How can I get out of debt AND save money?

Question

My wife and I are working our way out of debt; specifically, credit card (in lieu of student loans; I know this was a bad idea, don't remind me!) and personal (money loaned from her parents). Our current plan for the credit card debt is to get my credit card down to ~1/3 the limit, then pay hers off completely so that we are only at one bank; this may include getting a debt-consolidating credit card. As for the personal debt...we'll figure that out as we go. We also want to save for a house (northern California), get an emergency fund, have some multiple of monthly salary saved in case the worst should happen, etc.

Because of the nature of my job, I know with relative precision how much money I'm going to be making for the next 15 years or so, and I'm participating in my 401K almost to the max that my company will match.

Recently I've heard of/glanced at articles that talk about how much money a person should have saved up by various age milestones. We're way under even these broad guidelines.

Question: What can I learn to get out of debt AND save up specific amounts of money by a given time period without going to see a financial expert? I've heard lots of general (ofttimes very good) advice, just wondering if there are any specific suggestions for saving.

My bank offers free financial consulting, but I'm concerned/convinced that the advice would be at least a little bit (read lot) skewed in their favor.

Edit: Additional information -

Credit score is 648.

My APR is 20.49%, hers is a bit less (don't have it in front of me).

My balance is $2600, hers is roughly $5000 (don't have it in front of me).

The goal of paying off hers completely is mainly to have only one bank, but also to get away from her bank (Wells Fargo; bad stuff in the news, etc.)

Before we got our tax refund, we were trying to never use my credit card with...some success. Now the hope is to practically never use either credit card, at least for the time being.

Total debt is roughly $10000; current monthly net pay is $2818, after contributing 4% to TSP (work matches 100% of my contributions up to 3% of my gross pay, then 50% from 3-5%).

My wife and I are both 30, two kids in diapers at home.

Answer 1

A couple of positives about your post: You are paying attention and you are refusing to beat yourself up about past decisions. They are made, you have to live with the consequences, and you are now dealing with them like an adult. Pat yourself on the back for those two things.

The problem that I see is that you are trying to do too much at one time. Forget about buying a home for now. For an emergency fund $1,000-2,000 will do. That amount will solve about 90% of the problems you will encounter as a renter. I would scale back or even eliminate your 401k contributions. At your income level, I would stop contributions.

Then, if I were you, pay off your debts smallest to largest (balance). You need to make traction. I would also looking at what I could do to raise my household income. You are far below the national average for household income.

For people such as yourself there is no better resource than Dave Ramsey. He targets middle class households in debt.

Answer 2

Well, questions about resources are off-topic on this site, but here's some free advice that's completely worth the cost:

I would argue that any benchmarks about "saving X dollars by age Y" should be net of any debt (otherwise you could borrow $1M and be a millionaire overnight), so it makes no sense to save money (other than a small amount for emergencies) while you're getting rid of consumer debt.

My advice would be to focus on the debt first (including student loans and family loans), then focus on saving money. Whether focusing on highest interest rate or lowest balance is up to you; there's arguments both ways (one mathematical, one behavioral). Do whichever plan you're most excited about.

Any money saved while you have debt is costing you in interest. Long term, that's the best way to maximize your savings. You might consider stopping the 401(k) temporarily just to focus on the debt, but I fully realize that a 100% match is very hard to pass up. In the long run, though, it may not make a huge difference in retirement savings and might energize you to get the debt knocked out and change your spending habits.

I would steer clear of debt-consolidation unless you have ridiculously high interest rates (18%+) that you can't may off in less than a year. The fees and lack of flexibility may not be worth any interest savings.

Answer 3

You should contribute all the way to the max for your 401(k) match, but not anything more. You should look into borrowing directly from your 401(k) or seeing whether you can use your account as collateral (note that this is a little dangerous, as if you default, you will lose your savings, and have to pay an early withdrawal penalty). As a last resort, you should consider withdrawing your money as soon as your match vests. At 20%, the interest on your debt will only take six months (less with compounding) to exceed the 10% early withdrawal penalty, with the former being charged every year while the latter is simply a one-time amount. You should discuss your situation with an expert before messing with your 401(k), though.

You should be shopping around for loans. Bob Baerker suggested getting a credit card with a 0% interest rate and paying the minimum amount each month. If you don't have good credit, that might be difficult, but whatever you can get under 20% helps. Dilip Sarwate criticized this strategy on the basis of "Those expenses charged to the zero-percent card don't go away when the zero-percent sucker-bait rate expires: instead they create added debt with a large interest rate, leaving the OP much worse off than before." However, Bob Baerker specifically said to charge "everyday essential expenses". If you are charging expenses that you would otherwise be incurring, then you won't have "added" debt; any debt will be debt you would have had otherwise. And you won't have been paying interest for the initial period. You can use what you would have paid in interest and use it to pay down the principal, saving you even more interest.

Another thing you can do is get another credit card (or, once you have cleared the balance of one of your cards, use that) for new purchases. With how credit cards work, if you pay off the balance every month, you get an interest free loan from when you buy something to when your bill is due.