Author Topic: Case Study: Decent Progress but Still Battling Student Loans Monster  (Read 3939 times)

finallypayingoff

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I've been a persistent "lurker" on this site for at least a year and have decided to finally join and post a "Case Study."   My wife and I are in our early thirties. We live in a high cost of living area. We are both professionals that came out of law/grad school with a combined close to $200,000 in student loan debt about six years ago.  Since then we've reduced the student loans to about $70,000 through increasing incomes and trying to avoid lifestyle inflation.  We have a toddler and another child on the way.  Our incomes have really increased a lot over the past year plus, a couple of years ago our combined income was about 1/2 what it is now.

The Basics

My income: $105,00
Wife's income: $93,000
Combined: $198,000 (plus a small bonus potential for me of around $3,000-$8,000 per year)

Assets:
House $255,000 (purchased for around $280,000 in 2011 but on the market and not selling listed in that area)  House is 1100 square feet, we'd like to move closer to work.    Mortgage amount and rate listed below.
Emergency Fund: $8,300
Combined Retirement Funds: $65,000
529 for child: $7,000
Paid off 2005 Honda SUV and 2013 Hyundai Sedan.  (do not count towards net worth)
*My wife recently started maxing out 457 and 403(b) at her public employment job.  I have no retirement offered, no health insurance etc.,

Total Assets: $335,300

Liabilities
Mortgage:  $197,000 at 4.25% interest (15 year loan)
Wife's Federal Loans: $14,000 at 6.55% interest
My Federal Loans: $56,000 at 6.55% interest

Total Liabilities: $267,000

Approximate Net Worth: $68,300

Monthly Expenses
Mortgage/Property Tax/Escrow:  $2,615
Daycare: $1,100 (about to be $2,300 when newborn comes - we do not live near family and are transplants to our area)
Dog Walker $350 (probably our biggest "face punch" but we both work long hours and its our only way to fairly have a dog. We're homebodies and dog lovers so we went for it despite knowing how wasteful it is from a financial perspective)
Groceries/Diapers/Toiletries:  $650 (shop at Walmart)
Restaurants : $275 (mostly me eating lunch out with colleagues, "networking")
Student Loans : $1,206 (aggressive repayment)
Retirement: $3,000 (maxing out 457 and 403b)
Insurance: $100.00 (life and auto)
Water: $40.00
Electric: $60
Heat: $300 (oil, average as obviously used only in summer)
my phone $12 (republican wireless)
Wife's phone: $40 (smart phone)
Internet: $40 (no house phone or cable)
Gas: $280 (2 cars, 15 mile commute each way for each of us in same direction but different hours and cannot carpool)
Medical: $50 (co-pays etc. average)
Dog Misc. $80 (average - vet bills, flea and heartworm preventatives, food, etc)
Our Misc: $250 (haircuts, cash out of atm, clothing, dry cleaning, etc)

Total: $10,448

Questions, Comments

The above monthly average comes to a yearly expense of $125,376 (assuming daycare for 2).  Thus despite good salaries, there is not as much "wiggle room" left over as I would like once our second child is born.  Obviously daycare and other expenses would decrease if one of us were to lose a job, but it makes me feel vulnerable.  I grew up in a very working class household where my parents were constantly fighting over money.  That and the large "hair on fire" debt we have remaining for student loans leaves me feeling somewhat precarious. 

To make matters worse, I feel like a lot of my larger expenses are very fixed and hard to modify.  For instance, our house is modest but we still have a decent sized mortgage with around 10 years left on it (assuming we cannot sell).  We would like to sell to buy a similarly sized home closer to work.  This could perhaps allow us to carpool on occasion or allow one of us to walk to work.  Also, there is a certain long-range opportunity that becomes more likely for my career if I actually reside in the county where I work. That said, this opportunity is no sure-fire shot regardless of where I reside.

Our home, student loans, daycare bills take up most of the budget.  I'm not sure how to trim these in a high cost of living area.  We could probably pay less for daycare if we had someone come to our house every day but we are not from this area, are short on contacts, and would not feel comfortable with that arrangement given our situation. 

I sometimes wonder if we should cut off retirement savings (or decrease them) to just go after the student loans and be done with them once and for all.  The only problem is we only started saving for retirement with any type of momentum recently as we spent years going after the loans.  Also, we are now in a decently high tax bracket and I like the retirement savings as a way to get some relief (paying off our loans at our incomes provides little or not tax benefit). 

I may be underpaid as a sixth year attorney in a high cost of living area but I like my boss and my long-term potential here.  Sometimes I consider trying to get a job at a higher paying "medium sized" firm (don't believe big law would have me) but I've only been here for less than 2 years and have already moved around a decent amount for my relatively small time in practice.

Questions: What areas of our budget can be better optimized?  Is there anything we can do to further reduce our tax bill?  Should we focus more on the debt than the retirement savings?  Is there anything we can do with our large expenditures that I'm missing to improve monthly cash flow?  How hard of a face punch do we deserve?  I consider myself frugal but then I look at this and I think I'm messing up somewhere and bad!

I'm glad to be part of the community and thank everyone in advance for their time and thoughts. 






MDM

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Re: Case Study: Decent Progress but Still Battling Student Loans Monster
« Reply #1 on: June 14, 2015, 04:19:29 PM »
finallypayingoff, welcome to the forum.

Kids took up enough of our time that the pet expenses seem "obvious" candidates to cut, but I know them's fightin' words for some so your call....

A couple of thoughts:
 - refinance to a 30 year mortgage and put the monthly difference toward the student loans
 - contribute $5500/yr to a deductible tIRA for yourself.  That might (depends on bonus) get your AGI below $160K and make some of that SL interest deductible
 - put an extra $1K/mo toward the SLs (above what you are already doing).  Appears you can do that with no other spending cuts (assuming state tax ~5%).
 - work on your employer to offer a 401k plan.  Very surprising they don't.
 - if you don't get a W-2 (i.e., you are officially a contractor), then open an individual 401k.  Assuming you are paying ~5% in state tax, getting your AGI down so that not only more SL interest is deductible but child tax credits also kick in, puts your marginal tax savings on that money above 30%.

mozar

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Re: Case Study: Decent Progress but Still Battling Student Loans Monster
« Reply #2 on: June 14, 2015, 08:18:05 PM »
I'm not sure how it works but can you get an fsa on your own? Then you can pay your childcare through that. Just for perspective it costs $2,100 PER kid in my HCOL area for childcare. Are you self employed contractor or full time salaried?

Gin1984

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Re: Case Study: Decent Progress but Still Battling Student Loans Monster
« Reply #3 on: June 14, 2015, 09:17:09 PM »
You put your retirement savings in expenses but don't include taxes, you should.
Refi your student loans, that should help, both decrease your payment be able to pay them off quicker.  Also, if you focus your overpayment on your wife's loan you could pay it off in about a year this way. However, with your child on the way, you won't have your wife's income for that period.
However, removing her income plus her retirement savings does appear to allow you to pay all the needs, depending on taxes, for her time off.  However, she can't do the same for you (if you both wanted to take time off).
Are you planning to dip into your EF for that or is there another source of income (disability, which btw, I don't see in your expenses), also is the money needed for giving birth set aside?  I agree that your wife should check if she has a daycare FSA which would allow you to pay $5000 of your daycare pretaxed and without paying FICA, saving you at least $1600 in taxes.
The child's birth is a qualifying event so she could open the FSA because of that.  In addition, if she has access to a health care FSA, your copays etc could also be untaxed/not FICAed and a young child is going to rack up a bit, again she can open one within thirty days of the birth.

ShoulderThingThatGoesUp

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Re: Case Study: Decent Progress but Still Battling Student Loans Monster
« Reply #4 on: June 15, 2015, 04:42:31 AM »
Your Walmart budget is bonkers. Are you buying a lot of prepared foods?

finallypayingoff

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Re: Case Study: Decent Progress but Still Battling Student Loans Monster
« Reply #5 on: June 15, 2015, 05:14:40 AM »
Thank you for all the thoughts thus far.  Some of them are things I haven't even consider, so I appreciate the fresh perspective.
I am a W-2 employee.  I previously was a solo attorney for a few years and was able to put away in a SEP-IRA during that time.  When our first child was born I joined a firm for a more consistent income. As to Mozar, I can't imagine having to pay $2,000+ per kid in daycare.  We do get a break on our daycare costs because my wife works in education and this daycare provides an educator's discount. 

We have great health insurance through my wife---the first pregnancy cost nothing out of pocket.  This one should also cost little or nothing.  My wife will get some work-related disability and only plans to take 3 months or so off when the baby is born.  I will take one week of vacation.

We were going to refinance our student loans but a certain vendor many on this site seems to like didn't have the best customer service (IMO) when I was attempting to finalize the process.

Gin1984 - I keep rationalizing our food budget as being ok because it includes diapers, paper towels, etc.  Obviously it's not and this is an area I can reassess. 

Finally, to those who mentioned child care plans at work, I think my wife has access to one with enrollment at certain periods of the year.  Some of her colleagues complain it's hard to get payment out of it to the child care provider but taxes are a real issue for us.  I'll have to double back later today and provide info about our taxes if that helps better complete the picture of our finances. 

Thanks again for the thoughts and face punches.

ShoulderThingThatGoesUp

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Re: Case Study: Decent Progress but Still Battling Student Loans Monster
« Reply #6 on: June 15, 2015, 05:39:06 AM »
You have an 1100 square foot house. Your cleaning supplies and diapers budget should not be a few hundred dollars a month.

Gin1984

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Re: Case Study: Decent Progress but Still Battling Student Loans Monster
« Reply #7 on: June 15, 2015, 07:45:32 AM »
Thank you for all the thoughts thus far.  Some of them are things I haven't even consider, so I appreciate the fresh perspective.
I am a W-2 employee.  I previously was a solo attorney for a few years and was able to put away in a SEP-IRA during that time.  When our first child was born I joined a firm for a more consistent income. As to Mozar, I can't imagine having to pay $2,000+ per kid in daycare.  We do get a break on our daycare costs because my wife works in education and this daycare provides an educator's discount. 

We have great health insurance through my wife---the first pregnancy cost nothing out of pocket.  This one should also cost little or nothing.  My wife will get some work-related disability and only plans to take 3 months or so off when the baby is born.  I will take one week of vacation.

We were going to refinance our student loans but a certain vendor many on this site seems to like didn't have the best customer service (IMO) when I was attempting to finalize the process.

Gin1984 - I keep rationalizing our food budget as being ok because it includes diapers, paper towels, etc.  Obviously it's not and this is an area I can reassess. 

Finally, to those who mentioned child care plans at work, I think my wife has access to one with enrollment at certain periods of the year.  Some of her colleagues complain it's hard to get payment out of it to the child care provider but taxes are a real issue for us.  I'll have to double back later today and provide info about our taxes if that helps better complete the picture of our finances. 

Thanks again for the thoughts and face punches.
Honestly, if it can save you thousands of dollars you may have to suck it up and deal with the lack of customer service. 
As I said, prior, giving birth is a qualifying event, so she could access it as long as she opens them within thirty days of the birth. 

charis

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Re: Case Study: Decent Progress but Still Battling Student Loans Monster
« Reply #8 on: June 15, 2015, 08:32:45 AM »
Finally, to those who mentioned child care plans at work, I think my wife has access to one with enrollment at certain periods of the year.  Some of her colleagues complain it's hard to get payment out of it to the child care provider but taxes are a real issue for us.  I'll have to double back later today and provide info about our taxes if that helps better complete the picture of our finances. 

You should definitely be contributing to an FSA for dependent care, it's truly a no brainer.  My experience is that I contribute a certain amount per pay check for the year and it comes back to me as a direct deposit reimbursement on payday - I pay the daycare and the FSA pays me back.

You could save by looking into home daycare providers, or a center that gives a sibling discount.

finallypayingoff

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Re: Case Study: Decent Progress but Still Battling Student Loans Monster
« Reply #9 on: June 15, 2015, 11:57:32 AM »
Thanks to everyone who responded.  It was good to get some fresh ideas.  I think about these things all the time (perhaps too much) but there was a lot here I failed to consider.  Thanks for clueing me in to the blind spots.  For instance, I never knew that since I do not have access to work-related retirement I can put $5,500 into an IRA regardless of our combined income.  Also, I now know for sure to cut back on groceries.  Finally, your posts have spurred me on to having us learn more about flex accounts for daycare. 

I'm looking forward to being involved in the community and appreciate everyone's time and thoughts. 

MDM

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Re: Case Study: Decent Progress but Still Battling Student Loans Monster
« Reply #10 on: June 15, 2015, 12:14:39 PM »
...since I do not have access to work-related retirement I can put $5,500 into an IRA regardless of our combined income.

It's not quite "regardless" but you are under the limit that exists because your wife is covered.  See http://www.irs.gov/Retirement-Plans/2015-IRA-Deduction-Limits-Effect-of-Modified-AGI-on-Deduction-if-You-Are-NOT-Covered-by-a-Retirement-Plan-at-Work.