How to prioritize debts and savings for big events

We recently purchased a house -- our first. Prior to this purchase, we had a small e-fund and felt confident in our savings goals. During the purchase, no thanks to a clerical error with the mortgage broker, we were told we needed extra funds to close. Had we felt comfortable taking extra time to think about it, we probably wouldn't have moved forward. Being in the rush that we were with the pressure of the market and also our baby's due date approaching, we pulled the funds together to close on the house. This nearly wiped us out completely.

Knowing that we have a baby on the way and only partial pay during maternity leave and then 1k/mo in daycare after that, I'm not sure how to prioritize for these big expenses and needs all while building up our efund again. I'd love your insight. Here's our situation:

  • 2k in credit card debt, which has been reduced to 6.99% interest rate, minimum is only 50/mo
  • 16k on 2 car loans at 3.5%  (I've been paying an extra $30-50/mo), minimum is 350/mo
  • 80k total on our federal student loans, 6.625%. (We actually *just* called and put ourselves on forbearance until March, which will free up 600/mo temporarily to put towards debt or savings, however it will mostly just offset our loss of income during maternity leave.)
  • A 1/3rd reduction in pay for 12 weeks from December to March (loss of about $450 every 2 weeks)
  • Hoping for natural labor and expecting only another 2k in medical, though there's the potential for a lot more medical if interventions are required. Currently, I have only $600 in that medical fund.

How much of an e-fund is really necessary (currently have $1600 after the house crap)? I *hate* the DR recommendation that all you need is 1k saved while you're paying off debt, especially as new homeowners and especially with kiddo coming. Should I just stick to minimums on everything and save save save? Or is there some happy medium where I save and still work on those CCs?

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  • With the understanding that you hate DR's recommendation for a minimal EFund, he does recommend to pile up money, money, money since the baby is coming. I would put minimums on debts for now, pile up as much of an EF as you can (for mom and the baby both) and then use that to both get you through the potential medical events and also the months following delivery. Once you are comfortable with your budget or back to work full time w/full pay, get as much extra as you feel you can and give that leftover EF to the debt or re-allocate to daycare to give yourself a cushion. I would probably go down to nothing less than $2k for an EF with a new home and a new baby, but I have neither so you might be more comfortable with a higher amount.

     

    Congratulations on the baby and the house 🎉!

    Reply Like 4
  • Agreed 100% with the above! Just pile up money and pile up money. Then, whatever you don't need, you can put back into debt reduction later if you want, or keep a robust e-fund. DR might judge, but we don't. 

    The good news is, if I read this correctly, your maternity leave pay is going to make daycare a piece of cake. If you stay on the maternity leave budget, the $1000/mo needed for daycare is pretty much going to just magically appear when you go back to work. 

    Congratulations on the new baby! Wishing you much health! 

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    • WordTenor - Great way of looking at it!

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  • I agree with the previous posters - give yourself a cash cushion (as much of one as you can manage) going into having the baby and maternity leave.  Let the dust settle and live with the budget (and the new baby!) for a little while and re-evaluate.  Then if you have cash available you can make an extra debt payment.

    Congratulations!

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  • If I were you, my goal would be to have your insurance's out of pocket max saved in addition to your efund preferably before the baby comes. (Also, YAY BABY!) Sure, everything might go swimmingly with the labor (fingers crossed!) but you'll have a new baby. And new babies are sort of notorious for needing to  go to the emergency room/urgent care/doctors/etc. Also, check with your insurance provider to see if they offer a nurse line for new parents. This can be a god send to new parents.

    Reply Like 2
    • Navy Blue Commander (de6d514c55de)  I've never heard of a "nurse line" before but I definitely will! My first child's pediatrician is always great about answering questions and calming fears...during office hours. I'll definitely ask about this resource for those times when I can't reach a nurse at our office! Thank you for the tip!

      Reply Like 1
    • Navy Blue Commander (de6d514c55de) In regards to the out of pocket max, is it your general practice to have that set aside and in addition to your efund all year? I never actually thought about doing this, but having the set number as a goal to reach for my medical sinking fund is such a good idea! I will focus on getting this built up now, but I'll also use this method to make my sinking fund goals for FY2018! Thanks!!

      Reply Like 1
    • Slate Blue Lightning (b7d3059e1104) 

      I TRY to have my OOP covered in addition to my emergency fund. I blow through it every three-four years. But I really think it’s imperative if you are going to have a baby. 

      A lot of insurances have a 24/7 nurse line, oddly no one really advertises it. Some insurances have it specifically for the first year of a baby’s life. Also check to see if they have any maternity programs. 

      And before I forget, before paying ANY large hospital bill, call and ask if they’ll give you a discount for paying in full that day. Most hospitals will knock 25% off the patient responsibility portion. I’ve saved myself 3k total in maybe thirty minutes of phone calls. The first time I called and asked the billing lady said “let me put you on hold for a second” and I thought “welp, no discount for me! She doesn’t even know what I’m asking about!” She came back and had knocked $800 off my portion. She’d put me on hold to do the math. 😂  

      Reply Like 2
    • Navy Blue Commander (de6d514c55de) I went to a meeting today regarding HSAs at work with your comments in mind. I know I'm not in a place to use an HSA right now, but I felt like attending the meeting to educate myself on the deductibles and process was a total win. I now have exact amounts for goals set for my family to use the HSA next year (2019). Thank you for sparking this interest. I don't know why I never considered setting a specific goal for medical needs before. I was just always trying to keep 1k in there, but in the event of a true medical emergency, 1k wouldn't even touch the surface of the expenses.

      I am aware that the HSA will directly draw from my pay, but knowing how much per month I'll lose in take-home pay, I'm working on a YNAB HSA category to help offset that cost. If I can save the 5900 in the next 14 months, then I'll opt to have one large lump sum taken from my pay and will use this savings in place of that income.... though there are several other ways I could work it. I feel empowered now with a savings goal. Thanks again!

      Reply Like 1
  • If you don't have it yet, I HIGHLY suggest a month ahead fund. We call it here a buffer. For us, it's $4,000 a month, that includes minimum cc payments, that covers all of our fixed and true expenses. I think having this will ultimately get you ahead in your savings goals if you can focus on what you need to save for the next month.

    Also, I would start buying diapers and wipes now if you're going that route, plus any detergent you'll be using for clothes washing. Those are godsends when you have a newborn and don't want to do a late-night grocery run.

    Save up for extra groceries, or fix a few freezer meals for postpartum as well.

    Hope that helps! We're looking to join you in the parent ranks next year :)

    Reply Like 3
    • AliciaKnits The buffer is my primary goal right now, but I've actually broken it into categories!! In my buffer, I've got daycare expenses for my first born, daycare for the second, mortgage, and then true expenses. So far I've only got the two daycares covered (or I could rearrange it and have the mortgage, true expenses, and a small bit of daycare) for one month. I also have an emergency fund of 1500 now. I won't contribute more to that until I know we are buffered (including both daycares, even though I won't need the second one for a few months). This has given me such clarity and I finally understand what I'm working towards!

      I have slowly started collecting diapers. With our first kiddo, we got the subscription to Honest Co. I liked the diapers but never really understood the real cost compared to other alternatives. I've got a small pack from a few different store brands now. I'm going to compare the sizing and quality and once we know what brand works best for the cost, we'll be able to start buying those huge boxes. I was hoping to cloth diaper, and we may still do that part time, but understanding the quality difference in disposables is key! I'm really impressed with Up&Up! (just got those for first kiddo for nights while he is potty training and they are actually as good as Pampers!)

      Best wishes on your hopes for growing your family this year!

      Reply Like 1
  • I also recommend that you just pile cash as much as you can and pay minimum on the debts. The "True Expenses" Master Category has priority over Debts, because you want to avoid getting in more Debt to begin with. Congratulation on your new baby! :)

    Reply Like 1
  • Hi! Congrats on the baby!  You have already received good suggestions on priorities and dealing with them.  I'd like to share my own insight based on a very similar experience and touch on dealing with money inflow vs. a quality standard of living.

    Have you considered that whoever is bringing in only ~900 a month to not go back to work or part time so you don't have to deal with daycare costs? Is that an option?  Unless there are other factors/happiness requirements being met by the job, it sounds like your net money will be less to pay for daycare and your net could be more if instead they stayed home.  I'm going to suggest that your quality of life may be higher as by having one of you stay at home as well.  My wife and I were in a similar situation with our first child and we worked out that if she continued to work we would bring in only a few hundred dollars extra a month after daycare costs.  That wasn't worth the added stress of the full time teaching job and at the same time have our newborn raised 1/3rd of the day by someone else in an environment we weren't part of.  It is hard to quantify financially if we are actually saving money by doing this instead of daycare. In general there is a cost associated with activities and such during the day when you're with the kids. We do feel that the value gained staying with the kids most of the day at such a young age outweighs any minimal financial lost we have absorbed. It has been five years since our first baby and my wife is still staying at home and it has been the best compromise for our family values and finances.  

    Another possible advantage if you drop that income is that you could potentially delay or reduce the student loan payment for longer. Your rate at 6.99% is also pretty high and there may be a program that lets you consolidate, reduce the interest rate, and or go to a graduated payment plan based on the new income values. In fact, we filed taxes separately the year we had the baby and were able to  re-calibrate her payment plan on a new graduated payment scale, it brought the monthly payment down by about 80%.  It is slowly creeping up each year but we are financially better off now then we were five years ago even with the one job. 

    Well, I hope you have a wonderful experience with the new life and birth process! Remember rule #3, roll with the punches! (Good for finances and life situations.)

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  • Don't pay extra toward the car loan. That is your lowest interest debt. If you are going to use that money to pay down debt, then throw it at the higher interest rate loans. Although in your situation I'd probably sit on that extra money for the time being to help build the emergency fund.

    The rest of the advice given here is pretty good.

    Reply Like 1
  • UPDATE: Friends. I have no words. I am coming to you a year later to follow up on this and get more advice.

    The day before (literally 24 hours before) my baby made his entrance, my husband lost his job. During his 4-month stint of unemployment (or should I say underemployment...he was driving for Uber+Lyft and doing odd jobs) and my 12-week maternity leave, we obliterated all progress we had made and we dug a debt hole so big I'm only just now seeing the full scope of damage. The job he was offered was entry level and pays less than his previous work. 

    So now I'm coming to you to ask for recommendations on how to handle the debt. What dangers are there in taking out a personal/debt consolidation loan? Do you have a bank/lender you like? We have both been working towards obtaining higher-paying jobs (he interviewed for a higher job within his company just yesterday and I have an interview tomorrow), so we are definitely actively trying to improve the income. After some close monitoring of our budget and the interest rates on our debts, it is imperative that we reduce our monthly minimum payments and our interest rates, and increase our income...our savings has been completely wiped and we are holding our breaths between paychecks. I need to rebuild that as well.

    I have signed up for Undebt.it and I look forward to the insight and confidence it will bring in determining payoff plans. Have you integrated your accounts with YNAB? Does it work well?

    I have money in my retirement plan and the interest rate looks to be about 5%, though I feel like borrowing against retirement would not be ideal. 

    Can you offer guidance? Chat with me a bit? 

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      • James
      • beeblebrox
      • 10 mths ago
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      Slate Blue Lightning (b7d3059e1104)  Bummer! Much empathy from me to you.  It is great you're keeping your financial health in mind.  It is stressful, and it can be difficult, but you can do this and overcome the situation. As you begin having small successes you'll feel much better than you do today. It is true, I've been there.   There have been numerous journeys from people using YNAB (and similar budgeting software/philosophies) like yours I have seen played out over time and the majority have turned out amazingly.  I'm confident your journey will turn out to an amazing conclusion as well.

       Chat incoming....

      Your specific ask is a chat how to reduce the financial hemorrhaging from interest rates and payments. Let's see if I can stay focused on that:

      Please don't use your retirement.  In most cases you may even go to the extreme of filing Chapter 7 Bankruptcy (in the US) and your 401K and IRA's are protected. I'm not suggesting filing Chapter 7 but I'd consider that before touching my retirement funds.  You should go through credit counseling in your district before making any decision like that. I suggest finding an approved credit counselor if only to figure out if your debt is larger than would be reasonable to pay off with the amount of income you're expected to bring in for the next several years.  But this is definitely the hammer.

      A consolidation loan may work for you, but I don't have any personal experience to share. I know the general guidelines are you have to be careful with whom your loan is through and make sure the terms are straight forward and that you are not buying into a variable rate loan or have early payment penalties.   

      A temporary option is to call the credit card companies, explain your situation, and ask for a lower rate and waived late fees for an extended period of time.  I've heard varying success with this strategy. It could be effective enough in the short term to give you some financial breathing room and time to line up a longer term plan.

      Another option, that I had personal success with is to get a new card offer with 0% interest for X months and shift the debt over via regular spending habits.  This only works if, 1.  your credit is still good and the offers are available to you 2.  you have the will power to not use it as additional credit.  If you think you might use the additional credit in a way you'll end up in more debt, then stop reading and don't consider this method.   When I was getting out of debt that is the route I took. It worked by stopping spending on my other cards,  and I use the new 0% card for all purchases (all being funded, of course) and I made only the minimal payment on this card. I made direct payments to the other cards based on all the new spending + pay toward debts amount.  This very quickly did a soft transfer of all the money on the interest bearing cards to the new cards.  The hassle was worth the interest savings to me. This was much more economical then doing the transfer the credit card companies offer which is usually a straight 3-5% fee.  I think I rotated my debt to two different new cards over two years before the debt was paid off and I had to pay only minimal interest for the few months it took to transfer the balances off to the new card.  I'm not sure if this really helped to lessen the minimal payments, but considering I did have a new job and was paying down the debt the minimal payments decreased fairly quickly. 

      I hope you and your husband are successful with the new job search!  

      Reply Like 1
  • Slate Blue Lightning (b7d3059e1104) said:
    I have money in my retirement plan and the interest rate looks to be about 5%, though I feel like borrowing against retirement would not be ideal. 

     True, because you cannot finance your retirement. Don't touch it!

    I'd also advise you to read "All Your Worth" by Elizabeth Warren and Amelia Tyagi to help you see how to get your needs-spending under control and your money in balance.

    They would recommend whatever you do, don't take a loan secured against the place where you live! Personal loans will cost more in interest, but you won't be putting the roof over your head at risk.

    Best of luck.

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