Author Topic: Case Study – How’s my new budget + What should my next goal be?  (Read 2315 times)

wintertell

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Topic Title: Reader Case Study – How’s my new budget + What should my next goal be?

Life Situation:  Married, Filing Jointly. I am 28 and my husband is 33. We currently live just outside of DC, but are moving to North Carolina in January.

Gross Salary/Wages:  65,633 – This assumes my annual 3% raise comes through next week.  We are dropping down to my income as my husband starts his own business. I get paid 2x/month, but the monthly income averages out to be 5469.47.

Pre-tax deductions:
Health Insurance Premiums: 148.71/month – We are switching to my health insurance Jan 1.
FSA Contributions (?): 200/month – Still need to determine how much FSA is needed.
401(k): 217.78/month – Contributing the minimum 4% to get 4% vested match.

Other Ordinary Income: We will receive ~1,500 in extra income distributed from an inherited IRA. Right now, I am assuming no income from my husband’s business just to be safe.

Adjusted Gross Income: 60,335 (est.)

Taxes:
Federal:  7635.12 (636.26/month)
State/local: 3,384 (282/month)
FICA:  5,021.04 (418.42/month)

Current Monthly Expenses (budgeted for Feb 2017):
Lot Rent: 785 – We have to rent the land for our mobile home until it sells.
Friend’s House/ NC House: $200 – 1 week at a friend’s house for work travel. Also might pay for some expenses while living in a family house. (TBD). Will likely start paying more when our mobile home sells.
Water & Sewer: 30 –Varies between $10 and $50/month.
Internet: 65
Phone: 100 – 2 Google Fi phones, have been using data at work.
Propane: 100 – Top off in Feb 2017
Truck Payment: 125.54
Car Payment: 195.9
Life Insurance: 50 (Estimated – Rolling over from HB’s work and don’t have quote yet).
Groceries & Eating Out: 600 – The last couple of months we have had 1k+ bills. Previously we did better around $600 for a few months.
Household & Pet: $200
Gas: $250 – Increased due to driving for moving.
Parking, Subway & Tolls: $50
Entertainment, Spotify & Hulu: $78
HB & WT Fun Money: $150 – We are cutting these in half from $300 to $150.
Misc Buffer: $100
Savings ($415/month): Emergency fund ($290), Auto Insurance ($75/month), Gifts ($50/month).

Monthly Summary
Total Monthly Expenses: $3079.44
Total Before-Tax Savings: $435.56
Total After Tax Savings: $415

Assets (197,495):
Cash: $22,563 – 16,785 split between business seed money, 4 month emergency fund, and targeted savings for expenses (auto maintenance, Christmas, travel). The rest ($5778) is planning spending for December/January.
HB 401(k): $40,861
WT 401(k): $5,492
Inherited tIRA: $84,282
Car: $11,000 (KBB est. value)
Truck: $4,953 (KBB est. value)
Mobile Home: $30,000 (Conservative estimate – We are planning on listing between 40-50K).
Revolving CC: $-1655.68 (Always pay off)

Liabilities (21,754):
Truck (1.99%): $6,571 – Originally 9,900, 7 year term taken out in July 2014, 125.54/month
Car (1.99%): $15,174 – Originally 15,345, 7 year term taken out in October 2016, 195.9/month

Net Worth: $175,741

Specific Question(s):
My husband is quitting his job in two weeks!! This means we are dropping down to a 1 income family. This is a big change for us! We have been making 140k+ for the last two years, so dropping down to 65K will be a change. My husband is going to start a business using the seed money we’ve saved. We are also moving from the DC Metro area to North Carolina in January to be closer to family. I will staying in DC 1x/month with friends and work remotely the other 3 weeks out of the month.

In general, I’m nervous about this big change. I am looking for feedback on my budget (above) as well as advice about how to handle our new situation.

Where do think you think the budget needs to be changed? What tips do you have for making it better? Am I forgetting anything?

Also, what would you advise be our next savings goal to be? We just reached 4 months of expenses saved this month. Should we save for 6 months of expenses? Should we start investing in a Roth IRA or increase my 401(K) contributions
?
 
I feel like we are behind on our retirement contributions. We also want to buy a house and put down 20% from the proceeds of the mobile home. We are planning on ignoring the 1.99% loans for now as we focus on other goals.

Also, we don’t plan on using the inherited t-IRA to reach our goals. That pot of money is on the balance sheet, but is (mostly) intended to take care of HB’s family when they are older. It was gifted both for HB and with the express desire to take care of family in addition to himself, which makes it complicated!

Many thanks for taking a closer look at our situation, and thank you in advance for your advice!
« Last Edit: February 24, 2017, 06:19:00 PM by wintertell »

ruraljuror

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Best of luck with the move and your new business venture. On the budget - looks like transportation is a very large percentage of your expenses. You can find dozens of ways on the forums for reducing that expense. You could also consider dropping the fun money to add to the buffer during this transition. If I were moving to a new state and starting a new business, I would want as much cash as possible until I knew what my new living expenses were going to be and how well the business would perform.

MrsPB

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You have no expenses/budget listed for vehicle repair/maintenance or clothing/footwear. Seems like a lot of people leave these out unintentionally, maybe as they are not regular bills but certainly can be quite large at times. Also no budget for travel/vacation. Maybe you don't do this ever as you travel for work a lot but thought I'd point it out!

MrsPB

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Also what about personal care like haircuts etc? Or does the go under fun money or household?
What about medical co pays/stuff not covered by insurance?

wintertell

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You have no expenses/budget listed for vehicle repair/maintenance or clothing/footwear. Seems like a lot of people leave these out unintentionally, maybe as they are not regular bills but certainly can be quite large at times. Also no budget for travel/vacation. Maybe you don't do this ever as you travel for work a lot but thought I'd point it out!

Also what about personal care like haircuts etc? Or does the go under fun money or household?
What about medical co pays/stuff not covered by insurance?

We've got about $600 saved for vehicle maintenance right now in our "targeted expenses". I'll add that in to the original post.

Medical co-pays not covered by insurance are paid out of the HSA.

We spend very little on clothing/personal care. We spend so little that I don't budget beforehand or keep a sinking category. Instead I just pay for it as the expense comes up out of the misc./household category or out of the buffer from other spending.

We might need to fund travel from a sinking category this year since cash flow is tighter. Previously we've saved for it just for a few months beforehand. Hopefully we can sell the mobile home and then start setting money aside for a cheap vacation!

« Last Edit: December 10, 2016, 06:23:57 AM by wintertell »

cincystache

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Congrats on the big life changes coming up! Exciting times.

As I read through your situation. You are already in pretty good shape. As others have said, transportation seems big, can you get rid of the truck? Also, try not to buy a house that breaks the budget if/when you do decide to buy.

regarding the retirement account question. I would probably max out Roth IRAs next year for both you and your spouse even if you keep the funds invested in mostly cash for now. Why? Because you can access your original contributions at any time tax and penalty free. I would try to avoid this because you'd be giving up decades of tax free compounding but if it was truly an emergency, the funds are accessible. Also, since you'll be in a lower tax bracket next year, the Roth vs. traditional IRA debate swings in favor of the Roth.

This will get the ball rolling faster on retirement accounts and as your situation improves and your husband's business takes off, you can start investing the Roth more aggressively once you replenish your cash savings accounts.

Hope this helps and good luck again!
« Last Edit: December 10, 2016, 04:17:10 AM by cincystache »

wintertell

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Best of luck with the move and your new business venture. On the budget - looks like transportation is a very large percentage of your expenses. You can find dozens of ways on the forums for reducing that expense. You could also consider dropping the fun money to add to the buffer during this transition. If I were moving to a new state and starting a new business, I would want as much cash as possible until I knew what my new living expenses were going to be and how well the business would perform.

Thanks rural juror! We'll have to see how transportation sorts out. I'll be travelling back and forth from DC, so that's why we still have some city commuting expenses (Metro) plus the gas for that travel. Our transmission recently started going bad, so we replaced my SUV with a Hyundai Elantra, so that's a step in the right direction. The only way I see to reduce transportation expenses is to pay off one of the cars or get cheaper insurance. We will re-pull quotes for insurance once we are NC.

wintertell

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Congrats on the big life changes coming up! Exciting times.

As I read through your situation. You are already in pretty good shape. As others have said, transportation seems big, can you get rid of the truck? Also, try not to buy a house that breaks the budget if/when you do decide to buy.

regarding the retirement account question. I would probably max out Roth IRAs next year for both you and your spouse even if you keep the funds invested in mostly cash for now. Why? Because you can access your original contributions at any time tax and penalty free. I would try to avoid this because you'd be giving up decades of tax free compounding but if it was truly an emergency, the funds are accessible. Also, since you'll be in a lower tax bracket next year, the Roth vs. traditional IRA debate swings in favor of the Roth.

This will get the ball rolling faster on retirement accounts and as your situation improves and your husband's business takes off, you can start investing the Roth more aggressively once you replenish your cash savings accounts.

Hope this helps and good luck again!

Thanks cyncystache! About 2.5 years ago, we were in over 180,000 of debt, so I am very proud of us to get to the point where it seems like we are in pretty good shape.

Can't get rid of the truck -- It's HB's daily driver right now, and he's planning on using it for his business. Now I'm wondering if we can deduct some of his maintenance for his truck for his business since he's quitting his job to go full time? Will need to investigate.

On the Roth IRA -- That sounds like a good idea since we are at a lower income. In part it depends on how much e-fund money we will draw down as we move. I definitely want at least 3 months in cash, so I'm not comfortable just maxing it out right away. I might want to even keep 6 months of cash (about 20K), but I'm just not sure what my risk tolerance will be yet.

Should it be "catch up" contributions for 2016, or new contributions for 2017? How does that affect our 2016/2017 taxes? We normally do our taxes in early February. Do we need to open the Roth IRA account before the end of the calendar year for them to count as 2016 contributions?

cincystache

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Can't get rid of the truck -- It's HB's daily driver right now, and he's planning on using it for his business. Now I'm wondering if we can deduct some of his maintenance for his truck for his business since he's quitting his job to go full time? Will need to investigate.

I'm not a CPA or business owner but I'm pretty sure if he is using the truck for work, he can deduct work related mileage at 54 cents per mile from his business income. Just keep a good mileage log. In the past, I've used an app that tracks it automatically.

On the Roth IRA -- That sounds like a good idea since we are at a lower income. In part it depends on how much e-fund money we will draw down as we move. I definitely want at least 3 months in cash, so I'm not comfortable just maxing it out right away. I might want to even keep 6 months of cash (about 20K), but I'm just not sure what my risk tolerance will be yet.

If your risk tolerance is low, that is fine, you can still put your money into a Roth IRA and earmark those funds for emergencies and leave them "invested" in cash. Best case, you never have an emergency and you can start investing the money more aggressively over time. Worst case, you have an emergency and need to tap into the Roth contributions and you're in the exact same position you would have been if you left the cash in your savings account.


Should it be "catch up" contributions for 2016, or new contributions for 2017? How does that affect our 2016/2017 taxes? We normally do our taxes in early February. Do we need to open the Roth IRA account before the end of the calendar year for them to count as 2016 contributions?

Your taxes aren't effected by Roth IRAs. You pay the same regardless of whether or not you contribute to a Roth. The benefits are tax free growth and withdrawals.

I would set a goal to max out Roth IRAs for both of you (5,500 each) for 2016. You have until April 2017 when you file your taxes to do this. Then, I would try to max out your 2017 Roth accounts by the end of next year. Leave it all in cash for now if you want more stability in the short term.

You don't NEED to open the accounts before the end of 2016 but I see no reason to wait. Vanguard lets you open an account with as little as $1,000 for their target retirement funds. The process takes about 15 minutes.

Crushing 180k in debt is awesome, well done. I'm sure you guys will figure everything out. I hope these ideas are helpful.

G-dog

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Check in to your husband setting up a 401k in his business - massive savings here. Of course, if he will npbe employing others, that complicates things.

Having his own business changes a lot of tax items - will he rent a separate building, or work out of your home? Each offers different tax deductions. Like someone noted, mileage on vehicle. Not sure, but you may be able to transfer the truck to the business and this may offer up maintenance and other cost advantages.

A lot to think about.

Catbert

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After you move and build up a 4 month e-fund, I would go for the Roth IRA.  As others have pointed out you can always use Roth contributions as a fall back e-fund if you have to.  If you can do it for 2016.

No since working your proposed budget over too much because you haven't moved and know know how it will really play out.

wintertell

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A belated thanks, Mary w and G-dog, for the comments.

I will get HB to get a 401(k) established as soon as is feasible with his business. We are still in the beginning stages though! Baby steps!

On the Roth 2016 - I did our taxes and found out that we weren't eligible to contribute because of the income phaseout last year. I need to re-do the calculation from MDM's spreadsheet about Roth. v. 401(k) now that we have a lower income.

I am also happy to report that my raise came through! A small boon!

I will post our February expenses this weekend and compare against my estimates. March will be our first month will no additional income so we will need be careful as we adjust to living on a lower income.

wintertell

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Re: Case Study – How’s my new budget + What should my next goal be?
« Reply #12 on: February 24, 2017, 07:45:15 PM »
We have now moved to NC! My husband has quit his job to start his own business. He is currently managing repairs and working to sell the house, but will focus on generating income eventually. I work in DC for 1 wk/month now.

Here is an updated version of our current income & expenses: 

Gross Income:  67,770 (Includes wages + IRA distribution)

Gross Monthly Income: 5,523 + 115 in commuting subsidy = 5,638
Pre-tax deductions:
Dental: 15.6
Health insurance: 124.32
Vision: 1.40
401(k): 331.38 – 6% contribution; get 4% employer match.
Med: 87/month
SS: 334/month
Federal:  682/month
State/local: 262/month

Average monthly take home income: 3,800

Current Monthly Expenses (Feb 2017)
* Note that we live on last month's income, so this is spending the money we earned in January.

Monthly Bills
Lot Rent: 785 – We have to rent the land for our mobile home until it sells.
Water & Sewer: 30 – Varies between $10 and $50/month.
Internet: 65
Phone: 95 – 2 Google Fi phones. This will drop in March as I am working from home & using less data.
Propane: 265 – Top off; pay in full discount. Last delivery of the season.
Truck Payment: 140 (6,264 @ 1.99%, small overpayment to nearest 10)
Car Payment: 200 (14,658 @ 1.99%, small overpayment to nearest 10)
Life Insurance: 80

Variable Expenses (up to 2/24)
Groceries: 659 (750 budgeted)
Eating Out: 124 (1/2 - 1/3 what we previously were doing)
Household: 105 - Soap, paper plates, fancypants shampoo/conditioner
Gas: 125 - Less driving in new location + our new-to-us Elantra gets 39 miles on the highway compared to my 25 in the old Rav4. 
Parking, Subway & Tolls: 96 -- 1 week in DC + stocking up on subway passes.
Health & Personal Care: 700 -- $540 prescriptions (waiting on reimbursement), $100 cut & color, $20 weight loss subscription, $20 haircut.
Home & Garden: 800 -- Fixing up home to sell, hired retired painted to paint house as a side job.
Spotify & Hulu: 18
HB & WT Fun Money: $100 – Cut from $300 to $100
Taxes: 475
Emergency Fund Savings (295). Current balance 15,300. Trying to get up to 16K.

Some Notes:
* We aren't currently saving for vacation, car insurance, Christmas, etc. Focusing on getting the emergency fund up to 16K and selling the house to free up cash flow.

Over the year, these expenses might be:
Vacation: $600 - Camping
Car insurnace: $800 - Rates likely to go down in NC but have to pay transfer tax.
Christmas: $800 - I always aim for 600, but we never seem to stick with it.
Gifts: ? Have to take this on a case by case basis.

* While we live with family, we eventually will be paying somewhere around $250-300 for utility bills and to my friend whose house I will stay at while working. Waiting for the house to sell.

Can we live on 3,800 next month?
Yes, but there are some risks:
* Next month we have an abnormal water bill - currently fighting with the management company over it.
* My company still has not set up my HRA, despite switching insurance in January. I have followed up with them and they say they are working on it, but no resolution yet. This is why we had to pay health bills out of pocket. If it is still not set up, we might have more $500+ health care bills.

Specific Question(s):
  • Where do think you think the budget needs to be changed? What tips do you have for making the budget better?
My impression is that there is not a ton of fat left to cut, since we have cut our allowances, entertainment, eating out etc.

Groceries are trending downward, but since we are also trying to eat healthy and are spread between two households currently, I can't get it down to extreme levels at this time.

I could re-dye my hair to my natural color as to not have to color it, but I want to wait and see if there is still room in the budget for a while.

  • What should we do with the proceeds of the house?
Proceeds estimated to be between 30-45K. After I get a new job, we will likely buy a house with a short commute for me. If it takes me a while to find a new job, we will rent in an area better for HB's business in a while after the house sells.
  • What would you advise be our next savings goal to be?
Once the house sells, we will have great cash flow (like 500-1.5K) until we make our next transition to a rental or home purchase. We will likely keep the house payoff in savings for a 20% down payment, though of course I open to doing other things with it.

With out current cash, that would be about 4K in checking, 16K in savings, and then house proceeds (30-45K). House ranges we are looking at vary from 175-230K.

Keep in mind that I hate debt with a passion because of our history of 180K+ in debt, and my heart wants me to pay off the truck loan at 1.99% despite the low interest rate...
« Last Edit: February 24, 2017, 07:51:56 PM by wintertell »