Case Study - Looking for direction on where to start

[cdngenie]

Hi MMM land!

I've been obsessing over this forum for a bit, but been less than successful in implementing these systems into our own family.

A little about me (us): I'm late thirties, an engineer working in a middle management role at a fortune 500 company. DH is a SAHD who has a small business he runs out of our home. We have two kids, the youngest is starting 1/2 day kindy in the fall.

We've been bobbing around, semi randomly throwing money into investment accounts, but not really seriously looking at our budget / finances until this year. Developing a budget has been an iterative process, but this is representative of the actual spend as of now:

Category   Monthly amt.   Comments   Annual
Salary/Wages   $14,069    Salary + vacation + PTO + Parking allowance   $168,830
Pretax Health Ins.   $968    Flex benefit credits   $11,619
Pretax Vision/Dental Ins.   $50       $600
HSA   $50       $600
Pretax Commuter costs   $0       $0
FICA base salary/wages   $13,001       $156,011
          
RRSP (pre-tax)   $1,296    RRSP   $15,550
TRRSP (pre-tax)   $1,584    (company stock, employer match 3%)   $19,006
Income subject to IRS tax   $10,121       $121,455
          
Healthcare deductions   $668    Includes $158/paycheck to HAS   $8,013
Long Term Disability Insurance   $170       $2,040
Paycheck income before tax   $9,283       $111,401
         
Other income (int., div., etc.)   $1,500    DH's home business (minimum monthly)   $18,000
   $100    Child allowance   $1,200
         
Rental income   $2,400       $28,800
Rental real expenses   $1,422    Mortgage + est. $500/mo utilities + ins + prop tax.   $17,058
Rental depreciation expense   $0    not claimed   $0
Rental taxable income   $979       $11,742
          
Federal Adj. Gross Inc.   $12,600       $151,197
          
Canadian Income Tax   $3,438       $41,250
Provincial tax part of above   $0    n/a   $0
Canada Pension Plan   $202    capped at 2425   $2,425
Medicare   $76    capped at 913.68   $914
Total income taxes   $3,716       $44,589
          
Add Daycare reimb.   $0       $0
Add Health care reimb.   $0       $0
Income before other expenses     $8,046       $96,554
         
Monthly Expenses:         
Post-Tax Payroll Deductions         
Insurance   103   Life/Critical illness on self, spouse, life on kids   
Tax free Savings   867      
United Way donation   122      
         
         
Mortgage   $1,333       $15,990
Rent         $0
HOA         $0
Property Tax   $167       $2,000
Home/Rent Insurance   $161    home insurance on both properties is $211, 50 allocated to rental   $1,932
PMI   $0       $0
Personal care   $33    haircuts 4x/year for me + 2 kids   $396
Bicycle Maintenance   $0    annual mtce comes out of miscellaneous   $0
Cable TV   $100       $1,200
Car Insurance   $150    2 vehicles   $1,800
Car Maintenance, Registration, etc.   $168    0   $2,016
Charitable contributions   $600    Monthly + miscellaneous charitable   $7,200
Child activities    $100       $1,200
Childcare      SAHD = Priceless   $0
Christmas/Holidays/Birthdays   $150       $1,800
Clothing/Shoes   $70       $840
Computer (paper/software/etc.)   $0    n/a   $0
Credit card fees         $0
Dental Insurance   $0    under employer plan   $0
Dentist   $0    under employer plan   $0
Dining (Pizza, Restaurant, etc.)   $400       $4,800
Donations/Gifts   $50       $600
Electricity   $180    average   $2,160
Emergency Fund   $0       $0
Entertainment   $50       $600
Financial Planning         $0
Fuel/Public Transport   $300       $3,600
Natural gas / water   $247    average   $2,964
Groceries   $1,000    punch me now.   $12,000
Hair Care   $0    included under personal care   $0
Home Alarm System   $0    not applicable   $0
Household; Maintenance   $200       $2,400
Internet   $118    average   $1,416
Landscaping/Yard work   $0    included in Household/Mtce   $0
Life Insurance   $150    whole life plan   $1,800
Lunches      under restaurants   $0
Medical (Doctor, Hospital, etc.)   $0    not applicable   $0
Medical Insurance   $0    covered by employer/Canadian healthcare   $0
Medicine (OTC + Prescription)   $0    covered by employer/Canadian healthcare   $0
Miscellaneous   $250       $3,000
Pets   $50       $600
Phone (cell)   $118    average   $1,416
Phone (landline)   $0       $0
Recycling/Trash   $0    not applicable   $0
School Tutition/Books/Etc.   $0    included under miscellaneous   $0
Sports/Recreation   $0    kid stuff is under kid activities.   $0
Subscriptions (paper/magazines/etc.)   $29    newpaper - need to cancel   $348
Travel/Vacation   $366       $4,392
Water/Sewer   $80       $960
Wine/Beer   $0    under groceries   $0
Work/Professional fees   $0    paid by employer   $0
Non-housing total   $4,959       $59,508
         
Loans:         
car loan   $644       $7,728    Balance - not sure. rate is 1.9%, 3.5 years remaining, original balance was approx. $26k
Secured HELOC   $108 ***      $10,500 I think this is a minimum payment, we're currently throwing about $1k/month on this. Interest is about 3.0% (variable), $50k limit
Unsecured HELOC   $0       $0  interest is 3.5%, $20k limit
Credit Card #1          $0           $0 interest is ugly, $15k limit
Credit Card #2          $0           $0 interest is ugly, $12k limit
         
Private RRSP   $150       $1,800
RESP   $200    educational savings plans   $2,400
         
Total Expense   $7,722       $92,659
         
Total to invest   $325       $3,895
Additional Mortgage Principal   $0       $0
Additional Loan payments   $0       $0
Other investments   $325       $3,895
         
         
"Gross" income   $16,548       $198,572
Income taxes   $3,716       $44,589
FSA add-backs   $0       $0
After-tax income   $12,832       $153,983
         
Savings   $3,897       $46,770
Living expenses   $7,857       $94,290
Non-mortgage loans   $752       $9,029
         
After-tax investable   $325       $3,895
         
         
         
Investments / Assets         
Private RRSP - Mine   96,185      
Private RRSP - Spouse   45,000      
Group Plan RRSP - Mine   34,971      
Group Plan TRRSP - Mine   43,743      
Group Plan TFSA - Mine   18,024      
Education Savings   34,000      
         
         
Rental Property   395,000   conservative, city assessed value. Currently $130k owing on mortgage.   
Primary Residence   387,500   conservative, city assessed value. Currently $155k owing on mortgage.   
         
Defined Benefit pension plan   Based on current service, payout is 5680/annum at age 65, if I continue working until 65 it's 65k/year.      

My questions:
 - Where do I start? I'm currently investing just over 20% of my pre-tax salary, but I'm sure I can do better than that. I know I have significant room to claw back the budget, although COL is high in our neck of the woods, particularly for food. I'm also negotiating with DH, who agrees with me when I bring up the need to claw back our budget, but pretty consistently falls off the wagon when he decides he and the kids 'need' to go out for burgers mid day. Areas for major facepunching and thoughts on how to motivate DH are very welcome.

 - I have bonuses that are payable in April (short term incentive - usually ~$25k) and December (long term incentive - estimated at ~$30k). Looking for advice on where best to put that money to work. The April bonus for this year was sunk into our kitchen reno, and I'd like to be more strategic with the upcoming bonuses.

[plainjane]

I'd say first thing to do with your next bonus is use up all that lovely TFSA contribution space you have left for you and your spouse (assuming neither of you are US persons - I was concerned by that comment about the IRS - if you are US persons, you probably should stay very far away from TFSAs and RESPs).    I'd allocate using the Couch Potato approach because I'm lazy.

Your incomes once you need to start pulling from RRSPs are going to be very skewed, which isn't tax efficient.  But at this point you're probably saving too much to take advantage of spousal contributions.  If you've got contribution space from before you were saving 20%, start filling that out.

Once you've maxed out the personal tax-advantaged savings, you might want to talk with a tax accountant.  There might be some interesting things you can do with your DH's business.

For your DH, have you asked him for what a fair monthly budget for these special trips (unplanned burgers, trips to the museum) would be?  Sometimes having a budget the other sets is substantially more helpful than "we need to spend less money" blanket statements.  Also, make sure you aren't the pot vs. his kettle.

[MDM]

My questions:
 - Where do I start? I'm currently investing just over 20% of my pre-tax salary, but I'm sure I can do better than that. I know I have significant room to claw back the budget, although COL is high in our neck of the woods, particularly for food. I'm also negotiating with DH, who agrees with me when I bring up the need to claw back our budget, but pretty consistently falls off the wagon when he decides he and the kids 'need' to go out for burgers mid day. Areas for major facepunching and thoughts on how to motivate DH are very welcome.

 - I have bonuses that are payable in April (short term incentive - usually ~$25k) and December (long term incentive - estimated at ~$30k). Looking for advice on where best to put that money to work. The April bonus for this year was sunk into our kitchen reno, and I'd like to be more strategic with the upcoming bonuses.

cdngenie, welcome to the forums!

Appears you are already off to a good start compared to many - congratulations on savings to date. 

As for doing better, well, the simple advice you'll get here, at bogleheads, etc. is "pick a few low fee diversified index funds, put your money there and then leave it alone (other than, perhaps, rebalancing asset allocation once a year or so)."  It is good advice, in addition to being simple - fortunately it doesn't take much time to do index investing, so you can continue to spend the bulk of your time now on family and earning the investable money.

Many ways to cut expenses.  One suggestion: cook extra for dinners so leftovers are available at lunchtime and the trips to burger row will decrease.

Nothing wrong with kitchen renovations - especially if they made it easier to do the "cook extra" noted above.


On a separate issue, if you programmed a Canadian tax calculation into the spreadsheet template downloaded from here, I'd be happy to incorporate it in the downloadable template for others to use.  Reply or PM if interested.

Good luck! 

[Mrs. Frugalwoods]

Congrats to you for outlining your expenses in such detailed fashion! Nice!

If you're looking to claw back the budget, seems there are a number of areas where you could realize a great deal more savings every year. I know that these decisions are personal for each family, but, since you asked.... :) Here are my two cents:

Personal care   $33    haircuts 4x/year for me + 2 kids   $396: Could you cut hair at home? We use a Wahl clippers and scissors for a grand total of $0 in haircuts/year
Cable TV   $100       $1,200: That's a pretty huge outlay of cash. Cancel? Use Roku, Amazon Prime, You Tube instead?
Charitable contributions   $600    Monthly + miscellaneous charitable   $7,200: I'm all for giving back, but this is awfully high. Is there something specific motivating/requiring these contributions?
Child activities    $100       $1,200: Also seems high--any way to analyze what this is actually spent on?
Christmas/Holidays/Birthdays   $150       $1,800: Whoa!
Dining (Pizza, Restaurant, etc.)   $400       $4,800: Another huge outlay of cash. Could you do frozen pizzas at home instead? Cook more? Scale back on restaurant frequency?
Donations/Gifts   $50       $600: Another category of gifts & donations? Is this different from the other two categories?
Entertainment   $50       $600: This plus the cable, child activities, and dining--wondering what this is for specifically?
Groceries   $1,000    punch me now.   $12,000: You said it first :). There are many threads on here for feeding a family for far less per month (like $200-$500)
Miscellaneous   $250       $3,000: That's A LOT of misc. What's going on in that misc :)?
Subscriptions (paper/magazines/etc.)   $29    newpaper - need to cancel   $348: Yes, please cancel! It's online!
Travel/Vacation   $366       $4,392: WOW. Again, this plus the cable, entertainment, misc, gifts, child activities--wondering if you could look holistically at all "entertainment" and perhaps re-prioritize?

Again, I totally get that everyone's financial goals and situations are different, but, if you wanted to, you could save quite a bit more every year. Best of luck to you and kudos for baring your budget!

[cdngenie]

I'd say first thing to do with your next bonus is use up all that lovely TFSA contribution space you have left for you and your spouse (assuming neither of you are US persons - I was concerned by that comment about the IRS - if you are US persons, you probably should stay very far away from TFSAs and RESPs).    I'd allocate using the Couch Potato approach because I'm lazy.

Your incomes once you need to start pulling from RRSPs are going to be very skewed, which isn't tax efficient.  But at this point you're probably saving too much to take advantage of spousal contributions.  If you've got contribution space from before you were saving 20%, start filling that out.

Once you've maxed out the personal tax-advantaged savings, you might want to talk with a tax accountant.  There might be some interesting things you can do with your DH's business.

For your DH, have you asked him for what a fair monthly budget for these special trips (unplanned burgers, trips to the museum) would be?  Sometimes having a budget the other sets is substantially more helpful than "we need to spend less money" blanket statements.  Also, make sure you aren't the pot vs. his kettle.

We're both canadian - the IRS references are leftover from the template provided in the khow to write a case study' thread.
We still have the full allowance for dh's tfsa, although mine will likely be used up early next year just from my regular contributions. ($400/paycheck). I'll get my butt in gear and get it set up in time to take the dec bonus.
We have about 80k left in contribution room for me. I've been knocking out just over $40k per year in rrsps, and because of my pension, any addition contribution room is clawed back to a virtually negligeable amount. DH still has about 40k, but since it won't really impact his taxes we're holding onto it in case we have to offset some capital gains.
We've been struggling with the spending for a while... We generally spend with cards and I'm contemplating moving to a csah system. We've had the discussion and set budgets for 'fun money' but if dh exceeds then there's no real impact... There's still cash in the account and credit on the card, so other than me grumbling about him busting the budget he set, there's no consequence.

[Chranstronaut]

We've been struggling with the spending for a while... We generally spend with cards and I'm contemplating moving to a csah system. We've had the discussion and set budgets for 'fun money' but if dh exceeds then there's no real impact... There's still cash in the account and credit on the card, so other than me grumbling about him busting the budget he set, there's no consequence.

I like this idea-- mixing it up might really help you guys out.  I would recommend that DH is on board with this and as another person suggests, get him to help figure out the allotted "Kids Cash" budget for the month.  That way he can spend whatever he'd like on burgers and outings as he pleases.  I'd recommend you use a cash system, too, for any other discretionary spending.  This makes it feel more fair and not that DH is being "punished" for staying at home.  And no cheating!  You don't get to stop by the ATM once the cash is gone for anything that is not keeping a roof over your head and basic healthy food in your stomachs.  With $1000 in groceries, you should never need an emergency pizza at the end of the month ;)

If DH feels resistant, it might help to take a month or two to lead by example on your own.  You might want to drop discretionary spending on yourself quickly, but it might take a more gradual approach for DH.  Talk to DH and truly listen -- what are his priorities for the money?  When he buys burgers for the kids, what his is real motivation?  It sounds like your family is very giving... is there a way to get equal or greater joy out of giving something hand-made or spending time together in a way that doesn't cost money? 

This is only tangentially on topic, but if you find yourself spending a lot on kid's birthday parties or DH wants to replace burgers with another bonding experience, try tie dying. I recommend ordering dyes online from Dharma Trading Company and doing it outside in the summer.  Wear old clothes and shoes.  This was my childhood bonding activity with my dad and we did it every summer for years.

There are many articles on leading your spouse to the frugal water, but ultimately, you can't make them drink.  Check these posts on the topic:

http://www.madfientist.com/my-wife-is-not-a-fientist/
and the followup from his wife:
http://www.madfientist.com/an-unexpected-guest-post/

http://www.mrmoneymustache.com/2012/03/22/selling-the-dream-how-to-make-your-spouse-love-frugality/

[plainjane]

We have about 80k left in contribution room for me. I've been knocking out just over $40k per year in rrsps, and because of my pension, any addition contribution room is clawed back to a virtually negligeable amount. DH still has about 40k, but since it won't really impact his taxes we're holding onto it in case we have to offset some capital gains.

One of the nice things almost nobody knows about RRSP contribution room is that you can put in the money one year, and carry the deduction forward against a future year when those capital gains show up.  (As long as you don't exceed your contribution limits.)  And in the meantime you get the tax free growth.

And with 80k of space, you should really consider doing a spousal contribution to even you guys out for when you have required withdrawals.  With a spousal contribution the deduction is still against your higher income bracket.

[Cwadda]

Cable TV   $100       $1,200
Internet   $118    average   $1,416

Can you get these bundled together at least? These are awfully expensive. Would you consider cutting cable to just basic channels and then getting Netflix/Amazon/Hulu etc?

Child activities    $100       $1,200

What activities are these?

Christmas/Holidays/Birthdays   $150       $1,800

Too much, unless you have a really big family. How much do you spend on your children during Christmas? Doesn't need to be any more than $200 for a child, although this is just my personal opinion.

Dining (Pizza, Restaurant, etc.)   $400       $4,800
Groceries   $1,000    punch me now.   $12,000

punch punch....PUNCH PUNCH.

$1000/month in groceries for 2 adults and 2 children? WHAT? You should be no more than $500/mo in groceries.
$400/month in restaurants? How often do you go out? Even if you got pizza 1 day per week that's only $80/month!

Subscriptions (paper/magazines/etc.)   $29    newpaper - need to cancel   $348

As in, cancel TODAY.

Miscellaneous   $250       $3,000

More details please.

car loan   $644       $7,728    Balance - not sure. rate is 1.9%, 3.5 years remaining, original balance was approx. $26k

What kind of car is it, how many miles, etc?


And here's another facepunch for your grocery/dining expenses.


*WHAM*


Don't worry though, you will improve with leaps and bounds.

[cdngenie]

Congrats to you for outlining your expenses in such detailed fashion! Nice!

If you're looking to claw back the budget, seems there are a number of areas where you could realize a great deal more savings every year. I know that these decisions are personal for each family, but, since you asked.... :) Here are my two cents:

Personal care   $33    haircuts 4x/year for me + 2 kids   $396: Could you cut hair at home? We use a Wahl clippers and scissors for a grand total of $0 in haircuts/year
Cable TV   $100       $1,200: That's a pretty huge outlay of cash. Cancel? Use Roku, Amazon Prime, You Tube instead?
Charitable contributions   $600    Monthly + miscellaneous charitable   $7,200: I'm all for giving back, but this is awfully high. Is there something specific motivating/requiring these contributions?
Child activities    $100       $1,200: Also seems high--any way to analyze what this is actually spent on?
Christmas/Holidays/Birthdays   $150       $1,800: Whoa!
Dining (Pizza, Restaurant, etc.)   $400       $4,800: Another huge outlay of cash. Could you do frozen pizzas at home instead? Cook more? Scale back on restaurant frequency?
Donations/Gifts   $50       $600: Another category of gifts & donations? Is this different from the other two categories?
Entertainment   $50       $600: This plus the cable, child activities, and dining--wondering what this is for specifically?
Groceries   $1,000    punch me now.   $12,000: You said it first :). There are many threads on here for feeding a family for far less per month (like $200-$500)
Miscellaneous   $250       $3,000: That's A LOT of misc. What's going on in that misc :)?
Subscriptions (paper/magazines/etc.)   $29    newpaper - need to cancel   $348: Yes, please cancel! It's online!
Travel/Vacation   $366       $4,392: WOW. Again, this plus the cable, entertainment, misc, gifts, child activities--wondering if you could look holistically at all "entertainment" and perhaps re-prioritize?

Again, I totally get that everyone's financial goals and situations are different, but, if you wanted to, you could save quite a bit more every year. Best of luck to you and kudos for baring your budget!

I'm not very good with the quotes, so all the responses will need to be lumped together, sorry...
 - personal care could come down but it's not the first area I'm planning to tackle. I work in a corporate environment and already look like the poor relation for ashewing the designer clothes... I'm reluctant to sacrifice further in that area. The kids ar both girls with long hair. We do trims about semi-annually for them.
 - cable tv is a package deal that also includes internet and land line. We had previously looked at just getting internet, but the cost difference was only about $20/month so it didn't seem worth it. It's probably worth looking at again.
 - child activities includes registered programs (swimming (~$60/ kid per quarter), dance (offered through the school - about 200 per year), gymnastics (~$120/kid x 2-3 sessions per year) plus random other events, field trips, etc.)
 - we donate through children's charities, alzeimers research (both my grandparents passed away from this and FIL is on the verge of a diagnosis) and cancer research /cancer kid support (childhood cancers run in the family... It's my payment to karma)
 - christmas/birthdays/holidays - I feel really trapped on this and I'm very open to suggestions. Between the two kids, we're facing 2-3 kid birthdays per month. Dh's family is big on celebrating birthdays, even for adults, and the going gift value is typically about $100 per. Christmas is the same on his side with gifts at about $50/person x 6 adults + 4 kids (not including our own). My side buys for kids only (2 nieces) at about the same value. Mothers dat/fathers day is celebrated for all. Additionally dh's family sends gifts for easter, valentines, back to school, but I've drawn a line and don't reciprocte for those.
 - dining out falls under a couple categories - lunches for me at work ( generally under control... - bring my lunch or am fed at lunch meeting about 80 - 90% of the time), snacks/lunches while dh is out with the kids (most of the budget and generally death by papercut... $12 at subway today, $20 at dominos tomorrow. Some of it he sees as tradition (he gets pizza at lunch on fridays with the kids) but most is bad planning.) Dinners out as a family are probably less than 40/month.
- I'll have to take a look at the donations category. I think it was a pre-tax / post tax donation thing.
- entertainment is the budget for concert tickets, zoo passes, etc. We honestly don't get out all that often, but it seems to be pricy when we do.
 - groceries are my demon. Food prices are definately much higher here, so I don't think the $200-500 would work, but there is absolutely much room to move. We shop at the 'discount' supermarket (superstore for the canadians) and we buy little prepared food. I haven't tracked out groceries in detail, but the bulk of the cost are fruits/vegetables and meat. We're definately not good at keeping up with sales, flyers, etc.
 - most of the travel budget is going into visiting family. We live 14hrs away and we've definately ramped up the visits since out niece was diagnosed and fil starting down the path towards dementia. We generally drive to avoid airfare, but there are usually many dinners out, etc. When we're there.
Miscellaneous is a bit of a black hole and it's included everything from speeding tickets to souvenirs on a last minute, once in a lifetime business trip (australia)

[4alpacas]

I think Mrs. Frugalwoods did a great job giving feedback about your budget. 

However, I thought I would respond to the pizza on Fridays comment you made in response.  My husband and I were in the habit of ordering a pizza on Friday nights.  $20/week wasn't killing us, but I knew we could do better.  Now we have pizza in every Friday night.  We are lazy (SO lazy) and buy a plain cheese frozen pizza ($4-$5).  If we're feeling fancy, we add toppings and bake.  I don't think either of us misses the old way. 

Maybe your family could switch to making their own pizzas on Fridays.  As a kid, I loved to make a mini pizza with all of the toppings that I liked (no sharing with my siblings). 

[cdngenie]

I think Mrs. Frugalwoods did a great job giving feedback about your budget. 

However, I thought I would respond to the pizza on Fridays comment you made in response.  My husband and I were in the habit of ordering a pizza on Friday nights.  $20/week wasn't killing us, but I knew we could do better.  Now we have pizza in every Friday night.  We are lazy (SO lazy) and buy a plain cheese frozen pizza ($4-$5).  If we're feeling fancy, we add toppings and bake.  I don't think either of us misses the old way. 

Maybe your family could switch to making their own pizzas on Fridays.  As a kid, I loved to make a mini pizza with all of the toppings that I liked (no sharing with my siblings).

Just to cladify, the pizza is a lunch tradition... I'd be absolutely willing to make homemade pizza, but I'm not around. (At work)

[DOPOLI]

Look at your rental more carefully. Do you think it's a good idea to have a rental?
It looks like you have $260K in equity, and are making $~$10K per year on it.
A 7% return in the stock market (on your $260K) would be $18K.
Also, are you including maintenance, renter churn, wear and tear in your rental profit? That takes away from your profit when you need a new roof, etc.

[cdngenie]

Look at your rental more carefully. Do you think it's a good idea to have a rental?
It looks like you have $260K in equity, and are making $~$10K per year on it.
A 7% return in the stock market (on your $260K) would be $18K.
Also, are you including maintenance, renter churn, wear and tear in your rental profit? That takes away from your profit when you need a new roof, etc.

That's a really good point and the realistic story (less tainted by me being conservative) is likely an even less rosy return as we likely have more equity sunk in there when considering actual market values. We have definately held on to that property for emotional as well as financial reasons... We're hoping to build on the lot at some point. It's probably worthwhile to look at the real cost of that dream including the opportunity costs.