Author Topic: Case Study: We need outside advice.  (Read 3565 times)

KtM

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Case Study: We need outside advice.
« on: December 06, 2017, 02:21:01 PM »
Hi all. My wife and I have been long time budgeters and we decided it was time for some outside eyes on our situation. There were some changes in employment situations recently and we re-did our budget to reflect that. I think we have room for improvement but I'm having trouble seeing things that need to be changed.

Life Situation: Married filing jointly. Two kids under 13. Living in Denver area in a purchased home.

Gross Salary/Wages:
Earner #1: $9416 per month (paid monthly)
Earner #2: $1549 per month (paid bi-weekly)

Individual amounts of each Pre-tax deductions: None - neither of our employers offers benefits or retirement plan options.

Adjusted Gross Income: $10,965 per month

Taxes: Payroll Taxes (all on a per month basis)
SS
Earner #1:$588  Earner #2: $96

Medicare
E#1: $138  E#2: $23

Federal tax
$1,130
State+local tax
$460
Total monthly income taxes: $2,435

Current Monthly expenses:
Mortgage: $1,149 ($599 interest $550 principal)
Property Tax: $168
Home insurance: $88

Car Insurance: $103
Car Maintenance and Registration: $97
Fuel: $85
Car Replacement: $150 (This is money we set aside every month to eventually replace one of the cars. We treat this as our car payment.)

Groceries: $500
Dining Out: $50

*Kid Activities and School supplies: $120
Preschool Tuition: $795 (preschool at a local elementary school)
529 plans: $200
*Kid Clothes: $10
*Haircuts: $10

Utilities: $156 -includes water, electric, gas, and trash
Internet: $35
Phone: $43

*Home Maintenance: $100
*Household Goods: $50

*Date Night: $75
Netflix: $11
*Vacation: $400 (all of this is set aside for future travel)
Booze: $40
*Discretionary: $300 (split between the two of us. This is what we can spend on ourselves. This funds clothing, charitable causes, hobbies, etc)

Taxable Account Contribution: $150
IRA Contribution: $458
HSA Contribution: $575
Medical Premium: $1,090
Emergency Fund Contribution: $100
Xmas Fund: $100
Other Random Stuff: $75 (AAA membership, birthday fund, museum membership, Costco membership)

HELOC Payment: $100

Total Monthly Outflow: $7,383

*This is how much we set aside monthly for these categories. If we don't spend the full amount we set aside what is left so we are able to fund months when there higher than expected amounts. (ie. We sign up for swim lessons and youth sports tomorrow at a cost of $300 for January through May. We have set aside money from the kid activities money the past several months so that full amount is covered without breaking our budget.)

Assets:

IRA:$240,000
Taxable Accounts: $4,700

Home: Estimated Value in Current Condition $375,000 - $192,00 remaining loan balance = $183,000

Liabilities:
$192,000 mortgage @ 3.75% We had been sending a lot of extra to this to try and kill it.
$500 HELOC balance@ 5.75%

The HELOC serves 2 purposes. First, it serves as an emergency fund in case of job loss or massive unplanned expense. Second, it is used to fund work that we can't do ourselves on our basement refinish. The current balance is from hiring a electrician to get the basement up to code. More details on the basement project below. 

Specific Question(s) and Comments:

Earner #1 is actively seeking a job with benefits. If the salary is comparable then the addition of any employer paid benefits would likely be a huge help in offsetting some of our monthly expenses and benefit our retirement savings.

Earner #2 just started paid part time work again after being home with the kids full time for 6 years.

The HELOC...

Our basement flooded right after we bought the house 2.5 years ago. We depleted our emergency fund to have the problem fixed. It ruined our entire basement and now we are re-doing it. The HELOC allowed us to have access to emergency money at reasonably low rates should we need it. As we got in to the re-finishing work, we found that there were certain things that it was more practical to hire professionals for. Thus a portion of the HELOC was used to fund those requirements, so long as it didn't compromise the emergency fund.

The question is, what are we missing? Is there something we could be doing to improve our savings, reduce our tax burden, or otherwise push ourselves more toward financial independence?

When earner #1 had a job with benefits we threw a lot of cash towards paying down the mortgage. We significantly reduced what we owe and that continues to be one of our priorities. What do others think about  investing any additional cash versus paying down the mortgage debt?

Are they any things we need to be punched in the face about? We both feel like we missed something when we re-did the budget with her new job but haven't been able to spot it.
« Last Edit: December 06, 2017, 03:41:34 PM by KtM »

myrrh

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Re: Case Study: We need outside advice.
« Reply #1 on: December 06, 2017, 02:53:45 PM »
The big thing I didn't see was a medical category (copays, prescriptions, dentist, eye doc, glasses, etc.) Maybe that's covered under the HSA category? Or is that intended to be a retirement account?

I think you can contribute 11k per year to his and hers IRAs since neither of you has a retirement plan.

I was a bit confused about the $10 clothes category; you also stated it's included as part of your discretionary funds. Maybe it's for the kids? If so, nice job. I'd be hard pressed to clothe two kids for $120 per year, shoes and jackets and stuff add up quick.

LifeHappens

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Re: Case Study: We need outside advice.
« Reply #2 on: December 06, 2017, 03:01:58 PM »
If you want to increase your savings rate and decrease your tax burden, start maxing out your IRAs. As myrhh said, you can contribute $5500 per earner. 

KtM

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Re: Case Study: We need outside advice.
« Reply #3 on: December 06, 2017, 03:47:13 PM »
The big thing I didn't see was a medical category (copays, prescriptions, dentist, eye doc, glasses, etc.) Maybe that's covered under the HSA category? Or is that intended to be a retirement account? This is all covered out of the HSA account

I think you can contribute 11k per year to his and hers IRAs since neither of you has a retirement plan. There is something missed. I had no idea we could do separate IRAs for each of us. THANK YOU!

I was a bit confused about the $10 clothes category; you also stated it's included as part of your discretionary funds. Maybe it's for the kids? If so, nice job. I'd be hard pressed to clothe two kids for $120 per year, shoes and jackets and stuff add up quick. Good point, I edited the original post for clarity. We are very lucky to be able to pull that off with hand me downs from neighbors and second hand shopping.

sunflower_yellow

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Re: Case Study: We need outside advice.
« Reply #4 on: December 07, 2017, 10:20:52 AM »
1) It sucks that you are paying just as much in interest as principle on your mortgage. Ouch.

2) I noticed that you have a lot of little budget categories for pretty specific things. It makes it seem that "oh, $20 isn't much to spend on ___," but when you combine that with a dozen+ other categories, it really adds up. And when you don't necessarily spend all of it in a month (or any of it in a month!), it's not really a budget per se, but more like a historical reporting of what you've spent.

Would you consider grouping some of these teeny tiny categories together into a larger "discretionary" grouping? Then, try to ease the total amount in the discretionary grouping down over time.

For example... take this list below. All of these budget line items look "reasonable," right?

-----LIST ONE-----
Dining Out: $50
*Kid Activities and School supplies: $120
*Kid Clothes: $10
*Haircuts: $10
*Home Maintenance: $100
*Household Goods: $50
*Date Night: $75
Netflix: $11
*Vacation: $400 (all of this is set aside for future travel)
Booze: $40
*Discretionary: $300 (split between the two of us. This is what we can spend on ourselves. This funds clothing, charitable causes, hobbies, etc)
Xmas Fund: $100
Other Random Stuff: $75 (AAA membership, birthday fund, museum membership, Costco membership)



Now look at this list. WHOA.

-----LIST TWO-----
~~Total Discretionary Spending~~
$1,341


I realize this runs counter to the recommendation "Understand where your money goes," but in this case, my impression is that you are losing sight of the forest for being lost in the trees.

3) I wish the best of luck to your wife as she transitions back to the workforce! It's certainly a trade-off to work in the home to raise children.

wawot1

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Re: Case Study: We need outside advice.
« Reply #5 on: December 07, 2017, 12:43:19 PM »
Would one of the employers offer a dependent care FSA that you could use to pay for childcare expenses?  Probably worth looking into....

Imustacheyouaquestion

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Re: Case Study: We need outside advice.
« Reply #6 on: December 07, 2017, 01:13:25 PM »
$4800/yr in vacations is a lot

thedayisbrave

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Re: Case Study: We need outside advice.
« Reply #7 on: December 07, 2017, 05:09:14 PM »
I would be more focused on maxing out the IRAs ($11,000 per couple) and building up an emergency fund over paying down the mortgage.

KtM

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Re: Case Study: We need outside advice.
« Reply #8 on: December 08, 2017, 11:45:10 AM »
2) I noticed that you have a lot of little budget categories for pretty specific things. It makes it seem that "oh, $20 isn't much to spend on ___," but when you combine that with a dozen+ other categories, it really adds up. And when you don't necessarily spend all of it in a month (or any of it in a month!), it's not really a budget per se, but more like a historical reporting of what you've spent.

Would you consider grouping some of these teeny tiny categories together into a larger "discretionary" grouping? Then, try to ease the total amount in the discretionary grouping down over time.

For example... take this list below. All of these budget line items look "reasonable," right?

-----LIST ONE-----
Dining Out: $50
*Kid Activities and School supplies: $120
*Kid Clothes: $10
*Haircuts: $10
*Home Maintenance: $100
*Household Goods: $50
*Date Night: $75
Netflix: $11
*Vacation: $400 (all of this is set aside for future travel)
Booze: $40
*Discretionary: $300 (split between the two of us. This is what we can spend on ourselves. This funds clothing, charitable causes, hobbies, etc)
Xmas Fund: $100
Other Random Stuff: $75 (AAA membership, birthday fund, museum membership, Costco membership)



Now look at this list. WHOA.

-----LIST TWO-----
~~Total Discretionary Spending~~
$1,341


I realize this runs counter to the recommendation "Understand where your money goes," but in this case, my impression is that you are losing sight of the forest for being lost in the trees.

I must admit, I've struggled against my gut reaction to what you posted above. My initial reaction was strongly negative, but as I tried to analyze what you pointed out without that initial emotional reaction, you may be onto a good idea. I think you are right about being lost in the trees. That was the analogy I used recently as well, hence asking for outside advice.

There is a lot of outflow bunched into all those categories and I'm betting we can find a way to reduce that spend by looking at it in a way we haven't done before.

This is EXACTLY the kid of challenge to my conventional thinking I was hoping to face by posting here. Thank you for that.

KtM

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Re: Case Study: We need outside advice.
« Reply #9 on: December 08, 2017, 11:51:19 AM »
Would one of the employers offer a dependent care FSA that you could use to pay for childcare expenses?  Probably worth looking into....
Good idea. Based on what I have found online we could make this work for preschool expenses. Thanks!

GnomeErcy

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Re: Case Study: We need outside advice.
« Reply #10 on: December 08, 2017, 12:03:48 PM »
1) It sucks that you are paying just as much in interest as principle on your mortgage. Ouch.

This is the case with every loan amortized over a 30 year period above ~2.3%, for a period of time. On a 3% loan, you're paying more in interest with your regular payment schedule until you're 7 years in. Have you looked at an amortization table before? It's just math.

Sun Hat

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Re: Case Study: We need outside advice.
« Reply #11 on: December 10, 2017, 09:45:35 AM »
The only big thing that I see is that you're paying 5.75% on a HELOC when you could pay it off in a month by skipping one month's vacation  contribution and $100 from your discretionary budget.

Personally, I really like your approach to allocating periodic expenses to the monthly budget. However, be sure to build up your emerg fund and pay for anything that will cost you interest before funding discretionary fun categories. For instance, I won't be taking any vacations this year because my home maintenance was costly and I didn't want to reduce my savings rate. It's my self-imposed version of 'eating my vegetables before having desert'.

While understanding that you want to have fun and enjoy life, you may want to consider taking less expensive vacations and using the difference to either invest, put towards mortgage, or fund a 529 (I'm not American, so I may be getting the name wrong - I mean a tax-advantaged education savings fund for your kids). If you reduced your vacation spending by 25%, you'd save $1200/yr. In a 529, that'd add up to a nice sum by the time your kids get to college age. Living in Denver means that you have all of Colorado's amazing parks and forest areas to camp in, and those vacations are cheap!

Meesh

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Re: Case Study: We need outside advice.
« Reply #12 on: December 11, 2017, 01:25:38 PM »
We set aside money for irregular expenses in detail as well. It's not that you should get rid of the info, maybe use it in sub-categories. The rule of thumb in data is to have as much of it as you can to better analyze the problem from multiple angles. In fact, I'd take a closer look at the $300/ month discretionary, it looks like a junk drawer to me.

Personally, I always try to beat last years category without loosing the amount of "fun" in discretionary spending. I take it as a creativity challenge. For example we used to spend about $500 a year on Christmas but since we always try to beat it, it's more like $200 now and every year I beat it I get unexpected savings that were set aside and to save more for the next year by readjusting and setting aside less.

You do have a lot of discretionary... $400/month on vacation? Read up on trip length- happiness ratios. The most value in a vacation is the first 3-5 days. Staying longer doesn't make it better, just more expensive. Also spread them out more if you don't already. Anticipation of them is actually more fun then going on them, so pay for them a few months in advance and spend all your time talking to your family on what you want to do there to get everyone excited. I'd also recommend making one of those vacations really cheap. One of our favorites is 4 days at family camp for $700 all included. Where are you going on $5,000/ year? My guess is 2-3 big trips? This can be really reduced.