Author Topic: How and Where Can We Spend Less?  (Read 7198 times)

Luthien

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How and Where Can We Spend Less?
« on: April 09, 2014, 07:40:08 AM »
My husband and I live in Wisconsin, have three children ages 8, 5, and 3 and are expecting a fourth in September.  I discovered MMM in October 2013 and have been trying to implement several new strategies to get us to FI more quickly.  Here are some of the changes we’ve made in the last few months:

  • raised the deductible on all of our insurance policies to lower the premiums
  • purchased a drying rack and have minimized use of our clothes dryer
  • switched to Ting & Republic Wireless to lower our cell phone bills
  • joined teamtreehouse.com and began teaching myself web design to try to increase our income (currently I am a stay-at-home-mom with no income, but I’ve always been interested in coding/web design and have dabbled in it in the past)

We already were living pretty frugally.  We’ve never carried credit card debt and have no loans other than our mortgage.  We prepare almost all of our meals at home and rarely eat out.  We don’t buy a lot of expensive prepackaged, processed foods.  I’m blown away by people who are able to live on such a small percentage of their income, but I’m having trouble seeing how we can live on less.  Please help!  Here are the details:

Income: My husband is self-employed as an independent contractor installing/repairing commercial doors and windows.  His income fluctuates throughout the year as his work is seasonal.  For example, sometimes we receive over $10,000 in one month, and sometimes less than $500.  I was having a really difficult time budgeting this income to last throughout the year.  In the past, I would simply transfer money from our business checking account to our personal checking account as needed.  But occasionally we would not have the money there when we needed it and we ended up borrowing short term loans from our parents.  So this year, I decided to give ourselves a fixed “paycheck,” and withdraw $5000 each month.  Realistically, it may end up to be a little different, but it’s very hard to predict and this seems like a reasonable estimate for this year.
Total Income: $5000/month

Current Expenses:
Fixed Expenses:
Mortgage (including taxes & insurance): $1458.14
Electricity/Gas (fixed budget plan): $145
Water (fixed at $70 quarterly, usage not metered): $23.33
Car Insurance: $28.51
Cell Phone: $16.12
Health Insurance: $214.97
Estimated Tax Payments (federal & state): $1386.67
Treehouse Subscription: $25 (used for me to learn web design in my spare time)
Netflix: $8.40
Homeschool: $50 (we budget this amount towards materials, museum passes, field trips, etc.)
Children’s Allowances: $25
Donations: $100
TOTAL Fixed Expenses: $3481.14

Variable Expenses (average of January-March 2014):
Groceries: $478.17
Essentials: $68.32 (includes needed clothing, household purchases, personal care items, etc.)
Gas and Vehicle: $29.97 (unusually low as we only had one working vehicle; we payed to repair it in March 2014 and I have been driving with the kids a lot more - I would estimate this will be more like $100/month now)
Medical/Dental: $248.33 (we had significant dental work, and will need more in upcoming months)
Miscellaneous: $94.25 (includes entertainment, gifts, random purchases)
Restaurants: $35.64
TOTAL Variable Expenses: $954.68

Total Fixed and Variable Expenses: $4435.82

Assets:
House (Current Zestimate): $225,074
SEP IRA: $31,672.80
Roth IRA: $11,061.09
2004 Pontiac Vibe: $3000 (needs some body work; this summer we are going to have to sell this and purchase a vehicle that seats at least six to hold our family. The Mazda5 will be too small for all the car seats we need to install, so we’re looking at minivans.)
Savings: $358.19 (just drained our savings accounts to fund the Roth IRA for 2013 tax year)
TOTAL ASSETS: $271,166.08

Liabilities:
Mortgage: $219,050.08
No other debts/loans.

Summary:
Monthly Income - Monthly Expenses = $564.18
Assets - Liabilities = $52,116 (net worth)

If we can only manage to save $550/month from our income, that will be a total savings of $6600/year.  Increasing our net worth by such a small annual sum will take so long to reach FI!  How can we save more to reach this goal faster?  How do people live on amounts that seem so much smaller than ours, when it feels like we are already frugal? Thanks in advance for your help.  :)

I feel I should also add that reducing vehicle expenses by biking is not really possible for us, because I know that is a common suggestion!  While I would love to live within walking/biking distance of a library, bank, grocery store, etc., that isn't going to be happening anytime soon.  The nearest grocery store is 7 miles away and to get there involves traveling on winding country roads I would not feel safe biking alone on, much less with four little kids in tow.  My husband also can't reduce his business commuting expenses (which aren't in this budget, but are paid for out of our business account) because he works all over the state and has to drive his minivan of tools/supplies to the job sites.  He easily puts on 25k miles/year doing this, but that is what provides the income for our family.

I would love to reduce our monthly housing payment by moving to a smaller house, but unfortunately that also doesn't seem realistic for us right now.  Last year we refinanced our mortgage to 3.75%, which brought down our monthly payment considerably.  For the past two years we have had local real estate agents do a market analysis on our home, and both times were told that we would have to bring money to the closing in order to sell our house as we would not be able to get enough to pay off our mortgage and pay realtor fees.  We are hopeful that housing prices will start to rise a bit more over the next year and will look at selling again next spring.

Thegoblinchief

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Re: How and Where Can We Spend Less?
« Reply #1 on: April 09, 2014, 10:52:39 AM »
Housing is the only real red flag. You should be able to get PITI down to ~$1,000 or less depending on tax rates, but generally your part of WI is low.

Finding a way to improve your taxes would help, perhaps consult a CPA? The tax rate seems a bit high, but I'm not a tax wizard.

Try to combine groceries, household, and personal care into a single category. $450 for all of that is doable without alcohol. Is Woodmans out in your area?

Really watching that miscellaneous category. Make every purchase pass a "48 hour" test. We don't give our kids very many presents, partly because they get showered from relatives, and for others we are going to increasingly do homemade stuff.

Utilities are good compared to mine.

Anything else gets nitpicky. I'm in an underwater house myself, so I understand the house issue. How far underwater are you?

I see you're learning web design. Tried any other work from home things? FrugalParagon likes Leapforce:

http://frugalparagon.com/2014/02/05/why-the-frugal-paragon-loves-leapforce-at-home/

Travis

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Re: How and Where Can We Spend Less?
« Reply #2 on: April 09, 2014, 12:22:00 PM »
How does that tax bill break down?  I'm not self-employed so I'm not sure how the math works, but that seems like a huge amount.

sirdoug007

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Re: How and Where Can We Spend Less?
« Reply #3 on: April 09, 2014, 01:12:00 PM »
The mortgage is WAY high for your income.  It's sucking 40% of your after tax income.  Most people recommend keeping this under 25% and I'm sure a lot of folks on here are way below that.

You should seriously consider finding a cheaper place, under $1000/month is a good target.

HairyUpperLip

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Re: How and Where Can We Spend Less?
« Reply #4 on: April 09, 2014, 03:09:45 PM »
Sounds like your husband knows how to use tools. When you do look for the new van I would suggest an early 2000's Honda Odyssey. These are known for having transmission problems. I would try to get one for as cheap as possible with a bad tranny and replace with any decent one from a junkyard. Should be a pretty affordable method to get into a larger vehicle for your family.

MDM

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Re: How and Where Can We Spend Less?
« Reply #5 on: April 09, 2014, 05:17:21 PM »
Adding to the "those estimated tax payments seem way too high" chorus.  Are those monthly or quarterly?

Even if quarterly...see https://www.taxbrain.com/tax-estimator.asp.  There I made some guesses (amount of mortgage interest, etc.) from the OP for your 2014 taxes.  The bottom line was you pay $0 federal tax - and wait, there's more - the IRS will pay you some amount for Child Tax Credit.  You'll need to use your own numbers....

Don't know about Wisconsin tax details.

Need to understand the true state of your taxes, as that could have a large effect on your planning.


Luthien

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Re: How and Where Can We Spend Less?
« Reply #6 on: April 10, 2014, 07:02:52 AM »
Regarding our taxes...

We use TurboTax to do our taxes, and yes, they are correct.  For a couple of years we had H&R Block and one year a professional accountant check over our numbers, and every time it was found to be correct, so we don't double check it that way anymore.

When you work for an employer, that employer pays a portion of your social security and medicare taxes, and you as the employee pay the other portion.  When you are self-employed, you have to pay for both portions, so it ends up being a higher tax rate.  For self-employment income in 2013, the self-employment tax rate was 15.3% (See this link: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Self-Employment-Tax-Social-Security-and-Medicare-Taxes). 

This tax is applied to the net business income on Schedule C, which is before the deductions and credits on the 1040 are accounted for.  You are also taxed on your income again on the 1040 after the deductions and credits (line 55, for the curious).  Which results in extremely large payments to the IRS quarterly for the self-employed. 

The number I gave is our monthly number for this year.  My husband made a higher income last year than ever before, so our estimated tax payments are higher than ever before.  MDM, I'm guessing when you used the taxbrain estimator that you put the $60k income I gave under "Wages, Salaries, and Tips" instead of under "Business Income/(Loss) - Schedule C or F".  Also, the number we would have to put in there is not $60k - it was more like $80k last year.  But it doesn't feel like we made $80k because we had to pay over $13k in federal taxes and over $3k in state taxes.  Estimated tax payments for this year are based on the previous year's income, so $16k/12 = $1300 in taxes due each month, which is where that number comes from in my monthly expenses.

Rebecca Stapler

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Re: How and Where Can We Spend Less?
« Reply #7 on: April 10, 2014, 07:11:48 AM »
MDM, I'm guessing when you used the taxbrain estimator that you put the $60k income I gave under "Wages, Salaries, and Tips" instead of under "Business Income/(Loss) - Schedule C or F". 

The only income I see in your post is that you're paying yourself $5k/month. Is that before or after taxes?

Luthien

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Re: How and Where Can We Spend Less?
« Reply #8 on: April 10, 2014, 07:15:53 AM »
Regarding housing...

I realize our housing payment is too high.  Unfortunately we made the mistake of buying too big of a house for ourselves years ago, and now it's hard to get out of it.  We qualified for one of those FHA 0% down loans back when they were still giving those out, and didn't know any better that we shouldn't buy so much house.  We do live in a pretty nice and spacious house with a big wooded backyard, so at least we have that to enjoy, but it sure is sucking a lot of money out of our income.

Thegoblinchief, we are actually not very much underwater.  Our mortgage balance is $219k, and the real estate agents said our house would probably sell for something in the $220-225k range.  But after realtor fees and such, we wouldn't have enough left to pay off the mortgage completely so we would have to bring money to the closing. 

Some ideas my husband and I have talked about:

  • Waiting until next spring and trying to sell again.  We are hopeful that prices in our area are beginning to rise (the real estate agents indicated this was the case) and with a slightly higher selling price and a slightly lower mortgage balance next year, selling would begin to look like a better option.  (This is our plan for right now.)
  • Selling right now at a small loss.  I'm not sure exactly how much we would end up bringing to closing, but I don't think it would be more than $5-10k.  We could then move into a small rental place for $800-1000/month and we would be saving $500-700/month on housing costs, which could go towards FI.  We aren't sure if this makes good sense to do over waiting a year to sell though.  Seems risky.
  • Listing our house right now at a price higher than the real estate agent recommends, high enough so that we wouldn't end up in the red at the closing.  Maybe someone would feel our house was worth that price, and I don't think we would have to pay the realtor anything if it did not sell.  I'm considering contacting some realtors to ask how they feel about doing this.
  • Selling our house without a realtor.  Saving the realtor fees would make it easier to not come out underwater, but we don't have experience doing this and it's pretty overwhelming.

Thoughts on these options?

Rebecca Stapler

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Re: How and Where Can We Spend Less?
« Reply #9 on: April 10, 2014, 07:20:12 AM »
Is it possible to convert any of your extra space into an apartment? Or taking on a roommate?

Luthien

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Re: How and Where Can We Spend Less?
« Reply #10 on: April 10, 2014, 07:20:35 AM »
MDM, I'm guessing when you used the taxbrain estimator that you put the $60k income I gave under "Wages, Salaries, and Tips" instead of under "Business Income/(Loss) - Schedule C or F". 

The only income I see in your post is that you're paying yourself $5k/month. Is that before or after taxes?

It depends.  If you look at our numbers for last year, the $60k income was after taxes.  But for this year, I'm treating it as before taxes.  Since my husband's income can fluctuate from year to year, we're taking this more conservative approach.  If this year ends up to be just as profitable as last year, or even more so, then we will be able to give ourselves a nice bonus at the end of the year.  If this year ends up to be less profitable than last year, we should qualify for a tax refund.  Seems safer to do it that way, as we can't count on a regular income stream.

Luthien

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Re: How and Where Can We Spend Less?
« Reply #11 on: April 10, 2014, 07:23:07 AM »
Is it possible to convert any of your extra space into an apartment? Or taking on a roommate?

Interesting idea, but unfortunately our house is not set up that way.  We only have 3 bedrooms.  The kids all sleep in one of them, my husband and I in the other one, and the third one is used as a playroom.  Even if we did clear out one of those bedrooms, the layout of the house wouldn't be good to have a permanent live-in guest.  I would also be hesitant about strangers moving in with us given that we have such young children. 

Rebecca Stapler

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Re: How and Where Can We Spend Less?
« Reply #12 on: April 10, 2014, 07:30:06 AM »
As for the expenses ... if you have some good land, could you start gardening, to reduce your grocery bill? Also, you may want to zero in on what are the "random" purchases. I no longer go to Target, because trips there increase the amount of my random purchases! I also have cut waaaay back on gifts, found inexpensive but thoughtful ways to give, and found a love for making homemade ornaments for my 10 nieces and nephews instead of spending lots of $$ on fancy ones for them ;)

I think it's great that you're looking to increase your income by learning to program. MH is a self-taught programmer and now that he has some good experience under his belt, his income possibilities have doubled. (and he's an attorney!)  It's a great field to self-educate because there are a lot of resources out there and employers can see whether you can do the job right off the bat, so there's less bias against self-taught programmers; it pays well; and it seems like a great field for women because companies are very interested in hiring women -- it may give you an advantage.

Christiana

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Re: How and Where Can We Spend Less?
« Reply #13 on: April 10, 2014, 09:13:48 AM »
Our family is similar in size and ages to yours, and also homeschools.  Mostly your costs are in line with ours, but there are a few categories where we spend less, besides housing and self-employment taxes:

Slightly less on groceries (stock up on staples at Costco or Aldi's or grocery salvage store).

Clothing:  we only buy some of husband's work clothes new, the rest is handed down from people at church, purchased from thrift stores, or sewn from thrift store fabric.

Homeschool:  for field trips/outings, we get one family membership per year to a place, and then go to that one place multiple times until the membership runs out.  We buy paper by the ream, and workbooks, and a few used books, but not much else.  Most of their art and craft supplies come to them as birthday and Christmas gifts.

If you do decide to stay in your house, consider planting a couple of fruit trees in the yard.  (My children are fruit fiends.)  Also, to maybe have some chickens if you're able to.

Somewhere on this forum there's a thread about annual living costs per person.  Less than $10,000 per year per person is pretty badass, and less than $5,000 per year per person is Super Ninja Badass.  So for a family of 5 going on 6, you're not doing so badly. 

Could your husband branch out into some other work during his off season?  Such as plowing driveways or weatherproofing residential windows?

AJ

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Re: How and Where Can We Spend Less?
« Reply #14 on: April 10, 2014, 11:36:08 AM »
I'm not sure spending less is where you should be focusing your energy. If you subtract off the taxes (which most people don't include when sharing budgets) and a rough guess of how much of your house payment is taxes/insurance, I'm seeing about $2k in non-mortgage expenses for a family of 5. That's darn good, and right about what the MMM family spends on their family of 3.

At this point, your energies are better spent increasing your income. Sure, you could probably get the numbers down a bit here and there, but taking on a second income (especially if it is well paying) will blow those changes out of the water. You are obviously already good at frugality, so there will be the temptation to focus on what you're good at and try to just get more frugal. That may help a little, but a second income will help more.

MDM

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Re: How and Where Can We Spend Less?
« Reply #15 on: April 10, 2014, 11:56:20 AM »
Myatzeck, thanks for the refresher on the joys of how the tax code treats the self-employed.  Yes, your assumptions on my assumptions are correct.  So it appears you have the tax issues well in hand - well done.

Regarding For Sale By Owner (FSBO): are there any local FSBO publications?  You may see them at grocery stores, etc.  If so, there may be ads in there from folks who will assist you in the legalities of the sale.  Or search "FSBO Wisconsin" (or similar) and follow the appropriate links. 

Based on our whopping total of 4 home sale attempts (2 successful using FSBO, 1 unsuccessful using a Realtor, and 1 eventually successful with a Realtor but at greatly reduced price), the 3 main things you need to do are 1) get the house looking great, 2) set the right price, and 3) find a buyer.  You certainly can do a successful FSBO, just as you certainly can do a successful sale using a Realtor.  There are others on this site with more real estate experience so you may get more advice here. 

If there isn't a FSBO-specific publication in your area - perhaps you could start one, either web-based or paper, for income.

One last thought on taxes (and you probably know this but I'm just reacting to what was written): you don't have to base this year's estimated tax on last year's income, if you can predict this year's tax situation well enough. 

SunshineGirl

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Re: How and Where Can We Spend Less?
« Reply #16 on: April 10, 2014, 12:13:46 PM »
My thoughts...

1. Finding a way to boost your income would be great. I bet your husband could do many other things, as others have mentioned, that wouldn't conflict with his current job. It soudns to me like you're at a time in your life when your time is worth more than money, but in addition to teaching yourself programming, is there a way you could earn even just a little extra money yourself? It might be a nice get-out-of-the-house break, and would help smooth out your income, which you might find comforting in those off-months.

2.  It sounds like you do have a handle on your taxes, but are you maximizing all your tax write-offs? Does your husband have a home office? He can write off the full cost of internet and cell phone, etc., but I'm sure you know all that. Can you also contribute to an SEP-IRA (ie do you do admin work for him?) Or can you contribute to a traditional IRA? It would be ideal if you could get your tax burden down to just the FICA taxes.

Thegoblinchief

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Re: How and Where Can We Spend Less?
« Reply #17 on: April 10, 2014, 12:16:40 PM »
Even in slightly more populated areas, the people I've known have had much better luck with flat-fee MLS services than straight-up FSBO. My brother is quite skilled at real estate but even he has never done straight up FSBO, always the flat fee brokers.

Zillow can be a good way to estimate a market price, looking at sale prices in terms of $/sqft, lot size, etc. Always shoot a bit high, because people will always offer a certain percentage lower.

Assuming the house is in decent shape, I would consider listing now. At the very least, start looking for cheaper houses, because that will help inform you about the local market.

Increasing the income would help, but you also want to be sane. I personally struggle working from home, and feel like my parenting really nose-dives if I do. YMMV but I'd consider a weekend gig for yourself versus work from home. Losing weekends takes getting used to as a couple, but we've done it for 8 years and I add between $15-$20K in a commissioned retail setting.

Villanelle

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Re: How and Where Can We Spend Less?
« Reply #18 on: April 10, 2014, 12:33:00 PM »
Since your husband's work is seasonal (and therefore I'd guess at least somewhat predictable), it seems like he could easily take on more work during slow seasons.  Advertising as a handy man, house painter, whatever could pull in decent extra money.  And during his busy season, he can simply take fewer side jobs if he really feels like he doesn't have enough time. 

sparklebunny

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Re: How and Where Can We Spend Less?
« Reply #19 on: April 10, 2014, 01:07:35 PM »
Business advice here: 

Talk with a CPA about setting up the business as an LLC, taxed as an S-Corporation.  Doing it this way means that you won't pay the self-employment tax (about 15%) on any earnings above your "reasonable" salary.  Goal is to set reasonable salary as low as your CPA will advise you too.  Then the rest of the profit is no subject to self employment tax.  You can take additional draws during the year if you need funds above your salary.  I personally think $60k might be too high of a "reasonable salary", but I don't know what you gross on average or what is reasonable for your area and profession.  I do know lawyers that don't take that much as a reasonable salary and that's why I mention it. 

Setting this up can save you a boat load on your taxes.  I run my business this way and it's worked great for the last 6 years.  Definitely worth looking into.

Thegoblinchief

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Re: How and Where Can We Spend Less?
« Reply #20 on: April 10, 2014, 02:00:29 PM »
Business advice here: 

Talk with a CPA about setting up the business as an LLC, taxed as an S-Corporation.  Doing it this way means that you won't pay the self-employment tax (about 15%) on any earnings above your "reasonable" salary.  Goal is to set reasonable salary as low as your CPA will advise you too.  Then the rest of the profit is no subject to self employment tax.  You can take additional draws during the year if you need funds above your salary.  I personally think $60k might be too high of a "reasonable salary", but I don't know what you gross on average or what is reasonable for your area and profession.  I do know lawyers that don't take that much as a reasonable salary and that's why I mention it. 

Setting this up can save you a boat load on your taxes.  I run my business this way and it's worked great for the last 6 years.  Definitely worth looking into.

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