Reader Case Study - Priorities for my small monthly cash pool

[BigFamZac]

Life Situation - Married filing jointly, 4 kids from age 9 down to age 4, Washington State;

Gross Salary - $6194/month

Pretax deductions - $245.33

Adjust Gross - $5,949

Total Income Tax - $490

Net Income - $5,202

Non-Mortgage Expenses
Car insurance = $124.09
Car Maintenance = $38.55
Charitable giving = $629
Child Activity = $40.23
Clothing = $33.71
Dining = $75.25
Gifts = $73.49
Electricity = $139.37
Entertainment = 8.69
Fuel/public transport = $392.3 (monthly ferry for commute = $103; Cut to an average of 270 so far this year)
Groceries = $834
House Maintain = $89
Internet = $40
Life Ins = $40
Med exp = $52.46
Medicine = $3.79
Pet = $54.64
Phone = $40
Trash = $23
School = $194.3
Sport/rec = $61
Water/sewer = $31


Non-Mortgage Total Expenses - $3,414.56

Mortgage - $1,463 => $1,163 payment + $180 property tax + $70 mortgage insurance + $52 homeowner insurance

Loans - (student) $336/month
One at 5% with 848 remaining
One at 4.5% with 11,119 remaining
One at 2.95% with 8130 remaining

Total Expenses - $4,900

Assets
$79,000 in 401(k)
$29,000 in house (254,000 value - 225,000 loan remaining)

Specific Questions
1. Do I target pay down of loans first? Which ones?
2. Do I target pay down of house to achieve 20% and reduce payment for repurposing of cash?
3. Working on targeting expenses but the transportation one is tough because we live way out and aren't in a position to afford anything close to where I work.

Thanks!!!!!

[Sibley]

It looks like I'm first. Hope this helps.

Yes, payoff the loans. Highest interest rate first while paying minimums on the rest, then move to the next one. The 5% won't take long to pay off with that balance.

Getting rid of PMI would be good, but I'm sure plenty of people would argue for investing the excess cash. I'm in the no debt camp myself, so to me getting rid of PMI then switching to investing is preferable.

Expenses:
Car insurance - can you reduce by shopping around, etc?
Charitable giving is a lot. Wild guess - you're tithing? Reduce/eliminate to pay off debt.
Dining and gifts - consider reducing these.
Do what you can on the transit and fuel. I get it, I take transit to work and it's a lot. But driving would be much worse.
I'm not sure if the food is good or not. There's 6 of you, but that seems high even so. There's lots of resources on the forum about grocery costs, so take a look and see if you can improve.

Is there any chance you can work from home?

[Faraday]

You have a cash flow problem!

If you have access to a pre-tax 401k type plan (you seem to have that since you indicate 401k savings existing), you need to up that contribution as fast as you can to keep from giving that money to the government in taxes vs. getting to put it in your 401k.

So yes, attack the small loans first. You can do that "Dave Ramsey Style" by attacking the smallest one first, push the saved cash to the next one, and so forth. You will see some nice, quick gains in cash flow.

Now: you are spending a LOT of money for monthly fuel. Are you driving a pickup to work or something like that?  Two questions:

1) Do you HAVE to have the vehicle?
2) If so, is it possible for you to improve the MPG of the vehicle or swap it out for something with better MPG?

Your fuel costs are similar to what I was paying to fuel an F-150 for the daily commute. Instead, I was able to replace that vehicle (getting 16MPG) with a Honda Insight Hybrid at 60MPG and I cut my fuel costs dramatically. I'm able to then take that money and sock it away in investments, with no pain to me or the wife.

If you are indeed having to buy this much fuel monthly, you are very vulnerable to gasoline price fluctuations. If it got really bad, you could end up losing the extra cash you save by paying of the loans. So ponder on your fuel costs, tell us what you've got going on and let's see if you can cut that fuel bill by at least $100, preferably much more!

[MDM]

You have a cash flow problem!

+1

Maybe not quite as bad as the OP suggests - do you really pay ~$6K/yr in taxes?  Or do you get $4K/yr in child tax credits, taking your federal income tax below $0?

But even with a small net federal credit, you aren't saving much now.  I'd pay off the 5% loan, but just pay the minimums on the rest and invest as much as possible.  Your call on the traditional vs. Roth question.

[Argyle]

The gifts and the groceries stand out to me as places you could cut back.  And any chance you could give time to the church instead of cash? 

[Faraday]

...
Non-Mortgage Total Expenses - $3,592
Mortgage - $1,463
Loans - (student) $336/month

Total Expenses - $5,091

There is a mistake in your numbers....your total expenses are:
Total Expenses - $5,391

Not $5091. That's what I meant when I say "you have a cash flow problem".  I'm not even sure how you are making it month to month, your Total Expenses exceed your income...with over $600/month "charitable giving"?!?!? You've got four kids while you are flinging over $600 at some church?!?!

Up to now, you've gotten no facepunches, and yet, you deserve many. You've gone to the trouble of a case study but not read, and your math is wrong?

Specific Questions
1. Do I target pay down of loans first? Which ones?

Treat debt as though your hair is on fire. It is as if you are being stung by a million bees all over your body. Of course, you read these words on the blog, right?

You need results ASAP. After all, you're gonna suspend your charitable giving to hammer down the loans, right? :-)

You start with the smallest loan, nail that down and move on to the next one and the next one, thereby freeing up cash flow to attack the next one. Then you can resume with the charitable stuff.

2. Do I target pay down of house to achieve 20% and reduce payment for repurposing of cash?

Well, getting PMI gone would be nice, but where-the-heck is the cash coming from? You are cash-flow negative every month. What about refinancing? Even if you don't get rid of PMI, can you save at least a half-point on mortgage interest while rates are low?

3. Working on targeting expenses but the transportation one is tough because we live way out and aren't in a position to afford anything close to where I work.

Yeah, right. You GOT to be driving a pickup to work with that fuel cost. You drive a Dodge Ram with bullhorns on the top of the grille.

I live almost 40 miles from my job and my fuel costs are about $130/month for two vehicles. Me and DW work from home at least one day a week and I ride an ebike whenever possible.  (I know you know what an ebike is, if you live in the PNW...)

Once upon a time, I drove a pickup truck to work. That's back in 2000 when I was a consuma sucka. I bought a used 2000 Honda Insight hybrid (for $10,200 off ebay) to do the commute in and even with the car payment, ended up $120 cash-flow POSITIVE the month after I bought it. (I took that savings, plowed it back into the car loan and had the car paid off in less than 2 years.)

And BTW, I still drive that car today. That 15 year old Honda Insight Hybrid gets 60MPG and is made of aluminum. It might outlast me...

Thanks!!!!!

Don't thank me, thank my fist, and the fists of everyone else here....

[Faraday]

I just realized, your vehicle is costing you $630/month in fuel, insurance and maintenance?!?!?!? Holy smokes.
And what school do you go to that's costing you $200/month? When does that end?!?!??!

Dude, you've got over $1k/month going to vehicle, charitable giving and...school but you are carrying loans and cash flow negative?

You are living in a cash flow EMERGENCY. You cannot screw around with this if you have four precious, sent-from-God babies. You MUST fix this problem RIGHT NOW. If someone gets sick and you have medical expenses, or in an accident, or just ends up needing school supplies, you are gonna be in a world of hurt.

And of course, you aren't saving jack squat pre-tax. You need to increase that, otherwise you are just giving it to the Federal Gov't instead of building up your 401k. Are you at-least getting all the company matching funds?

Suspend the charitable, hammer down the loans, then attack the transportation costs. Refi the house if you can but don't go after $70 PMI when you have so many other crazy places you can take money back from....

[MDM]

There is a mistake in your numbers....your total expenses are:
Total Expenses - $5,391
Not $5091. That's what I meant when I say "you have a cash flow problem".  I'm not even sure how you are making it month to month, your Total Expenses exceed your income.

Much depends on the federal tax situation.  Seems they are still cash flow positive by ~$4900/yr but I could easily have fat-fingered some numbers:

Category	Monthly	Comments	Annual
Salary/Wages	$6,194		$74,328
Pretax Health Ins.	$245		$2,944
FICA base salary/wages	$5,949		$71,384
Federal Total Inc.	$5,949		$71,384
Federal tax	-$10	2015 rates, MFJ, item. ded., 6 exempt.	-$124
Soc. Sec.	$369	Assumes 2 earners paying	$4,426
Medicare	$86		$1,035
Total income taxes	$445		$5,340
Income before other expenses	$5,504		$66,044
Monthly Expenses:
Mortgage	$1,163		$13,956
Property Tax	$180		$2,160
Mortgage Insurance	$70		$840
Home/Rent Insurance	$52		$624
Car Insurance	$124		$1,489
Car Maintenance, Registration, etc.	$153		$1,836
Charitable contributions	$629		$7,548
Child activities	$40		$483
Clothing/Shoes	$34		$405
Dining (Pizza, Restaurant, etc.)	$75		$903
Donations/Gifts	$73		$882
Electricity	$139		$1,672
Entertainment	$9		$104
Fuel/Public Transport	$453		$5,438
Groceries	$834		$10,008
Household; Maintenance	$89		$1,068
Internet	$40		$480
Life Insurance	$40		$480
Medical (Doctor, Hospital, etc.)	$152		$1,830
Medical Insurance	$4		$45
Pets	$55		$656
Phone (cell)	$40		$480
Recycling/Trash	$23		$276
School Tutition/Books/Etc.	$194		$2,332
Sports/Recreation	$61		$732
Water/Sewer	$31		$372
Non-mortgage total	$3,595		$43,143
Loans:
Student Loan	$15		$178
Student Loan	$191		$2,295
Student Loan	$130		$1,559
Total Expense	$5,094		$61,131
Total to invest	$409		$4,913
Summary:
"Gross" income	$6,194		$74,328
Income taxes	$445		$5,340
After-tax income	$5,749		$68,988
Living expenses	$5,004		$60,043
Non-mortgage loans	$336		$4,032
After-tax investable	$409		$4,913

Filing Status	2	1=S, 2=MFJ
# of earners	2
Total Income	$71,384
Std. Deduct.	$12,600
Act. Deduct.	$13,381
# Exempt.	6
Exemption	$24,000
SL int. (guess)	$2,016
Taxable	$31,987
Tax	$3,876
Tax after n-r credit	$3,876
# Children <17	4
Child Tax Cred.	$4,000
EIC	$0
Net Tax	-$124
Monthly	-$10
Mtg. Int. (guess)	$3,673
Prop tax	$2,160
Charity	$7,548
Item. Deduct.	$13,381

[thd7t]

Looks like Mortgage Insurance is your highest interest rate.  I don't know what your Mortgage rate, but I'll put it at 3.5%, because that's often generous, but even at a lower rate, MI will be a higher rate than any of your other debts.  Your mortgage insurance lasts until you hit 78% LTV.  For you, that's $198k.  So, you're paying $840/year on $27k (3.1%) + your mortgage interest rate (est. 3.5%).  Unless you have a 2.9% mortgage, you are above 6%.  However, as your balance goes down, your mortgage insurance doesn't, so the effective rate will just continue to increase, probably from 6.6% to around 12%.  Without your rate, I can't be specific, but the effective rate on Mortgage insurance is a debt emergency.

[justajane]

In my opinion, $70 in PMI is the least of your worries if you are paying that much in car expenses, food, and tithing. I know if you are committed to tithing that much than it is likely a sacred cow. Thus, I would encourage you to work extra hard on knocking out that food budget and the car. You can't afford to spend that much. You have little to no cushion in your life.

If you have a 9 year old kid, I'm guessing you're mid to late thirties? If so, you need to be putting more into retirement. What you have is not enough. Forget the house and work on upping those contributions. I'm tempted to say contribute more to retirement before you accelerate those student loans.

[justajane]

Isn't it pretty hard to get rid of PMI, though? I mean why would a bank make it easy for you? That's free money for them. Plus OP would need to pay down his mortgage 28K to get rid of it. At OP's current rate of surplus, that's going to take a very long time. Paying off the student loans would give him or her immediate results and free up more money to throw into retirement.

[thd7t]

Isn't it pretty hard to get rid of PMI, though? I mean why would a bank make it easy for you? That's free money for them. Plus OP would need to pay down his mortgage 28K to get rid of it. At OP's current rate of surplus, that's going to take a very long time. Paying off the student loans would give him or her immediate results and free up more money to throw into retirement.

At OP's current rate of surplus, he's going nowhere, fast.  Getting rid of PMI is automatic at 78% LTV as long as 24 months have passed.  He might have to make a call or write a letter.  The $28k is the larger issue, but he shouldn't balk at that.  This is the optimal place for debt paydown, as the interest rate is highest.  I guess that with the low student loan balances, he might see quicker cashflow change, but that's not the long term optimal approach.  Again, if it were a $28k debt at 12%, would we even be discussing where the money should go?  The insidious thing about PMI is that because the payment doesn't change, the effective interest rate is very high.  I can look for a thread where it's discussed in detail.

I think that some changes in transportation costs are the first place to look.  Over all, that's coming to around $725/month!

[BigFamZac]

You have a cash flow problem!

+1

Maybe not quite as bad as the OP suggests - do you really pay ~$6K/yr in taxes?  Or do you get $4K/yr in child tax credits, taking your federal income tax below $0?

But even with a small net federal credit, you aren't saving much now.  I'd pay off the 5% loan, but just pay the minimums on the rest and invest as much as possible.  Your call on the traditional vs. Roth question.

I pay no Federal Income tax thanks to credits

[BigFamZac]

Thanks! I really do appreciate the face punching.
There were a few typos in my OP that I have now fixed. I am new to mustachianism and am actively trimming the expenses to increase the cash I have to use.

I contribute 6% of my post tax income which my employer matches with 3% (this is the max they offer). The account is now at $79,500 ish.

Not excuses here but rather clarifications in hopes of more tips/punches:

Food
I will look at the grocery/food posts this weekend and see what other pearls I can glean there but part of the issue is that, being a big family, we do most our shopping at Costco and they don't exclusively sell food. We buy oil for the cars, some clothes, etc. so the number is a little inflated over reality.

Transportation
I know it makes me cry every month but it isn't commuting. I drive 7 miles/day at 30 mpg and ride public transit ($103/month). The struggle is 4 kids and spouse who are involved in our rural (read 'nothing is nearby') community. My focus right now is to cut trips by planning ahead and reducing the number of activities we are involved in.  Our family car is a Honda Pilot rated at 18/24 mpg. In reality I am getting an average of 27mpg which is less than desirable but there aren't a lot of options that hold 6 people.

Charity
I understand the sentiment about my charitable giving, it is a lot for us. The reason we do it is that it makes us happy to help people who need it.

Other Expense Cutting
Dining out has been zeroed (emergency status and uneeded); Gifts has been cut big time; Recreation has also been reduced in cost by refocusing on cheap and local (this will hopefully help with transportation too)

Questions
I really have two separate questions:
1. Ideas for expense cutting - Thanks for the punches I will search out the forums for ideas on grocery cuts, any ideas on more efficient cars that seat 6+?, we are committed to cutting trips to reduce transportation.
2. Loans or PMI? - some good info from you guys here, the general discussion leads me towards PMI first (thd7t), as I cut expenses the rate at which I can burn it will increase. Maybe the 5% because it is small then PMI?
3. Should I be contributing pre-tax even though my deductions mean I don't pay federal income tax and things don't look good for retiring before 60?

Thanks again!!

[ShoulderThingThatGoesUp]

Look, the thing on your charitable giving is that you are one bad month from being in a bad place yourself. It is not fair to your children to do what you're doing now. And when that bad month comes, when it will, do you want to be in a position where you can handle it, or in a position where you can't? Which do you think will enable you to return to giving to charity faster?

When you pay down your big debts and your PMI then look at charitable giving again.

[Faraday]

Look, the thing on your charitable giving is that you are one bad month from being in a bad place yourself. It is not fair to your children to do what you're doing now. And when that bad month comes, when it will, do you want to be in a position where you can handle it, or in a position where you can't? Which do you think will enable you to return to giving to charity faster?

When you pay down your big debts and your PMI then look at charitable giving again.

+1 to these comments.

You are running so close to disaster yourself, that helping others would be comical, except those of us here find it terrifying. The analogy I've heard that works best is the airline attendant preflight blahblah: "If the masks drop down, be sure to put your mask on first before helping anyone else..."

You asked direct questions, here's direct answers:

1) Pay off those loans from smallest to biggest, first. Why? You have a cash flow problem and that will free up cash faster than paying down the mortgage to wipe out PMI.
2) I carried a mortgage once where I pre-paid and got way under what I needed to cancel PMI, but the lending institution wanted an appraisal and realtor's estimate of value. The cost of those two items exceeded what I had left to pay for PMI, so I just let it ride. Make sure your lending institution is willing to shut off PMI without cost to you when you reach the magic number.  (I was with Provident and it was not that easy...)
3) Have you considered a "ScanGauge" for your Honda? If not, google it and see what you think.
4) On the spreadsheet, rank your monthly expenses from highest to lowest and run through the list - often - seeing what items you can optimize for the largest cash flow gains. That has worked wonders for me.

It's difficult for anyone to understand and adopt frugality. Turning around a family of six with four children is like turning a ship - it takes awhile.

The good news is, you have lots of options for improvement and you aren't saying el stupido stuff like budgeting for weekly manicures and pedicures, or leasing a BMW. You're trying to figure out what will give you the best yield and highest effect as fast as possible.

If charitable giving is as important to you as you say, imagine if you could hit FIRE and dedicate your entire life to the causes you feel strongly about. Imagine the power of such a commitment. It puts a whole new dimension into living frugally....

Imagine if you created a stache large enough to support just the charitable giving, and you simply let it run...forever...even after you are long gone. Wiping out debt and learning to live on less can allow you to reach that level!

You guys are hanging on by your fingernails. Commit - both to frugality and to your causes - and see where that path leads you.