Author Topic: Reader Case Study: It's Complicated & IDK What to Do (VERY LONG POST)  (Read 4382 times)

red7

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I’m struggling with making some big financial decisions in the shadow of my personal circumstances. I feel like my life is pretty freaking complicated at the moment, and I am overwhelmed trying to make sense of everything. Normally, I would consult with my parents about it (we’re a pretty close-knit family); however, part of the situation results from them, and I’d really like to get some outside opinions that I know will be practical, well-reasoned, and probably see some things I haven’t. **Things have already changed since I started pulling this together less than a month ago (!), and I’ve added the new info (look for the asterisks), but do keep that rapid pace in mind. :) **

This post contains a lot of explanation and additional information. I’m pretty nervous about opening up so much on the internet and have some privacy concerns, but I don’t think where I’m coming from will make sense without the detail I’ve provided here. For the short(er) version, just skip through and read the bolded and/or italicized information.

Income: My income has changed every year to date. I struggled to find a job out of college in 2008, so I ended up vastly underemployed and working PT retail customer service (herein after referred to as CSS), making less than $15K/yr. I started PT tutoring for math/science/test prep, and slowly realized that I really love it and don’t ever want to actually do what my college friends describe as their job. I now work FT as a private tutor (1099 status) and PT at CSS (the company I work for offers relatively amazing PT benefits). This will be my first full year working FT at anything. So far, I’ve averaged $2922/mo (gross) for Jan-Jun with tutoring and expect that amount to increase pretty significantly for Aug-Nov (though to be safe, I’m going to assume that any increase would average over the slow/$0 months to give $2922/mo for the whole year). My CSS gross income is on track to hit right around $10K this year, which averages to $833/mo.

Total Gross Income: $3755/mo average

Estimated Net Income (Gross - SE & Income Taxes): ~$2800/mo

Debts: $31.5K in student loans @5.125% (down from $43K+ in Dec 2012). I pay my monthly payment of $262 (auto-debit) plus $150 per week (paid weekly, because I want to avoid as much interest as possible on these suckers, and it is a HUGE motivator for me to see this balance drop so frequently).

Total Monthly Debt Payments: ~$912

Expenses

Cell Phone - $155/mo (family plan for self and parents, all on smartphones)

Health Insurance - $23.12/wk = ~$100/mo <--This is through CSS job, it’s pre-tax, and the company pays a chunk of the premium. It’s a Cadillac of health insurance, but I’ll have to COBRA after December if I want to keep it/attempt to re-qualify based on hours next year (min 1500 hrs required). The COBRA premium is ~$400/mo. Current plan is to COBRA and check out individual options during 2015 open enrollment.

Dental Insurance - $2.06/wk = ~$9/mo <-- Also CSS job, pre-tax

No car payment. I paid this off as a birthday present to myself earlier this year, also using the pay-an-extra-$150-per-week method. (What can I say? It works for me.)
Gas - $250/mo
Car Insurance & Taxes (12 mo avg) - $110/mo

Food contribution/Personal Care Items - $200/mo
Eating out - $200/mo

No rent/mortgage payment. See Complications/Things You Need to Know.

Doggie food - $50/mo

Total Monthly Expenses: $1074

Dedicated Savings:

401(k) Contributions - $83/mo <--This is through CSS job and is the full 10% I’m allowed to contribute. I get a 1.5% company match (in company stock) as long as I work >1000 hrs from Sept to Sept (met for this year as of 8/1).

Running gear/race fees - $50/mo

Doggie Vet/Boarding/Emergency Fund- $100/mo

Total Monthly Dedicated Savings: $233 

Assets:

401(k) - $9600 <-- CSS company pays the fees on this account for as long as I am a current employee (work at least 1 shift every 30 days).

CSS ESOP - $5100 <--CSS company gives me stock valued at ~8.5% of my eligible wages for every year I work >1000 hrs. Company stock is privately-held, dividend-paying stock only available to current employees. Only cost to me is the time I spend working there, and the fact that this is a retirement account with rules and penalties similar to 401(k). I can also buy stock through a special IRA at a specific credit union, or directly from the company for myself. Purchases and sales have some significant limitations due to the desirable returns (average 10-year performance: +14%).

2008 Car - $4500, if that, and averages about 27-28 mpg (I calculate this every time I put gas in it.)

Savings Accounts - $11200

Total Assets: $30400

Net Income – (Debt Payments + Expenses + Dedicated Savings) = $581 Uncommitted Savings

Approx. Net Worth: -$1100

It certainly looks like I have a good bit left over right now, and while I do have a healthy savings account balance that is quickly rising (that could probably be used much more efficiently), there are some serious caveats.

Complications/Things You Need to Know:
1. I don’t pay any rent, mortgage, or utilities (besides the phone) because I still live with my parents, and they don’t ask me to. They help my brother (who is in the military and has a family) pay for several expenses and feel that it’s only fair to help me too. In return, I help around the house, and they like having me close (usually). Honestly, it works out pretty conveniently for all of us a lot of the time because…

2. My mom has a chronic illness, and I’ve been one of her primary caregivers since she was diagnosed (I was 15 then, 28 now). When she’s doing well, it looks like a pretty normal life. You’d never realize her illness is anything other than a minor annoyance. BUT when she’s not doing well, she’s very, very sick, and life is anything but normal, sometimes for a year or more. My parents are above average savers for this reason, but not Mustachian by any means (and have zero taxable investments). Their savings account gets wiped out when Mom is sick for more than a few months in a row. I always end up helping them pretty significantly – financially, physically, and emotionally—during those times. We thank God every day that our insurance company picks up the vast majority of the 6-figure-and-counting medical tab, but without such good fortune, you can bet your last dollar that I’d be providing serious support to them all the time instead of just when Mom is sick and out of work.

-->Please don’t misinterpret my purpose in sharing this…I do NOT begrudge them any of my help. I know all of the sacrifices they made for me and my brother growing up (and continue to make now when possible), and I’m more than willing and grateful to be able to return the favor. However, Mom’s sick episodes, with guaranteed yet unpredictable reoccurrences, do present some wrinkles in how I need to approach my own finances. My savings account would easily be double, maybe even triple, its current value were these circumstances different. I don’t really consider it a choice to help them—they’re my parents. I love them and owe them for basically everything, not the least of which is years’ worth of rent. :) I remind them of this fact whenever they start asking how much they owe me. Besides, I feel like it all washes out in the end with family, so why add something else to fret over?<--

3. I currently contract with a small but very busy single-owner business for my tutoring hours. The owner and I were introduced by a friend, and we get along pretty well. So far, our business relationship is going much more slowly than I envisioned but still in a positive direction. I made it very clear when I signed on that I ultimately wanted to be a partner. We laid out a potential plan for how I could progress with the business should things go well: starting as a contractor, becoming an employee, and eventually buying a partial ownership stake. We are currently in the “contractor” phase. **Just this past week, the owner let me know that she has decided to make me an employee and to be ready to fill out the paperwork sometime in the next couple of weeks.** I don’t know exactly when we’ll get to the “buy-in” discussion/phase, but I’m not willing to wait more than 2 years (hopefully I can be patient that long!). If nothing is happening at that point, I’ll start my own business using my contacts and referrals.

4. My brother and his family are moving from an Eastern state to a Western state. They’ll be near a major airport this time and easier to visit (flying vs driving for hours on end), but travel will also be much more expensive. My niece and nephew are >3 but still < 10 which is prime childhood IMO. We currently see them about 4 times a year, rarely more than a week at a time, and I really wish I could spend more regular time with them. I’ve already priced flights (~$380 RT) and gotten a rewards CC (including sign up bonus) with the airline I use for most of my extremely limited travel.

SOOOOoooo… after all that, my questions:

How should I prioritize my short-term goals of paying off my debt ($31.5K) and buying in to the tutoring business (need >$20K) with a longer-term goal of FIRE (that includes the potential for periods of significant support of my parents)?

Should I use cash or leverage to buy in to the business, assuming a buy-in happens?

My instinct says cash would be less complicated and provide immediate dividends without any payments, but I would appreciate some advice from any small business owners/purchasers out there. I can certainly see an advantage to using leverage and keeping more cash/liquid investments on hand. I could also probably afford a much bigger slice of the business through leverage. Is there also an argument to be made for keeping my contractor or employee status, instead of becoming a partner?

How should I invest my savings for optimal results? Should I invest it at all right now, when I feel like my hair is on fire and know I will need the money in a year or two? Maybe I should opt for some kind of split?

Can/should I slow down my savings (or my debt payments) to visit my brother and his family more often? Can I do this and still meet at least one of my short-term goals? Is it worth turning a short-term into a medium-term goal, or leaving my hair on fire for a bit longer?

Growing up, our entire extended family lived within 30 minutes of each other and was (still is) pretty close. We had Sunday dinner together almost every week, my brother and I spent every summer at our grandmothers’ houses playing with cousins, we celebrated birthdays once a month with one big dinner party for everyone, etc. I want my niece and nephew to have at least some small part of those experiences. I have no desire to give them cousins, so I’m all they’ve got. ;)

Should I be thinking more about moving out on my own? How would it affect my other goals?
If you forced me to choose between this and other goals right this second, other goals would win. I have no sense of urgency about moving out, and actually a sizable bit of anxiety about it, given how much my parents have needed my help in the last couple of years. My current timeframe for this is just “by the time I’m 30, if everyone is OK.” I really worry about what might happen if I am unable to help support my parents through a health crisis. I seriously doubt I would’ve been able to keep them afloat during the last one if I’d been living on the other side of the city, closer to work. Some of my friends keep telling me I need to move out, be more social, etc., but I don’t think they really understand the pressure I feel to make sure my parents get to retirement age with their health, 401(k)/pension, and home as intact as possible. I honestly think they’ll be ok and need less of my help after that, thanks to a major drop in work-related stress and expenses, but they have to get there first (currently 50 and 53).

** New change in the last 10 days: My parents want to look at moving close to my brother/semi-retiring now (Mom has mentioned a couple of times that she’s not sure how much longer she can physically handle her job, and wants to evaluate going on disability payments). I’ve told them we need to have a sit-down to go over all of their expenses and expected income, current retirement investments, etc., and they’ve actually been really open to it! I think this is a great opportunity for me to talk to them in detail about their finances (and health) and get some relief from my concerns, but I have no idea how to start/what numbers we should be running to help them make a decision like that! I’m already privy to pretty much all of their financial information (they very openly tell me things), but they’ve never wanted to have a real conversation about it before. Exciting but scary!**

I feel like everything is up in the air right now, and I don’t know what to do. I just want to have a real plan for my life, after years of muddying through from crisis to crisis. I’m tired of feeling so reactive and drained and on edge, instead of prepared and confident about my life’s direction. I'm working on it, but I need more help, especially with the detailed planning part.

I would appreciate any specific advice as well as general thoughts/observations.


Writing this and re-reading it has made me wonder if I should be seeking a therapist instead of internet advice. Haha. But true.

Astromarine

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Re: Reader Case Study: It's Complicated & IDK What to Do (VERY LONG POST)
« Reply #1 on: August 29, 2014, 12:46:46 PM »
You gave out a bunch of detail, which is always key, and from what I could tell you seem like a mature, responsible person that has his head in the right place and doesn't waste money on stupid shit. You're to be commended. Sure you need help, but it's tactical not strategic, if you know what I mean.

On that note, one thing is kinda an important wrinkle: your parents are putting you up in their house, and they mentioned wanting to move. What does that mean for you? Would you go with them? Can your brother's family take more of a caretaker role once they're close? Is the house you live it rented or bought? Is it paid for?

All these questions sadly mean that while you DID let us know a lot, it gets kinda invalidated by the lack of info about your parents' move.

Catbert

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Re: Reader Case Study: It's Complicated & IDK What to Do (VERY LONG POST)
« Reply #2 on: August 29, 2014, 02:52:47 PM »
Boy, a lot of things up in the air in your life.  I would simultaneously build up an emergency/moving fund and pay-off student loans.  The "moving" part of your cash stash is in case your parents move and you need first/last month rent, utility deposit, etc.  Regardless of what else happens having paid-off SLs can't hurt.

If you can, keep up your CSS job enough so that you can earn benefits.

What's your long term job plan?  Is tutoring what you hope to do for the long run?  Depending on your subject you may be less marketable as you get older/out of school longer.  Whatever you do don't overpay for a share of the tutoring business.  You're basically really just buying a job.  It seems there would be no or minimal equipment or supplies to the business.

Good luck!

 

BlueHouse

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Re: Reader Case Study: It's Complicated & IDK What to Do (VERY LONG POST)
« Reply #3 on: August 29, 2014, 03:23:52 PM »
Quote
Should I use cash or leverage to buy in to the business, assuming a buy-in happens?
My instinct says cash would be less complicated and provide immediate dividends without any payments, but I would appreciate some advice from any small business owners/purchasers out there. I can certainly see an advantage to using leverage and keeping more cash/liquid investments on hand. I could also probably afford a much bigger slice of the business through leverage. Is there also an argument to be made for keeping my contractor or employee status, instead of becoming a partner?
That's a 100% services business. There's no inventory, no regulation. So what is there to buy into unless it's some major industry leader with a reputation and solid advertising and facilities. If you're going to people's homes to tutor, I would start immediately with a side gig for tutoring and see how long it takes to get a client.
It sounds like you're smart enough and a hard worker to get this spinning up quickly. I would definitely spend some time looking into going out on your own business wise.

Thegoblinchief

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Re: Reader Case Study: It's Complicated & IDK What to Do (VERY LONG POST)
« Reply #4 on: August 29, 2014, 05:07:39 PM »
I'd also agree that I really wouldn't invest yourself emotionally or financially in being a "partner". Tutoring is ALL about the personality (you), not about the brand name.

Why do you pay for your parents' cellphones? Even if it's to help pay back for free rent, etc, reduce the cost. Lots of ways you can get that bill below $150.

You must drive a LOT to spend $250 on gas with a reasonably fuel efficient vehicle. Reduce unnecessary trips. Bike. If the travel is for your tutoring, make sure you negotiate mileage reimbursement.

Eating out is INSANE for someone in such an insecure financial position. Make this $50 tops.

Not an expert on tax advantaged accounts, but you should really invest more instead of prepaying a 5% debt. For sure open a ROTH account. As a 1099 contractor you should be able to set up either a solo 401(k) or a SEP-IRA. 5% is already a borderline debt on prepayment versus investing, but when you factor in the tax efficiency of the other vehicles, over time you will be WAY ahead.

Bonus: at least with a Roth, you're still giving yourself some liquidity (principal can be withdrawn penalty free), which is something prepayment of a debt does NOT give you.

Ybserp

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Re: Reader Case Study: It's Complicated & IDK What to Do (VERY LONG POST)
« Reply #5 on: August 29, 2014, 08:09:55 PM »
When does your employee stock vest? You didn't say what total portion of your assets are in the CSS stock, but the description of how much the company gives you and how much you are able to contribute to the 401k imply that you have a significant portion of your savings in CSS. The rule of thumb is to sell as soon as possible to keep the total amount of stock in your employer's company down to no more than 10% of your assets.

This stock allocation thing is not anywhere near the top of your list of concerns right now. But if the CSS company fell apart, you'd lose a lot of your benefits, a chunk of your income, and a big pile of savings all at once. Diversifying as soon as you can protects the savings side.

Sarita

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Re: Reader Case Study: It's Complicated & IDK What to Do (VERY LONG POST)
« Reply #6 on: August 29, 2014, 09:29:26 PM »
No advice here, but just wanted to say that I admire your dedication and support to your family.  It's great to hear about a family that is so supportive of each other.  You are already wealthy in that aspect.

red7

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Re: Reader Case Study: It's Complicated & IDK What to Do (VERY LONG POST)
« Reply #7 on: August 30, 2014, 12:23:05 AM »
Edit: Good Grief! I have never quite realized just how long-winded I apparently am. My apologies, but thanks for reading!

Thanks for all of the comments so far. I'll do my best to answer the questions raised:

About Parents/House/Moving:

My parents purchased the house in 2002 and currently owe ~$104K @6.625% on the primary mortgage and have a second mortgage that I don't quite understand how it works. The interest rate is over 11.5% and the current payment is $460ish/mo....but the statements say something about $9500 in deferred interest being due when they pay off the loan. The deferred interest amount never goes up, but it also never goes down and that really concerns me. I added it all up recently and figured that if they sold the house for ~$140K, they would be able to pay everything off but would have little to nothing left over. Our house *might* be worth that if we invested a little money into fixing some issues that are minor for us but would definitely not go over well with buyers.

If my parents moved to be near my brother, I would definitely try to move closer (much, MUCH closer) to my tutoring job. I currently commute 25 miles one way (at non-peak hours at least). It's mostly interstate though, so it takes me about 35 minutes. Problem with moving closer is price. Tutoring is expensive...the people who have the disposable income to pay what I charge live in very large houses in elite public school districts. Rentals in the area are typically around $2K-3K/mo for a house, with smaller condos a little further away (~7 miles) going for around $1K/mo for a 2BR. No utilities are included in either amount. Are those reasonable prices for being closer to work? Seriously, I'm asking. I don't know.

They have brought up moving before, but within our metro area. Mom wanted to move further out, to be closer to her job. I told them no problem and likely a good idea for her, but to give me as much warning as possible because I would need to start looking for a place immediately. They were pretty shocked, and said oh but of course you can still live with us, we won't buy a house without room for you. I had to be very firm with them about the fact that moving closer to mom's work would make my commute more than double, and there was NO WAY I could do that. Plus I pointed out how much farther away she would be from her team of doctors and the large urban hospital where they almost always instruct her to go in emergencies, and where they prefer to admit her when necessary...This is the first time they've brought up moving since then. SO I'm a bit skeptical that this move would actually happen, unless my brother really offers support for it (more than just "sure Mom and Dad, whatever you want to do"). Or unless the financial aspect turns out to be really rosy for them. (I'm skeptical about that too, but happy to explore the possibility with them.)

My brother may or may not be able to handle more of a caretaker role, but he is at the very least aware of the strain it puts on me. He's 4 years younger than me, and when I went off to college, instead of stepping up, he stepped out. He rebelled big time, pretty much immediately, against the responsibilities that come from helping a chronically ill parent. Probably made things worse with all the stress he caused our parents. He dabbled in dealing drugs, drinking, and at one point -- when Mom was in the hospital and he was supposed to be driving himself to school -- he started skipping school to drive 3 hours away and have sex with some girl he met on the internet. He has come A LONG WAY since then, and I credit his beautiful but tough wife (and the armed forces, but mostly his awesome wife) with his transformation. At the same time, he hasn't been asked to do much beyond call regularly since then. I've warned him before that I was putting my time in now, and he (and his wife) needed to get ready for his turn again. I'm hoping that the big financial talk with my parents can actually happen the next time we visit them (we're planning to go one last time before they make the big move)--that way everyone can join in on the fun. :)

About Business (Tutoring & CSS):

As far as the tutoring business goes, it is a very well-established business. It was started 15ish years ago now (not sure on the exact time frame) by a pair of retired teachers. It was just the two of them up until they decided to retire for good last year....cue another 20 year veteran teacher looking to get out of the formal education game. The current owner originally wanted to do a partnership just like the founding partnership, but didn't have any friends who were also looking to get out at that time. So she took it on herself. It turned out to be waaay too much for one person, which is why our mutual friend decided to introduce us. This mutual friend is also an educational consultant who feeds me (and the business) referrals left and right. (Of course we refer right back, when it seems a good fit.)

I could easily have at least 10 students on my own right now. But this business is already well-known in the community, in a great location, and the new owner has just as much good will in her own right. We have an office with desks, chairs, and books where I can have students meet me. (Going to students' houses or other public meeting spaces is the WORST way to be a tutor...seriously, been there, done that, horribly horribly inefficient for the tutor.) I have actually helped run a small tutoring business before (that's how I got into it, helping out a friend...long LOOONG back story that's not relevant at this point). So the current owner has the education chops, and I have the tutoring business experience. It's a good fit. We mostly focus on ACT/SAT prep, with a little math and science on the side (mostly AP Calc or Stat and AP Physics). By my rough estimation, the business brings in at least $100K in revenue, probably closer to $200K, though I have no real idea what expenses are beyond rent and utilities ($1.2K/mo) and payments to me so far this year (~$17K, the other money I've made has been through clients I've kept outside the business). I just thought it would be less complicated to join an already-built company than start from scratch. And yes, the more I do it, the more I want to this to be my career. Also, just to point this out, this business would be my most direct competitor were I to go into business for myself.

The tutoring business requires more or less retail hours aka nights and weekends... the only hours you can really work are 4 pm to 9 pm M-F plus as much as you're willing to give on Saturday and Sunday. With the September ACT coming up, I'm working 10 a.m. to 9:30 p.m. on Sundays, with two 30-minute breaks, plus as much as I can Monday-Thursday and 6 hours on Saturday. SOO tutoring is in direct conflict with the CSS job. I'm pretty sure I won't be able to qualify for health insurance next year through CSS because 1500 hours/year requires an average of 28.8 hours/week. That's 4 almost-full shifts (a full shift is generally considered 8 hours). There's no way I can fit that in with tutoring. I *might* be able to hit the 1000 hour requirement for the retirement bennies, but even that will be a stretch if the tutoring demand keeps up.

The good news about the CSS stock is that I am fully vested, and it's in a very particular sector of retail which is less dependent on the current economic climate than most: grocery. Everyone's gotta eat, right? If the CSS company falls apart (and I highly doubt it will, given its size, longevity, and customer loyalty), I will have much MUCH bigger problems to worry about than my benefits and 401(K) because Daddy is currently a retail manager at said company, and ALL of his retirement is in the company stock. (Yes, I tried to talk him out of it by explaining how risky zero diversification is, despite how safe and reliable the company stock appears to be. No, he didn't listen.) My 401(K) is diversified into the surprisingly excellent array of low-cost index funds they offer in addition to the company stock option (company stock is 20% of my portfolio, mostly because of the matching and I keep forgetting to adjust my contribution elections for this year to compensate). The ESOP is free money that I don't have a choice with. Also, the CSS stock can only be purchased/sold during a 30 day period after the close of a quarter, when the stock is valued. Once you sell stock, you are not allowed to buy any more stock for a period of 12 months. I'm not sure how that may affect the ESOP, but I assume that rule would apply to purchases/sales made through the 401(K) plan as well. I should look into that.
« Last Edit: August 30, 2014, 12:25:07 AM by red7 »

red7

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Re: Reader Case Study: It's Complicated & IDK What to Do (VERY LONG POST)
« Reply #8 on: August 30, 2014, 12:32:21 AM »
Why do you pay for your parents' cellphones? Even if it's to help pay back for free rent, etc, reduce the cost. Lots of ways you can get that bill below $150.

You must drive a LOT to spend $250 on gas with a reasonably fuel efficient vehicle. Reduce unnecessary trips. Bike. If the travel is for your tutoring, make sure you negotiate mileage reimbursement.

Eating out is INSANE for someone in such an insecure financial position. Make this $50 tops.

Thank you for the facepunches. :) I definitely need them in 2 of these areas. The driving is hard to get around at the moment, but it's still good to be reminded that I spend a ridiculous amount on gas.

TomTX

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Re: Reader Case Study: It's Complicated & IDK What to Do (VERY LONG POST)
« Reply #9 on: August 30, 2014, 09:11:29 AM »
Before you even consider a partnership in the business, you need to have a serious look at the books. Most of what the current owner is taking out does not count as profit. That's their pay. Don't end up spending $20k to just buy yourself a job. You need a return on that money, above and beyond the time/effort you are putting in tutoring and running the business.