Author Topic: Case Study - What to do with Severance 'Windfall' and the next 6 months  (Read 4825 times)

asiljoy

  • Bristles
  • ***
  • Posts: 406
Iím 28 with an MBA and work in the IT field, and my husband is 34, and works in food service, and we've got an 18 month old nugget that we're gaga about.

Iím a recent convert to the Mustachian way, having found the blog while trying to figure out what to do after being laid off from a retailer thatís known for their red and khaki (Last day was actually 5/15 becauseÖ I donít know, I havenít actually worked there since mid-March, but I was paid like I was...). Well, the severance package turned into a windfall, for now, after I landed a 6 month contract-to-hire job in April that goes through October. That being said, Iím not sure to do next and I feel like my judgment is being clouded by bitterness toward the red/khaki, terror at the idea of not being able to provide for my family, and just being tired from all the change. But it feels like Iím stuck in a pile of mediocrity and I just canít get a handle on things.

So help please! What should our next steps be? Iíve never worked on a contract before and am leaning to just socking everything in a savings account until I find permanent work, but that also seems like a waste.

Gross Salary/Wages: 60/hour, max 9600/month for 6 months if I work without vacation/time off; No chance for overtime, but may turn into a fulltime job with benefits in October. This is a significant bump over what I had been making.

Pre-tax deductions: None, the contract offers no benefits and it isnít clear what this will cost if it converts into a full time job

Other Ordinary Income: My husband has worked for the red/khaki for years, currently is part-time while he stays home to take care of our 18 month old. He brings in around 300-400 a month working 12-18 hours a week after taxes/401k contributions(these are matched up to 5%).

Taxes: Based on my first paychecks....
Federal: 771 per month
State: 364 per month
FICA:  592 per month
Medicare: 139 per month

Current expenses:
Mortgage: 934
Escrow: 263
PMI: 72
HOA Dues: 225
Student Loans: 445 (6 different federal loans on graduated repayment plans. We switched to that payment plan so we could pay off some CC debt that accrued while I was on maternity leave for the little one/hospital costs were more than I had budgeted for and had planned on switching back or refi-ing earlier this year; that plan got lost in the recent shuffle)
Internet: 68 (Need for work; I work from home a couple days a week)
Phones: 60 ish (We use Ting so this goes up/down. My husband barely uses his phone, so this is all me)
Home/Car Insurance: 100/month. (Both cars are beaters and its condo insurance; this gets paid out twice a year and I usually shop around before renewing)
Term Life Insurance: 31/month (My husbandís, he bought it before we were married and I donít really know much about it)
Netflix: 7.99
Hulu: 7.99
Gas for the House: Between 30-120 depending on time of the year
Electric: Between 40-90 depending on time of the year (Gas bill and electric bill are more or less inverses of each other, when one goes up, the other goes down, so I just budget a hundred each month)
Water/Garbage: 40
Charity: 60
          The below are all a best guess based on a yearís data in Mint, but we really havenít taken budgeting seriously up to this point
Groceries: 700 (Ouch, I know. The best I can give is that this would also include all house hold supplies. Weíre working on this now. Currently weíre at 270 for the most recent month)
Gas: 200
Pet Food/Care: 100
Baby stuff: 100
Gifts: 200 (We have a large family that is constantly getting married/having babies/birthdaysÖ just makes sense to budget for this now)
Restaurants: 400 (This physically pained me while totaling up my charges in mint, I drank so much coffee/at out so much while at workÖ)
Healthcare: 120 for prescriptions, 260 on premiums for HSA plan through October at which point the red/khaki stop picking up their half of the COBRA payments
Retirement: None currentlyÖ
Misc: Usually I spent a chunk each month on clothes between dry cleaning and buying new to fit in at work (no longer needed, new work is casual/now I realize this is stupid) and we had been members at an expensive gym (justifying it on the idea that my kid loved their daycare and my husband and Iíd use that as date-timeÖ), and there were a bunch of other random expenses I canít explain. Weíve recently picked up YNAB in an attempt to get that shit under control.
(Total Expenses & Taxes = 4344+1866 + Misc-ish = 6210 + Misc-ish)

Assets: Current snapshot:
Townhome worth 171,000 per Zillow (grain of salt, I know)
2 cars paid off (2008 Chevy HHR and a 2002 Audi A4)
12,263 in an emergency fund, stashed in a Capital One 360 savings account (roughly 3 months of expenses should I lose my job)
1,499 in a Ďoh fuck I forgot about thatí fund tied to our checking at our credit union
1,670 in checking at our credit union
975 in HSA
24,066 in a Primerica Roth IRA (This is my husbands, he opened it before we met and we havenít contributed since we got jobs with 401ks)
15,529 in my husbandís 401k
18,234 in my 401k
18,085 in my Roth through Sharebuilder (itís currently invested in a mixed of stocks and funds using the method described in ďInvesting without a Silver SpoonĒ; itís currently up over the last couple years, but reading through the blogs here Iím not sure this a good long-term strategy)
2,389 in my IRA through Sharebuilder Ö I legit donít remember where this money came from or why we have it in there
3,000 ish in a mutal fund my in-laws set up for my husband when he was 6Ö (weíre trying to get it moved into a proper investment account, but honestly itís been a low priority; last I checked it's breaking even)
A good credit score; 816 per Mint.
(Total Assets = 263,010)

Liabilities: Townhome: 159,000. Per Zillow, itís worth 171 and a neighbor recently sold for 185; weíre 6 years into a 30 year FHA mortgage with 4.75% interest.
My 6 graduate student loans totalling 48,701 @ 6.55%. 17 months into 10 year payment cycle (I know, but to be fair, the job I got after my MBA doubled my previous salary)
My husbandís loan at 4,928 and is currently in deferment as heís still in school, but interest is accruing at a rate of 6.8%
No credit card debt, but we have a 10,000 line at 7.8%  with our credit union, 13,000 line with Amex that we get cash back on, and a red/khaki card that we use to get 5% off of groceries, but everything is going through checking until we get a handle on why we managed to accrue so much debt over the last 2 years (recently paid off 6,562)
(Total Liabilities = 212,629)

Specific Question(s):
My calculations right now put us at having around 2,000 dollars a month (conservatively, I feel like Iím missing something large/I know that any days off will have to be paid for out of my pocket) depending on how many hours I get left over to either save, put in an HSA, invest in retirement, or pay down debt for the next 6 months at which point Iíll either be hired here to do a job thatís ok (Low stress, pays well, allows for that mythical work/life balance thing, is decent experience, and the people are nice, but the work isnít exactly stimulating) or Iíll back on the market(Iím currently being recruited back by the red/khaki but not gonna lie, it was brutal to be reminded I was just a number after working as hard/long as I had been and I'm currently employed by a consulting firm that'd help place me). Weíll also have a severance check coming from the red/khaki of around 11,000 after taxes come the beginning of June.

So what should we do/Where should we start?
1)   Weíve already taken the extra paychecks I was getting in April (from being employed by red/khaki while not actually working there) and put that towards paying off the CC debt from maternity leave/the vacation we were on when I got laid off (really did not think I was getting laid offÖ), so thatís where all that extra money went.
2)   I feel like Iím not getting enough taxes taken out of my paychecks now that Iím not contributing to HSA/401k; I currently have 3 allowances
3)   I know I probably could refinance our student loans to save money at Sofi, but is that a good idea when my employment is in flux? Will they even look at me? When I checked, their fixed rate 3.85%, 5 year loan had something like a 800/month payment if I refinanced
4)   I know refinancing our mortgage to get rid of the PMI/get a lower interest rate is also a good idea, but my back of the envelope math puts us at having to bring 10-15 thousand to the table to cover closing costs and to get us down to that 20% mark depending on how our home is actually valued, which is just hard to swallow when my employment is in flux and would stretch us thin. Is this something I should still consider?
5)   Do I aggressively start paying down the student loans so that we can have fewer monthly bills in case I do end up having a gap in work? Or just hoard money in a savings account? Iíve never been a fan of having a massive emergency fund, but maybe that makes sense now?
6)   I had planned on putting enough money, 4200, to cover our health insuranceís deductible in the HSA, but we no longer get to put money in there pre-tax, so thereís no real advantage right?
7)   Does the general advice usually given to max out Rothís still make sense for us? Iím already in the process of rolling over my 401k to a Vanguard IRA, but thought it made more sense for any retirement money to be put into a Roth?
8)   My husbandís income weíve been putting towards our Ďoh fuckí fund to cover things like home maintenance, car fixes, etc stuff that comes up (like our washer just died, so we bought a washer/dryer combo for 600 from a scratch/dent store and that came out of the oh fuck fund; the working dryer was sold on craigslist for 150). Should this be redirected at debt repayment??
8a.   My husband isnít a super huge fan of his job and I would really enjoy having him home in the evenings (heís currently at work/school 3 nights a week and Saturdays). Is it a good idea to cut that life line right now? Heís able to scale up to full-time at any time (which would probably include a raise since heíd probably go back to management), they match 5% for his 401k, and we get 10% off at red/khaki (a perk that becomes permanent in 3 years?)

Sorry for the long post! Any help/thoughts/guidance would be appreciated.

JLee

  • Walrus Stache
  • *******
  • Posts: 5557
Taking your $9600/mo and subtracting taxes and everything you listed monthly, there's still over $3000 left. Where's that going?

Maxing a (traditional) 401k will save you ~$4500 on federal tax. I'd do that asap.
« Last Edit: May 21, 2015, 04:45:44 PM by JLee »

MDM

  • Walrus Stache
  • *******
  • Posts: 9490
So what should we do/Where should we start?
1)   That seems a good thing to have done.
2)   Probably true.  Check one or more of the following to evaluate 2015 projections:
http://www.paycheckcity.com/calculator/salary/ or
http://www.bankrate.com/calculators/tax-planning/1040-form-tax-calculator.aspx or
https://turbotax.intuit.com/tax-tools/calculators/taxcaster/ or
the reader case study spreadsheet.
3)   What does it hurt to check?  An interest rate reduction would be good.
4)   Agree with waiting a few months to evaluate employment stability before committing a large lump sum.
5)   Agree with waiting a few months to evaluate employment stability before aggressive pay down.
6)   If you still have a HDHP then you can still contribute tax free to the HSA - you just have to wait until next year to deduct what isn't done via payroll deduction.  See line 25 of form 1040. 
7)   The general advice for folks in the 25% marginal bracket (e.g., you) is to use Traditional, not Roth.
8)   Agree with waiting a few months to evaluate employment stability before aggressive pay down.
8a.   Work/life balance question...too many intangibles to hazard a guess via internet. ;)

Good luck!

lhamo

  • Walrus Stache
  • *******
  • Posts: 9616
  • Location: Seattle
I would:

1)  Pay off his student loan.  You can do this easily with the old mutual fund money (which gives you a good reason to wrap up that loose end) and the next extra bit you will get from working this month.

2) Check with Sofi about refinancing the rest of the student loans.  As the previous poster stated, it doesn't hurt to ask.

3)  See what the allocation/fees are on the Primerica/Sharebuilder accounts and if they suck (as you probably will find they do), get those accounts rolled over to Vanguard or another low-cost option ASAP.  jhlcollins' investing series has great advice on simple allocations for the Mustachian mindest (low fee, long term, set it and forget it approach).

4)  Start putting some of your monthly excess into your Roths.  You can withdraw your contributions at any time, so this can serve as a backup emergency fund.  There may be tax benefits to a Traditional IRA, but I would wait until your employment situation stabilizes before putting money there, just because you can't access it as easily as with a Roth.

5)  I'd wait on the house until the longer term job situation is clearer.  Once your DH finishes school/goes back to working full time you guys will be able to pay that mortgage off very quickly, anyway. 

One big issue that you may not want to discuss -- are you planning more kids?  Suggest if you are you schedule that around your DH's school/work development trajectory as much as possible.  Though it sounds like you being in IT and him being in food service, you are likely to always be the higher earner. 


asiljoy

  • Bristles
  • ***
  • Posts: 406
@JLee: Yep, but that is 9600 is if I manage to work the full month without any vacation/timeoff. For example, I don't get paid for Memorial day, a holiday for the full-time workers at my company, so now my wage for May is down to 9120... I get that I'm being overly conservative, but for now I'm ok with saying I only have 2,000 extra to work with each month and I'm trying to figure out the best place to put that.

@MDM@lhamo: Checked with Sofi and I was 'preapproved' for a 45,000 dollar loan, 5 year loan at fixed rate of 4.375% for a payment of 836/month, 5 yr variable at 3.065% for a payment of 809/month, or 10 yr variable at 3.44% for a payment of 443/month. I'm tempted to go with the 10 year variable until I get a more stable job and save the difference in case the rate goes up drastically. Or is that crazy talk?

@MDM: Thank you for the heads up! It is a HDHP, so I think I'll follow through on my previous plan of putting enough in there to cover the deductible and some known expenses (I have asthma and I know my inhaler will cost between 120-150 a month)

@lhamo: We were thinking of having another kid soon-ish before I got laid off. The thought process was that my husband would be able to finish his degree while doing the stay at home dad thing (which he loves or this wouldn't be an option) and then go back to work full time when number 2 hit preschool. He doesn't necessarily NEED his degree for his industry, but the ole' red/khaki mandate that you need a 4/year in order to get promoted past a certain point. My husband's reviews go really well and he has a pretty strong network within the company that had advised him that this was a good idea and would be good for his career. That being said, he's about half way done and has soured on the company; I promise I haven't tried to be debbie downer in this area, but me being laid off by them did not help. He's still going to a state school and we plan on paying out of pocket/his parents had money set aside that they contribute from(we don't count on this money, but its nice when/if it comes); the loan is from a previous attempt at a for-profit business school that smelled funny. The whole kid plan has obviously been put on hold for now, but we've toyed with the idea of saving up for the med bills/etc and just doing it. But. Obviously, not the best idea. 

MDM

  • Walrus Stache
  • *******
  • Posts: 9490
@MDM@lhamo: Checked with Sofi and I was 'preapproved' for a 45,000 dollar loan, 5 year loan at fixed rate of 4.375% for a payment of 836/month, 5 yr variable at 3.065% for a payment of 809/month, or 10 yr variable at 3.44% for a payment of 443/month. I'm tempted to go with the 10 year variable until I get a more stable job and save the difference in case the rate goes up drastically. Or is that crazy talk?
Appears very sane and thoughtful talk.  With any luck, employment will solidify all this will be a hazy memory....

lhamo

  • Walrus Stache
  • *******
  • Posts: 9616
  • Location: Seattle
What are the terms of the variable loan -- how often can they raise the rate, and is there a maximum cap?  And do you have the option of refinancing them again once your employment situation stabilizes?  If all of that looks good, then going for the lower payment is probably sensible, as the other two options would lock you into paying double what you are paying now (but for a much shorter term).  Since the payment will be close to what you are paying now, but the interest rate around half what you are currently paying, even a little bit extra every month going toward the principal is going to knock that down quickly.   If you can be disciplined enough to pay the payment you would have had with the 5 year fixed, while taking advantage of the lower interest rate, you will actually be done with it in less than five years.  But you have the option of not paying extra if/when things get tight.

Thanks for the explanation of the kid plan.  If I were you I would wait until you know if you are taking the new permanent contract, and then wait out any holding period until you are fully covered for maternity benefits.  Our kids are about 3.5 years apart, and it has been a good thing for us.  If nothing else, helps spread out the college tuition burden a bit!  THough that can be a disadvantage, I guess (two in college simultaneously may mean more financial aid). 

And I would have an honest talk with your family about the gift thing.   You guys are basically on one income, and a temporary contract.  Your family doesn't need $200/month in gifts.  If you can put that toward your student loans instead, you'll be out of those in no time. 

You should think about getting some term life insurance for yourself.  Your DH and child would get survivor benefits from social security if anything happened to you, but that wouldn't make up for the loss of your income.  And you should definitely keep your DH's policy -- you'd need to pay for childcare, etc. if anything happened to him. 

Why do you need both Netflix and Hulu?  Pick one.  Or ditch them both and use the library, or make dates with friends to watch favorite shows (make those a potluck night and it will also help you keep your dining out/entertainment budget in check).

Prescriptions seem high -- are there any generic/off license alternatives you can switch to to bring this monthly cost down?  And what will the health insurance bill be once red/khaki stops contributing?

Good job on cutting back on groceries -- if you can keep it at $300-400/month for the three of you and throw that extra at the student loans, that would be awesome.  That alone would get you to a five year or less payoff on the 10 year refinance option.


asiljoy

  • Bristles
  • ***
  • Posts: 406
What are the terms of the variable loan -- how often can they raise the rate, and is there a maximum cap?  And do you have the option of refinancing them again once your employment situation stabilizes?  If all of that looks good, then going for the lower payment is probably sensible, as the other two options would lock you into paying double what you are paying now (but for a much shorter term).  Since the payment will be close to what you are paying now, but the interest rate around half what you are currently paying, even a little bit extra every month going toward the principal is going to knock that down quickly.   If you can be disciplined enough to pay the payment you would have had with the 5 year fixed, while taking advantage of the lower interest rate, you will actually be done with it in less than five years.  But you have the option of not paying extra if/when things get tight.
I have no idea what the terms are; good call and I'll do more research.

Thanks for the explanation of the kid plan.  If I were you I would wait until you know if you are taking the new permanent contract, and then wait out any holding period until you are fully covered for maternity benefits.  Our kids are about 3.5 years apart, and it has been a good thing for us.  If nothing else, helps spread out the college tuition burden a bit!  THough that can be a disadvantage, I guess (two in college simultaneously may mean more financial aid). 
Yeah, I mean, it's more about me changing my mindset than it being a truly bad thing. My brother and I were 4 years apart. We weren't super close as kids, but it more or less worked out as you described. My parents were very generous with us and had plenty of time to dedicate to both of us.

And I would have an honest talk with your family about the gift thing.   You guys are basically on one income, and a temporary contract.  Your family doesn't need $200/month in gifts.  If you can put that toward your student loans instead, you'll be out of those in no time. 
This is all me. I get a kick out of seeing people smile after getting a great gift. But you're right, I need to rethink this. Gifts don't HAVE to be expensive and they don't have to be for everything little thing.

You should think about getting some term life insurance for yourself.  Your DH and child would get survivor benefits from social security if anything happened to you, but that wouldn't make up for the loss of your income.  And you should definitely keep your DH's policy -- you'd need to pay for childcare, etc. if anything happened to him. 
I have an opportunity to continue the coverage I got through red/khaki for about 20-30 dollars a month. I think. I'm pretty sure I ignored the paper work that came about this in a fit of 'F#@!$' anything to do with red/khaki rage. Like I said, I haven't been the most logical the last couple months.


Why do you need both Netflix and Hulu?  Pick one.  Or ditch them both and use the library, or make dates with friends to watch favorite shows (make those a potluck night and it will also help you keep your dining out/entertainment budget in check).
We don't. Good call again. We're actually less than a mile away from a really good public library that's apart of a really good system; really no excuse for not using it other than laziness. We'll cancel Netflix now, but Husband wants to keep Hulu through the summer to keep watching the Daily Show as long as John Stewart is on it. I feel like I'll have bigger fish to fry, so I'm going to let that one go.

Prescriptions seem high -- are there any generic/off license alternatives you can switch to to bring this monthly cost down?  And what will the health insurance bill be once red/khaki stops contributing?
The insurance that I'm on right now qualifies all inhalers of the kind I use on the same level for whatever reason; its a new fun twist to the coverage that started in March. That said, there's no reason that I can't shop around. I've heard that Costco sometimes can lower costs and we're already members there.

Good job on cutting back on groceries -- if you can keep it at $300-400/month for the three of you and throw that extra at the student loans, that would be awesome.  That alone would get you to a five year or less payoff on the 10 year refinance option.
Surprisingly, once we started paying attention and stopped wasting so much food, this wasn't as painful as I thought it was going to be. Also, shout out to budgetbytes.com for having awesome recipes. For the last four weeks, we've sat down on Sunday night and picked out recipes, and linked them to our Google calendar for each day of the week. Then my husband goes shopping just for the stuff that's in the recipes. Not rocket science, but oh man, has it made a difference.

humbleMouse

  • Bristles
  • ***
  • Posts: 297
  • Location: Minneapolis
I am going to assume you are talking about being layed off from target, which means you most likely live in or around the twin cities.  From taking a high-level view of your finances, a few things come to mind.

1) You are making almost 10k/month in an extremely low cost of living area. 
2) You spend 6k/month. 

Living in or around the twin cities is very cheap.  Spending 6k/month is quite a lot of money.  Don't have much specific advice for you other than pointing out that you could probably get by spending half of your current expenditures.

Teddy25

  • 5 O'Clock Shadow
  • *
  • Posts: 27
I live/work in MPLS, don't work for big red, but do know people who does. Sorry about what happened.

What is your mid to long term goals?  >5 - 20+ years.  is it FIRE?

I would contribute as much as possible to 401K, IRA and HSA. if you are in the 25% bracket, for every $1,000 you contribute, you save $250 in federal tax, plus state.  BUT if you are in the 15% bracket, Roth might be a better option.

Childcare in MN is expensive.  It might be cheaper to have one parent at home.

asiljoy

  • Bristles
  • ***
  • Posts: 406
@humbleMouse: Yep, totally agree we can do better.

@Teddy25: Thanks for the sentiment and for the information on the 401k/IRA. I didn't realize it made that big of a difference. Is there any problem with 'investing' that money in our savings account until I know that this temp position becomes permanent and then making a bulk investment into an IRA? And yeah childcare in our area was 1)impossible to find and 2)expensive as hell if you managed to get off the waitlist. We're sacrificing 2/3,000 a year to have my husband home if we just compare what he was making to the cost of daycare; if we take into account all of the costs of working full-time, the extra costs of finding care when they close for holidays/etc, we figured it was a wash.

My husband and I hadn't really considered FIRE before the generally accepted age of 65 before reading here. Now that we have, we both agree that it makes a ton of sense and would love to FIRE asap, but I haven't done any calculations for when that'd be a realistic goal. Next goals I guess are to pay off all of our debt as soon as possible. For what it's worth, we love our town/where we live right now and its practical in that its 10 mins to Uptown/Downtown, 15 mins away from the larger suburbs so we're close to jobs and activity, so I don't see us moving anytime soon; it's a 3 bed, 1 bath townhome on a cul de sac in a residential neighborhood where most of the houses are just regular houses, a couple blocks from the bike paths that lead down to the lakes.

Teddy25

  • 5 O'Clock Shadow
  • *
  • Posts: 27

#1 Come up with the realistic budget, by Max out your 401k/IRS/HSA accts first.
then, take what's leftover each month see how much you have left to spend on housing, food, transportation etc.
#1A Follow the Budget**** (use MINT.com daily)
#2 I would refinance and/or aggressively pay off the student loans.
#3 mortgage, paydown PMI, wait until a more stable job then refinance house to a 15 year mortgage
#4 taxes: based on info you provided, and assuming you will earn the 9,600 each month for the entire year, you annual is 115,2000. with standard deduction 12,600 (married joint), personal exemptions, 12,000 (4,000x3), student loan interest deduction, mortgage interest deduction and other write offs, you will be very close to the 15% bracket.


Misc items:
cut hulu or Netflix
internet with centurylink could be as low as $20 a month with autopay (call retention every year!)
your emergency fund is ok (Access to credit is important)
food budget (restaurant/groceries) is high, try to bring coffee/lunch to work, 600-750 might be more reasonable, limit going out to two times a week.


once you have lived on your new budget for six plus months, then you can reevaluate and determine how much you need to live during FIRE annually and multiply that number by 25-30 (depending withdraw rate).  that total will be your goal.

based on your current 45,000 spending, you will need between 1.125m-1.35m (excluding home)
@ 30k a year spending you will only need between 750k-900k
@ 25k between 625k-750k

Good luck!

lhamo

  • Walrus Stache
  • *******
  • Posts: 9616
  • Location: Seattle
Do you need hulu to watch the daily show on line?  I can't access the shows here in Asia (says I'm not in an area where they offer the service), but it seems that the shows are available on line on the show website.  I love me some Jon Stewart, and am glad that we at least get excerpts of the show through our satellite service, but if I had a free option I would choose that instead.


asiljoy

  • Bristles
  • ***
  • Posts: 406
Yeah, he could go straight to Comedy Central I think? For this particular bit, he's already jumped on board with cooking dinners before I get home from work/extras for lunches, a super pared down grocery/restaurant/entertainment budget, and trading in a car for a bike for trips under 3 miles (this encompasses Target, Costco, Cub, ECFE classes, the playgrounds, and the library). This Hulu thing was where he made his stand, so I didn't feel like it was worth the fight over 21/28 dollars? Especially since it has an end date.