Lazy Pays Well

A few years ago, I was in favor of most of the low-income tax breaks and programs. I volunteered with programs that served low-income families, and saw how much those programs helped.

Lately I'm much more cynical. It bothers me that I work a full-time job, and have to pay to subsidize the "lazy" lifestyle choices of others. We have friends and family who have decided to have one person stay at home (some with children, some without), and who live on a single income.

Because of that, they fall below the cut off for many programs. They qualify for earned income tax credits, several state tax credits (for helping offset housing & utility costs), food benefits (food stamps and WIC), and state-subsidized healthcare.

At tax time, they are getting tax credit refunds of $5-10k! Meanwhile, we're having to pay in way more than that, and that's after working hard all year.

In some ways, it makes me want to save up and pay off everything (house & all), beef up the retirement account, and then quit my job. Without any bills, we'd be able to comfortably live on Hubby's income, and we'd also qualify for many of the tax credits and programs. Plus I'd be able to do whatever I wanted with my time: sleeping in, volunteering, reading, exercising. We'd save money by not having the additional vehicle expenses relating to commuting, not having to maintain a professional wardrobe & continuing education expenses, I'd be able to coupon & shop for grocery sales more aggressively, and I'd be able to trim other expenses (like eating out) from our budget (because I wouldn't be too tired to cook).

Maintaining momentum

Hubby & I are having a difficult time maintaining momentum with the debt repayment.

While we haven't added to credit card balance, it's been going down very slowly. It seems like we'll charge $250 (for things like gas or books) and then we'll pay off $500. At our current rate, that last $5,000 is going to be around for a long time! In reality, we're hoping that it'll be gone by the end of the year.

We have been able to save over $5k for a down payment on the new car... but the new car will only add to our total debt. We'll have to budget for additional monthly payments of $400/mo, which will definitely slow down the credit cards.

On the student loans, we've been making the minimum payments on one and have deferred the other. We currently have over $47,000 - I know that's not going to get paid off with only $100/mo being applied towards principal.

We've basically diverted all the extra money in our budget towards miscellaneous items. About 40% is "blow money", 40% is short-term savings (repairs & renovations), and 20% is entertainment (eating out & vacation).

If we really focused and stayed "gazelle intense", we'd be able to knock out the credit card AND other car loan in maybe 6 months time. Instead it'll take a year. The other debts - the future new car loan, student loans, and 2nd mortgage - will end up taking 10+ years (when they could be gone in 5). I know it, I see it in black and white, but I just don't care anymore.

Strategic Mortgage Default

Over the past few years, a few couples that we know have strategically defaulted on their mortgages. These are people who could afford to make their mortgage payments, but who owed more on the house than they could sell it for, so they simply stopped paying. They saved the money that they had been paying, allowed the mortgage to fall behind, unsuccessfully tried to sell the house as a short sale, and ultimately had the house foreclosed. What happened after that varies- one couple took out a mortgage and bought a new house at the same time, before the delinquency/foreclosure hit their credit reports, another couple moved into a rental home, and another moved into an apartment.

I'm secretly hoping that all of them will get sued by the bank for the difference between what they owed and what the house sold for at auction. I'm incredibly annoyed by the fact that each of them seems to have gotten out of it basically unscathed. Buy a house when the market is high, and then simply walk away when values plummet. Sure, their credit scores surely were lowered, which probably translates into slightly higher insurance premiums, deposits, and interest rates - but they've each walked away from at least $50k in "underwater" loan balances.

One of the couples originally bought a foreclosed house a few years back, at an incredible price. At 2007 fair market value, they bought a $225k house for only $135k. They made a few renovations and improvements, then did a cash-out refi... getting over $60k in cash, and using it to pay off personal student/auto loans. Then, after the housing market tanked, they decided they wanted to move but discovered that their home was only worth about $150k. They stopped paying on the mortgage, allowing it to fall behind. When the bank foreclosed, they owed just shy of $200k on the loan- and had used the "equity" to completely pay off all their other debt. Ethically, morally, they see absolutely nothing wrong with this situation.

Compared to the "average" person who can afford their mortgage payments but simply don't want to pay any more, and decide to give back the house to the bank, this particular situation seems far worse to me. They got a huge financial gain out of it, by getting their other loans paid off completely! Had they not refinanced to pay off the other loans, they would still have had equity in the house, and been able to sell it. It is a horrible abuse of the system, and tremendously unfair to everyone else who continues to pay their debts.

For that reason, I truly hope that the banks chase after these people, and everyone else across the country who has walked away from their homes but who could still afford them. I would like to see the bank sue them for the difference, to have a judgment placed against them so that they have to repay the extra money that they've taken out.

I'm incredibly frustrated by stories like this, yet I know several people who have done it. I wish I could just hand our house back to the bank, and just get rid of the mortgage entirely, with no consequences! I'd be happy renting a house for a few years, if it meant being free of all the house debt and never-ending maintenance & repair bills. We fall into the large group of homeowners who owe far more on the mortgage than our home is currently worth, but wouldn't dream of just not paying on it just to give us more money to indulge in fun stuff.

It will be several years before we will be able to save up enough money to sell the house and pay off the mortgage (at even then, it'll be at a loss of $50-100k over what we paid!). In the meantime, we'll continue to pay more (due to higher interest rates, maintenance, etc) than those who walked away and are currently renting. Not to mention, we still have our other loans (student, auto, etc) that we'll be paying on for several years.

No Progress

In the past month, we haven't really made any more financial progress.

We spent a lot more on vacation than we had budgeted. We delayed in booking the trip, so prices went up a bit over what we had expected. We also splurged a bit while we were there. We had set aside $1000 for travel & accommodations, and had planned to spend an additional $500 while there. We ended up spending close to $2500 in total. We charged everything, and we'll pay off the trip this month.

We had a few extra bills this past month, including our annual homeowners association dues. The combination of vacation and the extra bills meant that we only paid the minimums on the remaining credit card debt.

We're still saving up for the down payment on the new car, setting money aside for car insurance on the new car, saving up for more home renovations, continuing to pay down credit card debt. Although I'd like to continue building up our emergency fund as well, and pay extra on other debts (car, student loan, mortgage), there isn't enough to do any of those until at least mid-summer.

Bleeding Money

Now that we've got plenty of breathing room each month, and the credit cards are at a point that we could pay them off entirely (if we wiped out our emergency fund, that is), we haven't been very focused at staying on track. We've been eating out a lot (at least 3-4 times/week, usually a lot more), I haven't been clipping or using grocery coupons, and we've allowed our miscellaneous spending to creep up.

Hubby also decided to buy a new car, it's been ordered but won't come in for a month or so. Although he could pay off the remaining credit cards, he's decided to instead focus on putting as much as possible for a down payment ($3000+), that way the monthly payments will be less. I'm not sure of the final price, but it will be in the $25k range. It'll be financed over 5 years, so we'll have payments of roughly $400/month.

Our other car's payments are $350/month, with almost a year and a half left.

I hate that we're taking out that much more debt, especially when the existing car was only just paid off and still runs fine... but the reality is that we're wasting at least that much in eating out and other non-frugal spending each month too.

At any rate, we haven't made much headway lately. In fact, we "reallocated" $4k from the short-term savings/emergency fund to put towards the down payment and an upcoming Florida vacation.

We're currently left with $6k in savings, which is a healthy start but nowhere near where our emergency fund should be.

Budget for 2011

Starting in February, Hubby and I are going to switch to a new budget. So far we've just been splitting our "extra" money, using about half to pay down credit cards and the other half to stash in emergency savings.

With our new budget, we're going to set aside money for several short-term savings goals, as well as to regularly save for non-monthly bills (like car insurance). It means hitting pause on the emergency fund, but overall it should be a better system.

Here are our anticipated categories & savings amounts, per month:

Vacation - $200

Car insurance - $210

House (maintenance/repairs) - $300

Mortgage (principal reduction) - $800

It's great to have so much "discretionary" income in our budget, it really makes it so much less stressful to know that we have a bit of a cushion to absorb unexpected items. Our immediate goals are to finish paying off credit cards (currently around $7k) and then to pay off the second mortgage. However, it'll probably take about 3 years.

Fall Updates

I updated the progress bars on the right side again, it feels so good to see the credit cards decreasing so much!

As soon as some of the pending payments clear, we'll be under $10k in outstanding balance on the credit cards! And I know that seems like a lot, but it's nothing compared to the nearly $50k that we once owed a few years ago. We're lucky in that we never quite got to the point that we were desperate, we were always able to pay our bills and the minimum payments - but we also started paying off back when minimum payments were only 1-2% of the balance (so on $50k debt, we were only paying like $600/mo), and our interest rates were mostly fixed rate balance transfers of 0-3% APR. If we'd waited a couple years to start paying it off more aggressively (and stop buying more stuff on credit!), we would have been in a rough situation. It seems like those great balance transfer offers all but disappeared, and minimum payments increased to 5% of the balance - so our monthly payments with interest would have been easily $3000/mo! When all that hit, we still had to absorb payments of half that, which was tough but fortunately still possible for us.

One of the cars is completely paid off, so we're down to a single car loan! I wish we could make the paid-off car last a few more years, and use the would-be car payment to pay off more debts and to save up for a new car, but it's my husband's car and he wants to get a new one next year... so I'm just hoping the credit cards will be paid off completely before the new car (loan) comes.