140 (2 line family plan)
Sub Total $2400
Debt payment $3000
Total $5400

I checked payroll for California and this should be do-able based upon your income, but it wouldn't leave a lot left over - you'd have to perhaps write down full monthly expenses to see if you have any others (you do - such as Auto Insurance etc) to confirm. And decide if you can handle the $3,000 payment.

The real key to success is buy in from both of you - if you are both ready to commit to this then you can achieve it, but if you set a target too high (and $3K is aggressive) then you might fail to meet it and everything unravels. Whatever rate of payment you decide you should realize that you might 'fall off the wagon' every now and then, and if anything does go wrong with your plan you just need to start it over again, and don't throw it all away.

Let me know what questions you have from this. This is an aggressive approach - you could also go conservative and take out a lower apr loan - it will also get you out of debt, but you would pay more interest over time.

Please realize I can only offer so much advice based on what I have here, and don't sue me!

 

[Haley]

This is a great example and really good advice.

A few missing expenses need to be put in the budget:
Car insurance
Medical copays for doctor visits
Copay for prescription medication

Will either of you need any clothing, or shoes for work?

 

[Matt]

This is a great example and really good advice.

A few missing expenses need to be put in the budget:
Car insurance
Medical copays for doctor visits
Copay for prescription medication

Will either of you need any clothing, or shoes for work?

Agreed - there is probably a bit of work to do pinning down the monthly budget, and that will be important when assessing if the plan will work or not.

 

[MLH]

I hope this doesn't come across as insensitive, but couldn't you cut the $50 monthly Yoga expense? I'm guessing it's included because it helps with your wife's injuries and/or MS, but couldn't you get the same workout from buying a few Yoga DVDs for $20 and doing it at home?
$50/month is $600/yr, so you could essentially negate/pay-off the US Bank balance with what you'd save by doing Yoga at home.

 

[Matt]

I hope this doesn't come across as insensitive, but couldn't you cut the $50 monthly Yoga expense? I'm guessing it's included because it helps with your wife's injuries and/or MS, but couldn't you get the same workout from buying a few Yoga DVDs for $20 and doing it at home?
$50/month is $600/yr, so you could essentially negate/pay-off the US Bank balance with what you'd save by doing Yoga at home.

I understand what you are saying, but I think that certain things can stay in a budget. I personally don't like to remove all costs because they are costs as things like this can really make the difference to lifestyle, which can keep people happy and on track with other things. Too much economizing can create resentment. Of course, if the spouse could be happy in doing then you suggest a great idea, but it isn't one I would suggest to my wife if we were in this situation.

Also - I am biased on this, I personally spend about $400-500 per month on instructor led training, and value the interaction gained. My wife does yoga and we discuss the benefits of having a corrective force in with you, and it really pays for itself. But it is fair to say, that could be skewing me.

 

[MLH]

I understand what you are saying, but I think that certain things can stay in a budget. I personally don't like to remove all costs because they are costs as things like this can really make the difference to lifestyle, which can keep people happy and on track with other things. Too much economizing can create resentment. Of course, if the spouse could be happy in doing then you suggest a great idea, but it isn't one I would suggest to my wife if we were in this situation.

Also - I am biased on this, I personally spend about $400-500 per month on instructor led training, and value the interaction gained. My wife does yoga and we discuss the benefits of having a corrective force in with you, and it really pays for itself. But it is fair to say, that could be skewing me.

I certainly understand the need for fun things in the budget. Speaking specifically about training, my fiance and I spend $3000 annually on Crossfit, so I'm not someone who cuts EVERYTHING out of a budget. But we're in a different place financially than Alpen_Geoff. So while, like you, I wouldn't suggest to my fiance that we cut $600 in something she enjoys from the budget, if I were in Alpen's place I would.
Just food for thought.

 

[Alpen_Geoff]

Lots of good info, I'm on the run now but just wanted to reply to say thanks! I'll review everything more thoroughly tomorrow and reply in entirety. Cheers!

 

[GA400]

Matt, as I was reading this I was thinking Chase Slate also - I can personally verify that this card can help. My wife and I got out from under some high APR debt several years ago with a Chase Slate card and it worked very well. We were "cleaning house" on our finances as we got ready to put two kids through college - they are both in school and doing great (yay!). This method of using the Slate card to transfer all my debt and aggressively pay it off pulled my credit score as well, over 45 points in a 2 year timespan.
Then working from a clean Slate (pun intended - a position with no credit card debt since about a year and a half ago - and aggressively following the travel hacking strategies to include picking up over a dozen new cards in the last year, my credit score has gone up another 35 points. And I have racked up over 600,000 miles and points that we are already putting to good use - visiting kids in college

 

[Alpen_Geoff]

Thanks again for the thoughts and inputs all.

One note Matt is that it looks like you missed one of the rent payments in your calculation:
Rent - $1400 utilities included Should be $2500 for the 2 places
Utilities - $210
Petrol - $300
Food - ~$460 (we are working to keep spending to ~$50 a week per person)
Yoga - ~$50
Dog supplies - $50
Phone - ~$140 (2 line family plan)
Sub Total $3710
Debt payment $3000
Total $5400

The idea of a Chase Slate sounds great, only problem is that for whatever reasons I've had little to no luck applying for Chase cards (only 1/4 approved) with no denials from any other banks. A rep last time said they don't trust issuing cards to "3rd world countries" (haha! A common misconception from our "excellent" public schools' geography classes) So I'm a bit hesitant to take the hit and get nothing from them again, I'd say in a couple months when my wife has established her income and we get things settled with split finances that she should be in good shape to get one. I'll do some digging for other cards maybe similar benefits, anyone have good suggestions?

I would certainly love to be able to make a move like this, it is actually what we did with the amex blue with 0% interest - bought VRs and used them to pay down other cards while "transferring" the balance to the amex blue. We now use this card exclusively for groceries / gas for the cash back which we then apply as payment to other cards while only paying off whatever we spent that month on the blue card.

This is a great example and really good advice.

A few missing expenses need to be put in the budget:
Car insurance
Medical copays for doctor visits
Copay for prescription medication

Will either of you need any clothing, or shoes for work?

Good points, car insurance runs me ~$260 a year and is due next month, wife has no insurance because she doesn't have a car yet and we have no plans to buy one in CA until I'm there.

Copays will probably add about $50 a month tops (our copay is between $0-$20 a visit)
No current medications fo as of now can't budget for it as I really have no clue what to expect if / when we have some.

As for clothing we're both very simple, if we spent $500 combined on clothing last year it would shock me! My work provides pants, polos, shoes etc. for me 2x a year so I'll maybe spend $50 for the rest of the year on odds and ends. Though my wife may need some additional clothing to suit the US workplace I can't imagine it will be more than a couple hundred dollars worth. Of course moving into CY2015 this can change and we will be cognisant of the risk of spending here.

Yoga is something we've gone back and forth on many times and I've given in that it can't be cut she sees too many benefits from it and I'm willing to give up in other areas to ensure that we can provide it for her. I put $50 on the budget as I don't know how much rates can fluctuate but currently she only pays half that per month.

 

[Matt]

Thanks again for the thoughts and inputs all.

One note Matt is that it looks like you missed one of the rent payments in your calculation:
Rent - $1400 utilities included Should be $2500 for the 2 places
Utilities - $210
Petrol - $300
Food - ~$460 (we are working to keep spending to ~$50 a week per person)
Yoga - ~$50
Dog supplies - $50
Phone - ~$140 (2 line family plan)
Sub Total $3710
Debt payment $3000
Total $5400

The idea of a Chase Slate sounds great, only problem is that for whatever reasons I've had little to no luck applying for Chase cards (only 1/4 approved) with no denials from any other banks. A rep last time said they don't trust issuing cards to "3rd world countries" (haha! A common misconception from our "excellent" public schools' geography classes) So I'm a bit hesitant to take the hit and get nothing from them again, I'd say in a couple months when my wife has established her income and we get things settled with split finances that she should be in good shape to get one. I'll do some digging for other cards maybe similar benefits, anyone have good suggestions?

I would certainly love to be able to make a move like this, it is actually what we did with the amex blue with 0% interest - bought VRs and used them to pay down other cards while "transferring" the balance to the amex blue. We now use this card exclusively for groceries / gas for the cash back which we then apply as payment to other cards while only paying off whatever we spent that month on the blue card.



Good points, car insurance runs me ~$260 a year and is due next month, wife has no insurance because she doesn't have a car yet and we have no plans to buy one in CA until I'm there.

Copays will probably add about $50 a month tops (our copay is between $0-$20 a visit)
No current medications fo as of now can't budget for it as I really have no clue what to expect if / when we have some.

As for clothing we're both very simple, if we spent $500 combined on clothing last year it would shock me! My work provides pants, polos, shoes etc. for me 2x a year so I'll maybe spend $50 for the rest of the year on odds and ends. Though my wife may need some additional clothing to suit the US workplace I can't imagine it will be more than a couple hundred dollars worth. Of course moving into CY2015 this can change and we will be cognisant of the risk of spending here.

Yoga is something we've gone back and forth on many times and I've given in that it can't be cut she sees too many benefits from it and I'm willing to give up in other areas to ensure that we can provide it for her. I put $50 on the budget as I don't know how much rates can fluctuate but currently she only pays half that per month.

Hey Geoff,

The numbers I suggested were when you are in CA in a few months. You could have the wife apply for one from CA if the VI are a problem, and get yours later.

You are living a really frugal life, and you will have no problems paying down your debt, providing that you both are employed and keep similar outflows. The biggest reason that you are in debt anyway is sudden, high medical bills coupled with lowered inflows from your wife not working.

Providing that you can maintain income and expenses as they are now, you are in fantastic shape, in fact this is more of a cashflow issue than anything. However, if you let the debts linger and increase your lifestyle expenses too much, you will be in a lot of trouble.

 

[Alpen_Geoff]

Update:

So I was able to get approved for a Slate card (!) thought with a very low limit, so I'll be calling in and trying to move a chunk of my existing credit line from another Chase card to the Slate to take advantage of the balance transfer. In the event that this is successful is the better idea to balance transfer to near the credit limit on the slate and make minimum payments from here on out (until the 0% interest is over) or use the slate for day to day expenses?

 

[Matt]

Update:

So I was able to get approved for a Slate card (!) thought with a very low limit, so I'll be calling in and trying to move a chunk of my existing credit line from another Chase card to the Slate to take advantage of the balance transfer. In the event that this is successful is the better idea to balance transfer to near the credit limit on the slate and make minimum payments from here on out (until the 0% interest is over) or use the slate for day to day expenses?

BT and make minimums to that card. Note that your minimum payments will be quite manageable, so don't fall into the trap of just paying that and thinking you have more disposable income... you need to be hammering down those cards with APRs on them.

FWIW I have managed to swap over lines very successfully with Chase, anything over $35,000 requires a new pull, but up to there you can transfer the vast majority cleanly. Typically they round up any balance and give you the extra: EG if you have a $1220 balance on a $8000 Line they will likely be able to transfer over $6000 of that.