Author Topic: Reader case study - fresh look!  (Read 3246 times)

laka

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Reader case study - fresh look!
« on: March 05, 2015, 10:28:52 AM »
Hello! I've been a reader around here for....well, a long time. A couple of years at least. I have seen the great feedback you guys give, ad I would really appreciate it if you could take a look at my situation. And I apologize for the length; I tried to keep it readable, but I didn't want to leave anything out. 

Income:
Me: $3,700
Him: $2,400
= $6,100 take home (health insurance, pensions, 457b taken out pretax)
$150-300 irregular income (bookkeeping side hustle) – always goes directly to credit card debt, in addition to payments below

Current expenses:
Mortgage 1: $1,355 (includes property taxes and homeowners insurance)
Mortgage 2: $257.90 minimum payment, we pay $400 total in order to have it paid off prior to the balloon payment coming due in 2021

Credit card 1: $550
Credit card 2: $450

Heat: $110
Electric: $70
Water/sewer/garbage: $80
Daycare: $1,100 (one child full-time, one afterschool)
Auto insurance: $100
Phones: $43
Internet: $24
Netflix: $18
Student loan: $82

Food: $700
Fuel: $240
Household: $100 (Laundry detergent, pet food, etc.)
Tools: $100 (mr. is a mechanic, still building up his tool collection)
Frivolous: $278 - some entertainment, some eating out, some vice-related (liquor store, smoking)

Savings for car replacement: $300 (cars are 15 and 18 years old, replacing at least one will be a necessity in the next year or two and I want to pay cash)

Assets:
House: $223,000
Car 1: $4000
Car 2: $1000
Retirement savings (balance of pensions and 457b): $80,000
Emergency fund: $1000
Car replacement: $1000

Liabilities:
Mortgage 1: $171,000 (4.5%)
Mortgage 2: $21,000 (7.75%)
Credit card 1: $11,500 (part at 0% interest until 11/2015, rest at fixed 0.99%)
Credit card 2: $6,200 (0% until 5/2016)
Student loan: $8,000 (3.5%)

Ok, I know there will be a face punch for the “frivolous” category, but it’s something we’re reducing each month and directing more towards debt.  The expense for smoking drives me crazy, but mr. is trying to quit.  We do get a redbox and a pizza every once in a while, or have a meal out.  But those are rare, and there are certainly no manicures or housecleaners in there.

Specific question:
We are paying our credit card debt off aggressively.  Mr. finished school in June 2014, and since then the balance has gone down over $10,000.  We used 0% offers to partially fund expenses while in school, most of the rest is a long holdover from lawyer bills due to a custody case 10+ years ago.  We kept the school loans to a minimum, only took out subsidized loans.  Right now we’re on track to have all credit card debt paid off by the end of 2015. 

However, we have some upcoming expenses, mostly house-related.  We need to replace our two porches, which are completely rotting out.  We should replace our windows, but at the very least they need some significant repair due to wood rot. And we have a small house with only two bedrooms. Our kids (boy – 9, girl – 5) share a small bedroom, which is working just fine for now, but we will need more space pretty soon.  We have an idea for a small, one-room addition over our existing kitchen, but really have no idea what it would cost.  And our garage is falling down.  We can make some repairs and make do, but longer-term we’re considering enlarging and heating the garage so mr. can do side work repairing cars at home.  But, $$$.

On the personal side, I am pretty burned out, and I would love to quit my job and take a little time off from full time work (I would still work part time, but my income would definitely be reduced). This would let me be home when my kids get done with school (reducing daycare costs to $0 and letting me be more involved in what will be a challenging year school-wise for the 9 year old). I’m holding on for now, and certainly don’t intend to make any changes before the credit card debt is gone at a minimum. My 5 year old starts school in September, which will get rid of the bulk of the daycare costs and will also let me have more options in how I get to work (biking or bussing, which just don’t work while I have to drop a kid at preschool, trust me, I’ve tried to figure out a way).

So. How do I approach this? I am so, SO ready to be done with the credit card debt. It has been hanging over our heads for over a decade, and it’s a reminder of a really difficult time in our lives.  But we need to do some work on our house, and while we’re fairly handy, we’re looking at a couple of large projects: replacing porches, including roof, and putting in footings since right now they’re balanced on piles of bricks, and an addition, which I don’t even know where to start. Even if we tackle these entirely ourselves, there will be expenses, and I can’t figure out if it makes sense to divert money from credit card payoff to house projects.  Really, I would like a fresh set of eyes (or many sets). I think I’ve reduced our expenses pretty well, and our priorities are good. Maybe I’m just impatient, but any advice would be welcome! 

RexualChocolate

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Re: Reader case study - fresh look!
« Reply #1 on: March 05, 2015, 10:47:40 AM »
Great cautionary tale on not buying houses. Your income is good, your prior spending haunts you a bit but is mostly tackled and that is amazing. Literally most Americans never even get this far. Great job on retirement savings.

Definitely keep working. Your savings on daycare dwarf your contribution to household income.

Don't beat yourself up on the frivolous category. Obviously, cigarettes have got to go (try Chantix, miracle drug IMO), but your big problem is the house.

Dump the house, rent a 3 bedroom. You'll have to renovate the front porch, but demo the back porch. It becomes stairs to the ground. If your house is really worth 223k, you'll have ~20k of equity out after transaction costs you can use to pay down debt. Will also free up some cash flow each month.

As for budget, good work keeping expenses low:
Food could use some minor optimization but pretty close for 4.
Netflix at 18 stands out. Just do one or the other, you don't need both streaming and DVDs. Massive savings of 9$ a month

bacchi

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Re: Reader case study - fresh look!
« Reply #2 on: March 05, 2015, 10:48:13 AM »
My first thought is that you need to wipe out the most expensive debt, which is the student loan. The fixed rate card (0.99%) doesn't need extra repayment until the other debt (student loan and then CC#2, assuming it'll jump to 15% or so) is gone.

As you know, there's just no way you can quit right now.

If you and your husband are good with tools, there's no reason that you can't fix the porch yourselves. A porch isn't a piano. Not knowing where you live or the height of the porch, you might be able to get away with precast footings.


PencilStache

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Re: Reader case study - fresh look!
« Reply #3 on: March 05, 2015, 11:41:00 AM »
A couple of things jump out when I read your case study. I believe the venerable MMM himself would say you are in a DEBT EMERGENCY!!!

Obviously your highest priority should be (and sounds like it is) paying down your CC debt as fast as possible. After that I would suggest taking out your second mortgage to avoid the balloon payment. Then you can tackle mortgage one and the student debt. Taking out the CC's is critical. It gives you a higher safety margin each month and allows you to take the money you were using to pay down those items and increase payments on other debt.

How do you get there:

- Cut down on the frivolous spending as much as possible. Zero isn't likely a realistic goal here, but cutting out the liquor store and smoking would go a long way.
- Cut down on gas expenses. Sounds like you have already considered how to bike and bus more, but really dive into how you can reduce this expense. Can you move closer to work? Get a job closer to home? Car expenses are one of the biggest drains on creating wealth. Could you move to one vehicle and reduce car insurance? Think outside of the box as much as possible.
- Adjust your internal temperature tolerances. Lower the thermostat in the winter a couple of degrees and raise it in the summer. Can leaving the windows open in the summer meet your home cooling needs? DIY insulation can save you a boatload on utility expenses each month. Lots of videos online can show you how to do this.
- Can you cut out the tool expenses? Does your husband earn money from being a mechanic? If not, I would say cut this out entirely as it is a hobby and not an investment. (Or at least until you get out of the debt emergency.) Can he borrow from a network of friends for any personal car repairs or home improvements? If it is a business, these expenses may be deductible on your income taxes. (That's a whole different post though. ;) )
- Can you cut any of your monthly food expenses? Move to less packaged items and less meats? For a family of 4, $700 does seem crazy, but it's something to take a look at.
- Can you move to a smaller and more efficient home?

Overall though it looks like you have cut a lot of the fat out of your monthly expenses that weigh down most Americans. So the real way to get ahead is to increase your income streams.

- It sounds like you already have a few side income streams. Can you increase these? What are you passionate about? (Writing, working out, teaching, etc.) Can you turn your hobbies into something that you can make money off of?
- You never directly said what your long term financial goals are? Why do you want to get into a better financial position? This is an important question because it feeds your motivation. Do you want to not work so you can spend more time with your children? If so, and you deem this important, you will be more likely willing to cut out dinner at Applebee's that week. 

It also sounds like you husband may not be as on board with the idea as you are. You need to communicate with him to make sure you have the same goals and motivations. Otherwise he may not be as interested in cutting expenses. Once you have the buy in, I think you can start to make quick progress. With an end goal in place, you can focus in on it and see through the forest to your future self.

It sounds like you are already thinking on a more frugal path and just need a little push to make things even better. Keep up the good work and let us know how it goes!

laka

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Re: Reader case study - fresh look!
« Reply #4 on: March 05, 2015, 12:33:45 PM »
Thank you! 

I know there's no way for me to quit right now. Really, I would put quitting/reduced work hours in the "financial goal" category.  I clearly make way more than daycare costs, and once my youngest is in school all that money can go towards the CC debt. Other financial goals: secure retirement, hopefully early, but I feel like I need to get out of this hole before I can really delve into what that will mean.

Interesting suggestion to wipe out the student loan debt first. I know the rate is higher than the 0%/0.99%, but since I also know the 0% rates will jump when they time out I've really focused on paying those off.  It's possible that once I get the 0% portion paid off I could switch focus, but the idea of getting the cards paid off entirely is a pretty good carrot. And Since I will be putting $2,000+ per month towards debt at that point, I don't know that it makes a huge amount of difference, $-wise.

Mr. is a mechanic for his job.  So the tools are necessary.  However, he has started a bit of a tool co-op with his coworkers, and they are sharing many of the more expensive and less frequently used tools (this is actually kind of amazing - I have to give it to my mr., he can be very persuasive!). He also fixes our cars, which keeps costs down, but it's definitely not just a hobby.  And for now, two cars are necessary to get to work. Mr. and I work in opposite directions (sigh), and I need to drop the kiddo off at daycare (mr. has to be at work before daycare opens), although I do not do pickup.  Once the youngest is in school, both kids will get on the bus before mr. has to leave in the morning, so my options are wide open. September. The car just needs to last until September.

The balloon payment on the second mortgage is under control, so long as we keep paying $400 per month.  We have been doing that for several years, and it will have the entire mortgage paid off 8 months prior to the balloon payment due date (mid-2020). 

Mr. and I are on the same page money-wise. I am really the overall money manager, but we have frequent money talks and agree on goals and priorities.  And we are working on ways to reduce that "vice" spending. 

The biggie: the house. We have no AC, keep the heat at 58-64 in the winter, and have an elaborate DIY system that works similar to a whole-house fan. We live in MN, which means bitter winters and hot, soggy summers. Insulation could definitely be beefed up. Total livable space is about 1300 sf, although we're finishing off the basement (won't actually be considered livable, since the ceilings are too low, but we'll use it).  So not huge for 4 people.

I hear what you are saying about the costs involved with the house.  I can't really get my head around the idea of selling it. Which is my own deal, I know.  But here is my reasoning: love our neighborhood, safe, walkable (to the library, grocery store, wonderful parks and natural areas), and we are very happy with our schools.  Those can be hit and miss within our metro area, but house values (and rent costs) are very closely correlated with school quality here. We are also very close (physically and emotionally) to both grandmothers, who we help frequently with house/living stuff and they help frequently with our kids. And we have a nicely-sized lot, which means we get a fantastic veggie and fruit garden in the warmer months. I really love where we live, and I love our house. When we purchased it (in 2006, so near the top of the bubble) we knew we would have some bigger projects, but we intend to live here forever, or at least until we can't walk up stairs any longer.

That probably all sounds like justification/rationalization.  And it is.  I will think on the housing costs. I have also looked into refinancing both mortgages. It wouldn't save much on interest over the life of the loan, but it could reduce our monthly payment by about $400. But it would extend the loan.   

Thank you. Much to think about.

Colorado Hiker

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Re: Reader case study - fresh look!
« Reply #5 on: March 05, 2015, 12:44:16 PM »
First debt I would tackle is that second mortgage, as that is your highest APR.  I wouldn't worry about paying off that first credit card too quickly (0.99% fixed is ridiculously low), or even your student loan.  Try to throw $$ at that second mortgage, aim to get that second credit card paid off before higher rates kick in.  Build a larger emergency fund, max out your tax advantaged investments, then maybe tackle low low-rate debts if it'll make you feel better, otherwise invest in taxable accounts -- after you've saved up an emergency fund, porch replacement funds, etc (you can always take your car $$ out of your emergency fund if something happens to one of them).  Looks like you could free up several hundred $ a month between groceries, frivolous, etc.  It really depends on how badly you want to attack your finances!

RexualChocolate

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Re: Reader case study - fresh look!
« Reply #6 on: March 05, 2015, 01:40:51 PM »

I hear what you are saying about the costs involved with the house.  I can't really get my head around the idea of selling it. Which is my own deal, I know.  But here is my reasoning: love our neighborhood, safe, walkable (to the library, grocery store, wonderful parks and natural areas), and we are very happy with our schools.  Those can be hit and miss within our metro area, but house values (and rent costs) are very closely correlated with school quality here. We are also very close (physically and emotionally) to both grandmothers, who we help frequently with house/living stuff and they help frequently with our kids. And we have a nicely-sized lot, which means we get a fantastic veggie and fruit garden in the warmer months. I really love where we live, and I love our house. When we purchased it (in 2006, so near the top of the bubble) we knew we would have some bigger projects, but we intend to live here forever, or at least until we can't walk up stairs any longer.

That probably all sounds like justification/rationalization.  And it is.  I will think on the housing costs. I have also looked into refinancing both mortgages. It wouldn't save much on interest over the life of the loan, but it could reduce our monthly payment by about $400. But it would extend the loan.   

Thank you. Much to think about.

I retract my earlier statement, no reason your food cost should be 700 if you're gardening half the year.

No need to apologize for justifying- there's nothing wrong with living in the house- just recognize the house as an expense and not an investment. Don't add any additional interest expense to it by refinancing, only refinance if it reduces interest paid.

I was proposing the most economically viable solution- you personally have to balance quality of life with that. It sounds like you're on the right track now, all of these issues will clear up in time if you keep your expenses in line with what you've stated here.

laka

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Re: Reader case study - fresh look!
« Reply #7 on: March 05, 2015, 01:48:33 PM »
I retract my earlier statement, no reason your food cost should be 700 if you're gardening half the year.

Ha! You missed the part where I said we live in MN. Outdoor gardening for about 1/3 of the year, actual food production maybe 1/4 of the year. :) That said, I'm deep into the meal planning/cost saving for groceries (we already avoid processed food and cook from scratch, we just haven't been great about cooking around sales and making sure we don't have much food waste), and I expect this month to be closer to $500. 

RexualChocolate

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Re: Reader case study - fresh look!
« Reply #8 on: March 05, 2015, 01:56:29 PM »
You quasi Canadian people are crazy. I'm crazy enough for moving back to Chicago, any further north sounds like 100% buffalo and tundra

Bracken_Joy

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Re: Reader case study - fresh look!
« Reply #9 on: March 05, 2015, 02:10:13 PM »
I think I would be tackling that "heat" category. It'll take an up-front investment, but insulation is just... always worth it. Especially since many areas have tax advantages for bringing your insulation up to eco-friendly standards. It sounds like you're already aware of your windows being an issue- replacing them will help this expense. In the meantime, the cling wrap to help insulate is a good idea. And curtains.