Financial Strategizing…

Now that law school is over and I will no longer incur additional education debt, I am finally on the road to financial freedom. Therefore, I need to strategize to figure out the right moves to make. I put it off for a while due to the uncertainty in my job situation with finishing law school and trying to find a new position. While I may not have a law position yet, I am still working as a financial analyst making a decent salary. Therefore, until things change on the job front, I have to proceed in the best fashion with my current $55k salary.

I am not going to make excuses for myself. I am in poor financial condition because I made bad financial and spending choices. Period! Four years ago, I bought a condo that I could barely afford with no reserves, 80/20 (100%) financing, $10k in credit card debt, and $25k in auto debt. During the last four years, I used debt to support a lifestyle that I could not truly afford and it slowly mounted.

So, here I am. I have a negative net worth of approximately (-$91,000), $207,000 in student loans to repay and $16,100 remaining on a credit card that I refinanced the 20% mortgage financing over to. With Christmas around the corner and repayment on my student loans looming, I have to figure things out. So…What now?

Current Financial Condition:

$16k in credit card debt at 3.99% fixed for life of balance

$207k in student loan debt – not in repayment at this time

Emergency Fund: $10,000

Current Action Plan:

Contribute 5% to 401(k) plan to get 100% employer match for 10% total

Contribute 2% after tax in my employer’s stock purchase plan

Removed credit cards from my wallet – use only cash and debit

Minimum payment on Credit Card is approx. $350 - $300 goes to principal

Student loans are still in deferment with half my federal loans in forbearance

Future Liquidity Events:

Bonus in 2/2008 expected at $3k

Tax return in 2/2008 expected at $2k

Scenario #1: Deplete Savings, payoff ccard, snowball student loans

Continue using only cash and debit cards for spending

Continue 5% 401(k) contributions for 100% employer match and 10% total

Stop 2% contribution to employer’s stock purchase plan

Defer fed student loans that enter repayment 1/2008 until 1/2009

Pay off credit card balance before private loans enter repayment in 4/2008

Use $8,000 of my emergency fund and reduce credit card balance to $8,000

Increase cc payment to $600 to reduce cc balance to $4,600 by 4/2008

Use $5,000 in bonus/tax return money to pay off $4,600 cc balance

Tweak Christmas budget and use $1,000 for Christmas gifts

Keep $1,000 as Emergency Fund

Snowball remaining student loans

Scenario #2: Deplete Savings, Min on CCard, payoff 2 student loans, snowball remaining student loans

Continue using only cash and debit cards for spending

Continue 5% 401(k) contributions for 100% employer match and 10% total

Stop 2% contribution to employer’s stock purchase plan

Defer fed student loans that enter repayment 1/2008 until 1/2009

Pay $300 on my credit card until the balance is $0 - payoff in 5 years

Use $8,000 of savings and payoff two smallest student loans

Tweak Christmas budget and use $1,000 for Christmas gifts

Keep $1,000 as Emergency Fund

Snowball remaining student loans

Comments:

I am leaning towards scenario #2. For one, my student loans have a higher interest rate than my credit card at 3.99% fixed. The downfall to scenario #1 is that my credit card still has a pretty high monthly payment which if eliminated, can go towards repayment of my student loans. While both plans are tough, they can be done. I may have to tweak credit card payments here and there due to irregular expenses like the occasional birthday gift (cheaper now of course), the quarterly water bill or license plate renewals. The tough part is the psychological part of not having savings at my fingertips. On the other hand, that may not be a bad thing because with a cash/debit only system, I will be less tempted to spend and spend big. I may even be forced to make a few lunches.

I get paid once a month. Here is what I am going to do for October.

Send credit card $600

Move $8,000 into second high yield savings account

Keep $2,000 in emergency fund and use $1,000 for Christmas

Stop 2% employee share contributions

Continue applying for law positions