Author Topic: Case Study - Cut expenses and achieve FI  (Read 8132 times)

Lookie Loo

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Case Study - Cut expenses and achieve FI
« on: September 21, 2014, 07:23:15 AM »
About us
I have been following the blog for a year now.  Ive made a lot of improvements to cut cost and pay off debt.  My wife and I are 37yrs old. I work from home and my wife is a stay at home mom with our 3 kids (1,3,4).  My wife plans to go back to work part/full-time in 1 year.  Our plan is to semi-retire in 10 years. 

Income - Monthly   $6,100
After 401k contribution, Taxes, Healthcare, dental, vision
   
Expenses   
Mortgage   $854
Escrow Tax   $224
Mortgage Insurance   $96
car insurance   $36
Student loan   $220
Internet   $35
TV   $27
HOA Monthly   $150
Escrow - Breakdown below   $1,100
Mobile    $147
Electricity   $111
Heat/Oil/Gas   $30
Water/Sewer   $50
Groceries   $1,170
Meals Out   $114
Beer & Wine   $34
Car Gas   $75
Coffee Shops   $22
Household products - cleaning, baby items   $80
YMCA    $75
Total Expenses   $4,650
   
Savings - Monthly   $1,450
   
Escrow - Variable Expenses   
Home Warranty Appliances   $375
Extra Mortgage Payment   $900
HOA Yearly   $850
Garbage   $180
Investing Subscription   $600
Homeowners Insurance   $319
Auto - Oil Change   $128
Auto - Repair Emergency   $500
Car Tax   $130
Insurance - Life   $1,010
Insurance - Disability   $1,042
Medical Expenses - Health Savings Account   $2,400
Vision - Contacts   $178
Haircuts - Wife   $154
Haircuts - Husband   $60
Tax Preparation   $230
Golf   $500
Clothing - Family   $900
Shoes - Family    $210
House Maintenance   $1,066
Gifts - Family, kids, bday parties   $1,000
Children Activities   $500
Total Escrow - Year   $13,232
Monthly Escrow   $1,103
   
Assets   
401k - Company Sponsored   $36,000
IRA   $58,000
Taxed Investing account   $6,500
Savings   $12,000
   
Liabilities   
Student Loan - 5.25%   $6,500
House - 30yr 4.35%   $168,000


Job
My job is not too stable lately.  Im worried about getting laid off.  I want to make sure I have enough reserve savings to live off for 3-6 months if I need to look for another job.

Home
We purchased a 2 bedroom townhome 1,200 sq ft, last year for $180k, 4.35%.  Its a great neighbor, good schools but HOA fees are high ($150/monthly + $850/yearly).

Insurance
Life - $1million policy on myself, $250k on my wife
Disability - $2k a month if disabled

Spending
Weve made a significant cost cutting and are now saving.  We have a lot of healthcare cost this year just from normal visits and new baby.

Car
We have a 2004 caravan, which I bought this year in cash.
   
Retirement funds:
401k Im putting 15% of my salary
IRA not contributing but its invested in ETFs
Taxable investing account invested in ETFs

Questions for readers:
1.   How can I cut more expenses?  We probably can cut the grocery and meals out.  My wife cooks a lot but we need to eat out once in awhile to give her a break.
2.   How much should I have in savings reserve?
3.   Should I pay off student loan with savings or taxable investing account?
4.   Mortgage we plan on making an extra mortgage payment per year.  But we also need to pay down around $15k on the mortgage to get rid of the mortgage insurance payment.
5.   Retirement If I want to be FI in 10 years, should I max out 401k, then contribute the rest to taxable investing account?  Or should I also max IRA out?  I can also max out HSA and invest that.
6.   Credit Card We want to do some travel.  Is it worth getting a travel points card and use this for all expenses to earn points?
7.   Should I increase Life and Disability insurance?

Thank you for your responses!

Gin1984

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Re: Case Study - Cut expenses and achieve FI
« Reply #1 on: September 21, 2014, 08:00:30 AM »
You could cook to give her a break, and cut the meals out.  And yes, you can cut those grocery a huge amount especially given that you are eating out and your household expenses are not included.  I would not be prepaying your mortgage if your student loans are not paid.  The student loans are at a higher interest rate.  And what is the "investing subscription"?  And when are you done with your mobile contract?  Read IP Daley's info on electronic savings.

Lookie Loo

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Re: Case Study - Cut expenses and achieve FI
« Reply #2 on: September 21, 2014, 08:20:56 AM »
You could cook to give her a break, and cut the meals out.  And yes, you can cut those grocery a huge amount especially given that you are eating out and your household expenses are not included.  I would not be prepaying your mortgage if your student loans are not paid.  The student loans are at a higher interest rate.  And what is the "investing subscription"?  And when are you done with your mobile contract?  Read IP Daley's info on electronic savings.

Thanks.  The investing subscription is website that gives market views.  Mobile contract is done next year and I'll switch to republic wireless.

Chrissy

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Re: Case Study - Cut expenses and achieve FI
« Reply #3 on: September 21, 2014, 09:25:03 AM »
1.  Cut WAAAAY back on groceries.  Do you have access to a Costco?  In any event, cook in bulk, and freeze meals for the week.
Cut meals out.  If your wife needs a break, YOU cook.
Cut out the investing subscription.
Mobile phones are high.  You can get that down to $60.
Electric seems high, but I understand that there are a lot of people at home all day long.  Change the thermostat, open/close windows and blinds, change bulbs to energy-efficient, and put tvs and appliances on power-strips that are kept off when the items aren't in use.

2.  Between the taxable account and the savings, you have a 4mo emergency fund.  I'd hold there.

3.  Do NOT pay off the student loan yet.  See reason below.

4.  The PMI is your debt with the highest interest rate.  The 15k you need to pay to get rid of PMI is costing you 12% a year.  Throw everything you've got into your house.  If you're comfortable having a 3mo emergency fund, pay 4k from the taxable account into the house, and you'll be PMI free in 8 months.

5.  Max out the 401k, then the HSA, then the IRA in that order, as you are able.  What's the employer match on the 401k?  Subtract the HSA savings from your take home pay, just the way you have the 401k and other health insurance, and list the amount currently in the HSA as an asset.

6.  Yes.

7.  No.



Lookie Loo

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Re: Case Study - Cut expenses and achieve FI
« Reply #4 on: September 21, 2014, 10:50:29 AM »
1.  Cut WAAAAY back on groceries.  Do you have access to a Costco?  In any event, cook in bulk, and freeze meals for the week.
Cut meals out.  If your wife needs a break, YOU cook.
Cut out the investing subscription.
Mobile phones are high.  You can get that down to $60.
Electric seems high, but I understand that there are a lot of people at home all day long.  Change the thermostat, open/close windows and blinds, change bulbs to energy-efficient, and put tvs and appliances on power-strips that are kept off when the items aren't in use.

2.  Between the taxable account and the savings, you have a 4mo emergency fund.  I'd hold there.

3.  Do NOT pay off the student loan yet.  See reason below.

4.  The PMI is your debt with the highest interest rate.  The 15k you need to pay to get rid of PMI is costing you 12% a year.  Throw everything you've got into your house.  If you're comfortable having a 3mo emergency fund, pay 4k from the taxable account into the house, and you'll be PMI free in 8 months.

5.  Max out the 401k, then the HSA, then the IRA in that order, as you are able.  What's the employer match on the 401k?  Subtract the HSA savings from your take home pay, just the way you have the 401k and other health insurance, and list the amount currently in the HSA as an asset.

6.  Yes.

7.  No.

Thanks for the advice, very helpful.  I'll need to do start doing some cooking.  How did you figure I'm paying 12% a year on PMI?

Mrs. Frugalwoods

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Re: Case Study - Cut expenses and achieve FI
« Reply #5 on: September 21, 2014, 11:42:12 AM »
First off, thanks for sharing all of this. I think it takes guts to expose your finances, so kudos!
If you really want to ramp up your savings, in a mustachian way, there are a number of categories I'd suggest you cut/explore:
-Food. Between Groceries, Meals Out, Coffee Shops and Beer & Wine: you're spending $1,340 per month on food alone. That's a lot. It's great that your wife is already cooking at home most of the time, but that's a huge portion of your budget going just to food. Buying in bulk, reducing meat, looking for cheaper stores/options--there are lots of ways to cut in this category and quite a few threads on the topic.

In the yearly expenses category, seems to me you could cut:
-Haircuts (cut at home!)
-Golf
-Clothes and shoes (seems high to me, but I do understand that you have 3 kiddos to clothe. Are you taking advantage of thrift stores and garage sales? Please tell me you're not buying all this stuff new...)
-Gifts ($1,000 is super high, in my opinion)
-Children activities (not sure what this includes?)

Gin1984

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Re: Case Study - Cut expenses and achieve FI
« Reply #6 on: September 21, 2014, 11:42:42 AM »
You could cook to give her a break, and cut the meals out.  And yes, you can cut those grocery a huge amount especially given that you are eating out and your household expenses are not included.  I would not be prepaying your mortgage if your student loans are not paid.  The student loans are at a higher interest rate.  And what is the "investing subscription"?  And when are you done with your mobile contract?  Read IP Daley's info on electronic savings.

Thanks.  The investing subscription is website that gives market views.  Mobile contract is done next year and I'll switch to republic wireless.
Then cut the subscription, you can get that may other places.  Don't assume you should more to republic wireless, it is not always the best deal.  Run the numbers based on how you use your phones. 

Chrissy

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Re: Case Study - Cut expenses and achieve FI
« Reply #7 on: September 21, 2014, 01:53:15 PM »


Thanks for the advice, very helpful.  I'll need to do start doing some cooking.  How did you figure I'm paying 12% a year on PMI?

You're paying 12% on the $15,000 it would take you to get out of PMI.  Here's the math:

1)  $96/mo X 12 mo = $1,152 for the year 
2)  $1,152 / $15,000 = 7.6%
3)  7.6% + 4.35% mortgage interest on the same $15,000 = 11.95% 

Pay it off as soon as possible!

frugaliknowit

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Re: Case Study - Cut expenses and achieve FI
« Reply #8 on: September 21, 2014, 04:26:44 PM »
I noticed your disability payout is $2k per month, but your expenses are $4650...Uhhhh, no good!  Need to up the insurance.

Lookie Loo

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Re: Case Study - Cut expenses and achieve FI
« Reply #9 on: September 21, 2014, 06:11:47 PM »
First off, thanks for sharing all of this. I think it takes guts to expose your finances, so kudos!
If you really want to ramp up your savings, in a mustachian way, there are a number of categories I'd suggest you cut/explore:
-Food. Between Groceries, Meals Out, Coffee Shops and Beer & Wine: you're spending $1,340 per month on food alone. That's a lot. It's great that your wife is already cooking at home most of the time, but that's a huge portion of your budget going just to food. Buying in bulk, reducing meat, looking for cheaper stores/options--there are lots of ways to cut in this category and quite a few threads on the topic.

In the yearly expenses category, seems to me you could cut:
-Haircuts (cut at home!)
-Golf
-Clothes and shoes (seems high to me, but I do understand that you have 3 kiddos to clothe. Are you taking advantage of thrift stores and garage sales? Please tell me you're not buying all this stuff new...)
-Gifts ($1,000 is super high, in my opinion)
-Children activities (not sure what this includes?)
Thank you.  It took a long time to finally post this.  We definitely need to cut the food cost.  We buy all cloths used in the neighbor or donations from friends and family.  The gifts are ridiculous.  The children activities include sport activities, crafts and materials for learning.  The rest we can drastically cut.

Lookie Loo

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Re: Case Study - Cut expenses and achieve FI
« Reply #10 on: September 21, 2014, 06:25:52 PM »


Thanks for the advice, very helpful.  I'll need to do start doing some cooking.  How did you figure I'm paying 12% a year on PMI?

You're paying 12% on the $15,000 it would take you to get out of PMI.  Here's the math:

1)  $96/mo X 12 mo = $1,152 for the year 
2)  $1,152 / $15,000 = 7.6%
3)  7.6% + 4.35% mortgage interest on the same $15,000 = 11.95% 

Pay it off as soon as possible!

This is a big eye opener.  Thank you.  I did not see this.

Exhale

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Re: Case Study - Cut expenses and achieve FI
« Reply #11 on: September 21, 2014, 06:57:26 PM »
One way to deal with the cooking is to doing some planning so that there can be a feeling of fun about your new MMM approach (MMM has some posts about delicious frugal cooking). Some examples: perhaps have a breakfast-for-dinner once a month, a baked potato (do-it yourself toppings) night, etc. Also, as someone who loves cafes, I've found that having nice coffee at home and a relaxing weekend morning coffee ritual has kept me from stopping in at cafes.  Good luck!

Prepube

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Re: Case Study - Cut expenses and achieve FI
« Reply #12 on: September 21, 2014, 10:18:12 PM »
You gave a lot of great information on your budget!  Thanks.

Having said that, could you break a few things down further?  What are you spending all that grocery money on?  It seems very high, though I realize there are five of you.  Why are you spending 75 per month on gasoline if you work at home?  With your yearly expenses as you list them, it seems you are not actually saving 1450 per month, because your total expenditures accounting for the yearly stuff adds a few hundred per month to your average monthly outflow.  I am almost always underinsured (or so the insurance salesmen tell me) but it seems you are spending a lot on life and disability insurance.  You might find some savings there if you considered it differently.  You're spending 500 a year on golf when you have a loan at 6500 loan at over 5%? Put the clubs away for a couple years til you get rid of that loan and pay down the mortgage. I'd also consider paying only enough for the match on the 401k and use it to pay the debts down instead.  You have to get rid of that pmi and the student loan.  Cuts out all the extra stuff in your budget, really get it down to the absolute no frills most mustachian frugalness you can, and I think you can knock it out really quickly.  But you have a long way to go with this budget... Let's see the grocery breakdown!  Then we can really get to work cutting out the fat!

lakemom

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Re: Case Study - Cut expenses and achieve FI
« Reply #13 on: September 22, 2014, 05:54:59 AM »
Income - Monthly   $6,100
After 401k contribution, Taxes, Healthcare, dental, vision
   
Expenses   
Mortgage   $854
Escrow Tax   $224
Mortgage Insurance   $96
car insurance   $36
Student loan   $220 Take $6,500 of your savings to pay this off $220 per month saved
Internet   $35
TV   $27cut this $27 saved
HOA Monthly   $150
Escrow - Breakdown below   $1,100
Mobile    $147 You should be able to cut this down by $100 unless you use a lot of data for work
Electricity   $111
Heat/Oil/Gas   $30
Water/Sewer   $50
Groceries   $1,170 Our family of 5 spends 700 per month and includes 'household' in here so savings of $470 + $80
Meals Out   $114 cut by at least 1/2 so save $57
Beer & Wine   $34 cut...should be part of grocery budget save $34
Car Gas   $75
Coffee Shops   $22 cut save $22
Household products - cleaning, baby items   $80 add to grocery
YMCA    $75
Total Expenses   $4,650
   Total additional savings $1010
Savings - Monthly   $1,450
   
Escrow - Variable Expenses   
Home Warranty Appliances   $375 can you cancel these?  That's what an emergency fund is meant to cover and you are paying nearly the cost of an appliance per year for insurance.  Save $375
Extra Mortgage Payment   $900 For now save this save $900
HOA Yearly   $850
Garbage   $180
Investing Subscription   $600 cut, use free online resources save $600
Homeowners Insurance   $319
Auto - Oil Change   $128
Auto - Repair Emergency   $500
Car Tax   $130
Insurance - Life   $1,010
Insurance - Disability   $1,042
Medical Expenses - Health Savings Account   $2,400
Vision - Contacts   $178
Haircuts - Wife   $154
Haircuts - Husband   $60
Tax Preparation   $230 do it yourself and save $230
Golf   $500 cut this for now save $500
Clothing - Family   $900 This seems high I'd say cut in half and save $450
Shoes - Family    $210
House Maintenance   $1,066
Gifts - Family, kids, bday parties   $1,000
Children Activities   $500
Total Escrow - Year   $13,232
Monthly Escrow   $1,103
   total savings of another $255 per month

Liabilities   
Student Loan - 5.25%   $6,500
House - 30yr 4.35%   $168,000


Insurance
Life - $1million policy on myself, $250k on my wife
Disability - $2k a month if disabled

Retirement funds:
401k Im putting 15% of my salary
IRA not contributing but its invested in ETFs
Taxable investing account invested in ETFs

Questions for readers:
1.   How can I cut more expenses?  We probably can cut the grocery and meals out.  My wife cooks a lot but we need to eat out once in awhile to give her a break. See suggestions above, and to give wife a break you take the kids off to play for a couple of hours rather than a meal out.  Keep a stash of freezer meals (either homemade or from the freezer section bought on sale) for days that are overwhelming for one reason or another.
2.   How much should I have in savings reserve?
3.   Should I pay off student loan with savings or taxable investing account? Yes, see above
4.   Mortgage we plan on making an extra mortgage payment per year.  But we also need to pay down around $15k on the mortgage to get rid of the mortgage insurance payment. I would wait and see if your job stabilizes or you find a different one.  At that point I would be doing all I could (even bleeding down the non retirement savings) to get rid of pmi.  At that point I'd concentrate on maximizing retirement accounts then putting extra on the house.
5.   Retirement If I want to be FI in 10 years, should I max out 401k, then contribute the rest to taxable investing account?  Or should I also max IRA out?  I can also max out HSA and invest that.
6.   Credit Card We want to do some travel.  Is it worth getting a travel points card and use this for all expenses to earn points?
7.   Should I increase Life and Disability insurance?

Thank you for your responses!

stash4cash

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Re: Case Study - Cut expenses and achieve FI
« Reply #14 on: September 22, 2014, 07:18:17 AM »
Hi Lakemom,

Mind sharing what your grocery shopping looks like? With a family of 5, I'm struggling to get below $800 or so a month. Curious to know how you get to $700. :)


lakemom

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Re: Case Study - Cut expenses and achieve FI
« Reply #15 on: September 22, 2014, 08:24:03 AM »
Hi Lakemom,

Mind sharing what your grocery shopping looks like? With a family of 5, I'm struggling to get below $800 or so a month. Curious to know how you get to $700. :)

My biggest savings is buying my meat 2X per year from the farmer (1/4 beef, 1/2 hog 2X per year).  So in Sept I paid $300 for pork and $500 for beef.  I will do this again in 6ish months.  Then I buy chicken and fish when on super discounts (either markdown or great sales) and add that to the freezer.  I do can and freeze a lot in the summer but I purchase all of it from a local Amish produce auction at a fraction of the cost of buying at grocery or farmer's markets and obviously considerably more than if I grew it myself.  I make virtually everything from scratch except granola bars which I stock up on when they are in the $1.00 per box range (quaker chewy).  We don't buy organics unless they are close in price to regular or less (ex.  a while back organic tomato paste was .50 a can on sale and regular is .60 so I stocked up on 20 cans of organic, have done the same with regular too).  Mostly I keep our budget low by stockpiling.  So recently goldfish crackers were .99 for the bag (regular 2.19) so I bought 20 bags and put them in the stash and since these are special treats around here this will last for months.  I buy all my bread/buns/rolls etc. from the outlet store on Mondays when everything is .69 I go weekly when the freezer is full and every other week when I have more room.  I also like to bulk cook (when there is freezer space) so quadruple batches of spaghetti sauce then freeze in meal portions to make cooking easier on days when we are busy.  We eat a lot of potatoes and rice and pasta dishes to help make our meat stretch.  We eat a lot of eggs.  My biggest downfalls are fresh fruits and veggies.  They take up a big portion of the weekly budget.  In my case, I spend 1,000+ per month in the summer/fall canning season and closer to 500 the balance of the year.  Mainly I just follow all the advice that everyone always gives about trimming the food budget (here and everywhere else on the internet).  It took some time to achieve (we used to spend $1100 per month...it was a bigger line item than our mortgage) but now I watch a lot less closely and still maintain within budget when balanced throughout the year.  Oh, and we also have a nearby bulk foods store where I stock up on flours/baking needs several times per year and they almost always have great deals on cheese.

I'd say #1 find the hidden gems in your area (my bread store and the bulk foods store) and use them.  Start stockpiling items you use a lot of and develop a repertoire of cheap, easy dinners that everyone in your family likes.  Oh and we don't use much milk around here (often a big budget item for families with kids) usually only 1.5-2 gallons per week.  We also don't buy juice or bottled beverages.  We make coffee/tea at home and drink water with meals.  We are also in the Midwest so our col is definitely lower than on the coasts and major metropolitan areas.  My $700 may translate to $800 in your area but certainly not to $1100!  I'm often surprised that out COL is closer to areas considered "high" than to areas considered "low" when people make the how much does xyz cost in your area posts.
« Last Edit: September 22, 2014, 08:32:29 AM by lakemom »

stash4cash

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Re: Case Study - Cut expenses and achieve FI
« Reply #16 on: September 22, 2014, 01:21:48 PM »
Thanks, lakemom, very helpful summary.

feelingroovy

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Re: Case Study - Cut expenses and achieve FI
« Reply #17 on: September 22, 2014, 05:44:24 PM »
Holy shit, Lakemom.  You are so Amy Dacyczyn! (Says with awe)

okashira

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Re: Case Study - Cut expenses and achieve FI
« Reply #18 on: September 22, 2014, 06:26:40 PM »
Ugh, are you using VectorVest?

Lookie Loo

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Re: Case Study - Cut expenses and achieve FI
« Reply #19 on: September 22, 2014, 09:15:50 PM »
Thanks for everyones comments.

Prepube We are spending a lot on meat, fish and milk, the rest consist of vegetables and fruit.  We also need to shop when better deals are going on.  We spent a lot on gas due to visitors and events, we can cut that to $50/month.  The yearly expenses are called Escrow - Breakdown below   $1,100 and they are counted in the monthly expense.  The life insurance is pretty cheap, I think the disability is expensive and I need to shop around.  Definitely will drop golf until things are paid off.  Im not too sure about stopping 401k to pay debt?  But right now the debt is a higher interest rate then the 401k.

Lakemom thank you for the suggestions on the expenses.  I lot of the yearly variable expenses we probably didnt spend the full amount.  For example, the cloths, shoes, children activities, etc.  I think we can cut the household to 0 and cut the grocery to $800/month.

Is everyone maxing out 401k and IRAs, then investing all savings in a taxable account to live off the interest?

RelaxedGal

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Re: Case Study - Cut expenses and achieve FI
« Reply #20 on: September 23, 2014, 08:05:44 AM »
Thought exercise: Disability payout is $2,000/month.  Unemployment would be at a similar level; I think mine was $800/week in Massachusetts but states vary.   What would you cut if you were constrained to living at that level?  How would you adapt to spending half of what you currently spend?  That will tell you where to cut, and whether you need more disability insurance on yourself and your wife.

frompa

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Re: Case Study - Cut expenses and achieve FI
« Reply #21 on: September 23, 2014, 07:09:44 PM »
On the disability insurance question:  I know people have varying comfort levels with this, but I always assumed that I was more protected by having a bigger stache, in the event of short term disability; and in the event of long term and catastrophic disability, I'm already covered by SS disability, so why pay for more coverage for what is only a possible event?  Of course, everyone has to know his or her own risk tolerance, and my approach takes my risk tolerance into account. But additional disability coverage when there is outstanding debt is a no-brainer to me -- get rid of all the debt first, and then consider (the luxury of) additional insurance coverage. 

Lookie Loo

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Re: Case Study - Cut expenses and achieve FI
« Reply #22 on: September 24, 2014, 09:21:38 AM »
My thought on disability would that my wife would be able to go back to work and only need to make $2k a month to cover living.  We would also be able to cut yearly expenses drastically.  I don't see the point to pay for short term disability because it only last for 6 months and covers basics.  If I needed this, I have 4 months reserve and could ask family for help if needed.  The problem with my disability is if I'm disabled to the point where my wife needs to be at home to assist me.  I think I need to shop around disability insurance to get a cheaper rate and increase it to $4k a month.

SunshineGirl

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Re: Case Study - Cut expenses and achieve FI
« Reply #23 on: September 24, 2014, 10:02:31 AM »
It seems to me like your most immediate issue is a potential lay-off. In light of that, I would beef up your savings to six months of expenses before tackling loans. I would also suggest that you start the job hunt now while you're still employed.

2ndTimer

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Re: Case Study - Cut expenses and achieve FI
« Reply #24 on: September 24, 2014, 11:42:59 AM »
Re Grocery Shopping:  Check and see if you have either a Grocery Outlet or an Aldi's in your area.  Either of these will save you big bucks though in different ways.  Aldi's has their own brands, which you will never have heard of, for less than you would pay for standard brands.  You will have to experiment to see which ones you like.  Grocery Outlet buys up discontinued, out-of-season, or other-than-standard stuff and sells it cheap.  I once heard the manager of our local GO gloating about having picked up a huge amount of fruit cocktail that didn't have the proper amount of cherries so he got it really cheap.