Reader Case Study: Follow-up to previous post

[toby2]

Case Study: Follow-up

About 9 months ago I posted a question asking how to proceed financially with a baby on the way. Our decision was to wait and see how baby impacted things. Baby is now 6 months old and healthy, and my wife and I are now seriously thinking about our financial future again. So I wanted to follow up with a more detailed look at our situation now that baby is here, and hopefully get some advice for proceeding.

Our biggest dilemma right now is how to use our savings ($30k). We currently have three different possibilities for how we want to use this:
   •   Hold for peace of mind (future child, reduction to one income, etc)
   •   Use for future house down payment
   •   Empty to pay student loans (more on that later)

What's holding us up from making a decision is that we have a lot of variables in play right now. The biggest is that we want to move in the next 2 years, closer to both my job and my wife's family. Our current home is 975 sq ft as well, so we may want something slightly bigger. Our plan is to rent out our house for a realistic break even on the mortgage, but the kitchen needs a decent amount of work to get it ready. We'd also need a down payment for a new place (or we could rent).

Complicating things further is that we would like another child in the next few years, and my wife will need to quit her job soon to student teach (seeking a career change to teaching). So we're also looking at a potential loss of income for a period of time. I also have virtually no retirement saved up, so that's a factor as well.

Given all these variables and blurry goals, how should we proceed?  Is it wise to slam our debt while leaving nothing in savings, or hold our current cash and pay debts with what we can save per month ($1k per month, considering that we have daycare and close to $1k in debt per month. If we tightened to the bones, we could get to possibly $1300)? Our ultimate goal is financial independence, but it's tough to see the end game when we're struggling to put together a strategy.

Quick Stats (household):

Age: 33, 32 (wife)
Income: $115,000
Monthly take home (net): $6,600

Assets:
Home: $180,000 (zilllow)
Savings: $30,000
Retirement: $35,000

Liabilities:
Mortgage: $187,000 @3.25% (1240/mo.)
Student Loan: $24,000 @ 6.5% ($300/mo.)
Student Loan: $11,000 @ 6.5% ($125/mo.)
Student Loan: $12,000 @ 2.3% ($145/mo.)
Student Loan: $10,500 @ 2.3% ($108/mo.)
Car Loan: $12,000 @ 0% ($240/mo.)

[jezter6]

Something's not adding up.

You bring home $6,600. Your debt liabilities are $2,158. Leaving you $4,442. Even at $1k for day care, you still have $3,400.

If you are able to save $1,000/mo, then your living expenses outside of debt and daycare are $2,400/mo?? There's something anti-mustachian going on if that's your monthly spend outside of housing and daycare.

Where is all that money going?

How much of that $6,600 will go away if your wife decides to quit and pursue other things? And how long (if you decided to kill some debt) would you have to re-save until she quits?

How much is the car worth? Even at 0%, you're losing $240/mo to a car payment on a depreciating vehicle that just gets you from point A to point B.

[MissStache]

I had the same thought as Jezter.  With takehome like that, you should be able to demolish those studen loan debts really quickly.  What on earth are you spending your money on?

[FrugalSpendthrift]

Given all these variables and blurry goals, how should we proceed?  Is it wise to slam our debt while leaving nothing in savings, or hold our current cash and pay debts with what we can save per month ($1k per month, considering that we have daycare and close to $1k in debt per month. If we tightened to the bones, we could get to possibly $1300)? Our ultimate goal is financial independence, but it's tough to see the end game when we're struggling to put together a strategy.

If your ultimate goal is truly financial independence, then you should start by focusing on reducing expenses and eliminating the high interest debt.  I think buying another house at this point would only delay your independence.  You listed a negative net worth and I don't see much urgency towards changing that.

Looking back at some of your old posts, I have a couple questions:

• Did you cancel cable?
• Did you sell one of your cars?
• Are you still paying PMI?
• Have you been using YNAB?
• Did you take on more student loans?  in your old post, you listed $50k in debt.
• You also listed a lower income.  Did you get a raise?  How have you used the additional money?

[Catbert]

I agree with others that you need to review and tighten up your spending.  Get it down so that you can live on 1 income when student teaching comes.

 To answer your question, however, I would use 24k of your savings to pay off the largest student loan.  Then use that $300 a month to refill savings or move on to your second student loan.

[toby2]

Thanks for the responses so far. We've been wrestling with our budget, trying to get it under control and save more. We use YNAB, and are diligent about tracking, just not as disciplined with actual spending. We both agree that we're not saving enough of our take home. Our biggest challenges are things like gifts (large family/siblings, lots of weddings, baby showers, etc) and travel (I work an hour away, we drive an hour away once a week to see family). We just can't seem to shake some of the ancillary costs that come with it.

Here's a breakdown of our monthly expenses:

Mortgage: $1240
Daycare: $900
Utilities: $175 (goes to $200ish during cold winters)
Internet/Cable: $108 (looking to ditch cable, but internet alone will still be $75)
Car Insurance: $108
Fuel: $200 (weekly travel to family an hour away)
Phone plan: $138 (would like to switch, but still under contract)
Train pass: $180
Dog: $100 (thyroid problems, needs medicine and Rx food)
Groceries: $500
Baby: $100 (diapers, clothes, etc)
Household: $50 (lightbulbs, batteries, etc)
Medical/Rx: $50
Misc. Car: $100 (maintenance, ez pass, car wash, etc)
Haircuts: $25
Gifts:$150 (really struggling with getting out of this one, but it's been tough)
Discretionary: $300 (night out once a month, beer, etc)
Total Debt: $915 (summarized in above post)
Total: $5350

This leaves us about $1250/month to save. Some obvious low hanging fruit, but the debt, daycare and travel seem to be the real killer here. The closer we can move to family and work, the better this figure might be. 

[toby2]

Thanks for the follow up questions. I highlighted my responses in bold below:

Given all these variables and blurry goals, how should we proceed?  Is it wise to slam our debt while leaving nothing in savings, or hold our current cash and pay debts with what we can save per month ($1k per month, considering that we have daycare and close to $1k in debt per month. If we tightened to the bones, we could get to possibly $1300)? Our ultimate goal is financial independence, but it's tough to see the end game when we're struggling to put together a strategy.

If your ultimate goal is truly financial independence, then you should start by focusing on reducing expenses and eliminating the high interest debt.  I think buying another house at this point would only delay your independence.  You listed a negative net worth and I don't see much urgency towards changing that.

Looking back at some of your old posts, I have a couple questions:

• Did you cancel cable?

Plan on doing this month.

• Did you sell one of your cars?

No, still deciding on this.

• Are you still paying PMI?

Yes, will be for the next 4 years

• Have you been using YNAB?

Yes

• Did you take on more student loans?  in your old post, you listed $50k in debt.

Yes, my wife is now paying off some grad school loans that had not kicked in at that point.

• You also listed a lower income.  Did you get a raise?  How have you used the additional money?

Yes, I got a nice raise about 6 months ago.
[/list]

[Thegoblinchief]

Discretionary is quite high (should be $50). Groceries are high for only 3 people ($300 including alcohol).

How much does your wife take home plus burn in HER commute? How much do you actually net per month once daycare is factored in? Stay at home parenting isn't for everyone, I know, but how much are two incomes actually helping?

Controlling spending is key. 6.5% interest loans are killing you. I'd use most of your savings to kill those off. You can easily shave $400 from your monthly spending. That gets the second loan killed off in about a year or less.

Then rebuild your savings, then try for kid #2, but really consider whether two incomes is actually beneficial. Maybe your wife should become a teacher once kids are school age?