Author Topic: Reader Case Study: Hair not on fire, but a chance it could be every 6 months?  (Read 3084 times)

MBot

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I found the MMM site a few weeks ago, and read through most of the blog archives in one night.

In our mid-20s, my husband and I hit rock bottom. We had unemployable degrees, credit card debt and no emergency fund. We took a hard look at life, and went back to school for reliable, better-paying jobs, both as technologists in different fields. We also paid off $20k of Credit card debt and saved $13k for a house down-payment in that time. We used Dave Ramsey then, and found him very helpful in getting us started. We also had to work a lot on breaking old habits and thinking differently about money. Finding MMM has been the perfect "next step" as we start to make real income. I want to understand how to leverage it better.

We now live in a modest house that is walking distance from our workplaces. Both our jobs occasionally require us to do some driving/haul equipment with our one car (bought used, paid in full). We have Canadian health insurance and benefits through our employers.

I work part-time and I am better paid, and I have 2 current possibilities on the table to raise my income. Either 2 part-time or one full-time plus one part-time. He is full-time but still has another credential to receive before his pay rises. We also work various side hustles/irregular incomes.

I have 3 questions, but the biggest one is this:
1. Our hair could be on fire anytime...

Our hair was on fire! We hate that feeling! We have paid off high-interest debt (credit cards), and half of a bank student loan. Now we are left with enormous government student loans. Mine of $65846 and his at $30101. (Most of these were not accrued going back to school, but with our first, much less lucrative degrees).

While in interest relief, they are at 0%, so all our payment goes to principal. Even with our income now, we qualify easily. Our income just went down slightly, so we will re-qualify for the next round. Applications are every 6 months.

And if/when they decide to deny us interest relief.... They convert to regular loans with a rate of prime + 2.5% floating (or +5% fixed if we choose that option! Ha ha.)

Right now we are treating this like our next “debt emergency!” after the $13,500 bank loan at 4.5%. The bank loan has a co-signer, so it is my first priority. I want to release that co-signer from their obligation to me, so that is the debt I am focusing on now.

Is tacking the government student loans next the right approach? It’s a “middle” interest rate, but these are enormous loans. It will take us a long time to pay off. Should we be putting more into retirement for compounding purposes? Or should we forget about retirement until these are completely gone?

2. I am open to any budget suggestions, but especially electricity. Our $115/month and 28 kWh a day seems high. What else can I do?
- In our previous 860 sq ft apartment with 3 people, we paid $50-60 a month
- In a 1300 sq ft house with 4 people, we pay $115/mo, which seems high. The house has been completely rewired 2 years ago with a new panel/breakers.
- The deep freezer drains energy and is mostly empty. I just cleaned it and put it up for sale.
- Old (7 years) desktop computer is not used every day. I will program it to automatically shut off at night and require a manual restart.
- Already do laundry and run dishwasher (new efficient model) at off-peak hours.
- We have gas heat.
- Water heater is ancient. Dryer is 15 years old. Both are electric and used by 4 people. We will change both to gas.
- At same time, also add a gas stove? (Minimal energy savings, but it will likely be inexpensive to have the gas line run at the same time, even if we don’t find a used gas stove right away.)
- Almost all LED light bulbs, except a few CFLs. The Ontario incentive for LEDs reduces cost to $6 for a 60W LED replacement when we need them.

3. Retirement/Split Focus?
We are new to retirement savings. That’s an understatement!

When my husband turned 30, we said “Okay, we can’t put off retirement savings anymore, so let’s just start putting away something.”  So we set up $500/mo to Tangerine Equity Growth for that RRSP. Which we know is really heavy on the Canadian side (50%) and only 25% each to US and International.  We will work on the convoluted TD e-series setup process and work out something more balanced. But should we even bother with this until the debt is gone?

Right now our plan is to heavily pay down debt for the next 2 years, and when its paid off we’ll start investing for me, and much more heavily percentage-wise for both of us.

This is a split focus, but it’s kind of our “uhm, the best we got” idea so far. We have very few real-life examples to follow, and a lot of Internet research, calculators, and trying to find friends/family/people who have done well to talk to.

Here's our numbers.


Income (Net Spendable)
Monthly
$200.     Myself – other income
$2600.   Myself – Hourly work part-time – technologist. (Mandatory pension fund of 6.5% already deducted with $1.26 match for every $1. )
$1720    Spouse – Hourly work full-time – technologist.
$660      2 boarders (they pay a contribution towards bills, not rent, It brings in a bit less up front, but it’s not taxable/receipted so we net more. And they’re fine with the arrangement). $660
 = $5180 monthly, or $62160 yearly net
 
Irregular
$2000/year? Event speaking, wedding officiating, painting, hairdressing, leatherworking income.
 
Tax refunds (given regular charitable contributions and lots of tuition tax credits built up)
$3000-5000/year (conservative)

= $67160-$69160 yearly net

Current expenses

$730     Mortgage (just increased payment by 20% allowable yearly)
$194     Electricity + Water. “Equal billing” with real use $160/mo. Refund of difference
    each August. (Water is $5 plus $40 of mandatory water “delivery charges,”
    electricity bill is approx. $115/mo)
$106      Gas (brand-new modulating high-eff. furnace)
$194      Property Taxes (bought the worst house/best neighbourhood and fixing up).
$  67      Property Insurance (brick house has a big rebuild cost, so expensive to insure)
$  25      Life Insurance (both of us)
$126      Car Insurance (personal and work use for compact hatchback, 2 drivers).
$80 Gas/tolls (live on US/Canada border. $4 toll twice a month & 3k drive. To save $25 on a tank of gas and buy cheap cuts of meat while we’re over.)
$275 Food. (We try to spend $50-$60/week on groceries and have surplus for entertaining. Includes dirt cheap protein powder, farmers market veggies, cheap cuts of meat, lots of beans/lentils.)
$100 General/Household (toiletries, pet care, lawn and garden, laundry/cleaning supplies)
$40 Social (local events, concerts, movies, dinners out).
$40 Date Night/Couple Stuff
$40 Personal/Fun/Clothing Money – me
$40 Personal/Fun/Clothing Money – Spouse (includes recreational league for 1 sport)
= $2057 needs + discretionary
 
$169 Student Loan principal (government, spouse) (mandatory, interest relief at 0%)
$368 Student Loan principal (government, me) (mandatory, interest relief at 0%)
$55 Student Loan interest (bank, me, at 4.5%)
= $592 mandatory loan payments
 
$100 Home Repair fund
$100 Car Repair fund
$50 Christmas travel/gift fund (family lives a full days’ drive away.)
$500 RRSP Tangerine index mutual funds
= $750 short-term savings and retirement
 
$3399 including savings and loan payoff
$5180 - $3399= $1781 monthly surplus, plus irregular income.

Assets
$150000.   House/ $131k in 2012, $23k improvements split with seller (furnace/ full electrical)
$6000.     Car (7 years old, compact hatchback)
$500.       Car fund  (just spent $700 from fund on repairs so it’s a bit depleted)
$1100.     House fund
$250.       Christmas travel fund
$1000.     Guitars (used every week)
$2000      Retirement Savings (just started, Tangerine Index funds for now)
 
Liabilities
$13500   at 4.5% - Bank Student Loan (me)
$65846   at 0% (if no interest relief, prime plus 2.5 floating) – Govt student loan (me)
$30101   at 0% (if no interest relief, prime plus 2.5 floating) – Govt student loan (spouse)
$128600 at 2.88% - Mortgage balance

Thanks for taking the time to read (and offer your advice)! I look forward to learning more from those who are here.
 
« Last Edit: May 15, 2014, 09:05:56 PM by MBot »

Thegoblinchief

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Gas dryer won't save a ton, but the water heater could. Keep in mind that the cost of the new appliance and the line installation will take a LONG time to recoup. We're talking years and years. I would not make this a priority at all, unless you're concerned about the water heater failing.

Spending on food could be a little lower, does this include stuff for the boarders?

Your debt is sizable but low interest. Most folks will side in investing versus paying it down faster. That said, prepaying does hold massive emotional appeal. I would split the difference and do 50/50 debt/investment.

MBot

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This seems like a simple question, but I have not yet gleaned it from reading these forums.

At what percentage does debt switch from "low interest, invest instead" to "get rid of it now!!!"?

5.5% on those government loans (or higher, when prime goes up) seems a lot scarier than a 2.88% mortgage. Is that all in my head?

I'm also envisioning a scenario where where we get interest relief for a few more years, but later on owe $70k at 8% or something like that.
« Last Edit: May 15, 2014, 09:48:21 PM by MBot »

SDREMNGR

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Deduct less on taxes.  Getting a refund just means you gave the government a free loan for a year.  Set your withholding lower.

schoopsthecat

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It might be mathematically best to put more money in retirement accounts, but if it were me, I would think about investing the extra money in after tax accounts instead of paying down the student loans...then at the point when they start actually costing you 5.5%, you can sell your investments and put all that money towards paying the loan down.


matchewed

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This seems like a simple question, but I have not yet gleaned it from reading these forums.

At what percentage does debt switch from "low interest, invest instead" to "get rid of it now!!!"?

5.5% on those government loans (or higher, when prime goes up) seems a lot scarier than a 2.88% mortgage. Is that all in my head?

I'm also envisioning a scenario where where we get interest relief for a few more years, but later on owe $70k at 8% or something like that.

Because no one can answer that question for you. It is a personal judgement call based on a great deal of your assumptions about debt, investment returns, and risk tolerance. What do you think investments will return? Can you stomach it if they don't in the short term? Does paying debt off make you feel safe? Is feeling safe even in your personal equation or are you looking to potentially maximizing the value of your dollars?

homeymomma

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Here's what I would do. Calculate what you would need to put away for retirement to keep you off the streets once you hit 65. Put that towards retirement, and the remainder of your surplus toward the loans. Once you pay down some of the loans, you can contribute more to retirement.

nereo

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At what percentage does debt switch from "low interest, invest instead" to "get rid of it now!!!"?
Personal choice, but the mathematical basis is that, historically, the markets have returned 6-7% over long time periods.  The one thing to keep in mind is that paying down loans is a known-return, whereas money invested may go down (possibly for several years). Also, it only works if you actually save (not spend!) the money you would otherwise put towards debt reduction.

For me, any debt less than 4% is not worth paying down any faster than I am required to.  4-5% is the hazy grey area where I look at the amount I'm saving and choose whether I'm more comfortable reducing debt or padding my nest-egg.  I aggressively pay down any debt over 5% as a "hair-on-fire" emergency.  Those are my own personal guidelines.

That said, to answer Q1:
I wouldn't pay any more than I was required to while the loans are at 0%.  If/when and only if/when they go above 4% would I even think of paying them down more quickly.  In the meantime, put that money into savings or towards that 4.5% bank loan.

Q2:
changing to gas likely won't give you a high ROI.  A better strategy is to start using less.  Line-dry, cook efficiently, insulate etc.  Insulating is the best way of reducing heating costs, which is likely your biggest energy draw in Canada.

Q3:
the only loan you have right now worth paying down (IMO) is the 4.5%, $13.5k bank loan.  the longer you put off saving for retirement the worse you will be.  I'd try to pay down the bank loan while also funding as much of your retirement savings as possible - agree with thegoblinchief that splitting it 50/50 might be your best bet.
EDIT;  I'd also stop over-paying your mortgage (I believe you said you paid 20% more than necessary if I understand you correctly).  Instead, put that money directly into your 4.5% bank loan until it's gone.  Then it can go back towards the mortgage or towards LT savings.
« Last Edit: May 16, 2014, 07:22:54 AM by nereo »