Paying off a mortgage before paying off credit card debts might seem unusual and uncommon. But it seem fine with me as I don’t generally do what everyone does.
In a previous post I wrote about a scam my husband was a victim of and we found ourselves in $15,000 credit card debts.
Few years ago, my husband and I decided to live on our highest income and use our lowest income to pay off debts. We paid off credit cards debts first from the lowest balance to the highest while paying the minimum on everything. We used the same strategy and paid off credit card debts, car loan, and tuition loan. Then a year ago, we decided to live on the lowest income and use the highest income to pay the mortgage after allocating $500 to our private business as capital investment.
Basically, we paid off our credit card debts, car loan, and tuition loan and started to pay one whole income to our mortgage and finance our own business.
With this recent scam and $15,000 to pay, my husband and I weighted multiple options. I decided we would live on the highest income (monthly expenses and mortgage) and use the lowest income to pay the credit card debt. That decision didn’t sit well with me and I reflected on it. I suggested to my husband to stop using his credit cards since he didn’t look at the statements. He didn’t look at his monthly statements and didn’t noticed that there were many fraudulent activities on them for months. I caught it when the fraudulent activities progressively started to appear on our checking account. As a reminder, review your bank transactions and credit cards transactions few times in a month to avoid paying for something you didn’t charge.
Too recently, my husband used one of his credit card to make a small purchase because he didn’t planned ahead to bring cash along. I didn’t appreciated it. While I reflected on how to pay of the $15,000, I suggested he asks his mother to get her own cell phone and move off our plan. He agreed. I suggested we cut cable he disagreed. I weighted multiple ways to cut our monthly expenses to free more cash. To me we need to cut cable. We need to change our internet plan to something basic enough for surfing the web. Our cable and internet cost $170 a month. I estimate we could free $140 at least with my option. I readjusted our allowances. He and I took $100 each a month for our personal things. I decreased it from $200 a month to $60 a month. That freed $140. We estimated electricity and water to be $160 and gas to be $160. If we paid less than that, the difference would go in our saving account for irregular expenses. I suggested we stopped putting $350 a month in the saving account for irregular expenses. That would free at least $300 a month. I suggested my husband look for a cell phone plan for me that is less than the Verizon plan we have. We all 3 cell phones including his mother cost $105 and month. He estimated taking his mother off the plan would free $20 a month. With all these changes, the total cash free would be $600 (140+140+300+20) a month. Our grocery budget is $375 a month for a family of 5 including food and non-food items. Our basic need expenses without mortgage is $695 (160+160+375). With mortgage included, our basic need including mortgage, grocery, electricity & water, and gas is $1,614 (919+375+160+160) a month. If we free at least $600 a month from our monthly budget and pay it toward the credit card which my husband moved to a 0% balance transfer card, we would pay off at least $7,200 off the $15,000 in 12 months.
I took a look at our year to date living expenses compared to our lowest income. I remarked that our year to date lowest income total to about $19,000 (January to September). We put $3,350 in our saving account as year to date which we use to pay for irregular expenses like car registration fee, kids school registration, car insurance, home maintenance…). Out of the same income we put a little over $2,000 toward our mortgage, $300 to finance our business, and invested $1,400 in our Roth IRAs. Out of $19,000 income, we saved and invested over $7,000 from January to September this year. Our monthly expenses no mortgage included as the mortgage is paid with our second income, is about $11,000 year to date. From that we saved $716 from utility and bus ticket. I walk to work and take the bus in winter. As you can see we saved over $7,700. We live modestly and are cautious about our spending.
You cannot control your spending and your income if you don’t budget. Our budget model doesn’t dictate how much we spend. We estimated how much we want to spend in each category. We record our expenses in each category for each month and compare it to our estimated budget to see if we over estimated our expenses or under estimated. It allows us to reflect on ways to cut cost in a category that has room for improvement.
After reviewing our numbers, I decided if we already saved $7,700 from our lowest income while we live on it, if we trim our expenses to free more cash as I described above, we would be able to pay most of the debts off if not all within 12 months. But I have to get my husband to agree to cut these expenses. Since he is not cooperating, I made the decision to let him be in charge of our monthly expenses and the credit cards debts payment. He has to come up with strategies to include the credit cards payment and our monthly expenses in our lowest income. I would be in charge of our investments and continue to pay our mortgage with our highest income. I cannot stop paying excess in mortgage to include our living expenses in that income when we will continue to pay for cable and other expenses we could trim. Therefore, we will continue paying our expenses just like before but include credit card payment under the same income. We would stop putting $350 in the saving account. But each time we pay less in utility bills, I would request he moves the saving into saving. Once I set that financial boundary, I felt like I found the best option for our dilemma. We will continue checking our numbers but I would be in charge of what I am passionate about which is increasing our assets.
Why paying mortgage that has a low interest rate over credit card has could have 15% interest rate after the 0% period? Well, our house is a roof over our head. It is a necessity. If we temporary loose our highest income, our lowest income cannot afford to pay for our monthly expenses, mortgage, and credit card. We could easily struggle to keep our house. However, if we couldn’t pay the credit card bill in a month, no credit card company would take our house from us. Therefore, I am confident to continue paying off our mortgage and then starting to create other sources of income. We might pay more in credit card interest. But it doesn’t matter to me since we are already in $15,000 debts. Saving few thousand dollars in interest when we turn around and waste few thousand dollar in expenses like cable doesn’t really save anything. At least paying off our mortgage would keep a roof over our head.
If you are in a similar situation or wonder which debt to pay off first, a financial advisor would give you an advice that could help you pay the least amount of interest; an accountant would advise you on what would reduce your tax, but your heart would make you feel which decision is the best for your particular situation. Weight all your options and go with the one that allows you to sleep at night.
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