Case Study -- low-income seeking Financial Freedom

[violetfern]

Life Situation: Single mother of three kids (ages 12, 15, and 17), been struggling financially to get on my feet since 2007.

I currently live in Vermont.

I file as Head of Household.

My 17-year-old is now a senior in high school. Because she repeated 10th grade at another school, we thought she'd be a junior so we'd have a bit more time to think about college, but the school insisted she enroll as a senior. She wants to go to Art School. We'll definitely need a scholarship. I'm working with the school counselor for all of that. My 15-year-old gets mostly straight A+ grades in honors classes and is highly motivated but unsure of what path she wants to pursue in college. My 12-year-old is highly gifted in math and science but he's still quite young for planning his future.

Gross Salary/Wages:
$975 a month as part-time job as town clerk, 15 hours a week. $846 after taxes. This job may go away as the situation in the department where I am working has changed and they are unsure if they need me there. I walk or bike to work so there are no commuting expenses. I took a part-time job so I could have some steady income to cover basic expenses along with child support income while building my Airbnb and professional organizing business.

$1000 a month for child support but this will go away as the children gain independence.

$500 a month = average Airbnb income. I started in December 2016 renting a room in my house and it is growing wonderfully. In September I am earning over $900. But the income goes up and down. Average cost per night is $50. For day-to-day operations of the business, expenses are almost nothing. However, I am slowly renovating my house (an 1860 farmhouse that was badly neglected) and part of those costs are deductions for my Airbnb business.

$500 a month = average professional organizing business income which I just started in June 2017. I haven't put much work into it yet so I hope it will grow as I get stronger in marketing and networking. I currently charge $25 an hour but typical rates are $75-$150 an hour. I plan also on becoming a member of NAPO (National Association of Productivity and Organizing Professionals) for learning, networking, and marketing. That will cost around $500 including required courses.

Adjusted Gross Income: $2975

Taxes: I should pay attention to these but I usually get a refund of around $6000 (which I use to pay off credit card debt and do repairs on the house) so it's not been a big concern.

Current expenses:
Braces for daughter $110 (This will end in July 2018. There is no interest on this monthly payment.)
Electricity $60
cell phone $40
Internet and landline phone $86
Pet insurance: $26
Car insurance $61 (USAA)
Water/Sewer $50
Car gas $100 (average, depending on how much driving I do; about half of the driving is for business and will be a tax deduction)
Heating fuel $40 (2 cords of wood at $240 each, some of it a tax deduction for my Airbnb business)
Eating out $50 (average)
Laundry and cleaning supplies $5
Hair cuts $10
Toiletries $20 (shampoo, conditioner, skin care, soaps, toothpaste, etc. I rarely wear makeup.)
Dog (standard poodle) and two cats care $50
Medicaid copays $5
Gifts $20
Clothes and shoes $50
Wine $40 (two Bota boxes a month)
Entertainment $20
Food $550
SUBTOTAL = $1393

Mortgage payments: $670 Total (breakdown following)
P&I: $417
Property insurance: $81
Property tax: $172 (The full property tax on my house is $5223.04 but I get assistance from the state (calculated each year in the summer) lowering it to $2066.04 this year. Property taxes in Vermont are high, unfortunately, and I am very grateful for the assistance.)

SUBTOTAL WITH MORTGAGE = $2063

Expected ER expenses: I plan to have a smaller house (under 1000 feet) and a smaller food budget, and less mom-taxi-driving, but I'll be getting out more and traveling so costs will likely be similar.

Assets:
House value: $210,000
Car value: approximately $4,000 (2008 Honda CRV with 180,000 miles on it)
TIAA-CREF account: $5820
VT Teachers Retirement Fund: $1580
Redwood fund with Aspiration bank: $184
Aspiration savings back: $220 (earns 1% interest)


Liabilities:
Credit Card: Owe $8400.
It's 0% interest until March 2018. I earn 1.5% cash back on purchases on it. I have been putting as much money as I can each month toward paying it off, on average $1000 a month. If there's any amount still due in February I should have received my tax refund by then and will be able to pay off the rest. Most of this credit card is from renovation costs and will be tax deductible as an Airbnb business expense.

Mortgage: My mortgage principal balance is $125,200.
My house value is currently around $210,000. My interest rate is 1%. I bought it through USDA Rural Development for $140,000 (original loan amount) including funds to renovate it and closing costs. The closing cost of the house itself was $110,000 in May 2013. I put in tons of work on it! $670 is month payment including property insurance and property tax.


Specific Question(s): I have had many financial advisors look at my income and expenses and they all say I am doing very well with what I have but basically I need more income.

My goals --
#1 - Pay off credit card as fast as possible. There is no option to be paying it when I'll be charged interest.

Wild for me goal -- Be earning $1000 a week by December 31, 2017. And then gradually double that by December 31, 2018, through building my professional organizing business and venturing out into the world of lucrative blogs.

Much of what I read about gaining financial independence is based on investments earning 10% interest. How and where does one get 10% income? Please advise about that.

I may be receiving a large chunk of money in October, due to a car accident last October when I was rear-ended and got a concussion and whiplash. My last appointment with a neurologist is in two weeks and then I hope to close the case with my lawyer and receive compensation for injuries. I do not know how much this may be. I want to either:
- buy a rental property (I have an eye for good property, but I can be too trusting and sweet with people. However, I do have people who have my back now and who can stand behind me if needed.)
or
- invest in stocks.
What are your thoughts on that?

Thank you for your ideas and assistance.
I am tired of being poor and struggling. I am smart and capable but I have not figured out how to make income. There are many things stacked against me but I do not want to get into that. Being a victim is now in the past. I am empowered and competent!

I hope this is clear for you all to understand. Please let me know if you have questions and if there are things I need to do to make this clearer. I greatly appreciate your help!

[Cwadda]

You're not in bad shape.  You really just need to jack up your earnings to start saving for retirement.

Taxes: I should pay attention to these but I usually get a refund of around $6000 (which I use to pay off credit card debt and do repairs on the house) so it's not been a big concern.

This is a huge concern, you never want to get a refund. Because you just lended $6000 to the government at 0% interest! Keep your tax return as close to $0 as possible.

I may be receiving a large chunk of money in October, due to a car accident last October when I was rear-ended and got a concussion and whiplash. My last appointment with a neurologist is in two weeks and then I hope to close the case with my lawyer and receive compensation for injuries. I do not know how much this may be.

Don't count on it. Assume you're getting nothing.

$975 a month as part-time job as town clerk, 15 hours a week.

Have you pursued full-time work recently?  It seems like you already have a solid skill set. Do you have a degree? Nice side hustles, keep up the good work.

- buy a rental property (I have an eye for good property, but I can be too trusting and sweet with people. However, I do have people who have my back now and who can stand behind me if needed.)
or
- invest in stocks.

I would say the first thing you should do is increase your income.  You need to get a little more money to crank up the investing.  Do you have real estate investing experience?  If you think you can beat the stock market with real estate, go for it.  But it's not easy, and requires some upfront capital.  A source of capital could be your primary home, either cash-out refinancing or a HELOC. There are options to access that needed capital, but again, you have to be confident in what you're doing.  The stock market is a little easier, in my eyes. Just buy VTSAX and watch it grow.

[violetfern]

Thank you for your reply.

I have tried for pretty much 30 years to pursue full-time work, often working over-time and not getting paid for it, but none of those jobs have paid enough to live on and I've been stuck on welfare. Believe me, I have worked so hard it has almost killed me and took on more and more work and high-level job responsibilities and I was still paid so badly I was on welfare. I am weary of employers telling me I am worth next to nothing. I have a BA and MA from two of the top colleges in the country. I am extremely skilled and capable and competent at many things and in many fields, but working full time has never paid enough to get off welfare, no matter what I do. Hence my decision to go full-time self-employed. I have value and I am tired of employers telling me I don't and then people criticizing me for being on welfare. It's disheartening and utterly depressing to put it mildly. So I figured if I am going to struggle financially, at least as I get things going, then I am going to struggle in a situation where I have time freedom and I am being paid my worth. Already I feel a zillion times better!

I am not paying taxes up front that I shouldn't. The $6000 I usually get is a refund from EIC and child-tax credit.

Well, I certainly am not counting on getting a pay-out from the accident, but it is quite likely I will get between $5000 and $40,000. There's a big difference there! I will be coming back with more questions once I do get the pay-out!

Regarding buying rental property -- one has to start somewhere! No, I do not have experience but how does one get it without starting? I have owned 4 homes in my life and two of them were sold at a substantial profit. The current one I am in is worth $100k more than I bought it for, and the third house I had bought at the height of the real estate bubble in 2005 (but I didn't know that) and then sold in 2011 for less than I bought it for. That was a loss because of my divorce and  not having the funds to hire a lawyer to fight my abusive ex-husband.

I don't know anything about investing in the stock market. Assume it is just like someone not knowing a foreign language and starting at the very beginning. Where should I go?

[Frankies Girl]

To learn about the market and basic investing, check out Jim Collins' site or book http://jlcollinsnh.com/stock-series/


I'm not going to hit on the other points in your case study, but I feel sort of qualified to discuss your eldest child's plans for school/future. I'm an illustrator/designer. I got insanely lucky and made a decent living at art. I am an anomaly, however, and that "luck" was also because I worked my freaking ass off and took crap jobs whenever and lived with family sometimes in the early days.

Unless your kid is so incredibly talented that they get a full ride scholarship and already is being scouted by design firms or otherwise has paying customers for their work... they should not go to an art school (especially if they have to pay or get loans). Get a job out of high school and take classes on the side at community college, or if funds are available and there are other (better) options, go to a 4-year school, but if a degree is absolutely the only path (which it doesn't have to be) get a degree that will lead to a bankable, usable career and take the art classes as electives, or minor in some sort of creative field. Do the art stuff on the side, as a hobby.

Artists (digital/web/3D/practical) are thick upon the ground. Everyone thinks that a little talent and some hard work is all they need to become recognized as the incredible talent they believe they are. But in reality, if they even find a real arts job that can support them, it's usually cube farms of boring advertising work, low hourly pay and crap benefits (if there are any). This is a shit career path for most creatives.

You said yourself you have two degrees and can't find full time employment. Don't let your kids go down that same route. Find creative solutions for them that maybe isn't "a degree in anything" instead, focus on a job that they might find fulfilling and enjoyable and still allow them to work on creative pursuits in their down time. There have to be other things the kid likes that can be spun into a career/degree.

 

[violetfern]

Thank you for your reply!

I hear you about art school and the degree thing. There are thousands of people (and probably more) like me in New England. Sadly it is rare to find work that pays livable wages in this area, even if it does require multiple degrees and years of experience and oodles of job skills. I've taught at a university and other schools for years and was still on welfare. I helped to write and edit state teacher certification exams across the country and was still on welfare. I was in charge of over 80 tours a year to France, negotiating contracts in French, handling accounts payable/receivable in multiple currencies, being on call 24/7 to manage international emergencies, leading tours, hiring personnel, doing all the marketing, etc. and I was still on welfare.

My oldest daughter suffers from severe depression and anxiety. She's on meds now and is doing much better but she keeps talking about killing herself by 21 and just wants a survival job (she works at a local restaurant now and has more money saved up than I have) and to do her art. It is hard to support her and emotionally heartbreaking and draining for me. But I seek out all the resources I can and do what I can and love her fiercely. My 12 year old is in a similar situation. I was working full time as a teacher but he refused to go to school if I wasn't at home to make him go and ... well it's been very difficult. Working full time does not allow me to care for my children as they need right now, and it won't get me off of welfare, no matter what I do and how hard I work.

So anyway, art is a way for me to support her to pursue joy and hopefully find a way and reasons to stay alive. She's very excited now to have an internship at the local art museum and she helps teach art to children at the local community art school.

[MDM]

$500 a month = average Airbnb income. I started in December 2016....

Taxes: I should pay attention to these but I usually get a refund of around $6000....  The $6000 I usually get is a refund from EIC and child-tax credit.

Don't shoot the messenger...but if you have more than $3400 in investment income (and that includes rental income - see 2016 Publication 596 - p596.pdf and Airbnb General guidance on the taxation of rental income), you get $0 EIC.

[violetfern]

Thank you for that information. I don't think that will be the case considering all my business expenses but I will keep that in mind.

[snacky]

Hey there! I am a single parent, and currently not working due to illness, so I feel ya. Hard.

One gift I am determined to give my kids is marketable job skills so their early adulthood is easier than mine was. For one of mine that means I'm strongly encouraging him to go into the trades. With a welding or plumbing or electrical ticket he can make decent money while pursuing his dreams. Is there a trades or apprenticeship program your eldest could look at? Lots of tradespeople do artistic work, or she could just have the income while doing art on the side. It's a better route than art school, in my opinion.

Could you sell your farmhouse and buy a place with more space for airbnbers?

[MDM]

Thank you for that information. I don't think that will be the case considering all my business expenses but I will keep that in mind.

Definitely worth confirming.

In many cases (e.g., tax brackets) if one is "a little bit over" the effect is minimal. 

In the case of the $3400 investment income limit for EIC, going $1 over means the loss of the entire EIC.

If you are at all close, doing a reasonably detailed estimate of your 2017 taxes sometime in the next couple of months might allow enough time to adjust income/expenses as needed.  Good luck!

[violetfern]

Airbnb sends out 1099s. I do not think it is considered as rental income for tax purposes. A professional tax accountant did my taxes last year and simply created a Schedule C for it.