Author Topic: READER CASE STUDY: Jumping on the Bandwagon  (Read 6268 times)

AlwaysLearningToSave

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READER CASE STUDY: Jumping on the Bandwagon
« on: June 13, 2015, 08:04:48 AM »
Life situation:  Young attorney two years out of law school and stay at home wife with 10 month old daughter.  Live in Midwest.  Wife will be returning to work part time in education for modest increase in income in the fall.  We are both relatively frugal by nature, but that comes from upbringings where frugality was a matter of necessity.  The limiting factor was lack of money-- not choosing to be frugal despite available money.  Many extended family members are decidedly not frugal.  We have done considerably better than our other family members but learning to be frugal despite an abundant income is a newer concept for us. 

NOTE:  All figures are expressed monthly

Gross Salary/Wages: Monthly $6,333.34

Other Income:  I supplement with teaching occasional classes at local college; wife supplements with freelance piano gigs as available.  We will ignore this income for purposes of this case study, as supplemental income is primarily used to pay down debt.

Tax Withholding:    Federal: $683.94; State: $278.06; SS $379.56; Medicare $88.76; Total: $1,430.32*
*NOTE:  We claim 0 exemptions for purposes of withholding despite knowing the conventional tax planning wisdom of limiting withholding for behavioral reasons-- it is easier to make wise decisions with a larger chunk of money in the form of a tax return than smaller bits in the checking account throughout the year.  I'm open to critiques on this as the practice was started before we discovered MMM.  If we change this, I will just need to figure out how to ensure the new monthly income is invested appropriately and doesn't burn a hole in my or my wife's pocket.

Monthly Take-Home Pay: $5,409.69

Deductions / Savings:
401(k) Contribution:  $760; divided $253 in Roth bucket (my contribution); $507 in Traditional (employer's contribution and match).
Healthcare Flex Spending Account:  $125.00
Mortgage Principal:  $232.00

Current Expenses: 
Mortgage Interest:   $590.31
Escrow Payment for RE Tax, Ins.:  $342.26   I think there is opportunity for savings on home insurance
Groceries:  +/- $400.00 this category includes anything bought at grocery store, including otc meds, toiletries, diapers, etc.  Food cost is lower.
Auto Insurance:  $54.63
Trash:   $21.00
Internet:  $60.00
Cell Phones:  $93.15 I have smartphone bought before discovering MMM, wife has dumb phone.  Reluctant to change service providers to "discount" carrier because of poor reception in area.
Life Insurance:  $70.00
Sling TV      $20.00 Unnecessary but it was a compromise to cut much more expensive satellite TV
Restaurant / Fast Food: +/- $30.00
Transportation (Gas and maintenance on two older, efficient, paid-for cars): +/- $120.00  Savings will come with my new bike-to-work habit
Gifts / tithes:  +/- $100.00
Home Maintenance:  +/- $50.00
Miscellaneous: +/- $400.00

Healthcare Spending:
Health Insurance: $680.82 (Wife / Daughter on private plan)
Health Insurance: $86.30 (My portion of premium through employer plan)
Prescription Formula:  $611.00 (half of this expense is reimbursed through a state program, as long as funds are available)   
NOTE:  I know this category is absurd.  I hope to transition to a HDHP with HSA during the next open enrollment period, but the way my employer structures its health insurance offerings complicates matters.  Formula expense is not covered by health insurance, but necessary and unavoidable due to daughter's rare health condition (just take my word for it, I would avoid this expense if I could).  We went with "traditional" gold insurance plan for wife/daughter this year in light of uncertainty about daughter's condition.

Utilities:
Gas: +/- 80
Electric: +/- 80
Water/Sewer: +/- 40
NOTE: I expect to see decreases in this category with recent changes to thermostat settings, dryer use, switch to LED bulbs, turn down of water heater temp, conscious effort to use lights less, low-flow shower head, etc...

Assets:
Vanguard Roth IRA: $4,000.00
My 401(k): $4,000.00
Wife's 403(b): $3,000
Wife has some $$$ in public employee retirement system-- not sure of the value.
Emergency Fund: $10,000 (about half in Ally Raise Your Rate CD @ 1.29% interest; about half withering away in traditional bank savings account with approximately 0.00% interest)
Home: approx. 176,000.00

Liabilities: 
Wife Grad Student Loans: $23,500 @ 6.8%
Wife Undergrad Loans: Wife Undergrad Loans: $6,000 @ very low interest rate
Outstanding mortgage principal: $155,000.00; 30 yr @ 4.5% interest.
We currently pay $525.00 per month on Wife's Grad Loans and pay minimums on other debt. $525 is close to double the minimum on traditional ten-year amortization.  We hope to increase this to more than $1,000 per month when wife returns to work in fall.

Specific Questions:
I am interested in hearing whatever advice, insight, and critiques anyone has to offer.  I am specifically interested in savings opportunities I may not be seeing. 

Also interested in critiques to our debt repayment / investment strategy.  We currently contribute the minimum to take full advantage of employer match to $401(k).  Pretty much all other effort is directed toward killing the high-interest student loans.  Is there a better strategy? 

StockBeard

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Re: READER CASE STUDY: Jumping on the Bandwagon
« Reply #1 on: June 13, 2015, 01:18:40 PM »
If you pay more taxes than you should throughout the year, and count on the tax return, technically you are leaving money on the table (you could instead get closer to a 0 tax return, and invest the additional money several months earlier). I would try to optimize that if you have time/motivation to do it.

also, your "miscellaneous" section at $400/mo is big compared to your other sections, which kind of removes lots of visibility. There might be room for frugality in there?

MDM

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Re: READER CASE STUDY: Jumping on the Bandwagon
« Reply #2 on: June 13, 2015, 01:24:31 PM »
Tax Withholding:    Federal: $683.94; State: $278.06; SS $379.56; Medicare $88.76; Total: $1,430.32*
*NOTE:  We claim 0 exemptions for purposes of withholding despite knowing the conventional tax planning wisdom of limiting withholding for behavioral reasons-- it is easier to make wise decisions with a larger chunk of money in the form of a tax return than smaller bits in the checking account throughout the year.  I'm open to critiques on this as the practice was started before we discovered MMM.  If we change this, I will just need to figure out how to ensure the new monthly income is invested appropriately and doesn't burn a hole in my or my wife's pocket.

We currently pay $525.00 per month on Wife's Grad Loans and pay minimums on other debt. $525 is close to double the minimum on traditional ten-year amortization.  We hope to increase this to more than $1,000 per month when wife returns to work in fall.

Specific Questions:
I am interested in hearing whatever advice, insight, and critiques anyone has to offer.  I am specifically interested in savings opportunities I may not be seeing. 

Also interested in critiques to our debt repayment / investment strategy.  We currently contribute the minimum to take full advantage of employer match to $401(k).  Pretty much all other effort is directed toward killing the high-interest student loans.  Is there a better strategy?

You folks are doing pretty well.  Wololo's comment about high miscellaneous is a good one: take a closer look there.

At 6.8%, putting your excess cash flow to that loan is a good idea.  Speaking of cash flow, getting 6.8% instead of giving the IRS a 0% loan seems a good reason to adjust your withholding.  At a quick glance (using the case study spreadsheet) it appears you are overpaying federal by ~$250/mo.  You'll have to evaluate state yourself.

AlwaysLearningToSave

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Re: READER CASE STUDY: Jumping on the Bandwagon
« Reply #3 on: June 14, 2015, 05:28:58 AM »
Thanks for the insights! I think you are both correct that I need to reevaluate my income tax withholding. My thought process before discovering MMM was that cash in a checking or savings account would hardly do any better than the 0 interest loan to Uncle Sam. But you are wise to point out that I can get a guaranteed 6.8% return on this money if I change my withholding and use it to pay down debt. That return over one year is substantial enough to justify a change.

I think you are also right that I need to further break out my "miscellaneous" category. I've only been very carefully watching spending for a few months, so it is a work in progress. I have used it as a catch-all for normal-but-irregular expenses, like clothing (wish I did t need to wear a shirt and tie), Child's needs, car registration, etc. looking closer here might be fruitful.

Any other thoughts or critiques from the Mustacians?

Argyle

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Re: READER CASE STUDY: Jumping on the Bandwagon
« Reply #4 on: June 14, 2015, 05:53:33 AM »
Is daughter an infant who will "graduate" out of the formula within the next year?  If so, that would be $611 you could put straight to debt.  Once you get that 6.8% debt out of the way, that will bea big chunk of money you can stash in savings/investments.

The half of your emergency fund that's earning no interest could be directed elsewhere.  You might look around for a credit union deal.  My credit union offers 1.29% on checking if you fulfill certain requirements, mainly using their debit card 12+ times per month. 

You also might be able to squeeze some more money out of the situation by putting all the expenses you can on a credit card with cashback rewards with the proviso that you have to be sure you're not going to go hogwild and run up unnecessary expenses.

AlwaysLearningToSave

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Re: READER CASE STUDY: Jumping on the Bandwagon
« Reply #5 on: June 14, 2015, 06:16:06 AM »
We hope and pray she will grow out of the need for the formula. Most kiddos with her condition outgrow the condition between 2 and 5 years old. She has a fairly severe case so there is a strong possibility she will need this type of expensive prescription nutritional supplementation for several more years. I would love to be able to put that money toward debt, but I don't think we can plan on doing so any time soon.

We recently started using a cash back rewards card for most expenses.

I should look into other savings account options.


AlwaysLearningToSave

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Re: READER CASE STUDY: Jumping on the Bandwagon
« Reply #6 on: June 27, 2015, 07:39:18 AM »
Thanks for all the advice! I just got my first payroll calculations since changing my 401(k) contribution to traditional from Roth and adjusting my W-4 withholding exemptions. Your advice found about $300 per month that we were leaving on the table. Combine this with cash-back credit card rewards and new-found savings from cancelling our home-pickup recycling service in favor of taking recycling to the free community dropoff and we should have about $340 per month extra to put toward student loans. This could save maybe $400 in interest over the life of the loan!

This forum is AWESOME!  I likely would not have made the withholding changes if left to my own devices.  I'm so glad i happened to stumble upon MMM and only wish i had done so sooner. Now I'm off to look for even more ways save!


little_brown_dog

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Re: READER CASE STUDY: Jumping on the Bandwagon
« Reply #7 on: June 27, 2015, 08:05:53 AM »
I just refinanced my graduate loans that were also at 6.8% with SOFI down to 5%. The process was easy and they allowed my husband to be my cosigner since I make a very small income and wouldn't have qualified on my own. You might want to wait until your wife has some sort of income before trying to refinance though - there is a good chance they won't accept her if she has 0 income, but they took me with limited PT income as long as my husband cosigned.

Midwestache

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Re: READER CASE STUDY: Jumping on the Bandwagon
« Reply #8 on: June 27, 2015, 08:43:51 AM »
What was the graduate degree for the wife? Could she work more to help pay that off before being full SAHM?

AlwaysLearningToSave

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Re: READER CASE STUDY: Jumping on the Bandwagon
« Reply #9 on: June 27, 2015, 12:32:52 PM »
Wife will be going back to work part time in the fall.  almost all of her additional income will go straight toward the loans. Would have been better for us to pay them off before she went SAHM, but it didnt work out that way.

I looked at Sofi as well.  They would not accept her with no income. I am reluctant to cosign because then I am personally obligated to repay it, but maybe i just need to get over that. I've also considered setting up a HELOC to see if i can get the interest rates lower. I would not use the HELOC to refinance the loans all at once but i could move some of it to a lower rate. Again, the debt would become mine. It it is just a wild idea at this point.  I havent done enough research to know if that would even be feasible. Has anyone else done a student loan refinance using a HELOC?

MDM

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Re: READER CASE STUDY: Jumping on the Bandwagon
« Reply #10 on: June 27, 2015, 01:43:13 PM »
Young attorney two years out of law school and stay at home wife with 10 month old daughter.

I am reluctant to cosign because then I am personally obligated to repay it

It may not be a true reading, but the juxtaposition of the highlighted comments does make it read unfavorably to you.  Is marriage just another legal contract to you or, upon further reflection, might you change your opinion about the merits of cosigning?

ShoulderThingThatGoesUp

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Re: READER CASE STUDY: Jumping on the Bandwagon
« Reply #11 on: June 27, 2015, 04:19:59 PM »
I'm with MDM, I don't get why you wouldn't co-sign if it would lower costs.

Cycling Stache

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Re: READER CASE STUDY: Jumping on the Bandwagon
« Reply #12 on: June 27, 2015, 05:35:08 PM »
Young attorney two years out of law school and stay at home wife with 10 month old daughter.

I am reluctant to cosign because then I am personally obligated to repay it

It may not be a true reading, but the juxtaposition of the highlighted comments does make it read unfavorably to you.  Is marriage just another legal contract to you or, upon further reflection, might you change your opinion about the merits of cosigning?

I had to re-read this a couple times too.  While I understand that 50% of marriages don't work out, and I can understand not signing on to massive spousal debt given that fact, I was expecting to see $100k-$200k debt that you were hesitant to sign on to.  With a wife and 10-month old daughter, you should be able to commit to a $23,500 debt.  That's maybe 2 years away--tops--the way you're strategizing, especially since it's one of your highest interest rates.

I'd say bite the bullet, love the ones you're with, and make a 2-year commitment to the marriage.

Btw, I would give different advice if we were talking about $100k in debt.  The reality is that marriages often don't work out, despite our best intentions.  I don't think it's ridiculous at all to account for that fact.  But in this case OP should be able to see his marriage lasting long enough to eliminate that debt and save money along the way.

AlwaysLearningToSave

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Re: READER CASE STUDY: Jumping on the Bandwagon
« Reply #13 on: June 27, 2015, 07:51:22 PM »
Young attorney two years out of law school and stay at home wife with 10 month old daughter.

I am reluctant to cosign because then I am personally obligated to repay it

It may not be a true reading, but the juxtaposition of the highlighted comments does make it read unfavorably to you.  Is marriage just another legal contract to you or, upon further reflection, might you change your opinion about the merits of cosigning?

I had to re-read this a couple times too.  While I understand that 50% of marriages don't work out, and I can understand not signing on to massive spousal debt given that fact, I was expecting to see $100k-$200k debt that you were hesitant to sign on to.  With a wife and 10-month old daughter, you should be able to commit to a $23,500 debt.  That's maybe 2 years away--tops--the way you're strategizing, especially since it's one of your highest interest rates.

I'd say bite the bullet, love the ones you're with, and make a 2-year commitment to the marriage.

Btw, I would give different advice if we were talking about $100k in debt.  The reality is that marriages often don't work out, despite our best intentions.  I don't think it's ridiculous at all to account for that fact.  But in this case OP should be able to see his marriage lasting long enough to eliminate that debt and save money along the way.
Points all well taken, but I assure you the reasoning is not a lack of commitment. I already committed to repaying her loan for her when we decided for her to stay at home.

The primary reason I don't want to co-sign the student loan is because of a unique aspect of federal student loans. If the borrower dies, the debt is discharged. A non-cosigning spouse who does not live I a community property state is not liable to pay the deceased borrower's student loan debt. A co-signing spouse, however, would be liable to repay the debt. So if a borrower's spouse consigns the student loan today and borrower dies tomorrow, the co-signing spouse has a personal debt he or she would not have had the borrower not cosigned.  I view it as something akin to a built-in life insurance policy for the amount of the student loan debt.

Viewed in this way, the question is whether the interest savings are worth the very small risk that she would before it is paid off. Perhaps I need to rethink the calculus in light of the relatively small amount of the debt.



MDM

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Re: READER CASE STUDY: Jumping on the Bandwagon
« Reply #14 on: June 27, 2015, 08:13:32 PM »
Points all well taken, but I assure you the reasoning is not a lack of commitment. I already committed to repaying her loan for her when we decided for her to stay at home.

The primary reason I don't want to co-sign the student loan is because of a unique aspect of federal student loans. If the borrower dies, the debt is discharged. A non-cosigning spouse who does not live I a community property state is not liable to pay the deceased borrower's student loan debt. A co-signing spouse, however, would be liable to repay the debt. So if a borrower's spouse consigns the student loan today and borrower dies tomorrow, the co-signing spouse has a personal debt he or she would not have had the borrower not cosigned.  I view it as something akin to a built-in life insurance policy for the amount of the student loan debt.

Viewed in this way, the question is whether the interest savings are worth the very small risk that she would before it is paid off. Perhaps I need to rethink the calculus in light of the relatively small amount of the debt.

Good to see that you had some reasoning behind the choice.  If you look at the extra interest you pay for not refinancing and consider that the premium cost of a $23,500 10 year term life insurance policy, you'll find that is very expensive insurance.  Not to mention the "value" of the insurance will decline as the loan principal is paid down.

AlwaysLearningToSave

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Re: READER CASE STUDY: Jumping on the Bandwagon
« Reply #15 on: June 27, 2015, 09:48:25 PM »

If you look at the extra interest you pay for not refinancing and consider that the premium cost of a $23,500 10 year term life insurance policy, you'll find that is very expensive insurance.

That I agree with.  After putting more thought into it, I think we do need to look into refinancing with me cosigning as soon as we are able. I need to just take the risk and be prepared to pay the debt should the worst happen. While we tried hard not to buy too much insurance, we have enough life insurance on her that having 20 grand less would not be catastrophic.
« Last Edit: June 27, 2015, 09:56:49 PM by AlwaysLearningToSave »