Author Topic: Reader case study- budget up for review!  (Read 5145 times)

MichelleD1977

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Reader case study- budget up for review!
« on: October 07, 2013, 09:16:16 PM »
Hello you mustachians!

I am new to this blog and very motivated to put some of these concepts to work.  My husband and I are by nature very frugal and already living by many of these principles.  However, we've never tried to consciously limit our spending for any goal. If there was money in the bank, we felt it was OK to spend it.  no more of that will be happening!

A little about us- I just graduated from physical therapy school, huz is a Chemistry lab preparator at the University of Oregon in Eugene. We moved from Vermont to Eugene so that I could do a 2 year physical therapy residency with an awesome PT here in Eugene. Our biggest financial ball and chain is my school debt (was about $110,000 at 6.5%-8%, which we about split in half with a refinance cash-out on our house in VT. Now we still owe the debt along with our mortgage but at a more sane 4%. The remaining $50,000  at 6.5% I'd like to pay off in three years or less. (This will leave a lesser interest $14,000 loan and our house loan). I've calculated it will take about $1,900 a month to make the goal.

This is our budget-
Income about $5,400 a month, plus $1,200 for rent of our house in VT (total $6,600)
We have about $4,000 in savings for emergencies and (hopefully) maternity leave at some point

Mortgage on house in VT- $1589/month
 (15 year mortgage, 4% interest, remember about 1/3 is what we just took as cash-out to pay off half my loans, total loan $165,000.  It looks like we are renting our house for a loss but we are not)
Rent in Eugene-$1,200
Gas-$150
Phone/internet-$97
Average electric and garbage-$140
Student loans-$1900
Groceries-$400
Dining out/drinking out/homebrew ingredients-$220
Pet food-$15
Car insurance-about $50
Other misc stuff-$600 (I know this is not very detailed, but I'm struggle with itemizing on a budget for the non fixed expenses)

total: $6361 vs. income of $6600 so there is some wiggle room in there.  It's about 1/3 of our take home pay, not 1/2 but 50% more than what we were paying on my debt until I came up with this plan, which I think is a good start. I am interested in hearing where you see the most room for improvement if we are to get even more motivated.

One thing I am struggling with as far as budgeting goes- how does everyone budget for things like Christmas presents, plane tickets home to VT for Christmas, and other non- monthly purchases? I really don't want to have a budget with each thing I can imagine itemized, just gives me a headache and I'm sure there will still be monthly expenses I don't think of. However, I also really want this to work.  Some career goals would be much easier to do if I can shake this debt hanging over my head. 

Right now we have decided to just concentrate on the debt and contribute again to 401K once the 3 years is up.  We already have about $138,000 in a Traditional IRA. Does that seem smart?


Thank you for any advice!

Michelle and Dave
« Last Edit: October 07, 2013, 09:22:10 PM by MichelleD1977 »

CU Tiger

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Re: Reader case study- budget up for review!
« Reply #1 on: October 07, 2013, 10:04:43 PM »

Groceries-$400
Dining out/drinking out/homebrew ingredients-$220

Other misc stuff-$600 (I know this is not very detailed, but I'm struggle with itemizing on a budget for the non fixed expenses)

My thoughts would be work on getting your current spending on food and drink down below $400 total. That would give you an extra $220 to toss at the debt. If you eat at home, you can eat a lot of food for cheaper. Also, drinking out is kind of insane. I can buy a six pack of Shiner Bock for the price of two beers at a bar. And Shiner Bock is expensive up here!

I don't know what to tell you about plane tickets, Christmas presents and stuff, because back when I was young and broke, I didn't spend money on things I could not afford. I wasn't in debt, but did not have money for flights, etc.

I am not even telling you NOT to spend money on flights and Christmas presents., I'm just saying that when you do, you need to acknowledge to yourself what you are doing.

One way to figure out how to cover expenses like that is to figure how much they cost you and set up a sinking fund:

Cost of flying for Christmas $800
Cost of presents                $400
Total we need                  $1200   / 12 (months we have to save for those things) = $100 a month

Then every month, the minute you get paid, you put $100 in a safe "sinking fund" account (safe as in you can't get to it to pay for impulse purchases) and by the time you need it, you'll have the money you need.

If you start today (October 10) and figure the same thing it would be like this:

Cost of flying for Christmas $800
Cost of presents                $400
Total we need                  $1200   / 3 (months, assuming you start saving today, charge the tickets in November, and pay for them in December when the bill comes due) = $400 a month during October/November/December

smalllife

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Re: Reader case study- budget up for review!
« Reply #2 on: October 08, 2013, 05:11:55 AM »
This is our budget-
Income about $5,400 a month, plus $1,200 for rent of our house in VT (total $6,600)
We have about $4,000 in savings for emergencies and (hopefully) maternity leave at some point

Mortgage on house in VT- $1589/month
 (15 year mortgage, 4% interest, remember about 1/3 is what we just took as cash-out to pay off half my loans, total loan $165,000.  It looks like we are renting our house for a loss but we are not)
Rent in Eugene-$1,200
Gas-$150
Phone/internet-$97
Average electric and garbage-$140
Student loans-$1900
Groceries-$400
Dining out/drinking out/homebrew ingredients-$220
Pet food-$15
Car insurance-about $50
Other misc stuff-$600 (I know this is not very detailed, but I'm struggle with itemizing on a budget for the non fixed expenses)

total: $6361 vs. income of $6600 so there is some wiggle room in there.  It's about 1/3 of our take home pay, not 1/2 but 50% more than what we were paying on my debt until I came up with this plan, which I think is a good start. I am interested in hearing where you see the most room for improvement if we are to get even more motivated.

One thing I am struggling with as far as budgeting goes- how does everyone budget for things like Christmas presents, plane tickets home to VT for Christmas, and other non- monthly purchases? I really don't want to have a budget with each thing I can imagine itemized, just gives me a headache and I'm sure there will still be monthly expenses I don't think of.

Are you planning on moving back to VT when your residency is over?  I ask because right now the rental is losing money before taking vacancies or repairs into account.   

I agree, try and get your food/eating out/homebrew under $400/450.    That alone will give you $200 extra a month.

There are quite a few threads on the forum regarding budgeting, but I did a lot of research and landed on YNAB for precisely the reasons you mentioned - the random expenditures or non-monthly items.   It takes a few months of adjustments while you play catch-up, but after that even a yearly insurance bill doesn't phase me. 

How far is the commute and on what vehicle(s)?  $150 in gas seems high to me.

And do you even need me to tell you that $600 in miscellaneous is ridiculous!  If you can't itemize it, it probably wasn't worth buying.  Either that or you need to make a household category. 

What is the phone plan?  Even with internet I bet you could get that down a bit more. 

Also, consider going home on a random weekend rather than Christmas.  It will be much cheaper and you will likely find it less stressful not having to navigate or travel on the holidays.

MissStache

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Re: Reader case study- budget up for review!
« Reply #3 on: October 08, 2013, 06:35:40 AM »
A few things stick out to me:

-Groceries-$400
-Dining out/drinking out/homebrew ingredients-$220
That's crazy high for two people.  You can get that way down with little effort.  Read through the forums and there are a lot of tips on how to lower your grocery bill. 

-Rent in Eugene-$1,200
I'm not sure what the COL is like there, but that is a lot to pay in rent.  May not be worth tacking if you are only there for a short time, however.

-Other misc stuff-$600
WHAT!?  This is nuts.  This is a LOT of money that is miscellaneous, especially since it doesn't include eating out. 

I know itemizing a budget sucks and it is tedious at first, but it is so, so important to learn about your spending habits.  Break them down into broad categories to make it easier.  Even something as simple as "personal" for each of you (for me this is things like clothing, makeup, medication, and the very rare lunch with coworkers) and "household" (TP, cleaning supplies, home repairs) will give you a clear picture.

For big items, we have a separate travel savings account that we both contribute to montly.  Each month $100 goes into it.  As we need it, we take $ out for trips.   We each have separate savings accounts that we use for other non-monthly purchases like gifts or co-pays or larger single-expense items. 

Welcome to the forums! 

Another Reader

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Re: Reader case study- budget up for review!
« Reply #4 on: October 08, 2013, 06:42:18 AM »
How are you not renting your house for a loss?

MichelleD1977

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Re: Reader case study- budget up for review!
« Reply #5 on: October 08, 2013, 07:43:37 AM »
I say we are not renting our house for a loss because the mortgage includes about $55,000 that is my school debt.  Just before we refinanced we were paying a 30 year mortgage of about $112,000 (6.125%) at $1,100 a month and renting the house for $1,200. Now we owe $165,000 (4%) which we pay $1598 a month. Basically, we're paying the extra $400 a month as a student loan payment, at a much lower interest rate than I was paying before (8%). We may be able to make extra on it eventually but did not want to raise the rent on our current renters, who are awesome.

seattlecyclone

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Re: Reader case study- budget up for review!
« Reply #6 on: October 09, 2013, 09:14:13 AM »
Don't think about part of your mortgage as a student loan payment. Transferring your higher-rate student loan debt to a lower-rate mortgage was a smart move, but that transaction is over. As it stands right now you're cashflow negative on the house. End of story.

If you plan to move back to that same town in Vermont in two years, holding on to the house at a slight loss may be better in the long term than going through the transaction costs and hassle of selling that house now and buying a new one later. But if you don't plan to limit your post-residency job search to that one location, I would sell the house and put any proceeds toward the remainder of your student loans. That will knock out a chunk of the remaining balance and give you an extra $400/month you can put toward your loans to pay them off even faster. Win-win!
« Last Edit: October 09, 2013, 09:15:56 AM by seattlecyclone »

nawhite

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Re: Reader case study- budget up for review!
« Reply #7 on: October 09, 2013, 09:53:49 AM »
Just before we refinanced we were paying a 30 year mortgage of about $112,000 (6.125%) at $1,100 a month and renting the house for $1,200.

This means you are losing money on the rental!!! Even now with 112,000 at 4% you'd be at a payment of around $900 a month and you'd still be losing money.

Lets be super conservative and figure out your rate of return on this rental. I'm going to assume the house is worth around $200k because for your current mortgage you'd need about 20% in equity at the $165k loan. Use your actual numbers in my math.

Ignoring the student loans (though I agree with seattlecyclone personally) lets say you'd be paying $900 a month in mortgage payments on your house and getting $1200 a month in rent. If you never have to make a single repair and never have a single month of vacancy, your rate of return in this case is (1200-900)*12 / 200k = 1.8%. This is a little higher than inflation.

Notice this is with being really generous in the assumptions for you. If you have a single month of vacancy, or need to replace a single appliance, you are making less than inflation on this rental even if you ignore the student loan!

Like seattlecyclone says, unless you plan on moving back into the place in the near term, you will be much better off selling the rental house and using any equity to pay off student loans.

StarryC

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Re: Reader case study- budget up for review!
« Reply #8 on: October 09, 2013, 11:07:24 AM »
Eugene is a great town to get rich with bikes and reduce your gas costs.   

That rent seems very high for Eugene to me.  I see plenty of 2 bedrooms for $800-900 on craigslist.  You could save $300-$400 a month right there.  In 3 months you could even make up for losing your security deposit if you have to break a lease so it is worth it to move if you are staying 4 or more months.  You may have thought you were "rich professionals" when you moved and needed a house fitting to your station.  But that's wrong.  Find a reasonable 2 bedroom apartment, which should be plenty of space.  Even if you have a baby, that is enough space for the first year, or two or five. 

It sounds like you feel that budgeting is "fussy."    1) Figure out all of the annual expenses- Christmas, flights, 2x car insurance, car tags, everything you can think of.  Add up, divide by 12.  Save that much each month.  You don't need a sinking fund for each individual line item.

2) For that $600, going out money, groceries, home brew, go cash only.  So, right now you have $600 + $400 +220.  Those items should be reduced.  I'd start by reducing to $1,000 in month one.  Put $360 in an envelope for groceries ($10 less per week).  Put $175 in an envelope for drinking out/home brew($12 less per week).  Put $465 in an envelope (or split it with your husband).  Every time you break a $20, consider writing down what you spent it on.  Figure out when you run out of cash, and what the big purchases are.

Next month, try to do $900- $350 for groceries, $150 for drinking home brew, $400 for miscellaneous.  Can you go to $850?  Can you do $800 in December and spend the extra on presents instead of using savings? 

By moving, and reducing your discretionary spending to $900 you could save an additional $720 a month.  That is not nothing. 

dadof4

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Re: Reader case study- budget up for review!
« Reply #9 on: October 09, 2013, 01:47:49 PM »
This means you are losing money on the rental!!! Even now with 112,000 at 4% you'd be at a payment of around $900 a month and you'd still be losing money.
Not necessarily.
Per month, they are paying
~$550  in interest = 4% * 165K / 12
~$300 in taxes and insurance
~$150 in repairs
-------------------------
$1000

So they are making about $200. They lose some flexibility in that they are forced to pay off the mortgage loan instead of the student loan, but they are building equity with most of their mortgage payment.

If my assumptions are off (like having higher tax, insurance or repairs), or if they have significant equity in the house that could be making them money elsewhere, then it may be a bad investment.
« Last Edit: October 09, 2013, 02:43:07 PM by dadof4 »

marty998

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Re: Reader case study- budget up for review!
« Reply #10 on: October 09, 2013, 03:01:01 PM »
Don't think about part of your mortgage as a student loan payment. Transferring your higher-rate student loan debt to a lower-rate mortgage was a smart move, but that transaction is over. As it stands right now you're cashflow negative on the house. End of story.


I disagree totally with that. The OP is smart enough to know the sources of her debt and can tell the difference (and is still throwing wads of cash at her mortgage as if it were student loans so she knows exactly what she is doing). Refinancing student loans to the mortgage does not make the house a cash flow negative bad investment.

Ignoring the student loans (though I agree with seattlecyclone personally) lets say you'd be paying $900 a month in mortgage payments on your house and getting $1200 a month in rent. If you never have to make a single repair and never have a single month of vacancy, your rate of return in this case is (1200-900)*12 / 200k = 1.8%. This is a little higher than inflation.


Including interest in the numerator but not removing the debt from the denominator doesn't make sense. The denominator should be the equity in the house. So the return is $3600/ say $35000 = ~10%, which is a much more appropriate answer.
« Last Edit: October 09, 2013, 03:02:35 PM by marty998 »

seattlecyclone

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Re: Reader case study- budget up for review!
« Reply #11 on: October 09, 2013, 03:49:39 PM »
Don't think about part of your mortgage as a student loan payment. Transferring your higher-rate student loan debt to a lower-rate mortgage was a smart move, but that transaction is over. As it stands right now you're cashflow negative on the house. End of story.


I disagree totally with that. The OP is smart enough to know the sources of her debt and can tell the difference (and is still throwing wads of cash at her mortgage as if it were student loans so she knows exactly what she is doing). Refinancing student loans to the mortgage does not make the house a cash flow negative bad investment.


It sure does. She is currently putting a net $400/month into this mortgage that she would not be spending if she sold the house right now. That makes it a cashflow negative investment, by definition.

Let's step back from whether you classify part of the debt as a student loan or not. Suppose you sell the house. Even if realtor fees and other closing costs eat up all of your equity and you get $0 from the sale, you have still wiped $165k in debt off the books in one fell swoop, and increased your available cash to repay your other student loan by $400/month. You now have $2,300/month to put toward that $50k student loan (instead of your current $1,900), and you will be completely done with that loan in two years. You'll still have your "lesser interest" $14k loan to pay off, but that one will be gone in about six months if you continue repaying at a rate of $2,300/month.

More realistically, let's assume you had 20% equity in your house when you refinanced it. That puts its value around $210k. If you sell it for that much, you'll probably receive somewhere in the ballpark of $25k from the sale that you can plow directly into your student loans. If you do this and pay off the rest with $2,300/month, you will be completely debt-free in less than two years, and starting to save to buy another home by the time your residency is finished.

Compare that to your current plan. Your $1,900 payments will get that $50k student loan paid off in 2.5 years, and you'll still owe about $150k between the mortgage and your smaller student loan at that point. Like I said earlier, this won't be such a bad position to be in if you plan to move back into your house when your residency is done. But if you don't, the bottom line is that your house in Vermont is not a very good long-term investment as a rental property. This is especially true if you don't live anywhere near there to do repairs yourself. If you don't plan to move back there, get rid of the house and watch your debt disappear.

dadof4

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Re: Reader case study- budget up for review!
« Reply #12 on: October 09, 2013, 07:57:28 PM »
It sure does. She is currently putting a net $400/month into this mortgage that she would not be spending if she sold the house right now. That makes it a cashflow negative investment, by definition.

...the bottom line is that your house in Vermont is not a very good long-term investment as a rental property.
I have to disagree with you as well. As long as the rent covers expenses (interest, taxes, insurance, maintenance) - and it does, with $200 left over, than the $400 are going toward their principle - in effect they are building equity.

Take two scenarios.

1. Sell the house. As you mentioned, this will create a $400 positive cashflow (or closer to $550 if you add average repair and maintenance on the rental).
    With the added $550, she'll repay the student loan in 22 months. While saving the $2450 for the next 6 months, after 28 months she'll have about 15k in equity.
    Assuming house currently costs 210K, and the sale cost her 10%, she'll have another 24k earning her 7% annually, so another 3-4K.
   Total equity - 15+24+3 = 42k


2. Her current plans. The student loan will be repaid in 28 months.  During that time, she would have built 17k equity in her house. The house would have appreciated in value*. At a conservative 3%, that accounts for another 14k in equity!
   If she sold the house at that point, it would be worth 224k, and she would owe 147K on it. If we deduct 10% for the selling cost, we'll get:  224 - 148 - 22 = 54k   So she's 12K richer this way -that's a good incentive to keep the house for now!
  If she decides to move back to VT, the incentive is even bigger, since she wouldn't have lost that 22k to realtors and title clerks.

In summary, you're doing well, keep it up!

* Most people who own highly mortgaged property are actually margin dealers in the real estate market. This would scare most people if this were stocks, but is brushed off for real estate. You need to realize you are in a volatile position, even if it's a good decision long term.



« Last Edit: October 09, 2013, 08:25:46 PM by dadof4 »

MichelleD1977

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Re: Reader case study- budget up for review!
« Reply #13 on: October 09, 2013, 08:17:33 PM »
Thanks so much for the input everyone, I appreciate the house debate as we've debated it ourselves. The reason we decided to refinance and not sell is because we have at least a 50% chance of moving back to our house after 2-3 years, the likelihood we will move back to the area even greater (and could possibly rent it for a higher price and manage it ourselves).  We also have very reliable renters who are handymen and take it upon themselves to fix most things.  They will probably stay in the house for at lest 2 years, maybe longer. This makes it easy.  The house is valued at about $220,000 and yes selling would probably come very close to wiping out my debt but then we would have no assets either.  The house has been buiding equity by about 10% a year since my husband bought it 10 years ago for $115,000.  I've considered it might be smart to have as a rental property even after the 15 year mortgage is paid off.  All that number crunching gives me a headache but it seems at least some folks think it was the right decision.

I agree we need to move to a cheaper rental.  We rented this place from a friend of a friend from VT and it was nice to have a home to come to.  It's a BEAUTIFUL little house need the University (hence the high rent) and walking distance for my husband, so it is very convenient.  There are perfectly acceptable houses to rent elsewhere that are cheaper, though, so I am sure one of those is in our future.

Thanks so much for the advice on how to budget more, cut more expenses.  This is our first attempt at actually tracking our spending, so I need to break my husband (and probably myself!) in a bit.  Maybe it will be a good New-Years project to evaluate our "misc" budget and get more concrete about it.   

MichelleD1977

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Re: Reader case study- budget up for review!
« Reply #14 on: October 09, 2013, 08:19:31 PM »
I forgot to say that the mortgage payment includes our taxes, which are about $200-300 a month.