Author Topic: Case Study: Sole Breadwinner, SAHM, Little Margin  (Read 6980 times)

myllanac

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Case Study: Sole Breadwinner, SAHM, Little Margin
« on: November 20, 2013, 05:11:12 PM »
Updates in red.

I'm hoping you all can inspect my details and provide some insight. In particular I'm hoping this could spawn some discussion for Mustachians-at-heart who just don't have the high earnings that make early retirement possible.

Financial details below. Other information: Married, age 27/26, my wife is a stay-at-home-mom to our 2 year old and 4 month old sons.

Income:
- $40,000 salary, $32,000 net after taxes*, health contributions ($2,106 per year, $81 per biweekly paycheck), and 401k (6% with 3% match - this maximizes the match, anything over isn't matched).
- I am starting a new job in a few weeks that presents much better growth opportunity for me, compared to where I was for the past four years. But, I have looked back on our last five tax returns and our living expenses always seem to inflate to whatever our income is. Obviously going from renting newlyweds finishing school with one car to a two-car family of four with a house and a commute changes the math, but the point is I want to make sure I don't eat any increases in salary with lazy expenditure inflation.
- Approximately 5% bonus, paid in September. We don't "live" on this but use it for once-a-year expenses like our birthdays/Christmas sinking fund, life insurance annual premiums ($400 between us, 25 year term, enough for a 3% withdrawal to replace my income, and enough for me to handle child care if something happened to her), and short-term savings goals: beef up our emergency savings to 3 months of expenses (right now it is about 1.5 months), replacement minivan once our 175k-mile one dies, and finishing putting gutters on our house.
- My wife worked part-time as a daycare/preschool worker until our second son was born in July: that brought in about $5,000. Our older son was in the nursery portion at no cost to us. This was a federal grant-funded program and the agency did not get the contract renewed, plus we had our second son. I'm conservatively not estimating any extra income from her for 2014: finding something that nets anything after child care is too daunting (we don't live near free grandparent babysitting). She will see about summer care and will look for day care center employment next fall when our oldest is starts preschool a few days a week.
- We are on track for about $4,000 in a tax "refund" for 2013; this includes the refundable child tax credit and the earned income tax credit, plus all our withholding back. We don't have an income tax liability and are approaching a negative tax rate when considering payroll taxes. This goes in the savings categories I mentioned above - we don't "live" on it.

Current expenses:

Housing:
- Mortgage: Total payment of $767 a month (principal and interest is $538, PMI $60, homeowners insurance $42, property taxes $142).** The balance is about $117k; the home is worth about $135k. We purchased a year ago with a mortgage of $120k (30 years at 3.5% fixed).
- Utilities: About $215 a month. We are on budget plans for electricity ($60) and gas heat ($70). Water runs about $90 every three months, so I set aside $30 a month. Internet is $36. Trash and recycling is $54 quarterly ($18 per month) - my municipality does not provide trash service, so it's a private company.
- Total Annual (Monthly) Housing: $11,784 ($982)

Auto:
- Insurance: $106 a month. We have just liability*** on the van (it's worth about $1,000), but collision and comprehensive on my car for about $200 more a year ($750 deductible), because it's worth a bit more (about $3,000) and totaling it would wipe us out. $200 a year buys us 11.25 years ($3,000 - $750 / $200) until break-even, and I've had a handful of close calls every year. It's only a matter of time until there is an actual impact.
- Gas: We budget $140 every two weeks. My weekly commute is 200 miles of my 240 mile range, so a fill-up a week at $40 per time. The van's range is 300 miles and we usually can go more than two weeks on one tank at $60 a fill-up.
- Maintenance: We use the "windfall money" from bonus and tax refund to pre-fund a sinking fund for this, about $500. Oil changes and scheduled maintenance. More if we expect tire replacement, but that shouldn't be the case for 2014.
- Registrations: $100 each, once a year. Again, pre-funded with windfall money.
- Total Annual (Monthly) Auto: $5,612 ($468)

Personal:
- $300 every two weeks for food. Groceries, eating out (full restaurants rare due to our kids' ages, but more take-out).
- $50 a week for other things: non-food items at the grocery store (e.g. toilet paper), Kindle books, small buys.
- My iPhone is provided by my employer. My wife is on her parents' family plan and we pay them $180 a year ($15/month).
- Total Annual (Monthly) Personal: $10,400 ($866)

Other:
- About $4,500 a year in charitable giving. After food and shelter, this is our first priority. We are willing to do what it takes to still succeed with the other 90% of our income.

Assets:
- $13,000 in 401k (TRRMX, fully-vested)
- No other non-taxable investments (yet)
- About $18k in home equity
- $3,000 emergency fund (in our checking account that earns 3% monthly)
- Cars are worth $4,000 together

Liabilities:
- Mortgage: $117k balance, 1 year into 30 year fixed at 3.5%

Specific Question(s):
- Obvious areas for optimization: home utilities, driving, and eating. The biggest bang for our buck is eating, followed by driving and finally utilities. I know we eat out (take-out) too much. It's the classic "convenient vs optimal" issue. We just need to buckle down.
- My commute is 20 miles each way. Right now that can't change: we live where we live and I am starting a new job where I'm starting a new job. But, if I can work one day a week from home, that cuts my commuting miles by 20%. My wife and I need to talk about trying to drive the van less. On utilities, I have to do some investigation on how much to spend optimizing versus how much benefit we get (break-even analysis), etc.
- How can we further optimize our expenses? In our situation, even little cuts will feel like a pay raise.
- What are some income options for a stay-at-home-mom of a toddler and an infant? She has maybe an hour-and-a-half window a day where our two year old is napping and the 4-month old might also be napping: but he could also be feeding or needing to be held. Otherwise her attention is held by both kids.
- We use YNAB and I'm thinking that when we come in under-budget on bi-weekly basis that I would move the available balance for that period into a category for "saving/investing" and then get that into my Vanguard account (I'm switching jobs in two weeks and will move my 401k to an IRA S&P Index fund there).
- We are paying $60 a month for PMI and I hate it. We need to get our loan balance to about $100k before I can request it end. Are my next $17k extra dollars best spent paying down the mortgage?

* I have nothing withheld for federal income tax, but do need to withhold some for state income taxes. And then obviously the obligatory FICA/Social Security payroll taxes.
** We purchased a year ago because a) I broke the $40k threshold in a salary raise, b) our son was starting to walk and our apartment was not conducive to that, c) we were paying $600 in rent for a two-bedroom, rented from a friend's parents, which was below market rate (compared to $538 for principal and interest on a mortgage of $120k at an unprecedented 3.5% 30 year fixed rate), and d) my parents wanted to help us with a down payment via my late grandfather's estate.

*** Our state is no-fault and has unlimited lifetime medical benefits. The bare minimum coverage is still $600 a year, $350 of which is the catastrophic claims premium. There is legislative debate to cap the lifetime benefit, but for now this is our reality.
« Last Edit: November 21, 2013, 08:37:06 AM by myllanac »

tat96

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Re: Case Study: Sole Breadwinner, SAHM, Little Margin
« Reply #1 on: November 20, 2013, 05:50:00 PM »
Just my $.02.  $4,500 in charitable giving on a $40,000/yr income with two kids and a SAHM is quite a bit.  I understand there might be some religious/personal reason behind 10%+ total income going to charity but have you thought about donating time instead of $$?  Most charities/churches are more than happy to accept labor (especially skilled) in lieu of donations.  Maybe this is something your wife could look into if she feels so inclined since most organizations are ok with their volunteers bringing children along.  I understand the tax benefits of charitable giving but I would still expect you to get all your tax money back if you are married filing jointly, with two children, and a mortgage. 

tat96

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Re: Case Study: Sole Breadwinner, SAHM, Little Margin
« Reply #2 on: November 20, 2013, 06:05:45 PM »
More $.02.  Just saw that you are paying PMI!!!  Please take a look at charitable giving.  I am literally facing the prospect of giving having to take care of my 80 y/o grandmother right now because she gave so much she can't put food on her table.  Giving is good but not at the expense of your families welfare.  Once you have achieved FI or at least a little more financial cushion you can join Warren Buffet and his buddies by pledging to give all your money away.  At this point though (your age, having a wife and kids) slow down on saving the world!!

swick

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Re: Case Study: Sole Breadwinner, SAHM, Little Margin
« Reply #3 on: November 20, 2013, 06:07:37 PM »
Welcome!

My first thought was the charitable giving as well, and Tat96 basically covered what I was going to say. I work for several non-profits and the single biggest factor in the success of our organizations is volunteer time. I bet there are loads of things you  or your wife could do from home that would help - or opportunities to volunteer as a family or with the kids. It would be a good chance to do good, maybe learn some new skills and create some memories.

If you feel you have to give a certain % of your income, you can calculate what your time would be worth, at a flat rate that feels right to you, or by what the charity would have to pay to have those jobs done and donate in cash the difference at the end of the year.

My other thought would be to use a crockpot as much as possible, it is a great deterrent for getting take-out. There are tons of great frugal recipes here in the Mustachian Recipe Index https://forum.mrmoneymustache.com/off-topic/mustachian-recipes-8326/msg128872/#msg128872

gooki

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Re: Case Study: Sole Breadwinner, SAHM, Little Margin
« Reply #4 on: November 20, 2013, 06:14:53 PM »
Your auto insurance is very high. Shop around.

As for the PMI it's costing you 4.235% (assuming $17,000 to repay before it goes away). Add the 3.5% interest rate of your mortgage an your rate of return would be 7.735% for repaying you mortgage down to below the PMI level. If it was me I'd do it.

Frankies Girl

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Re: Case Study: Sole Breadwinner, SAHM, Little Margin
« Reply #5 on: November 20, 2013, 06:24:10 PM »
Totally agree with tat96 - if your charitable giving is important, how about cutting back on the actual cash, as you're just a short trip away from wiping out everything, I can't believe that a religion would expect you to neglect your family and putting your own well-being in jeopardy. What doing some actual volunteer work instead? You're living way very close to the bone as it is.

I'd also bring up the house that you have a mortgage on that is over 3 times your salary. The general recommendation is no more than 2.5 times your salary, and if you're trying to save money, it should be less than that. That mortgage is a BIG money sink, and depending on the market in your area, you should look into finding a less expensive house/apartment MUCH nearer your work and sell that house. And finding a 2 bedroom apartment would take out several of those utilities like trash and home maintenance costs.

Collision and comprehensive on a car only worth 3K is a waste of money. They will total it for a fender bender even, and you'll not get the full amount that you think it is worth anyway. You have a back up vehicle, and in the event that you lost the use of one car, you could make it work as many, many on-car families out there survive just fine. If you moved closer to your job you could walk or ride a bike (just sayin') and get rid of one car and the expenses associated with it.
« Last Edit: November 20, 2013, 06:41:57 PM by Frankies Girl »

Dee18

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Re: Case Study: Sole Breadwinner, SAHM, Little Margin
« Reply #6 on: November 20, 2013, 06:40:34 PM »
Not buying takeout is a transition, but once you make that change you will find that cooking at home is just as efficient as picking up food.  Perhaps pledge no take-out for 30 days, just to get on the bandwagon.  Also, now is the time your two year old is developing eating habits.  It is much easier to not introduce a child to McDonalds than to take it away later.  I would also suggest you plan for the holidays to not buy any new toys for the children.  The younger one obviously won't even know and the older one will be just as happy with used items in good condition--especially something to ride on.  Start the traditions you want now.  One of my co-wrokers said the big deal for her young children on their birthdays is they get to eat cake for breakfast--just that one day a year.  Anything you make into a tradition becomes special, whether or not it costs money. 

The other comment I may as well make (or someone else will) is when you replace the van, you don't need another van.

Given your wife's experience, when the children are a little older she might be able to care for a couple elementary children after school, or some other part time child care.  But for now I imagine she needs the break if both children nap at the same time!

Fuyu

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Re: Case Study: Sole Breadwinner, SAHM, Little Margin
« Reply #7 on: November 20, 2013, 06:42:03 PM »
Maybe change your withholding so your tax refund is less and your paychecks are more? If you didn't have a tax liability in previous year or current year, you can ask your employer to exempt you from withholding.

http://www.irs.gov/publications/p505/ch01.html#en_US_2013_publink1000194441
« Last Edit: November 20, 2013, 06:43:59 PM by Fuyu »

ShortInSeattle

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Re: Case Study: Sole Breadwinner, SAHM, Little Margin
« Reply #8 on: November 20, 2013, 06:42:55 PM »
It's awesome that you are so generous. I agree that your giving is high. I might drop it to $1500 and use the rest to build up that emergency fund first.

As you know less takeout will help.

Does your wife like to write? She could self publish a book or look for paid writing gigs to supplement, if she is game. Or check out the book $100 startup. Or sell cute stuff on Etsy... Or do a couple babysittimg gigs. I imagine being an entrepreneur would be tough with two little ones.

Over time the kids will be more independent and you may see salary increases. If you can hang in there... will it get easier?

Kudos to you for already doing well with what you have. :)


StarryC

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Re: Case Study: Sole Breadwinner, SAHM, Little Margin
« Reply #9 on: November 20, 2013, 07:34:01 PM »
$4,500 is MORE than a tithe.  And, there is some dispute about tithing before/after tax, but it seems like tithing $3,200 would be plenty.

There are some things you can do to reduce your utilities for FREE: Turn down the heat/ Up the AC, turn off lights, unplug things, lower the water heater temp, etc.  For $50 you can probably be sure your house is well insulated with a tube of caulk and some window plastic. My local utility also provided some free and $1 fluorescents.  Contact your utility provider and maybe they can do an energy audit.

Can you learn to do some of your own car maintenance?  Oil changes, air filters at least!

Can your wife baby swap with someone?  So she has one morning a week kid free, and another morning she has all 4 kids?  In that time maybe she could do some extreme couponing, freezer cooking, phone calls to service providers to lower prices, etc?  I think it's pretty crazy to expect her to make much money during nap time if she is doing all the cooking, cleaning, shopping, and child care.  But, perhaps with some work around she can do some optimizing to reduce expenses. 


abhe8

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Re: Case Study: Sole Breadwinner, SAHM, Little Margin
« Reply #10 on: November 20, 2013, 09:35:49 PM »
i think your spending is pretty reasonable. i just think your income is low. i would give your wife another few months and then have her start an at-home daycare. my good friend is licensed for 10 children at a time (in addition to her own 5 children, including her newborn). so even though it can be tough at times (says the mama of 4 kids 5 and under!) it can be done, can be done well and can really help the family financial situation.

i agree with dropping the full coverage auto insurance. like the pp said, you do have a back up vehicle and your wife/kids could spend days at home. (again, btdt, it can work.)

$200 bucks a month on household stuff seems like a lot. do you all use cloth diapers? if not, check into it. you can save a BUNCH easily that way. also, do you coupon? you can get all the basics (toilet paper, tooth paste, soap, etc) for free or better then free with a little patience adn savy.

car insurance seems way high to me. our 2 SUVs are worth a lot more then yours and our ins is 55 a month. its worth the time to make a few phone calls and shop around.

use the library!!! ours even has free kindle "borrows." and awesome interlibrary loan. dont' buy books!!!!!!

PMI is throwing money down the drain. your hair is on fire!! get that thing gone asap. even with just the 600 food + 200 household, i bet you can come up with 200 savings a month, if you tighten things up. i agree with no eating out (although with a brand new baby, we did eat out more then other times. but at 4 months old, its time to get back into the swing of things.)

how much of the 4k tax refund and 2k bonus are you actually saving? i hate to say it, but gifts and life insurance premiums are "living" money, not saving money. even though you only spend them once a year. what are the life insurance premiums? i'd shop around of they are more then $30 a month. give  yourself a monthly budget for all gifts. if christmas is 600, put in 50 a month. if bdys are every month, give yourself 50 or so a month for those as well. that way you can really keep track of how much you have saved for the new van.

trash and recycling: how much trash do you have? with some changes to our consumption habits, we are down to about 1/2 to 1 big black trash bag per week. for a family of 6 (with maybe 4-5 disposable diapers per day). compost all the food waste. recycle all the paper, plastic and metal. take the cans to scrap metal recycling. consider ditching the trash and recycling from the private company. find out where the dump is and take the trash once a week. we take recycling about once every 2 weeks.

no phone bill, land line or cell??

look for free/easy ways to save a few bucks:
- turn down the heat and ac. get sweaters, socks and tank tops to wear as needed
- turn hot water heater down. space out showers, dishes and laundry
- hang up the laundry to dry. all of it.
- turn off the lights anytime they are not in use
- sell your stuff on craigs list and ebay. if your wife is so inclined, she can make a pretty penny buying and selling on craigslist as well. around here, people are GIVING away big ticket baby items. i just bought one of those saucers for $10. they go for $30-$50 on craigslist all the time. assuming i'm not killing the deal in gas money, thats a quick $20 - $40 right there. she can make it a game, of sorts, to see if she can earn the grocery money every month this way.

it is true you would have more money to save and/or spend if you did not give to charity. but i'm not going to suggest it. obviously you are making a very intentional decision to give and I respect that.

I think you have some good room for improvement. max the 401 k match. do you  have to give 6percent to get the 3pecent match? then see how fast you can get that pmi gone. and get creative with income increasing opportunities.

myllanac

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Re: Case Study: Sole Breadwinner, SAHM, Little Margin
« Reply #11 on: November 21, 2013, 08:44:15 AM »
Thanks to all for the replies so far. I have updated my original post in response to some of these. Also (in no particular order):
- We will definitely check out more crock pot recipes. When we make white chicken chili it is dinner and lunch for both of us, so quite cost-effective and easy to make.
- As I updated in my post, she is going to look for a summer day care opportunity in our home, and/or something in a center in the fall when our older son starts preschool a few days a week (we are celebrating his 2-year birthday next week, it's wild for me to imagine him in preschool already).
- My earning potential is in a better spot now. I was limited where I was, but my new employer is a younger company and I have a chance to make a name for myself compared to a large company.
- I never though about PMI as effectively additional interest. Effectively our mortgage rate is over 7%. We'll definitely prioritize paying down the mortgage balance to get rid of PMI, then lumping that $60 a month as an extra payment every month (we won't miss it because we're already paying it).
- After PMI is off and we're truly at 3.5% interest, is $1 better spent paying down the balance (interest savings) or taxable investments? I wouldn't take a loan with my house as collateral, even at 3.5%, in order to invest that money in the stock market. I would rather own my home free and clear. It's a risk thing.

BoulderTC

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Re: Case Study: Sole Breadwinner, SAHM, Little Margin
« Reply #12 on: November 21, 2013, 12:42:20 PM »
Updates in red.

Other:
- About $4,500 a year in charitable giving. After food and shelter, this is our first priority. We are willing to do what it takes to still succeed with the other 90% of our income.


Just want to affirm that you're not the only one out there that has set this standard and sticks to it. My husband and I feel the same way you do (granted, we have two salaries) that we are willing to succeed on the remaining 90% of our income after giving. This is one of the main reasons I have never posted a case study - I anticipated all the comments you got on this. Good on you for sticking with it! :)

aj_yooper

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Re: Case Study: Sole Breadwinner, SAHM, Little Margin
« Reply #13 on: November 21, 2013, 12:56:30 PM »
If you have the option of a Roth 401k, I would do that as you are presently in the 15% taxable bracket.  I would also optimize your withholding to match your actual taxable amount for state and federal.  Eliminating the PMI would be very helpful.  Crockpots rule.  Increase your emergency fund.

Catbert

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Re: Case Study: Sole Breadwinner, SAHM, Little Margin
« Reply #14 on: November 21, 2013, 01:38:29 PM »
Would you be willing to forgo the tithe for a year or two in order to put that money toward getting rid of PMI?  Then you could double the tithe for the next year or two to make up for it. (Yes, I know a year or two won't totally pay off the PMI but you will be adding even more from other sources, right?)

bobsmiley

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Re: Case Study: Sole Breadwinner, SAHM, Little Margin
« Reply #15 on: November 21, 2013, 03:37:14 PM »
i think you cant get rid of pmi before 5 years with your loan seeing as you put down less then 20% with what looks like a fha loan.