Case Study- Dumb in the Desert- Please Help

[exactlybrianna]

We are 32 and 39, married, two kids- 14 and 10 in Arizona. Husband is the GM of a small, local, family owned advertising/marketing business which is in unstable condition ie. losing business.

Earnings-

48K from husband (We've been making double that with commissions but business is doing poorly so we are adjusting to living with our base salary)
I bring in about $800/month working from home online. I'm mostly a SAHM, unschooling our kids.
My father lives with us and pays $440/month

TOTAL/MO- $4572

Monthly Spending-

Rent- $1200
Auto/renters- $131 (getting quotes for better rates as I type this)
Life insurance- $67/mo for $300,000 20 year term for each of us. (10 years left. Should we cancel it?)
Auto loan on 2013 Prius V- $308 We just refinanced and owe $16,637. KBB says it's worth $15,450 (we'd love advice on selling/trading etc. Our son is a serious musician and we have to haul gear multiple times a week so we need something with some cargo space, but otherwise flexible)
Health Insurance- $575 (THE cheapest we could find on eheathinsurance, so frustrating!)
Cell phones- $186  ($50 of this is phone payments)
Gas/Electric/water- $280
Netflix- $13
Mozy online backup- $16 (Alternative ideas?)
Gas/Fuel- $75
Groceries/pet food/prescriptions/personal care- $800 (our goal but almost always go over, working on it)
Family allowance- $160 ($10pp/pwk)
Eat out once a month- $40
Miscellaneous- $1000 (medical/dental/kids classes/gifts/- working hard on reducing this!)

TOTAL- $4851

We only have about $3,000 in savings.
We have an IRA worth around $12,000 that is no longer being contributed to by us or his employer.
No debt besides the auto loan
My husbands car is a paid off 2004 Hyundai Accent that is in bad shape but we won't replace when it dies.

Our landlords are selling our house in the next year so we need to move. We've toyed with cashing out the IRA to use as a down payment on a house because you don't pay a penalty if used for first time home purchase. We have seen that on a small, older house we could maybe have a mortgage around $800. But we'd have no savings for big repairs so trying to decide if renting is smarter for us. I think we could rent somewhere cheaper for maybe $900/mo. We've also considered using the IRA to purchase a house to use as a rental property and just keep renting ourselves, somewhere cheaper. But again, without savings for repairs that could be a disaster.

We are obviously nowhere near FIRE. We've been making a lot of money and have absolutely squandered it with nothing to show, BUT, at least we don't have a lot of debt besides the car. We are mostly needing advice about buying vs. renting, what to do with our IRA, and our auto loan.

Thank you for any input, we really appreciate it!

~B

[robartsd]

Life insurance- $67/mo for $300,000 20 year term for each of us. (10 years left. Should we cancel it?)

Since you are dependent on your husband's income and have no assets to self insure with, you probably need to keep this on him. What would your husband do if you were to die - if he'd be working less to spend more time raising the kids, then it make sense to have life insurance on you too. Your kids are old enough to take care of themselves for a few hours after school, so if the plan is for your husband to continue working and send the kids to school, then you may not need as much life insurance for yourself.

Cell phones- $186  ($50 of this is phone payments)

You need the frugal communications guide.

Groceries/pet food/prescriptions/personal care- $800 (our goal but almost always go over, working on it)
Miscellaneous- $1000 (medical/dental/kids classes/gifts/- working hard on reducing this!)

Lots of work to do here. Miscellaneous is to big to not break out in order to better work on it. $800 for all 5 of you sounds OK (but not going over it).

We only have about $3,000 in savings.
We have an IRA worth around $12,000 that is no longer being contributed to by us or his employer.
No debt besides the auto loan
My husbands car is a paid off 2004 Hyundai Accent that is in bad shape but we won't replace when it dies.

Details for the auto loan and how it relates to the Prius's current value? Could the value you could reclaim by selling both cars be combined with your cash savings to purchase a suitable car in cash?

We are obviously nowhere near FIRE. We've been making a lot of money and have absolutely squandered it with nothing to show, BUT, at least we don't have a lot of debt besides the car. We are mostly needing advice about buying vs. renting, what to do with our IRA, and our auto loan.

In your situation, I'd certainly be looking to downsize your housing, but I'd continue renting until you can save up more money. Be glad you know that the landlord plans to sell, start shopping for your next rental house now and hopefully you'll find your next place before it becomes urgent. Good luck!

[2Birds1Stone]

NO NOT cash out your IRA under 99.999% of circumstances.

[StacheInAFlash]

We are obviously nowhere near FIRE. We've been making a lot of money and have absolutely squandered it with nothing to show, BUT, at least we don't have a lot of debt besides the car. We are mostly needing advice about buying vs. renting, what to do with our IRA, and our auto loan.

Sounds like the drop in your husband's income has been a rude awakening to the exploding volcano of wastefulness your life has been! You have a long ways to go, but at least you're here! That is an important first step.

The advice you're specifically asking for:

1) Do not buy! You are not ready at this point to make that jump, even if you can get a cheaper mortgage than your rent. Get your shit together for a year, and then take a good hard look again. And, I feel most would agree that you definitely are not in a position to become landlords, if a bank would even loan you the money necessary for an investment property. $12k probably would not be a sufficient down payment.

2) Leave your IRA invested, and start adding to it instead of subtracting from it! Simple.

3) How much is left on the car loan, and what is the interest rate? What is the blue book value on the vehicle? Is the Prius not working at all right now for hauling gear, or is it just not ideal? Can your son learn to play the flute instead? Nice and small! Just kidding, but in all seriousness, you are on shaky financial footing so changing vehicles needlessly right now may be unwise. But again, depends a lot on what the details are on that loan.

Now, for the advice you didn't really ask for!
4) Your husband should be looking for a new job. If he was making "double that" 48K and is a GM, he should see what his value is to a company not in trouble.
5) I agree that your auto insurance/renters seems high. Get that below $100 at least, and even then it would still be a bit high I think. Can you break it apart so we can see how much is Auto and how much is Renters?
6)Life Insurance seems high, but I think at the moment if one of you were to die, the other would be in trouble. Let it ride for a while more until you get your finances in order.
7)Cell Phones are way to high. How many are you paying for? Are your kids paying for their own if they have them, or at least earning them through some chores? What about dad?
8) $280 seems high for utilities. Learn to use less of all. When the time does come to get a new place, consider potential utility costs as you weigh your options.
9)Mozy online backup? Why do you need that? Look at google drive or amazon cloud for much less if you think you need it at all.
10) Gas seems really high for a Prius and an Accent and only one commuter. How far are you hauling your son's gear multiple times a week?
11) As you already know, your groceries and miscellaneous categories are a big wasteful mess. Figure out what is actually going on here, and reduce!
12) Is your dad's $440 a fair amount? I have no idea, but is he helping with kids or cooking dinner or paying for groceries or what? Does he drive your vehicles? Is he retired or working or not able to live on his own or doing you a favor by renting a room? This sounds harsh, but if he is costing you more than $440 you might need to figure a way to remedy this in some way that makes sense.

[Another Reader]

First, you are in no position to buy a house.  Your husband's income is declining and at risk.  That's unfortunate, as the rent vs buy scenario in most parts of Arizona favors buying.  The first thing I would do would be to cut the food significantly.  That's going to be difficult for thee adults and two kids, including a teenager.  The "miscellaneous" budget would also go as close to zero as I could get it.  Gifts, classes, other unnecessary expenses would all go for now.  Mozy?  Gone.  Family allowances and eating out?  Gone for now.

Second, in your husband's shoes, I would start looking for a new job.  If the business continues to slide, that's what he will have to do anyway.  If he made over $90k selling, he can do that again with another company or another product.  Sitting around hoping for a recovery is not a good option. 

Third, why are you "unschooling?"  Can you put he kids back into the school system for a year or two so you can get a full time job?  You could work long enough to have a solid savings cushion and most of a down payment on a $200k house if you could match your husband's $48k for two or three years.  Taking money out of your IRA is foolhardy, especially in your current employment/income situation.  You have inadequate retirement savings, so the focus should be on adding, not subtracting.

The auto loan might have to stay.  If your husband's car dies, he will need a reliable car for almost any sales job.  I would put reducing that expense on the back burner for now.

With your budget prowess and a new job for your husband, you will get through this in much better shape.  If you go back to work, you will be in a position to buy a house a lot faster with a much bigger savings cushion.   Win-win.

[onlykelsey]

Also, 14 year olds are old enough to work for their hobbies, assuming the 14 year old is the musician. Babysitting and paper routes were my jobs of choice as a 11-13 year old. Where I grew up turning 14 opened a slew of job opportunities up under child labor laws. 

He can at least be saving for upkeep on his equipment and $20 for gas a week.  Maybe make him start paying for his own lunch, etc.

You really, really, really should not touch your IRA. You're already in your 30s with essentially nothing saved.  Saved first, then think about spending a big chunk on something like a house.

[geekette]

I'm not sure why you went with ehealthinsurance instead of healthcare.gov.  At least with the latter, you should qualify for subsidies at the income you quoted.  Open enrollment is over for this year, though.

[AZDude]

Really, there are two things you need to do, right away:

1) Make more money. This means either your husband finds a new job, negotiates a higher base salary(unlikely, given the info), or you put your kids in school and get a full time job(no idea what skills you have, so this might be unrealistic).

2) Cut your misc expenses. You say you are working on it, but realize you are losing money every month. $300 a month with $3K in savings means you are ten months, less than a year, away from insolvency. You need to understand the urgency here and that you are digging your own financial grave. You make enough to survive, but only if you cut out some of the stuff from your budget. Cutting 1/3 of your misc expenses puts you back into a sustainable economic future.

After that, when you are financially stable, then you can work on optimization and working toward FIRE or other goals. Regarding the home, maybe look into buying a condo. They are unpopular, but I have seen two bedrooms in good areas for $80K, and three bedrooms in OK areas for a little over $100K. If you do decide to buy, then make sure you get something that is realistic to your income and long term plans.

Forget about the Pruis for the moment. You do not have the cash to sell it and buy something else without a payment or a significantly lower payment.