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Crushing debt and a 401(k)
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November 21, 2000: 11:55 a.m. ET
With multiple debts and a wish for savings, create a solid budget
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NEW YORK (CNNfn) - You've got student loans, credit card debt, and you need a car. There's your 401(k) and you'd like to have a rainy day fund. Plus, you'd love to start a family. How do you do it all?
In response to a reader's question, Elissa Buie, a certified financial planner from Falls Church, VA, and a member of the financial planning association, suggested creating a budget.
Ask the experts a question
I am 27 and my husband is 30. I have $3,330 left on a student loan, and about $1,200 on a credit card that I could probably pay off in about two months. My husband has about $7,500 in credit and $22,000 in student loans.
I am a contractor with no health insurance or retirement benefits through my company, and my husband just got his first permanent position with a company. We are trying to pay off our debt, purchase a used car for approximately $9,000 in the next six months, start saving for retirement, and would like to start a family. We have no money saved yet and are not sure where to start.
I have approximately $800 per month that I use to pay my debts, my student loan is $80 a month, and my husband has about $400, his student loan is $270 a month. All we seem to be able to do right now is pay off the bills. Can you suggest a good way to start saving and in what way?
My husband has a 401(k) option, but he doesn't get a match from the company. We are considering an IRA, but feel we need to supplement it with a money market account and mutual funds. We aren't really sure what the minimum is for these types of accounts. Also, could we use these accounts for both an emergency fund and saving for a car?
Along with this, I have gone back to school and will be paying about $400 every three months. Can you assist in pointing us in the right direction to get off on a good solid start?
You have asked a lot of questions. Really good questions! I am going to give you specific recommendations. You should understand, however, that without knowing you and knowing more about your situation, other courses of action may be as good or better. Hopefully, this will give you some food for thought and you can adjust the recommendations based on your knowledge of your situation.
First, while it may not sound like fun, you need to establish a budget. Look at what you've spent over the past six to 12 months to come up with the average per month. Don't forget things like car maintenance, taxes and gifts, which don't necessarily occur on a monthly basis.
Once you have a budget, you can see where you might be able to "cut back" in order to increase your discretionary cash flow. Things like eating out and discretionary ATM withdrawals are good areas to consider cutting back on. Can you reduce travel/parking expenses to work? How about clothes and dry cleaning? How about groceries and lunch at work?
If you tend to charge on the credit card each month and find that those items really are discretionary, consider setting a firm "miscellaneous" amount in your budget and withdrawing exactly that amount of cash on a monthly or bi-weekly schedule, and spending only until the cash runs out. It is much easier to pull out that credit card than it is to pull out that cash and you will probably end up spending a lot less. Then you can start to prioritize the use of your available cash flow, as well as that already being allocated to paying off debt.
I suggest that you minimize what you are paying on the student loans as they are probably at a fairly reasonable interest rate and there may be tax benefits (consult with your tax adviser). I am assuming that you are both covered with health insurance by your husband's new employer. If not, you should purchase health insurance before you do anything else. It appears you have at least $1,200 per month plus any additional cash flow you discover by developing a firm budget.
I would suggest the following list of priorities: Pay double the minimum on the credit cards (and stop using them!) I'm guessing this will use about $400 of your available cash flow.
While I wholeheartedly endorse getting rid of credit card debt, you also need an emergency fund and you need to start saving for your retirement. So some balance among priorities is in order.
The best thing you can do is to stop adding to the credit card balances. Then paying double the minimum will eventually pay them off. Any windfalls (bonus, gift, tax refund, for example) should be partially allocated to paying these off as well.
HHHave $400 per month put into a savings account or money market account at your bank. This can be done either directly out of your paycheck(s) or the bank will withdraw the amount from your checking and put it directly into a savings/money market account if you request that they do so.
When you have three to six months of living expenses accumulated, you could then move on to investing longer term (in mutual funds, etc.) for purposes other than retirement. And you might consider allocating some of this $400 per month at that time to increasing your 401(k) savings. This would also be the fund you would use to make a down payment on a car.
Your ultimate goal is to achieve and maintain a balance in this account of three to six months of living expenses. If you use some of it, you will need to replenish it as soon as possible.
Allocate $50 per month to purchasing life insurance on each of you. Buy inexpensive term insurance. (A thorough needs analysis would be in order if you fear your ability to individually support yourselves if one of you were to die.) Disability insurance is another critical coverage for each of you and I would suggest you pursue the availability of such coverage with your employers.
Maximize your 401(k)
Invest the remaining $350 per month into your husband's 401(k) plan.
Despite the fact that his company does not match, you should maximize your retirement savings to this vehicle before you consider an IRA. Note that $350 allocated to a 401(k) doesn't actually use up $350 of cash flow, as your income taxes will be reduced by making this contribution. You would probably be able to save $450 per month to the 401(k) plan and use the tax savings to make up the difference. Or you could save $350 per month and have an additional $75 to $100 in tax savings to allocate to other purposes - those above or others not yet identified.
You will note that I didn't address the car above. Cars are depreciating assets. In your particular situation, I would strongly suggest that you minimize funds allocated to purchasing a car.
Of course, only you know the actual need for a new car. If you decide to purchase one, that payment would reduce one or more of the above suggested uses of funds. You would probably reduce the emergency fund savings and the retirement fund savings in some proportion. If you have identified more cash flow than the $1,200 per month, these could be used to increase any of the above recommendations or toward the car.
I hope that helps you choose a direction. If you can't do as much as I've indicated above, any progress in any area is just that, progress! You are already heading in the right direction just by asking the questions. 
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