Need advice...possible layoff...save or pay extra on debt?

[Lady Belle]

I've been reading the Budget Board for a while now, and you all seem so knowledgeable!

I may be getting laid off in about 6 months to 1 years time. I say may because even if my job is eliminated, I have a very real chance of being put in another area at the same pay rate (the company is looking at outsourcing just my department, they are actually expanding in other areas). I'd say my chance of actually being out of work is around 25%. But, it's high enough that I'd like to plan for it as if it WERE going to happen. I always like to plan for the worst case senario. Also, if it did happen, I would be able to find work realtively quickly, but I'd most likely take a 25% to 40% pay cut.

Anyway, this is what my delema is. Right now we have two CC's that, before rumor of possible job loss came along, we were planing to pay off in about 18 months anyway, using most of our income that's left after paying household bills and DH's truck payment. Also, right now we have 2 months of my pay in savings.

So, should we start making minimum payments on the CC's and increase our savings incase of job loss, or make even bigger payments on the CC's to get rid of them faster (and the only way that will happen is if DH works more OT and we use all bonuses and the tax refund as we are all ready putting most of our leftover income towards them anyway)? Or should we just continue as we are going?

I'm not too worried, even if I lost my job tomorrow (not likely but you never know!) if we cut back on the household budget and went to minimum payments on the CC's, we'd make it 5 months on just what we have in savings, and that's not taking into account unemployment payments or the fact that I'd work at McD's (or something) to get extra income until I found "real" work. I just want to get us into a better position, if possible. Oh, and DH's job is 100% safe, as long as he keeps showing up and doesn't punch his boss in the face, they never fire him and the company isn't going out of business anytime soon. Yes, it really IS that secure, trust me on this one!

 

[sammielynn]

I'd get rid of those CC bills. If you make the minimum payments you will still owe them money for years. Work on paying them down as if your job was secure. Best wishes on keeping your job.

 

[The Disney Bunch]

pay off your bills! This way anything y ou have coming in is yours.

 

[Toby'sFriend]

hmmm -

I think that if there is a significant chance that you will end up in a job making 25 to 40% less, then one of your first priorities needs to be getting your expenditures to a point where you can live on that much less.

If you got the credit cards paid off, how close would you be to that?

 

[Lady Belle]

hmmm -

I think that if there is a significant chance that you will end up in a job making 25 to 40% less, then one of your first priorities needs to be getting your expenditures to a point where you can live on that much less.

If you got the credit cards paid off, how close would you be to that?

When we get them paid off, we'd be about there. Our original goal was to pay off the CC's so I could afford go part time, allowing us to start having kids. So we wer planing on my pay going down 50% once I was working part time anyway.

BTW, we locked up the cc's in October, so we haven't charged a dime since then!

Also, my odds of not working for this company in one form or another is about 25% (I'd guess). Only if I lose the job altogether would I then most likely see a pay cut. But since I like to plan for the worse case senario, I want to paln as if losing my job was 100%, not 25%.

Thanks for the advice so far!

 

[Am_I_There_Yet]

I have business dividends coming to me, that will stop two years from this March. We're talking a very considerable amount and it has me starting to get nervous, so I understand. We're gearing up for it now.

I too have CC bills and am trying to abolish those and put money into my savings account at the same time. I'm self-employed (realtor) and my income is very inconsistent, to say the least!

I've been taking a major portion of every commission check and putting it towards bills and a portion of it in savings. The way I look at it, is I'm paying more interest on the CC bills, than I am earning from my savings account. For us, it makes more sense to get rid of that monthly bill, since I'm currently paying over $150 a month in interest. (Ouch!)

On top of everything else, we're readying our house for a quick sale, if it comes down to that. I have a lot of equity in it and know it could be our ticket out of trouble if it comes down to that.

Lotsa stress!

 

[luvthatdisney]

Lady Belle~

I was in your shoes earlier this year and yes I was laid off in November - I had worked for this company for 13 years - there is no such thing as job security anymore!!

Since I had been on a written budget since July - and had my $1K in savings (I do follow Dave Ramsey's Plan). I knew exactally what we needed to live on. I did receive a severace package - it was not alot, but it was some! I also knew that since I obtained severance that I could not obtain unemployment benefits until my severance was exhausted (I had to figure up how many weeks the amount I received equated to). However, if you register and pay for college (which I have done) they will waive the severance waiting period. I just received my first unemployment check this week and I start as a full time student on Jan 9th!

I have put the severance money in savings and will use it to pay bills as needed - from what I figured DH's pay plus my umemployment I will be about $400 short a month - so that will come from my severance. DH is up for a promotion and hopefully he will get it - keep your fingers crossed and that would greatly help out! I am getting to participate in a federal program called the WIA (workforce investment act) - it is going to fully pay for my 2 year degree - including gas and supplies!!! So I will not have any kind of student loans. Once my unemployement benefits run out - 26 weeks - I will probably get a part-time job depending on if my DH gets his promotion or not!
I have learned alot about what the government offers to laid off employees since this has happened to me.

OP - It appears you do have money in savings and I would keep as much of it there as you could, but I would pay off any small bills you have outstanding - however since there are storm clouds on the horizon I would not let all of my savings go to pay off bills. Just pay the minimums until you know for sure what is going to happen and keep saving. If your job is in the clear - you could use what you saved up to pay off the bills. Unexpected things happen and you dont want to deplete your savings until your job is in the clear!

 

[PlaneJoy1]

I have to agree pay the credit cards!

With two months of your salary in the bank and a possible severance payment (?) from your current job and/or unemployment that would hopefully be enough to float you until you get a new job.

You will have to sacrifice to pay off the credit cards, but imagine how it will feel if you don't lose your job and have that extra money each month. That's what I'm looking foward to!

 

[eugeniuss]

I would pay the minimums on all your bills while getting a savings account with at least $1000 dollars... once you do that, pay the minimums on all your bills except the smallest one so you can get that one paid off real fast, then continue on with the next highest bill putting all your money from the first now paid off bill towards the second... this way you have successes by eliminating smaller debts which will keep your drive going to become debt free... I would do this with all your bills, and not just CC's...

(all above stolen from Dave Ramsey's book)

 

[Toby'sFriend]

well, in an absolutely worst case scenario - you can charge groceries on a credit card while unemployed. So in a manner, a low interest credit card with an open line of credit is an emergency cushion. If you have enough money in a savings account to keep your mortgage and truck payment current for a couple of months, I think you have enough money saved.

I wouldn't recommend taking what you have in savings now out to pay off the bills, but I would put all extra money you get from your DH's overtime and everything else you can dig up toward the credit cards and then the truck loan to get them gone.

 

[Lady Belle]

OP - It appears you do have money in savings and I would keep as much of it there as you could, but I would pay off any small bills you have outstanding - however since there are storm clouds on the horizon I would not let all of my savings go to pay off bills. Just pay the minimums until you know for sure what is going to happen and keep saving. If your job is in the clear - you could use what you saved up to pay off the bills. Unexpected things happen and you dont want to deplete your savings until your job is in the clear!

Yes, thank goodness I insisted we put all the gift money from the wedding in savings! I have no intention of touching savings short of the car dieing or the roof springing a leak. I'm just torn between paying down the debt faster verses increasing our savings even more. If I do lose the job in 6 months, then even if we put EVERY spare dime towards the debt that we could, it STILL would not be paid off in time (although the minimums would be lower, thus helping our monthly budget post-lay off). But if we did that, our savings would not grow during those 6 months.

At our current rate of debt payback, we'd be free and clear of CC debt in roughly 18 months anyway. If we increase the payments even more, I think we could shave maybe 3 months off of that. If we cut back to the minimum payments, we'd be able to save $3000 in six months, almost doubling the amount of time I could "afford" to be out of work (meaning 0 income on my end, again not including unemployment payments).

 

[Lady Belle]

I would pay the minimums on all your bills while getting a savings account with at least $1000 dollars... once you do that, pay the minimums on all your bills except the smallest one so you can get that one paid off real fast, then continue on with the next highest bill putting all your money from the first now paid off bill towards the second... this way you have successes by eliminating smaller debts which will keep your drive going to become debt free... I would do this with all your bills, and not just CC's...

(all above stolen from Dave Ramsey's book)

I've read DR, although we aren't exactly following his plan. But our savings is already WELL over the recomended $1000. Thanks though!

 

[disneysteve]

should we start making minimum payments on the CC's and increase our savings incase of job loss, or make even bigger payments on the CC's to get rid of them faster (and the only way that will happen is if DH works more OT and we use all bonuses and the tax refund as we are all ready putting most of our leftover income towards them anyway)? Or should we just continue as we are going?

I think this is a real judgement call and doesn't necessarily have one RIGHT answer.

I would NOT cut back to the minimum payment on the CC. Nobody should EVER pay just the minimum. If you run the numbers with an online calculator like those at bankrate.com, you'll see that even paying $1 over the minimum significantly decreases your repayment period. So keep making more than the minimum.

But I also agree that if there is a chance of job loss or income cut, you should boost your savings to carry you over better. So run the numbers and come up with a balance that still lets you pay more than the minimum while also building up your savings. If you are expecting bonuses and a tax refund, use those to increase the savings.

Also, if you anticipate a substantial tax refund, change your withholding now so that your take home pay increases. Makes no sense to get a big refund.

 

[luvthatdisney]

LadyBell~

How confident are you that you could get another job quickly if you are laid off. If you could get one fairly quickly then I might would just keep on the same cc payment plan you have been on and get those paid off in 18 months as you had planned.

However, if finding another job is going to take some time then I might start a debt snowball and save up as much as I could. I have heard of some people going 1-2 years before finding another comparable job. I would not want to stretch myself too thin just in case.

A debt snowball would be to pay the minimum on all debt (ie cc's) and take the one with the smallest balance and pay it off first and then move that payment amount to the next cc - thus starting the snowball. YOu could also do this with the highest interest rate - whatever you like!

I definately would not deplete my savings as you never know what might happen. If you feel you want to pay off your bills I would keep $1k in savings for emergencies.

This is really a personal decision that you will have to make along with your spouse. It does need to be made together as your job loss will affect both of you - not just you. I hope everything works out for the best - I am trying to make lemonade out of my bag of lemons!!

 

[Lady Belle]

I think this is a real judgement call and doesn't necessarily have one RIGHT answer.

I would NOT cut back to the minimum payment on the CC. Nobody should EVER pay just the minimum. If you run the numbers with an online calculator like those at bankrate.com, you'll see that even paying $1 over the minimum significantly decreases your repayment period. So keep making more than the minimum.

But I also agree that if there is a chance of job loss or income cut, you should boost your savings to carry you over better. So run the numbers and come up with a balance that still lets you pay more than the minimum while also building up your savings. If you are expecting bonuses and a tax refund, use those to increase the savings.

Also, if you anticipate a substantial tax refund, change your withholding now so that your take home pay increases. Makes no sense to get a big refund.

I ran our cc balances through a payment calculator. Even if we increase the monthly payments to the max we possibly could (which wouldn't be by much, since we're paying about 25% of our monthly take home to the cc's already anyway!), it would only cut the time it would take to pay them off by 2 months. To me, that just not worth the trouble.

And the idea of making the minimums just makes me ill, even if I'm saving the differance!

So, I think we'll stick with our current budget plan! DH can pick up some OT and we'll save that, plus he's due for a couple of bonuses and we'll save those too. As for the tax refund, this is our first year fileing as married, so I'm not changing anything untill I see how it all shakes out. My goal is to get about a $1,000 to $1,500 refund each year. I'd rather get a refund than owe! But I won't know what we'll get this year until we file, and that's when we'll need to see if we need to change our withholding.

Thanks so much for the advice, everyone! One way or another I'm getting these suckers paid off, and then I'll never have to worry about it again!

 

[Calliaz]

I'd pay off the credit cards first. If, by chance, you are laid off and you need money, you can charge again--if you have to. If you aren't laid off, you've made good headway to becoming debt-free. You are paying the CC company far more to borrow money than you earn on savings.

#1--Pay the minimum on the card with the lowest interest rate and put as much as you can towards the card with the highest rate until it is paid off. Then move on to the lower rate card.
#2-If you have good credit and one or both of the cards are at a high rate, switch cards to a lower-rate card.
#3-If you own a house, see what kind of rate you can get on a home equity loan and pay off the CCs with that (then start paying off the loan).

You can do it!

 

[Lady Belle]

#3-If you own a house, see what kind of rate you can get on a home equity loan and pay off the CCs with that (then start paying off the loan).

I'd thought about that, but the last thing I want facing a layoff is a higher house payment! We default on that and we'll be living in a cardboard box in a hurry!

 

[Am_I_There_Yet]

I'd thought about that, but the last thing I want facing a layoff is a higher house payment! We default on that and we'll be living in a cardboard box in a hurry!

Not only that, but in most states you can only get 80% of your equity and you pay closing costs to get the loan. Plus, the interest rates will be higher than most CC's. And if you do need to sell it in a hurry, you've just eaten up a huge portion of your equity.

 

[Calliaz]

I'd thought about that, but the last thing I want facing a layoff is a higher house payment! We default on that and we'll be living in a cardboard box in a hurry!

A home equity line of credit is really what I was thinking of. It would be good if your CC interest rates are on the higher side and the amount of debt is more substantial (say over 10k). Overall, you would save money and probably lower the amount of the payment so that default is not even a consideration (since the payment is spread over 20-30 years). Again, you always have the cards as a backup if the worst happens and you have to start accruing debt again. But, this way you are putting yourself in the position to be debt free if you are not subject to a layoff.

My local credit union is offering a credit line worth 80% of your home's equity at 6.75%. Even with closing costs, this may be a lot less than you are currently paying in interest on your CCs. Plus, depending on your tax situation, the interest paid on HELOCs can be deductible.

 

[airplane]

I would defintely pay off the bills. If an emergency pops up you can always put money back on the cards.