Confessions of a Laid-off Lawyer

Just Your Average Joe Blogging Away His Debt—In One Year or Less

Burning a Hole

with 19 comments

Total Black: $3,371.21
Total Red: $270,855.95

Since I was a kid, my mother has always said that money burned a hole in my pocket.  Guess I haven’t changed much.  Well . . . no . . . somewhat I have actually.  I got paid today.  Almost $3,400.00 after taxes and other deductions, about $5,100 before—a check representing five weeks of pay.  But I’m starting to feel that heat rising on my backside.  In the interim, I opened a local checking account with the Bank of St. Croix.  It can’t hurt to have a bank account here. 

I’m unsure what to do with the money.  It isn’t all that much but there are quite a few options.

First I can just hold on to it for now.  Nothing is due right now.  Rent is paid for July as are my IRS bill and the auto loan payment.  I’ll have another paycheck coming in two weeks that will add about $1,400.00 to the amount above.  My next pay check would cover rent and leave money left over for either the auto loan or the IRS bill but not all three.

Second, I could pay prepay a few bills: I could take $900.00 and prepay August rent—putting that bill off until September—and also send $500 to both the auto loan and the IRS bill, for a total of $1,900.00.   Both rent and the auto loan won’t be due until the first week of August.  IRS bill is due on the 28th each month.  This could be a good option because it would leave me with about $1,200.00 for other bills and expenses and gives me three more paychecks until those three bills come due again.  By the beginning of September when they’d come due, I’d have accumulated—before paying other bills—about $4,400.00.

Third, I could just prepay rent for three months: pushing off rent until November.  That would free up $900 a month for the next three months and give me that much more each month for use in making monthly payments to other bills.

Fourth, I could lump-sum a sizable portion of the money onto a larger debt.  For example, looking back at my Twelfth Day of Accounting, there are a number of debts I could race, so to speak.  I could eliminate the AmEx bill entirely—roughly around $2,400.00 from charging a portion of the auto loan; that would also leave about $900 left over—the amount needed for rent.  Curious.  I could also send $3,000.00 to the remaining $4,000.00 Visa card that was canceled a few months back.  As noted back in Breakdown, that credit card will cost me $200 a month, part of a total of $718 a month for credit card bills.  If I can eliminate the balance entirely—or bring it down substantially—I’d be in a better place month-to-month.  If APRs are my concern, I could send about $3,000.00 to the auto loan and bring that amount down to $15,000.00  But that won’t reduce my monthly payment.  If eliminating an entire debt is my concern, I could pay my sister back: the remaining amount I owe her is $1,800.00.  Or I could send $3,000.00 to my mother, for example.  Or to the IRS.  I could eliminate one student loan, currently at $2,940.37 and 5.75%.

Financial planners would issue the canned response: pay the highest interest rate first and the one with the highest balance.  That would mean the auto loan.  But as I said, that doesn’t help my month-to-month situation, something important if, as I noted in No Ka-ching, Ding, or Bling, it’ll be a bit longer until I get a part-time job.

I’ll have to think a bit longer about all this.  But I think the mandatory criteria are as follows: 1) the payment puts me in a better situation financially each month, and 2) the payment eliminates an entire balance or brings me as close as possible.

Written by Laid-off Lawyer

July 15, 2010 at 23:01

19 Responses

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  1. glad the check came in!

    Reading your entries over the past year, it looks like you sometimes have significant cash flow problems. Have you figured out your monthly expenses so you can determine if the “extra” money can go to pay down more of a debt or needs to be used for next month’s minimum bills?

    Have you considered putting $500 or so in a savings account at the st. croix bank and leaving it there for emergencies (such as credit cards being frozen, no atm card, unexpected expenses, etc.).

    govtlawyer

    July 16, 2010 at 07:10

  2. Yup. That was the topic of Breakdown.

    As I mentioned above, I did set up a checking account at the local bank. And I can leave money there for sure. Partly my idea in setting it up. Plus—kinda cool to have an “off-shore” account. 😛 But yeah . . . all good points you mention to have a bank account here. I’ll be getting an ATM card / debit card with this account whenever they send it to me. Could be two months?

    But otherwise . . . I’d rather take the money and spend it on something “wise” like my debts, rather than slowly let it trickle out of my pocket through that referenced above.

    Laid-off Lawyer

    July 16, 2010 at 08:05

  3. High APRs first LoL, you should know this. Pay off a cc and keep the rest for rent

    Bouard

    July 16, 2010 at 08:08

  4. 10% to savings in an IRA. It provides an unattachable safety net.

    set me up

    July 16, 2010 at 08:24

  5. Pre-paying several months of rent is plain dumb. This is providing interest-free money to your landlord while paying interest on the many debts that you have.

    Again, keeping track of your cash flow to make sure you can meet all of your upcoming obligations/due dates, you pay whatever extra you can afford to the balance with the highest rate.

    Forget about the account with the highest balance…that does not matter in the least. It is ALL ABOUT the rate. A 19% APR on a $10 balance should tell you to pay that $10 rather than an 18% APR on a $100,000 balance.

    You know this…you quoted the wise financial planning advice, so I don’t understand why you would even consider prepaying months of rent when the rent will be $900 today or $900 when it is due in 2 months.

    T

    T-Bag

    July 16, 2010 at 09:25

  6. Put it in a savings account for the time being then you can sit back and take your time to think about putting it to the best use without it burning a hole in your pocket:)

    You could do with an emergency fund, its often the lack of easy access savings which causes us to borrow money or put things on credit. Even people with a high amount of debt need to keep some cash in savings for emergencies.

    Dreamer

    July 16, 2010 at 09:30

  7. Not sure you have the available funds to pay down anything significantly. 2800 a month doesn’t leave much leeway.

    According to your own breakdown:
    500 IRS
    900 Rent, utilities etc
    500 Car payment
    700 Credit Card minimums
    160 Gas

    2760 right there. Not including groceries, eating out, pet stuff, haircuts, and all the assorted misc expenses that come up each month.

    My advice is to save up any extra money you have now and use that to balance out the coming months rather than turn to loans or credit cards.

    anon

    July 16, 2010 at 09:33

  8. @Dreamer: Good point but just not sure I can “afford” to bank a lot just now. I certainly can’t afford to just leave $3,300.00 in the bank. But you’re right that I can leave some in there. Perhaps $500?

    @set me up: my job already withholds a mandatory retirement contribution of 8%. We’re uncertain whether that’s withheld before or after taxes and how much interest we get. We can get paid out once we finish clerking. Right now it is a retirement account of sorts. Well, a pension, I suppose. I could role it over into an IRA when I finish up. If not, I’d have a nice readjustment amount for moving to a new location. The law clerks want to be exempt from withholding, but that’s an uphill battle so I’m banking on $320.00 a month less as mentioned in Breakdown.

    @Bouard & T-Bag: I agree that highest APR should go first. But it’s also seems to be the “poor man’s” approach to just be a good boy and “pay your bills.” No one seems to appreciate what I’m trying to figure out here. And that’s really been one focus of my blog—how to be super-smart about getting rid of my debts.

    For example, if I can eliminate one entire credit card with this money—say the canceled Visa at $4,000. Then I’d reduce the 700 credit card number anon cited. And I’d reduce it by $200 a month. Right there is the groceries etc. anon cited. Or how about I pay off a student loan and drop that number significantly? By just paying bills with this large amount I dilute its effectiveness.

    But—to be brutally honest—by sending it to an active credit card I also run the risk of charging it back up when I need to get fuel for the car or groceries, etc.

    My thinking here is how to be strategic with this money. T-Bag is certainly correct that by prepaying rent I don’t accomplish anything. Well, when thinking only about numbers. But I’d free up $900 a month for three months—an amount I could then reroute to other bills, for example.

    Laid-off Lawyer

    July 16, 2010 at 09:55

  9. It cant hurt, $500 its a good start and you can build on it.

    Dreamer

    July 16, 2010 at 10:30

  10. I understand what you’re saying regarding paying off a credit card in order to eliminate that monthly expense, but it really does not make sense.

    Assuming you HAVE the cash flow to make all of your minimum payments, paying off a lower rate card to eliminate its corresponding monthly payment is not helping you unless you anticipate a lesser cash flow in the months ahead. Assuming you are basing your payment amounts on what you know your minimum income will be (which you know know since you have a “normal” job), you only have two reasonable choices.

    1) Save X Amount for emergencies
    2) Spend the rest on the highest rate card, regardless of the balance

    Now, things would change if you anticipated a cash flow problem in the near future, as then that decreased obligation by the additional payment could hurt you. Do you understand what I’m saying here?

    It is an understandable misconception that eliminating the additional required monthly payment would help you, but it will actually be worse for you assuming a fixed minimum income that is sufficient to pay all monthly minimums.

    T

    T-Bag

    July 16, 2010 at 11:19

  11. How about using some of the money to stock your pantry with some non-perishables, pet food, etc. so if you encounter cash flow problems later, you’ve at least got the food angle covered.

    The “breakdown” post did not include food (I pay about $160 a month for one person, cooking almost all meals at home), the iphone (?), pet costs (2 vet visits a year at $150 each = $25 a month), misc. expenses such as bar dues (if its $300 a year, it’s $25 a month), socializing with coworkers (guess at $25 a month), haircuts ($20 every other month = $10 a month). Hopefully you’re all set with clothing for the year, and the car won’t need anything. You might be looking for work again in a year, so you’ll need money for resume paper, postage, travel, etc. I’d calculate all of your reasonably expected monthly and annual costs before paying more than the minimum on anything, the $3,000 could be enough to make up any shortfall until you find a second job.

    I’d also consider getting on a cash basis and stop using credit cards, as in this economy and credit market, it would not be surprising if your accounts get frozen, closed, reduced, etc.

    Good Luck!

    govtlawyer

    July 16, 2010 at 11:22

  12. @govtlawyer: I am trying my damndest to stay off credit cards, both because I don’t want to—and don’t want to have to—give them my business. They’re a completely ruthless, unsympathetic lot. Business need not be only bottom-line driven, especially not when, as mentioned in Staying the Course, there are businesses striving for something more than just a money focus. And also too when we’re in this economic debacle they helped caused. They could institute a three-strike policy on late fees for example: only after paying late three-times will they tack-on a late payment fee. Or cut APRs in general. Instead they’re doing everything else to drain us dry. Like squeezing the bottle of ketchup to get every last bit drop out. But that all said, when one has to wait five weeks for a paycheck—then it is a necessary evil. Otherwise though, a few of the expenses you noted won’t apply. I already took the cats to the vet. They only go once a year—if that. But with crazy critters around, like centipedes, I could need emergency vet money. Hence the $500 Dreamer noted. iPhone has been prepaid for about $300 worth. I overpaid it so that bill won’t come due again until the Fall. Socializing is a somewhat “necessary” cost. Paper—eh, I’ll just use paper from work. And I’m actually giving thought to staying on for another year. I guess I’ll have to cross that bridge soon, however, since federal clerkship deadlines are approaching soon.

    @T-Bag: I think we may have to agree to disagree on this one. If I’m getting charged 27.24% APR on a $4,000.00 credit card. Why should I make monthly payments on that card—at approximately $200.00 a month—when I can just take one big $3,000.00 bullet and damn near blow it away now. That card is closed. I can’t run it back up again. And with the $200 I would have had to send to that card, I can instead double up a payment on another card. Or take $50 and put it in savings and send $150 to my mother.

    @anyone & everyone: What am I missing here? Don’t prepay rent when interest is accruing on other debts; I can appreciate that point. But why not pay off one of those debts? What benefit do I get to making on time payments? I don’t think “paying over time” will benefit me right now. My credit is already in the tank. To get it up, I need to reduce my debt. To reduce my debt, I need to pay it down. Period. How much will I end up owing on a $4,000.00 credit card at 27.24% if I pay it at a rate of $200.00 a month?

    At this point, car insurance is paid in full for the year; that won’t come due until July 2011. I have a few small one-off bills outstanding from New York: amounts not covered by health insurance. Otherwise, other than routine monthly expenses—and unforeseeable “emergency” or urgent expenses—all that remains are debts owed to my mother, the IRS, student loan lenders, and credit cards.

    I thought about sending $3,000.00 to the IRS but if I did that, it does reduce total red, of course. It would not, however, reduce the amount I need for monthly payments—and I, and others, have noted a gap in the amount I will probably need each month. So holding on to this amount as a parachute to help carry me through the next few months does sound like a good idea. Right now. But the wind in that sail may get siphoned out after a few months too. So why not eliminate the need for a parachute altogether?

    Laid-off Lawyer

    July 16, 2010 at 12:52

  13. Not sure about StCroix, but most jurisdictions do not allow execution against an IRA or retirement. 10% every month (after tax) is a nice emergency safety net.
    But the best advise I ever got was to live like you make 10% less than you take home. Only way to real wealth.

    set me up

    July 16, 2010 at 15:01

  14. Since you have a constant stream of income, I would not worry about freeing up money for the months ahead and just tackle whatever debt has the highest APR, keeping aside enough to pay your living expenses. Especially if you get a part time job, future cash flow should not be a problem. The money that you owe for the car is just as legitimate a debt to pay back as a credit card, so if that APR is the highest, pay that off first!

    Anonymous

    July 16, 2010 at 15:13

  15. @Anonymous: the highest balance with an APR is the car. The highest APR is the credit cards collectively—all at 27.24% APR last I checked.

    I agree with you that I can finally start living differently now since I do have a steady, and predicatable, amount of income, something I didn’t have—and which, as noted back in Yet Another Update on Efforts—acted as a barrier to budgeting and planning against my debts.

    The only thing that’s held me back from making a knee-jerk decision is waiting until Monday when my account is “established” and then I can wire funds to BofA. A good, “forced,” cooling-off period.

    Laid-off Lawyer

    July 16, 2010 at 15:27

  16. I give up 🙂

    Pre-Pay your rent for the year and spend the rest on canned goods…hey, who knows, maybe those canned goods will increase in price at a rate higher than 27% per annum before you need them!

    T

    T-Bag

    July 16, 2010 at 15:31

  17. My concern is that your margins are so tight that you would put yourself in a perilous financial situation if you threw a lump of spare cash at one debt. I understand that you want to make progress and clear debts but I wonder if this is the right time. As I said earlier you need to try to start an emergency cash fund to keep you from reliance on credit.

    I have always believed in the pay yourself first mentality, even if it is just a small amount to put away at first, it starts the momentum.

    Could you just keep things ticking over until you are in the positon to make more money? I say this because it appears that your liabilities are exceeding your income. If you got a part time job and/if when you leave for a higher paying job then you will be in the position to start clearing debts.

    Meant with genuine concern.

    Dreamer

    July 16, 2010 at 15:35

  18. 1. Do you have a plastic container with lid or a freezer bag? If not, get one. Insert all your credit cards in it. Put it in the freezer. Literally.

    2. Do not defrost above until a real emergency arises. Put $ 500 in an emergency fund.

    3. I paid off credit cards (I think 8 or 9 all together) smallest balance first. Then did the same with private student loans. Smallest to largest, except I did have one student loan at zero percent and I just paid as required until I was ready to be done and sent in the last couple of hundred dollars. This worked for me because I was able to mark something off the list and then have less to worry about. Until you are able to get that rolling, just pay the minimum and save the rest of your money.

    4. I had one student loan that was incredibly riduculous. If had an interest rate tied to LIBOR and was all over the place. I paid for over 3 years and the balance was still 20% more than I started with. If you have any like that, get rid of them! Fast, seriously. Not worth it.

    5. Make a budget on paper. Use cash as much as possible to allot for food, entertainment, gas, etc.. When you are out of cash, you are out.

    Frankie

    July 16, 2010 at 16:11


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