Case study: self employed, recently married, $101K in student loans

[allspiritseve]

Hello all,

I would really appreciate some advice on marking our finances more mustachian. We have about $101K in student loans. Together we make about $5,700/month. I'm self employed, and make $50/hour doing web development. I've got contracts that provide about 20 hours a week right now, but that should increase soon. My wife is a PhD student, and makes $26.5K/year. We rent, and have one car (2002 Saturn SL1, paid off).

Here goes...

Savings:
Emergency fund: $1,000
Roth IRA: $3600 ($2,750 mine, $850 wife's). Not actively contributing.
Costa Rica fund: $1K (wife has required internship for PhD, so we're doing it in Costa Rica. Trying so save up $4k by May. Wife applied for a grant so we may not need this, but we want to go even if we don't get the grant.

Debt:
Credit card $1500 @ 8.99% (remaining after wedding/honeymoon in June):
Student Loans: $101K ($14K @ 7.9%, 60K @ 6.8%, 11K @ 6.5%/deferred, 16K @ 5%)

Income after taxes: $5,700/month ($3,700 mine, $2,000 wife's)

February expenses: $5271.64

Cash expenses: $1970.56
Rent: $1,050 (I can walk to work, and my wife can ride the bus though I usually drive her to/from work every day).
Student loans: $750 (minimum payments, wife's are deferred until she graduates in ~3 years)
Health insurance: $50.56 (we pay extra for a better dental plan. I might lower this when we have the opportunity)
Spanish lessons: $120/month

Spending: $1197.35
Entertainment: $37.66 (movies, netflix)
Eating out: $595.37 (yikes)
Coffee/tea: $96.67 (also yikes... mostly me)
Art Projects: $393.65
Groupon for ski passes near my parent's house: $74

Work/education: $383.52
Books: $175.05
Business: $200 (mostly hosting, yearly payment)
Office supplies: $8.47

Car: $642.44
Repairs: $423.09 (loose left tie rod, leaking transmission fluid)
New keys for car: $98.38 (key/remote unlock for wife plus a spare key)
Gas: $68.97
Insurance: $52

Fixed expenses: $240.10
Cellphones: $87.11
Internet: $29.99
Electric/Gas: $123

Variable/irregular expenses: $837.67
Parking: $16.75
Groceries: $383.14
Health: $56.85
Household supplies: $157.98 (we redecorated and bought some furniture on craigslist)
Pets: $82.32 (water fountain for cats, play pen for chinchillas)
Travel: $7.95
Vet: $43.60
Water: $89.08 ($60/3 months for tap, $20/5 months for spring water)

[Danielle]

Don't lower your health insurance!  Take care of yourselves.  If it's worth it to stay with the dental plan for the added security, then keep it.  I would instead try to cut back on car costs, since you said you can both easily access work by other transportation.  That, and I think you know where you can cut out costs with eating out and coffee/tea :)

[Nancy]

First of all, congratulations on deciding to make your finances more mustachian! Clearly, you are keeping track of expenses, which will make fine-tuning your finances easier. I think it's important that people cut back where they can, but make room for expenses that are really important to them. So we'll make our suggestions, but ultimately, you'll have to decide what is right for you.

Right away, I think you need to destroy your credit card balance. So how will you find the money?

Areas to cut back:
Spanish lessons: There are numerous sources to learn languages on the Internet (check out the Fluent in 3 Months blog) and at the library. Maybe, if you want to practice with a native Spanish speaker, see if there is a Meet Up group near you or, again, check your library.
Eating Out: you said it yourself, this can easily be cut back. Try starting with a no eating out at lunch mandate.
Coffee/tea: Try buying some really nice coffee and making it at home yourself. I used to frequent the coffee shop just to get away from my desk. Now, I just take a walk.
Books: Unless these are for your wife's classes, I don't think there is a need to buy books. Again, try the library.
Art Projects: If this is something important to you/your wife, then keep the budget line, but try reducing it to $100/month (as I did with my sewing/knitting budget)
Car: Start walking/taking the bus, and you'll save on gas and repairs.

I think you should set a goal of how much you'd like to reduce your debt this year. Then work backwards and find out how much you'll need to cut out of the budget, and then find the places to cut. I also think you should get serious about your retirement savings. If you can get a water fountain for your cat, you can max out your Roth IRA. I think you can easily make some mustachian changes. Good luck!

[twinge]

Congratulations on your marriage and kudos for trying to get a handle on your expenses via tracking.

You're fortunate in that you have a lot of potential "fat" to cut out of your budget to get the debt payment down--even given that your salaries are currently fairly low relative to what you are likely to earn in the future.  That said, I think it's pretty essential to get a handle on them now.  It's especially good to do it when you're recently setting up a new household because you are starting lifetime patterns.  For reference, my family (2 adults, 2 kids) live on less than you are spending in a month--and we have a 2000 mortgage and pay 1000 in daycare and live in a high cost area and we don't feel particularly spartan in our lifestyle.

Here's how I would start, if I were in your situation:

1. I would also ditch the 1000k emergency fund and 500 of your Costa Rica fund and pay off the credit card at once.  And then don't add to it again except for an emergency. I doubt you're earning 9% on that money, and if you have an emergency you can always put it back on the credit card. You'll still have 500 in the Costa Rica fund for emergencies too.

2.  I would suggest going cold turkey on a lot of things until your Costa Rica trip to save up the money for an emergency fund and the trip--don't eat out at all, brew your own coffee, don't indulge your pets, make cheaper art,  etc.  Make studying Spanish, researching Costa Rica etc. your "fun" for March and April and see how much money you can save.  It's just two months and your reward will be an amazing trip.

Good luck!

[AJ]

I wouldn't count business expenses (hosting, etc.) in your household budget. IMHO, you should keep a separate budget for your business and pay yourself a salary from it. That way, you can also set aside your taxes for that portion of your income.

All of your expenses, if looked at individually, are fine, but when you add them up I think your spending is kind of high for your income. For example, I don't think $120 for Spanish lessons is necessarily bad, but you also have $400 in art supplies, $600 in eating out, almost $100 for pet non-essentials, etc. It is really going to be up to you to decide which of these is most important.

You might think about going to a cash allowance for a few months. Decide how much you want to spend on incidentals and non-necessities and keep it in cash. If coffee is important to you and art supplies to her, great. You're each free to spend your funds on whatever is important without blowing the budget. If you want to pool your funds and buy your chinchillas tuxedos, great, as long as you both cut back somewhere else :)

Also, how intense do you want to be with regard to debt payment? If you're feeling really gung-ho, maybe you could get a part-time side job until you have enough web development work to keep you busy full time. Obviously, you don't want to take on so much that your career-building suffers, but 10-15 hours a week at a job that doesn't require a lot of brain-energy could help you reach your goals. Or, maybe a newspaper route? In my area, these are done with cars and pay $600-800 a month. It really sucks getting up that early every morning, but it also sucks being in 6-figure debt, so it really just depends on your goals and desired timeline.

[kolorado]

Prioritize and attack. You grouped your items seemingly randomly, without any structure of importance. This is crucial when controlling your money!
Here's how I think your expenses should go.

Fixed and Necessary Expenditures:

Rent: $1,050
Student loans: $750 (minimum payments)
Health insurance: $50.56
Insurance: $52
= $1902

Necessary but somewhat flexible:
Business: $200
Gas: $68.97
Cellphones: $87.11
Internet: $29.99
Electric/Gas: $123
Parking: $16.75
Groceries: $383.14
Health: $56.85
Household supplies: $157.98
Pets: $82.32
Travel: $7.95
Vet: $43.60
Water: $89.08
Office supplies: $8.47
= $1355.21

Optional expenses:
Spanish lessons: $120/month
Entertainment: $37.66
Eating out: $595.37
Coffee/tea: $96.67
Art Projects: $393.65
Groupon for ski passes near my parent's house: $74
Books: $175.05
= $1492.40
Total monthly expenses: $4749.69

Unexpected "emergency" expenditures:
Repairs: $423.09
New keys for car: $98.38

Even at your level of spending, it looks like you should be socking away $1K a month into your savings account. February was a bit different in that you needed most of that $1K to cover repairs to the car. Does something like that seem to come up every month preventing you from saving the money instead? You should probably get a little more disciplined with tracking over longer periods and create a "budget".  My "budget" doesn't so much tell me what I can spend so much as it tells me what I will probably spend based on past use and record keeping.
Without doing anything differently and assuming you don't have another major "emergency" expense, you should be able to save $1K a month for March, April and May, which will almost be the $4K you want to save. But why be as wimpy as that?
My immediate thoughts here are that you should drastically cut or eliminate everything from the Optional category. Then you would go up to the Flexible category and trim there by freezing spending, using less, shopping sales and changing plans if possible.
I second the suggestion to drain your savings and pay off the credit card. At your income level, you should be able to easily save for your trip by cutting the optional stuff.
You will need to add an Other category to what is listed above for things like clothes, gifts and donations that you didn't list for money spent last month. I'm going to assume you will spend on those categories this year so you should be sure you have enough wiggle room in your repayment and savings plans to allow for it.
I don't think it's unrealistic for you to have a savings goal of $2K a month.

[allspiritseve]

Thank you everyone for the excellent advice! This was one of our more spendy months, but I agree there's a lot of fat we could trim.

[Daffy]

Eating out less is definitely an easy way to save money, based on what you've shown us.

I have a question for you. How do you have health insurance for two people for only $50? I've never seen any plan that cheap!

[allspiritseve]

@Daffy my wife's a PhD student, her university gives her (and me!) a great healthcare plan.