Author Topic: Reader Case Study - High Debt, Low Income (Pay Down vs Save)  (Read 789 times)

Wayward

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Reader Case Study - High Debt, Low Income (Pay Down vs Save)
« on: January 10, 2018, 05:30:23 PM »
Happy New Year All,
 
I started tracking my spending in January 2017, after reading Your Money or Your Life, and boy was it a wakeup call.  After finding MMM, ERE, JLCollins, and other blogs I made some serious changes, but still feel stuck so Iím hoping for some advice and motivation from the Forum.
 
About me: 33-year-old single female, childfree, no pets living in a HCOL area in the Northeast, USA with a roommate.  I have a BS in Environmental Science and am currently employed full-time in public service (read: low pay) as an Environmental Scientist since May 2015 and have been increasingly miserable at my job.  There is great healthcare and a pension (vested after 10 years), but there is no matching to the 457, no increases in pay (no, not even COL thanks to last Governor), and promotions are non-existent.  At first my plan was to use the PSLF program to have my loans forgiven after 10 years (120 monthly payments), however I really want to relocate to a LCOL area with lower taxes, better quality of life and (hopefully) a better paying job.
 
Gross Annual Salary: $47,107.06         
Gross per check: $1,811.81                 Pay is bi-weekly, 26 pay periods per year
Federal income tax: $188.00
FICA: $32.40
Medicare: $25.37
Pension *: $132.99
Unemployment Ins*: $7.70                     < I think this has a cap as I only paid $142.38 in 2017
Temp Disability Ins*: $3.44                     < I think this has a cap as I only paid $80.40 in 2017
Pre-Tax Dental: $4.94
Pre-Tax Health: $57.10
Family Leave Ins*: $1.63
ROTH 457 (1%)*: $16.78                   < This is the lowest contribution I can make, since I already opened it
Union dues*: $20.90
Total Deductions: $599.74
Net Per Paycheck: $1,212.07
Net Annual (x26): $31,513.82

                       
*I cannot get rid of any of these deductions BUT I will be able to rollover the ROTH 457 and all that Iíve put into the pension (about $8,500 currently, since Iím not vested) upon termination of employment!  This is the only hope holding me together right now, as Iím literally in tears every time I see my paycheck.
 
Side jobs: About $3,000 net in 2017 from working as a horseback riding instructor/trainer. This job is over for winter 2018, but I will be looking for more paid opportunities as this is mainly how I get to pursue my passion for riding and horses.  I work at another barn in exchange for lessons/riding time.  I tried driving for Uber/Lyft (it wasnít worth it)   
 
As of January 2017:
Debts (rounded)
Student loan (5%): $47,000                 < Min $182.06 (income based repayment). Consolidated for PSLF : (
Auto loan (1.9%): $22,000                   < Yes, facepunch (sold in July 2017, balance paid off by dealer, valuable lesson learned)
Credit cards (17-21%): $6,000             < Balance transfer 0% in January 2017, the balance is now paid off as of December 2017!)
Total debts: $75,000                         < The wakeup call
 
As of January 2018:
Debts
Student loan (5%): $37,511                 < Min now $503 (without IBR). Denied refi by SoFi and Earnest due to high debt, low income
Balance transfer (0%): $4,500              < 0% until November 2018. This is from buying a used 2007 Pontiac Vibe when I sold the financed car as I did not have enough savings
Costco Citi (0%): $1,200                      < 0% until March 2018, all credit cards will be paid in full forevermore
Total debts: $43,211                         < Still an emergency
 
Assets
ROTH 457: $4,790                              < About 85% stocks, 15% bonds or other
Ally Savings (1.25%): $1,156              < Emergency fund
NetSpend (5%): $1,000                      < Experiment
Pension payout: $8,500                       < Not sure if I should count this
Total assets: $15,446
 
Net Worth: -$27,765
 
2017 Expenses totaled $22,664. Please keep in mind my expenses were high the first half of 2017 Ė my ex was very spendy and I stupidly experienced lifestyle inflation.  For the last several months I cut my expenses to the bone (Sept-Dec averaged $1,400 per month, not including debt) and have been aggressively paying off debt, therefore saving very little.  Reading other case studies here there was a poster who said something along the lines of ďdo you want to be a debt free worker bee or financially free living off a fat stack of investments?Ē to the OP.  Since I certainly desire the latter, it made me think Iíve made a mistake, hence this post for help!
 
*Sept-Dec Average Expenses  (Down from $2,000-$2,300 per month from Jan-Aug)
Rent: $600                                  < Includes internet, Netflix, and all utilities) with awesome roommate
Phone: $48                                  < Stuck with T-mobile, got phone for free from ex but itís locked and I canít unlock it
Household products: $20               < Paper towels, toilet paper, dish soap, etc.
Gas: $80                                      < The barn is 1 hr each way
Car insurance: $65                       < Progressive, paid in full every 6 months
Car maintenance: $300                   < Used car was having starting issues, this should be lower in 2018      
Food, incl restaurants: $250            < Working on lowering this further
Doctor: $15                                < Chiropractor, as needed
Personal care: $10                      < Toothpaste, skincare
Clothing: $10
Total per month: $1,398
 
2018 Budget (maximum $15,000 planned, will require more cutting)
Costco: $120                 < Renew in July
Laptop: $700                 < Laptop is 6 years old, hoping it will last the rest of this year at least
Phone: $350-600?          < I would like to switch to Project Fi, but would need a new phone. Suggestions?

 
$31,513.82 (2018 net pay) - $15,000 (2018 expected expenses, not including debt) = $16,513.82 (left for debt/savings) + any additional income from side hustles
 
My ultimate goal is to reach FIRE, live and work/volunteer (Workaway, WWOOF, horse riding holidays, etc.) in different countries.  Iím very interested in geoarbitrage and have considered switching careers, perhaps to teaching abroad (would need TEFL or teacher certification).  I feel stuck in analysis paralysis with making a solid attack plan for paying off debt and saving for FIRE.
 
*Iím not sure of an exact FIRE amount yet, much of what I want to do abroad will likely have room and board included or cheap (perhaps a $150-250k stash?)
*When the student loans get down to about $30,000-$32,000 or my income increases I will try to refi again. 
*Iím most interested in relocating to Washington, Oregon, Nevada, Colorado, or basically anywhere in the western USA, but I'm searching everywhere.  Any suggestions for LCOL areas would be appreciated!

Specific Questions:
*Would it be optimal to take the balance transfer payment ($409 minimum needed to pay in full by Nov 2018) and pay the allowed min ($69) while putting the remainder ($340) into a Netspend/Insight saving account (5% interest) to collect interest until payoff date?
*Should I re-certify my income to get a lower monthly payment for the student loans, even though I have been paying more than $503 per month?
*Should I throw as much extra money as possible at the student loans OR should I add to investments (such as a Vanguard ROTH IRA or NetSpend/Insight account)?
*When I find new employment would it be optimal to max out a Traditional 401k, instead of just to matching (if any) as my rate is 5% on the student loan per the investment order post?
 
Sorry for the length of this post, thank you for reading!  Donít be afraid to be tough, I wonít get offended or defensive by any suggestions.
« Last Edit: January 11, 2018, 07:12:51 AM by Wayward »
Play a game to pay of student debt with Givling, sign up with code RW411953!

Sign up for a 5% interest savings account with NetSpend here: http://www.mynetspendcard.com code 3230468760
(info at https://www.financialpanther.co/netspend-account/)

former player

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Re: Reader Case Study - High Debt, Low Income (Pay Down vs Save)
« Reply #1 on: January 10, 2018, 06:29:52 PM »
Congratulations on paying down so much of that hair on fire debt in the last year - it is very impressive progress.  Your expenses budget looks pretty badass too.

I don't have the knowledge to answer your specific questions, sorry.  I just couldn't resist sending a little encouragement your way for what you have achieved already.
Be frugal and industrious, and you will be free (Ben Franklin)

Peony

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Re: Reader Case Study - High Debt, Low Income (Pay Down vs Save)
« Reply #2 on: January 10, 2018, 07:33:32 PM »
It looks to me like you're doing an excellent job getting things in order.

I've bought a couple of used unlocked smartphones and a tablet on a website called Swappa. It's like eBay for electronics. My experience was good.

Hirondelle

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Re: Reader Case Study - High Debt, Low Income (Pay Down vs Save)
« Reply #3 on: January 11, 2018, 04:17:36 AM »
You've been doing a great job for the past few months. Congratulations on paying off that much dept in such a short time. It looks like you can be dept free in just a few years.

I can't really help you with the pension specific questions as I'm not US-based, but I do like your FIRE plans of volunteering your way around the world with just a small stash (similar to my own dreams!). As you mentioned TEFL/ESL teaching; did you consider getting a certification and trying out online teaching? There's some cheap/affordable certifications you can get online and I've seen VIPkids recommended for online teaching on here several time. Could also serve you as a side hustle income to pay down your dept even faster.

happy

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Re: Reader Case Study - High Debt, Low Income (Pay Down vs Save)
« Reply #4 on: January 11, 2018, 04:43:32 AM »
The principle is to always pay the highest paying debt off first, and don't invest unless you can get a higher interest rate. Paying off the debt is a guaranteed reduction in interest without risk, but investing always carries a risk.

I'm not from US so I can't advise you of any local loopholes but in general terms:

Pay the minimum off the 0% loans, but make sure you have the money at hand to pay them off at their due date.  If you can get 5% ( like wow!, are you sure?) in a savings account in the meantime that you can access at the right time, then go for it.

Then, make sure your emergency fund is adequate.

On the face of it,  @5% on loan ,vs 5% in Savings, it doesn't matter whether you pay off or save: my personal preference would be to get rid of the debt. BUT you should look into which option works best in your local circumstances e.g. are there tax breaks for doing one or the other, or will you be eligible for a refi at certain points etc etc. Hopefully someone with local knowledge can help with these details

Congrats on your progress. It might seem a bit overwhelming right now, but stick to your plan, and things usually come right ahead of schedule
Journalling at Happy Aussie Downshifter

ShoulderThingThatGoesUp

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Re: Reader Case Study - High Debt, Low Income (Pay Down vs Save)
« Reply #5 on: January 11, 2018, 06:36:12 AM »
You can definitely make more money in the private sector, and your loans are small enough that I don't think holding on to OSLF is worthwhile. I work in the environmental industry; feel free to PM me your resume if you want me to look it over.

Wayward

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Re: Reader Case Study - High Debt, Low Income (Pay Down vs Save)
« Reply #6 on: January 11, 2018, 07:14:38 AM »
Congratulations on paying down so much of that hair on fire debt in the last year - it is very impressive progress.  Your expenses budget looks pretty badass too.

I don't have the knowledge to answer your specific questions, sorry.  I just couldn't resist sending a little encouragement your way for what you have achieved already.
Thank you so much, I appreciate the encouragement!
Play a game to pay of student debt with Givling, sign up with code RW411953!

Sign up for a 5% interest savings account with NetSpend here: http://www.mynetspendcard.com code 3230468760
(info at https://www.financialpanther.co/netspend-account/)

Wayward

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Re: Reader Case Study - High Debt, Low Income (Pay Down vs Save)
« Reply #7 on: January 11, 2018, 07:16:31 AM »
It looks to me like you're doing an excellent job getting things in order.

I've bought a couple of used unlocked smartphones and a tablet on a website called Swappa. It's like eBay for electronics. My experience was good.
I never heard of Swappa, but it looks awesome and the phones I'm interested in are there pretty cheap!  Thank you for the suggestion :)
Play a game to pay of student debt with Givling, sign up with code RW411953!

Sign up for a 5% interest savings account with NetSpend here: http://www.mynetspendcard.com code 3230468760
(info at https://www.financialpanther.co/netspend-account/)

Wayward

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Re: Reader Case Study - High Debt, Low Income (Pay Down vs Save)
« Reply #8 on: January 11, 2018, 07:25:07 AM »
You've been doing a great job for the past few months. Congratulations on paying off that much dept in such a short time. It looks like you can be dept free in just a few years.

I can't really help you with the pension specific questions as I'm not US-based, but I do like your FIRE plans of volunteering your way around the world with just a small stash (similar to my own dreams!). As you mentioned TEFL/ESL teaching; did you consider getting a certification and trying out online teaching? There's some cheap/affordable certifications you can get online and I've seen VIPkids recommended for online teaching on here several time. Could also serve you as a side hustle income to pay down your dept even faster.
Thank you for your reply, I will research online teaching more!  I'm currently looking into a Workaway in Washington State, perhaps I could kill two birds with one stone and job search while I'm out that way.  Seems like a very Mustachian way to see the world and give back :)  Good luck on your dreams!
Play a game to pay of student debt with Givling, sign up with code RW411953!

Sign up for a 5% interest savings account with NetSpend here: http://www.mynetspendcard.com code 3230468760
(info at https://www.financialpanther.co/netspend-account/)

Wayward

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Re: Reader Case Study - High Debt, Low Income (Pay Down vs Save)
« Reply #9 on: January 11, 2018, 07:37:41 AM »
The principle is to always pay the highest paying debt off first, and don't invest unless you can get a higher interest rate. Paying off the debt is a guaranteed reduction in interest without risk, but investing always carries a risk.

I'm not from US so I can't advise you of any local loopholes but in general terms:

Pay the minimum off the 0% loans, but make sure you have the money at hand to pay them off at their due date.  If you can get 5% ( like wow!, are you sure?) in a savings account in the meantime that you can access at the right time, then go for it.

Then, make sure your emergency fund is adequate.

On the face of it,  @5% on loan ,vs 5% in Savings, it doesn't matter whether you pay off or save: my personal preference would be to get rid of the debt. BUT you should look into which option works best in your local circumstances e.g. are there tax breaks for doing one or the other, or will you be eligible for a refi at certain points etc etc. Hopefully someone with local knowledge can help with these details

Congrats on your progress. It might seem a bit overwhelming right now, but stick to your plan, and things usually come right ahead of schedule
I was cautious about the 5% savings too, but it's true and it's FDIC insured so no risk like stocks!  There are limits to how much you can save and it requires some leg work to set up though (link in my signature) 

You are correct, the debt certainly feels overwhelming - I just want it gone!  But my fear is finally getting there, only to realize I'm back to almost nothing
Play a game to pay of student debt with Givling, sign up with code RW411953!

Sign up for a 5% interest savings account with NetSpend here: http://www.mynetspendcard.com code 3230468760
(info at https://www.financialpanther.co/netspend-account/)

economista

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Re: Reader Case Study - High Debt, Low Income (Pay Down vs Save)
« Reply #10 on: January 12, 2018, 09:25:58 AM »
If I were you I would definitely switch to Project Fi.  My husband and I pay around $45 per month for both of us.  Let me know if you want our referral code - you will get $20 off your first bill (and we will get $20 off ours too). 
Follow along on my journey toward becoming (semi) mustacian :) http://forum.mrmoneymustache.com/journals/economista's-journal/

ginjaninja

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Re: Reader Case Study - High Debt, Low Income (Pay Down vs Save)
« Reply #11 on: January 12, 2018, 10:04:49 AM »
Avoiding lifestyle inflation will help you alot going forward!  Awesome job on the quick repayment so far!  Is there any other way you could increase your income?  I worked catering for a while on the weekends because it did not interfere with work.  Plus I got to take home alot of the extra food which was a double win because it saved me money on groceries too!

Wayward

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Re: Reader Case Study - High Debt, Low Income (Pay Down vs Save)
« Reply #12 on: January 12, 2018, 10:33:51 AM »
If I were you I would definitely switch to Project Fi.  My husband and I pay around $45 per month for both of us.  Let me know if you want our referral code - you will get $20 off your first bill (and we will get $20 off ours too).
I'm thinking I will set aside some money each money to buy an unlocked phone outright to switch to Project Fi.  I would love to use your referral code, please let me know and I will use it as soon as I can switch!
Play a game to pay of student debt with Givling, sign up with code RW411953!

Sign up for a 5% interest savings account with NetSpend here: http://www.mynetspendcard.com code 3230468760
(info at https://www.financialpanther.co/netspend-account/)

Wayward

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Re: Reader Case Study - High Debt, Low Income (Pay Down vs Save)
« Reply #13 on: January 12, 2018, 10:36:39 AM »
Avoiding lifestyle inflation will help you alot going forward!  Awesome job on the quick repayment so far!  Is there any other way you could increase your income?  I worked catering for a while on the weekends because it did not interfere with work.  Plus I got to take home alot of the extra food which was a double win because it saved me money on groceries too!
Thank you, catering sounds like it would be really beneficial! I will look into some local options
Play a game to pay of student debt with Givling, sign up with code RW411953!

Sign up for a 5% interest savings account with NetSpend here: http://www.mynetspendcard.com code 3230468760
(info at https://www.financialpanther.co/netspend-account/)