Author Topic: Reader Case Study - debt gone! :) How to proceed from here?  (Read 5733 times)

homeymomma

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Reader Case Study - debt gone! :) How to proceed from here?
« on: April 28, 2014, 11:38:44 AM »
My husband and I recently paid off all our student loans and our car. (2012 Hyundai elantra sedan) yay. Here are our current finances. We live in the DC metro area and my husband commutes, I stay home with our toddler. We have a second baby on the way next fall. Note that we are living in an otherwise empty family home, where our electrical and gas are paid for us (yay. don't hate.) We may continue to live here for another 1.5-3.5 years.

Income:
Husband monthly paycheck: 4308
Amex cash back: approx 40-100, depends on the month
Husband side income: 3000 so far this year, we don't expect or depend on this
= 4308

Current expenses (fixed monthly):
Gas: 170
Entertainment (incl. Netflix): 10
Husband life ins: 33
Food (groceries and any eating out): 450
Health ins: 536
Kids (diapers): 50
Shopping/hobbies/home maintenance: 150
= 1400

Expenses (non monthly):
Approx 230 every 3 months for water/sewer
Occasional car maintenance
Health care: 1000 individual deduct/2000 family, 3750 individual out of pocket max/7500 family
Car ins: 350ish every 6 months
Dental, etc: varies
To deal with all these unknowns, I put aside 400 each month into a sort of "flex" spending account, which absorbs months where a lot of these occur together. We're currently in the black by 1400 in this account, as it's also where I stash any extra income.
= 400

Investments (monthly contributions):
H vanguard Roth IRA (all vfinx): 458.                               Current value: $7900
My betterment Roth IRA (84/16 allocation): 458.               Current value: $9220
Taxable betterment acct (90/10 allocation): 100.               Current value: $780
Daughter taxable "education" (80/20 allocation): 40.         Current value: $500
I know that last one is pitiful, and we should have a 529 or something but it seems crazy to put much more toward it at this point and I want to have access to it before college if need be.
= 1056 (monthly contributions).                                      Current value total= $18400

Other assets: $10,000 in an emergency fund savings account

Liabilities: none

Income - Expenses = 1450



Specific Questions:

#1: I'd like to save the additional 1450/mo for a down payment on an eventual home purchase, acknowledging this may be a long way off (3.5+ years) especially if we continue to live in the dc area. Where should we save it? Savings account? CDs? Percentage invested (this is what my husband wants to do, it seems risky to me)
         This 1450 will BAReLY cover our rent/utilities, second car, etc when we move from here. We're hoping that my husband will have gotten a couple raises by then to help but realizing this helps to focus our savings goals. Our savings rate will drop sharply when we move.

#2: how insane is our risk level right now with investing? There's no way we'll be able to retire for another 35ish years, so I haven't worried about much other than setting up the accounts. I don't know how to invest in another fund within vanguard. Do I have to save up another "minimum" to add one?

#3: additional to our 10,000 emergency account, should I set up yet another for a second car? We will need on in the next 1-4 years, when we move. Or just take that money from our house savings when the time comes? (Side question: if I'm saving separately for health care, car expenses, etc., what exactly IS the emergency fund for?)

#4: how do you all budget for health expenses? I'd like to at least have our full deductible on hand, but we also have a 10% co-insurance that could bring our expenses way up, in this, the year of baby #2. However, setting aside our full 7500 out of pocket max seems a bit silly.

#5: when I use traditional retirement calculators, we fall short. When I do more mustachian calculations, assuming a paid-off house, we come in about right. I don't think we can really afford to put more toward retirement, though. Are we in dire straights?

Thanks to you all, just for reading this far!! Any advice greatly appreciated.

homeymomma

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Re: Reader Case Study - debt gone! :) How to proceed from here?
« Reply #1 on: April 28, 2014, 12:38:04 PM »
Ok, sorry! 120 of you and read my question and not replied :)
Should I have split into into separate threads?
Help! How can I improve my post?

nereo

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Re: Reader Case Study - debt gone! :) How to proceed from here?
« Reply #2 on: April 28, 2014, 12:41:17 PM »
Quote
#1: I'd like to save the additional 1450/mo for a down payment on an eventual home purchase, acknowledging this may be a long way off (3.5+ years) especially if we continue to live in the dc area. Where should we save it? Savings account? CDs? Percentage invested (this is what my husband wants to do, it seems risky to me)
         This 1450 will BAReLY cover our rent/utilities, second car, etc when we move from here. We're hoping that my husband will have gotten a couple raises by then to help but realizing this helps to focus our savings goals. Our savings rate will drop sharply when we move.
#1) if it was less than 3 years I'd say put it in something safe.  3.5+ years I'd favor the market, knowing that there's a chance it could go down.  That said, historically over 75% of three year periods beat out inflation, with an average return of almost 10%.  You have to decide how much risk to take there though.
Second thought: why do you assume 1450 will barely cover rent/utlities?  do you already know where you will be moving to?  I know the averages around DC, and i know it can be expensive.

Quote
#2: how insane is our risk level right now with investing? There's no way we'll be able to retire for another 35ish years, so I haven't worried about much other than setting up the accounts. I don't know how to invest in another fund within vanguard. Do I have to save up another "minimum" to add one?
I don't think it is insane at all.  Why do you say there's "no way we'll be able to retire for another 35ish years"? Seems to me you're already making good headway; keep socking away in your ROTHs and saving even more and you can/should be FI in far, far less time. 

Quote
#3: additional to our 10,000 emergency account, should I set up yet another for a second car? We will need on in the next 1-4 years, when we move. Or just take that money from our house savings when the time comes? (Side question: if I'm saving separately for health care, car expenses, etc., what exactly IS the emergency fund for?)
Right off the bat I'd ask why you even want a second car.  That's going to be a big killer of wealth - perhaps the biggest in your budget.  Avoid it if you can.  As for whether you should set up another account... that depends on whether you need to compartmentalize your accounts to keep from spending one down.  There's no "need" to have seperate accounts if you know that one has money for X, Y, *and* Z in it.  BUt there's nothing wrong with your approach either.  Whatever works for you.
Answer: the emergency fund is for emergencies, many of which you cannot prepare for.  Having health car and car expenses helps, but you never know when something unexpected is going to come along.  The need to hire an attorney.  A family member in a dire crisis.  You can't plan for all of it.  Still, $10k is a large fund.

Quote
#4: how do you all budget for health expenses? I'd like to at least have our full deductible on hand, but we also have a 10% co-insurance that could bring our expenses way up, in this, the year of baby #2. However, setting aside our full 7500 out of pocket max seems a bit silly.
When I lived in the US I had a high-deductable insurance and I kept enough cash liquid to make sure I could meet that deductible. Now, with the ACA there's a lot of uncertainty.  Some are predicting double-digit % increases for 2015 & 2016, others are saying the increase might be the lowest it's been now that there are 8mil signed up.  It will be interesting for sure.
Just make sure you can meet your deductible and count on your rates going up every year by "x"%.  You will have to decide what you think "x" might be (solve for "x"!) and adjust annually.

Quote
#5: when I use traditional retirement calculators, we fall short. When I do more mustachian calculations, assuming a paid-off house, we come in about right. I don't think we can really afford to put more toward retirement, though. Are we in dire straights?
"traditional retirement calculators" make a lot of strange assumptions, like you need 80% of your earnings in retirement.  Which suggests if your salary doubles oyu suddenly have twice as far to go to get to retirement.
First, estimate how much you need to SPEND each year of retirement.  Then shoot for 25x that number.  28x or 30x if you are really conservative, less than 25x if you will have any side income or a pension, rental property during retirement.  Voila!  It can get much more complicated but that's the long-and-short of it.

To answer "are we in dire straights" I'd say definitely NO.  You are socking away the max in ROTHs every year, with $18,000 already in there.  Not counting anything else and assuming 7% returns that puts you at $1.8M in 35 years (you said you could never retire for at least 35 years).  That means you'd have $72,000/year to live off in perpetuity, all of it tax free (since it comes from a ROTH). Adding in other savings and it gets even rosier.
Point is: keep making your ROTH contributions and you'll be ok. Make a few cuts, learn to live on less and save a bit more and you could retire more than a decade sooner.




nereo

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Re: Reader Case Study - debt gone! :) How to proceed from here?
« Reply #3 on: April 28, 2014, 12:46:06 PM »
Ok, sorry! 120 of you and read my question and not replied :)
Should I have split into into separate threads?
Help! How can I improve my post?
no - Many people on this board like to take their time and write thought-out responses, and many can only write these responses when they aren't working.  That's one of the things I really like about being here.  Give it a day or two to give people a chance to respond.

homeymomma

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Re: Reader Case Study - debt gone! :) How to proceed from here?
« Reply #4 on: April 29, 2014, 02:19:08 PM »
Wow, nereo, thank you for such a thoughtful response.

About the 1450 barely covering rent- our rent for a 1bedroom with a 1 hour commute for my husband last year was 1350. Since we'll have two kids when we rent again, I assume it will only be higher because we'll need a two bedroom.
 The dc area is indeed quite expensive. I'd love to move but my husband is not convinced he could get another job. (He does very niche work now and gets paid pretty well for someone who went to art school for photography.)

Not retiring for 35 years- I'd love to really see FI as an option before we're in our sixties, but I'm not sure we'll stop at 2 kids, so just having a traditional retirement age/plan is going to have to do for now, with all the unknowns in our future (I'm 27, H is 30).

Second car- we have a second car now. H commutes in a beater that his mom (the home owner where we live) keeps for use when she is here every few months. If we had only one car I'd be stuck at home. This is not an option where we live because I would be completely isolated. I'm willing to do a lot of things to save money but staying at the house all day with two small children is not one of them. Anything is possible when we move but it's unlikely we'd be able to afford living centrally enough for this to not continue to be an issue.

Good point about the emergency fund. Those are all excellent examples. :)

Thank you again!!

Thegoblinchief

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Re: Reader Case Study - debt gone! :) How to proceed from here?
« Reply #5 on: April 29, 2014, 02:44:09 PM »
Take advantage of the free housing as long as possible. Most DC case studies I've seen support renting vs buying unless you're in bad parts of town or way out in the sticks.

If you're not exactly sure when you'll lose the free house, keep a year's worth of rent in something conservative but higher yield, like bonds. That way you've got some float to cover the increased expenses.

None of your spending is high, but $450 for food and $150 for misc can be worked on a little bit.

Do you live in an area with activities within bikeable distance or can DH use the metro?

homeymomma

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Re: Reader Case Study - debt gone! :) How to proceed from here?
« Reply #6 on: April 29, 2014, 03:03:35 PM »
I'm interested in the bonds suggestion because I feel like from here on out we'll be keeping a ton of money in cash savings accounts. Silly/embarrassing question: how does one buy bonds? We have betterment and I use vanguard for my husbands ira but even it is beyond me.i don't know how to even buy anything other than vfinx in vanguard.

The 450 is down from 500+, so we are making headway there. Food is how we socialize and how my husband gets through his days at the office sometime, so it's hard to cut back sometimes. I feel like if I gave my husband a personal allowance, he would just spend it on lunches anyway, so I have sort of given up this fight. The 150 is often not spent it it's entirety but it's sort of like a mini monthly version of an emergency fund so I don't constantly feel like we're going over budget just because I had to mail a package/buy stamps/pay admission somewhere that month.

Finally, we don't really live within any bike able distance. We're in an incredibly upscale neighborhood which means it's designed for fully functional, non-knowing-their-neighbors two car families. It would downright dangerous to bike anywhere from this house because of scary narrow high speed roads. NOT something I'm going to attempt with my baby, much less baby#2 on the way. Plus one of my realizations with committing to frugal life-changes has been "know thyself" I'm sure if we went out and got all the stuff for carting around kiddos on bikes, we'd use it all about four times per summer on the weekends, then it would start collecting dust because I'd have some scary experience with an asshole driver and refuse to go out ever again. (It's terrible but I'm just like that. I excuse it as a momma bear tendency, but I'm really just a wimp).
Metroing would cost over $5 per day, and add a minimum of 40 minutes to my husbands already hour long commute, because it would  be going in/out two "spokes" of the metro system to two different suburbs. He does it when his mom is here and using the car but it's really awful. He prefers me to drop him off and come get him :)

Thegoblinchief

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Re: Reader Case Study - debt gone! :) How to proceed from here?
« Reply #7 on: April 29, 2014, 04:07:19 PM »
Vanguard has a number of bond funds you could buy into using your existing account.

See this thread:

http://forum.mrmoneymustache.com/investor-alley/what-bond-fund-do-you-like/

I bike on busy roads all the time with my kids in a trailer, but at least you're honest with yourself :)

elaine amj

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Re: Reader Case Study - debt gone! :) How to proceed from here?
« Reply #8 on: April 29, 2014, 05:20:11 PM »
I don't know much about investments or anything - but good for you to sit down to gather all the data to put together a plan :)

I was curious about the small amount you plan to save for your daughter's education. Also, what about baby #2? When my kids were born we started saving $100 a month per kid. Now they are 11 and 12 and we have about $39k saved. I am worried it won't be enough so we are upping it to $200 per kid per month. We plan to pay for their tuition and they will be responsible for their personal expenses, rent, etc (and yes, they will pay us rent even if they live at home). It is currently about $40k per kid for a 4 yr degree at our local university right now. I imagine it will go up by the time they go to school - but whatever we save will be whatever they have available. Is your plans for your children to mostly pay for their own education?

homeymomma

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Re: Reader Case Study - debt gone! :) How to proceed from here?
« Reply #9 on: April 29, 2014, 08:45:31 PM »
Elaine, yes basically we are prioritizing our own retirement goals and home ownership over being able to pay our kids' way through college. We put the $40/mo towards it mostly as a placeholder. We will increase it if we feel able in the future, and we have had a few small $50/$100 gifts given to her that have gone in there. She has one wealthy grandparent who may or may not make a substantial contribution in future.
It is hard for us to prioritize this way, sometimes, because my and my husband'is degrees at private colleges were both paid for by our parents. My husband even got a very expensive master's as well. However, 3 of our 4 parents currently have zero retirement plans and are all 60+, so we find it difficult to follow their example in good conscience.
 So we are taking what we learned from them and have decided to ease our children's stress later in life by making sure we are set up for ourselves. Hopefully we will be doing well enough later in life that we will be able to help them with college, loan repayment, home buying, or child care when they have their own children. If not, at least we will not be a burden on them.
If we waited to have children until we could plan to finance their college education entirely, we would probably never have them. We are optimistic, perhaps, but hopeful that we can instill in our kids a hard work ethic and desire to succeed financially which may or may not involve taking our loans for college. We'll see what makes sense at the time, 17 years from now.
We'll probably do the same for baby #2, just to have an account ready for gifts.

elaine amj

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Re: Reader Case Study - debt gone! :) How to proceed from here?
« Reply #10 on: April 29, 2014, 08:51:24 PM »
That's not a bad plan. My husband paid his own way through college without major hardships with absolutely no loans and built up his savings from an early age. I definitely believe kids can handle paying their own way :) If it gets too hard, I might start demanding a higher rent from my kids so I can claw back some money from their education funds!

Gimesalot

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Re: Reader Case Study - debt gone! :) How to proceed from here?
« Reply #11 on: April 30, 2014, 08:19:49 PM »
Based on comments other DC folks have made, it might be a good idea to look at renting instead of buying.  But that is off in the future.

I think that you finances are in good shape.  However, ifyou are worried about having to wait too long until owning a home or FI, you could start working from home.  Other people who are SAHM/Ds have mentioned some of their ideas.  A couple of people use Leapforce.  There are several people that babysit at night and on weekends.  There is even a lady that watches kids for 30 minutes before the school bus in the morning and after the school bus in the afternoon.

About college... I paid my way, I still have some student loans almost 10 years after finishing, and its not a big deal.  Your children can get a great education without you spending tens of thousands of dollars.

MDM

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Re: Reader Case Study - debt gone! :) How to proceed from here?
« Reply #12 on: April 30, 2014, 10:57:40 PM »
Help! How can I improve my post?
Would you consider putting your numbers in a spreadsheet?  If so, see here.

Doing so tends to reduce ambiguity.  E.g., is that $4308/mo gross, or after taxes, or after taxes and 401k and pre-tax insurance, or...?  It also "forces" (of course you don't have to do anything you don't want to do) you to get more detailed on where your money is going, define the status of loans, etc.

The better the information that people can see, the better advice they can provide. 


homeymomma

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Re: Reader Case Study - debt gone! :) How to proceed from here?
« Reply #13 on: May 01, 2014, 12:37:09 PM »
Based on comments other DC folks have made, it might be a good idea to look at renting instead of buying.  But that is off in the future.

I think that you finances are in good shape.  However, ifyou are worried about having to wait too long until owning a home or FI, you could start working from home.  Other people who are SAHM/Ds have mentioned some of their ideas.  A couple of people use Leapforce.  There are several people that babysit at night and on weekends.  There is even a lady that watches kids for 30 minutes before the school bus in the morning and after the school bus in the afternoon.

About college... I paid my way, I still have some student loans almost 10 years after finishing, and its not a big deal.  Your children can get a great education without you spending tens of thousands of dollars.

I wonder often whether we should just be investing like crazy people while we have this break on rent, rather than hoarding cash to buy a house. It might be better in the very long term. However, rent around here is SO high, it seems prudent to give ourselves the OPTION of buying when we move, even if we don't actually end up doing that. I don't know. We're very much in that nesting phase of life. I'm a home mom and we're having a second baby. There's nothing more attractive than the idea of ownership and permanence that comes with buying. My husband also wants a lawn to mow, lol. Lots of others I'm sure face the same emotional/financial battle. But mostly now our decision to save for a house is based more on fear that we won't have enough in the budget to cover rent for a 2-bedroom when we leave, whereas a mortgage might be within reach.

Random Hangers

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Re: Reader Case Study - debt gone! :) How to proceed from here?
« Reply #14 on: May 01, 2014, 01:30:32 PM »
Will you be moving because the homeowner wants her house back? Or because you think you'll want/need a bigger place once baby #2 comes? If it's the former, then yes, saving up for a house (or for renting/moving expenses) is wise. Otherwise, stay there as long as humanly possible!!

Also wanted to chime in that I agree with your plan to save for retirement over kids' funds (for now, anyway). I had zero tuition help from my parents (Dad was kind enough to fill the cupboards with food whenever he visited, which was AWESOME), got scholarships/fellowships, worked my way through school, and it turned out great for me (no student loans). I get that school is more expensive than when I graduated in 1999(undergrad)/2003(grad), but smallish student loans would be a reasonable tradeoff, I think.

As for your savings, I've always opted for several "pots": I have a car fund, Hubby has a separate car fund, and we have a general savings account with about $17k (I *just* moved $10k of it into laddering CDs last month) in it that we add $500/month to and use for vacations, unanticipated expenses, etc. I found it worked well for my peace of mind that way, but if it's easier for you to dump it all into one pot and earmark it in your mind, that's fine too.

We've only gotten into non-retirement investing (a brokerage fund at Charles Schwab with 2 index funds at the moment) in the past year or two, when I finally realized that our savings account wasn't growing (interest-wise) the way I imagined it would.

Hope that helps.

phred

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Re: Reader Case Study - debt gone! :) How to proceed from here?
« Reply #15 on: May 01, 2014, 01:59:14 PM »
If you move out of the present house, will it stay empty?  Empty houses get broken into a lot, so you are actually helping the owner.

Stress at work is not really relieved by having an upscale lunch.  Bringing a decent lunch from home, followed by a brisk walk around the building/block will be much more effective.  The money saved can be used for evenings out, or even for buying new furniture.

You might look into establishing an HSA/Health Savings Account

homeymomma

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Re: Reader Case Study - debt gone! :) How to proceed from here?
« Reply #16 on: May 01, 2014, 02:19:16 PM »
We live in my husbands moms house while she is living in a different city for a post-retirement job with an unknown timeframe. That's why we don't know how long we'll be here... Because we don't know how long she'll be there. She wouldn't kick us out or anything when she come back but our interpersonal interactions are generally strained so we would want to be out promptly. (She is very generous, don't get me wrong, she let's us live in her 5 br house and pays our electric and gas bills, which I'm sure are exorbitant because the house is so massive.)
She comes back every two months or so for about a week at a time. So yes, the house would be empty otherwise but im SURE she could get somebody to pay HER for the privilege of house-sitting, so we're not really doing her any favors.

I WISH we'd done an HSA last year when we had the option, but our current plan is not eligible. :(

As for house savings, yeah see above for why we want that last-minute flexibility. It hard to plan not having any idea how long we'll stay here, but putting money in a cash savings account seems like a low-risk first step. Hopefully we won't regret it!

phred

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Re: Reader Case Study - debt gone! :) How to proceed from here?
« Reply #17 on: May 01, 2014, 03:06:28 PM »
Sorry your MIL is putting such a strain on you.  I've just finished reading Dmitry Orlov's "Five Stages of Collapse".  If the SHTF, then having an extended family all on good terms with each other is the way to survival.  Well, OK, maybe not good terms, but tolerable enough to continue sharing the same house.

bdc

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Re: Reader Case Study - debt gone! :) How to proceed from here?
« Reply #18 on: May 01, 2014, 10:17:09 PM »
Maryland, Virginia, and DC all have significant tax benefits on top of the tax-free accumulation and withdrawal provisions (like the Roth).  Bottom line: there's no real justification for you to be investing in taxable accounts.  It's not a lot of money today, but I like to practice financial discipline. 

mrsggrowsveg

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Re: Reader Case Study - debt gone! :) How to proceed from here?
« Reply #19 on: May 02, 2014, 07:07:42 AM »
It sounds like you are doing really good so far.  I am really new to investing so I don't have much advice for you there.  I saw that you are spending $50 a month on diapers.  With two kids, that will be even higher.  Cloth diapering is insanely easy.  After an initial investment, you will save loads of money of diapering.  We also do cloth wipes.  I am having a second baby in the fall also :)

homeymomma

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Re: Reader Case Study - debt gone! :) How to proceed from here?
« Reply #20 on: May 02, 2014, 08:33:40 AM »
Maryland, Virginia, and DC all have significant tax benefits on top of the tax-free accumulation and withdrawal provisions (like the Roth).  Bottom line: there's no real justification for you to be investing in taxable accounts.  It's not a lot of money today, but I like to practice financial discipline. 

I'm not understanding what you mean. We don't have a 401K or anything so after we max out our Roth IRAs there's no further tax-advantaged option for us (that I know of... anyone?). Do you mean I shouldn't be putting the $100/mo into the taxable account? What should I be doing with it?

It sounds like you are doing really good so far.  I am really new to investing so I don't have much advice for you there.  I saw that you are spending $50 a month on diapers.  With two kids, that will be even higher.  Cloth diapering is insanely easy.  After an initial investment, you will save loads of money of diapering.  We also do cloth wipes.  I am having a second baby in the fall also :)

Thanks! $50/mo is actually a high estimate, it's a bit under that because we shop Costco for both diapers and wipes. I actually have a smallish collection of cloth diapers that we used for my daughter for about 9 months. She started wetting all the way through every layer and our into her outfits, and I found myself doing a TON more laundry than normal. It was just not worth it. It was either buy a bunch more liners and doublers or quit, and my husband was never super on board with cloth so we quit. We also live in a house that is very inconvenient for laundry. That being said, I'm planning to try the cloth ones again for our second baby. I'm hoping to use them early on when the amount of pee is very small and it's just breastmilk poop. After that hopefully our first will be potty trained so if we have to switch to disposables again it will only be for one. These are my optimistic thoughts! But yes, we'll probably spend a bit more on diapers here and there. I also felt like our water bills were WAY higher when we used cloth! I was probably too obnoxious about the washing routine. Oh also I should add that I do want to do cloth wipes this time around! I'll probably just start with using a sink and our unreasonably large collection of tiny washcloths. We'll see!