Paying off debt and living within means vs. long term planning

Question

My husband and I are divided as to the best way to handle our current financial situation. First, a little background.

We are in our high 20’s, have been married for six years and have three kids. We started our marriage with ~$25K in savings and no debt. I was in graduate school for the first five years of marriage with no tuition and a $35K stipend yearly and my husband has been a student with no tuition and a ~18K-29K stipend yearly (it has gone up over the course of our marriage). We also got some help financially from family members. Over the course of my graduate schooling and several difficult pregnancies, we burned through our savings and now have ~$13K in credit card debt and < $500 in savings.

I am now a postdoc with a salary of $55K while my husband’s current stipend is $29K. Our income very, very barely covers expenses (especially considering childcare/commute) and we live fairly frugally (we spend little on eating out, groceries, clothing, toys, vacations, etc.).

My husband’s attitude throughout our marriage has been that we are both in school and making much less than our maximal salaries and that we should not be afraid of debt. Most people come out of school with large student loans so we are already ahead of the game. Our family is better off than we are and if need be can help us out if disaster strikes. Either way, within a few years our schooling should pay off and we will be making ~150K and be much more comfortable.

My attitude has always been that I prefer to live frugally and within our means both because it is a good habit and because I have always been very afraid of debt. While it is true that our salaries will rise at some point, we hope to have a large family (we both come from families of ~8 children) and will be paying private school tuitions ($5K-10K a year) for religious reasons, so we will always have to be tightening our belts. While it is true that our family can help us out, I prefer to be self-sufficient as much as possible and would be mortified if we had to ask for help.

At this point, we have quite a bit of debt (and our credit cards are nearly maxed out, thus lowering our credit score significantly), little savings, and our income does not cover our expenses (with a several hundred dollar shortfall monthly). I hope to get a job with a close to six-figure salary within a year or two. Our question is what to do going forward until I get that job. I would like to try to maximize income as much as possible (tutoring jobs, etc.) while being as frugal as possible as well as utilize debt consolidation strategies to try to pay off as much debt as we can and/or build up emergency savings funds. My husband feels that this is a short-term cash flow problem and while it would be good to consolidate the debt, there is no problem with continuing to use credit cards going forward to cover our expenses and no need for us to maximize income. He feels that becoming too intense about budgeting/maximizing income will be detrimental to our current career paths and our mental/emotional health as a family.

Edit: Based on the comments, I will add a bit of clarification to our situation.

1. For the coastal area we live in, $84K is a bit over the median income (which is not adjusted for number of children).

2. Our credit card debt is a recent situation - while we have used credit cards to build credit since we married, we used to pay them off each month until the birth of our third baby. Medical bills, the need to buy a new car (which was secondhand and a great price, but still), lowered income during maternity leave, and a longer gap between graduate school stipend and postdoc salary than we had anticipated combined to get rid of our savings and put us in debt.

3. Consumer goods are not a huge part of the problem. Currently, healthcare premiums, taxes, rent, utilities, childcare, auto insurance, commute costs, and gas, all of which are relatively fixed, make up 84% of our monthly income (this isn't including credit card payments or groceries). Our grocery bills have gone up recently due to a child with special dietary needs. We rarely buy takeout or eat in restaurants and rarely buy clothes or other consumer goods.

4. Until recently, I was calculating our monthly income by dividing our yearly income by 12 - although this meant that our budget was technically covered, I still found myself using credit cards occasionally. I realized that this is due to the fact that most months only have two Fridays for paychecks so our monthly income is several hundred dollars less than I had been calculating - taking us from result:happiness to result:misery.

5. There is no realistic way to downsize on car/home - they are all relatively inexpensive and as our cars are already quite old and our house is quite small they can't be downsized further without considerable loss in quality of life.

6. Regarding asking family for help - they are not so well off that a $13,000 loan would be easy for them - when I wrote that we could ask them for help I meant that in the case of an emergency (medical emergency, job loss, etc.) we can probably count on them which is why my husband feels that a full emergency fund (3-6 months monthly income) is not a necessity for us.

7. I am a big fan of David Ramsey - however, it is difficult to pursue paying off debt with gazelle-like intensity when one's spouse disagrees with the premise that debt is bad.

Our Plan

Thank you to all of you for your advice. We had a long discussion about how to handle our finances and were able to come to an agreement on how to view debt in general and on how to manage our finances in the short term:

1. Debt consolidation - either by calling the credit card companies and asking for a better deal or getting a new card with low interest on balance transfers (and freezing all the cards in ice to prevent using them as much as possible), or possibly a personal loan if we qualify.

2. Try to reduce somewhat negotiable fixed expenses (utilities, auto insurance, etc.).

3. Reduce (already-small) spending on consumer goods as much as we can.

4. Try to maximize income relatively easily (e.g. asking for a raise, tutoring nearby children during the evening, etc.) without sacrificing on personal/family time.

Answer 1

Frugality

When someone mentions living frugally, I always point to the book "America's Cheapest Family". I'm not affiliated with this book in any way and do not gain anything from promoting it. I'm just another happy customer.

As much as you are already doing to curb spending, this book may give you some extra pointers or suggestions to help you out. This family was able to do quite a bit with a large family, small income, and not drive everyone crazy. It also talks about teaching your kids how to manage money, as a bonus.

Credit cards

As far as consolidating your credit cards, that's a double edged sword. It reduces your interest, but also "gives" you the idea that you can continue to spend. If you have high interest and high monthly payments, then by all means, consolidate them into a single, low interest, low payment loan. The next step is to stop using credit cards.

I'll mitigate that with 2 reasons to actually keep 2 of your credit cards.

1. This is a high limit, low interest card that you use for absolute emergencies only. This is for when your cash on hand can't cover something you need to pay now and can't live without. YMMV, but this has to be the last resort type of emergency.

2. This is a low limit card where you don't care about interest rate, because you have an auto-pay on it to pay it off every single month. This is a card you put something small, like your Netflix on, and you let it help build your credit history over several years time. This card is completely off limits for everything else. This is one credit card hack that is easy to do and I'm told can help you a lot later on.

Neither of these cards should have a yearly fee.

3. I know I said 2, but here's a 3rd reason to have a credit card. This is another card with no yearly fee, low limit, and whatever interest. This one has some sort of cash back program that you can use for things you would normally pay with cash, and then you pay it off every single month. This is for gas, groceries, clothes, or whatever you spend on regularly. The cash back you get should go towards paying off the card, but it can also go towards your savings. As a side benefit, you can keep track of your spending habits with the statements.

Another credit card hack for better credit scores: You might want to pay off your credit card twice a month. Your regular bill and your credit history queries don't usually match up, which means that your credit history might say that you continually have a high credit card use, even though you pay it off every month. Paying the card in the middle of the month will help keep that balance low, so your credit history isn't accidentally negatively affected.

Increasing income

Getting another job can increase your income, but it'll also likely increase your stress, reduce your time with your kids and spouse, among other things. Weigh this option very carefully before choosing it.

Getting that 2nd job can also increase your cost of living, so make sure it's financially wise to do so. If you are significantly increasing your income without concurrently significantly increasing your costs, then it may be a good job to have.

Debt

While you shouldn't be afraid of adding debt, you also shouldn't be jumping into it either. As Nathan L points out, not all debt is created equal. Also, not all debt is paid off as equally easily. Before getting into more debt, you should really weigh whether you need to spend the money. The book I mentioned earlier goes pretty deep into that subject, so I'm not going to.

Age

As you both are still fairly young, you have a lot of time to get out of debt, since you have a lot of earning and learning potential left. Try not to make bad financial decisions, and you should be fine in another 5-10 years. Even though you are trying to make good decisions, bad ones will happen, so you just need to not beat yourself up for them and roll with the punches.

You are much better off than many people I know who are older.

Compromise

Neither you or your husbands ideas are 100% correct, but neither are they 100% wrong. You need to have conversations to talk over your finances to decide and agree on what to do about certain things. If you don't agree on the decision, then it's probably not going to work out, simply because you don't agree on it.

Getting your families involved might not be out of line here. They may have suggestions that can help. Families are supposed to be there to help out. From the sounds of it, they are already helping. If they have given you loans, they already have an investment in getting you into a better financial situation so they can get paid back.

Be prepared for heated discussions by being patient and willing to listen. You might also want some snacks, so people can get their blood sugar leveled out.

Be willing to listen to brain storming sessions. A brain storming session is one where all ideas are accepted. Sorting them out and labeling them as good, bad, maybe, hell no, last resort, already in progress, etc. happens later. This session is just about putting options down on paper. Often times, outlandish ideas seem more reasonable on paper as well as more possible than originally thought, once some consideration is laid out behind the idea.

Conclusion

From what you said in your question, you seem to be on a decent track already. Try to be patient, keep working to make things better, and realize that you don't need to figure everything out right now. Some decisions are just fine to hold off on. Some decisions you make now may need to be changed later. Other decisions may simply need more information before you can make them, so try not to feel rushed to "figure out everything", because you simply won't be able to. That's life, unfortunately. Also, some decisions will be made for you.

BTW, it's ok to not know something, as long as you continue to learn, grow, and try to eventually figure it out. That's why you're here on this site, and remember that none of us have it all figured out either. :-)

Answer 2

In my opinion, your idea is bad and your husband's idea far worse. You need to find a way to live within your means, that is spend no more than 84K/year. That could be done in a few ways:

1. You get that higher paying job now (I assume around 75K).
2. He drops out. Is a doctorate necessary to make 75K/year?
3. Spare jobs like the tutoring and other things. Some of the things you said or even deliver pizzas. You can earn that few extra hundred dollars.
4. Stop using and paying your credit card bills. This will destroy your credit, but it can be cleaned up later and you won't be falling further behind.

With the options you outline making 150K is not all that great of a salary when you consider multiple children in private school. Plus you two are paying a lot for your educations for a good salary in both tuition and opportunity costs.

Funding a lifestyle with a credit card for "a few years" when you are already maxed out is insanity.

Debt consolidation really does not workout for most people, you just need to get out of debt.

You have a good emotional intelligence about debt, especially the kind of debt you are talking about. It leads to health and relationship issues. Just please know that debt consolidation most often leads to more borrowing.

Answer 3

While your husband's basic premise that debt is reasonable to secure higher earning potential, not all debt is created equal. For example, mortgage debt may be reasonable because the interest paid is a substitute for rent expenses, and the interest rate is very low. This assumes you are not buying more house than you can afford.

Student loan rates vary widely, so while some student loans might be reasonable, I wouldn't agree that all are. I should probably add here that the biggest problem with student loans is the shear magnitude of debt people are accumulating against degrees that do not support an increase in earning potential sufficient to repay the loans.

Credit card debt generally comes with a much higher interest rate, and is the most foolish way to finance the debt you need to finish school. Loans and gifts from family are difficult for everyone involved, and should be avoided if possible (but that's a judgment call you have to make and outside the scope of sound financial advice—rather it's an interpersonal relationship subject).

You might be able to negotiate a repayment schedule and lower rates with your credit card company if the alternative is to default. In any case, you need to find a way to a lower interest rate.

Answer 4

This statement

My attitude has always been that I prefer to live frugally and within our means both because it is a good habit and because I have always been very afraid of debt.

and this statement

little savings, and our income does not cover our expenses (with a several hundred dollar shortfall monthly).

Are diametrically opposed. Both of these cannot be true. This is the opposite of long-term planning. If you don't live within your means, there is no way you can plan for anything long-term, as eventually, you'll run out of available credit, and then you'll be forced to cut back somewhere.

Running up credit card debt now is essentially stealing money from the future

Think about it, you're already spending like you have a six figure job when you don't. Every dollar you spend now that you cannot pay off is money out of that six-figure job.

If you continue borrowing, you will not be able to afford to send your children to private schools as that money will go to fill the hole you're digging now.

You should also not assume there is a six-figure job in your future. Don't count your chickens before they've hatched. Life is full of surprises, and not all of them are good.

How to bring your spending in line with your income

With children, how do you and your husband plan to get extra work without incurring extra child-care cost? Before jumping into a 2nd job, make sure you won't end up treading water or digging a deeper hole for yourself.

Dave Ramsey's baby steps (through step 3) are a good place to start. It's essentially, get a small emergency fund, pay off credit cards then get a larger emergency fund.

Now, how to actually get out of debt.

1) Since your credit score has taken a hit, consolidating may not save you much. Use Ramsey's debt snow-ball method to get your debt paid down, then re-evaulate consolidation.

2) Can grandparents handle child care? Perhaps a fun summer with the grandparents could take some pressure off.

3) Can your husband take a summer (or spring or fall) sabbatical and get a better paying job temporarily? If you're focused, just a summer could make a big difference

4) Can you downsize in either home or car (i.e. two cars to one car family)? Most people spend most of their money on home and cars. Downsizing here can make a big difference

EDIT: Addressing debt snowball vs debt avalanche methods

Some comments argued the OP should use the debt avalanche method instead of the snowball method.

Unless one of the credit cards has an extremely high interest rate, the OP is unlikely to see much of a time difference between snowball vs avalanche debt free day.

The debt snowball method has one key advantage. Seeing early victories. The real issue for the OP is their behavior is creating a financial problem. Lifestyle will take a hit, so plan in some early victories.

Answer 5

While it is true that our family can help us out, I prefer to be self-sufficient as much as possible and would be mortified if we had to ask for help.

You have your answer right here. If they can help, ask them. You did nothing wrong, you are just trying to have a family in a world where most people struggle to live decently. There is nothing to be ashamed of. If it is a matter of pride, then swallow it and do what is best for your children.

Explain the situation in details to your family, and if they accept to help, pay them back as soon as possible and treat them to restaurants when you get financially stable.

Answer 6

A university education puts you in trouble financially during and quite some years after the education while it in general pays off in the long run. It makes sense to finance this education by debt, and I would see this rather as an investment in the future. It especially makes sense to not take any side jobs that would delay the completion of the course or risk lowering grades. The main objective there is to finish the education with good grades and secure a good job as soon as possible while collecting some debt along the way is reasonable.

Going to college is a financial risk by itself (you may not find a well paying job afterwards) but you both already decided for that.

The same is true with lots of children. They are a financial drag and some people decide to get children later in their life when they are settled more financially. You already decided not to do that. Getting children (relatively) early means that your expenses increased during a period where your income is rather low. It increased the risk of an overly large debt, but as long as the debt remains manageable, one could motivate additional spending now so that the "health of your family" stays high as optimizing the quality of life. Your kids will be out of the house earlier and that means you can work more and earn more later and pay back what you spend now. Example: Kids remember a visit to a fun park for a long, long time - it gives them a lot of joy, although it's usually also quite expensive. It still might be worth it.

My summary is therefore: University education and having children early is a financial risk at your stage of life, even though it pays off or cancels out later. Your actions should depend on the right balance between frugality and height of debt and on your appetite for risking getting into a debt trap. Many people do collect some debt during that period but are able to pay it back later.

The risks: You might not get sufficiently well paid jobs soon enough to pay back the debt before it's getting out of control. For example because the world economy might take a slump next year and companies might not hire any more (it's not totally unrealistic) or there might be health problems.

Recommended strategy:

Try to live on $84k so that the debt level kind of stays constant. Try to cut costs further where possible but do not cut everything that means fun to your family. Depending on where you live $84k might make achieving this balance easier or more difficult.

Do not try to increase your salary by any means that would delay your original plan to finish education and secure good jobs. That would be hurting your long term perspectives rather more than it would benefit you in the short term. If that is the only viable option it might be worthwhile to take on additional debt (for a reasonable interest rate) as kind of investment into your future instead.

The danger is the immediate bad financial situation and the risk of not securing well enough paid jobs. Focus your attention on that. Otherwise just follow the long term plan that you already have.

How safe you want to play it is probably a decision you and your husband have to make.

Answer 7

Whatever you decided to do, whether to live within your means or to continue your current lifestyle, or something in the middle, what you must do is make a concrete plan.

Sit down with your spouse and decide on two numbers:

1. The maximum amount of time you both are willing to stay on negative cashflow.

2. The maximum amount of debt that you both are willing to go under.

Decide on these two numbers and stick with them. Plan your budget so they do not exceed these two numbers. Also, take into account that as the debt level increases, so do the interests, make sure your income increase can actually cover the elevated interests.

Make an agreement that if these two numbers are exceeded that you both will take this a lot more seriously. On the other hand if you are well on schedule, then agree that you can relax a bit.

Do not budget on the hope of being able to rely on your parent's money. Sure if an emergency happens, it's great to have your parents on your back, but never make a plan that relies on them. They have their lifestyle and emergencies too, dipping into that to fund your lifestyle is rarely a good idea.

Answer 8

Until recently, I was calculating our monthly income by dividing our yearly income by 12 - although this meant that our budget was technically covered, I still found myself using credit cards occasionally. I realized that this is due to the fact that most months only have two Fridays for paychecks so our monthly income is several hundred dollars less than I had been calculating - taking us from result:happiness to result:misery.

You've got two months/year with three paychecks. Sock away those two paychecks and dribble them back 1/6th at a time into your main checking account.

Otherwise, I wholeheartedly agree with "My attitude has always been that I prefer to live frugally and within our means both because it is a good habit". CC debt is the second worst possible legal form of debt to have. (Worst are payday and car/boat title loans.) Your hair is on fire with those 15+% loans, and -- as everyone knows -- that's a Bad Thing.