Windfall Case Study - too much cash for a newbie

[elm21]

New to MMM and can't get enough.  Been reading the blog and forum for a few weeks and respect this is the best place to get advice. We are looking to turn our lives around and become FI.  Thank you for your help.

Life Situation: 40 years old, married, wife does not work but stays home with 8 & 4 year old.  She plans to go back to work next year when youngest starts school.  We live in expensive Souther California.

Wages approx:  $3400/ month *work unstable

Expenses:
Rent: $1500
Car insurance: $80
Life insurance: $45
Utilites: $40
Phone: $110
Internet: $50
Credit card (minimum only): $320
Food: $800
Eat out: $140
Gas: $50
Household (Target, etc): $140
Entertainment: $80


Assets:
2007 Prius
Roth IRA (wife's): $4000
Stocks (wife's): $7000


Liability:
Student Loan: $17,000 at 7.75% interest (I unknowingly consolidated back in 1999 and so am unable to reduce interest rate). This has been on IBR at $0 monthly payment, but has been painfully capitalizing interest since 1999.
Credit card 1: $10,185  at 9.99% interest  paying $87/month in interest
Credit card2: $3,300 at 13.24% interest paying $38/month in interest
Credit card 3: $3,125 at 13.24% interest paying $33/month in interest

We have not and do not contribute to any retirement funds.  I do not have an IRA.  We do not have college savings for kids.  We do not own a home.  My company offers a 401K with 3% but I have not started contributed yet.

QUESTION:
We recently received a $90k settlement which we put into a Trust and keep in a Capital One 360 Savings account.  We are just learning about wealth creation and FIRE.  We normally live paycheck to paycheck and the credit card debt we have accumulated has been for food/necessities when work is slow which it often is.  So, what should we do with the money? Some ideas we had are:

1.  Keep $20k in savings for emergency. Pay off credit card and student loan debt in full. Invest $11k in Roth IRA. Invest remaining $25k in Vanguard index funds.

2.  Use $90k for down payment on our own house (home prices in our area start at $700K so we would most likely have to move which we don't want to)

3.  Buy an investment property in another state (like a condo for $90k in Florida)

4.  Start a small business like ice-cream truck or food truck

5.  Any idea or suggestion you have

Thank you in advance.

[gimp]

Here's my objection. You are earning 3400/month in an unstable work situation where homes cost $700k. I think using $90k as a downpayment is a bad idea - you should not be able to get a loan for a $700k home on $3400/month post-tax. If someone does give you the loan, it will be very expensive, and you will be likely to lose the house.

I would highly recommend paying off all the CC debt, and keeping the rest of the money safe - some as an emergency cash fund, most in your preferred choice of total market index fund and bond fund - until your income stabilizes or you move somewhere much cheaper.

[seattlecyclone]

Here's what I would do:

I would go with Option 1. Paying off the loans will improve your cashflow by $320/month, making it much less likely that you'll need to resort to credit cards in the future. An emergency fund can also be a good idea, especially when your income is unpredictable. $20k is a reasonable amount. Maxing out your IRA is also a good idea; your income is low enough that you probably owe little (if any) tax with two kids, so Roth is probably better than traditional until your wife starts earning money again. Once you have finished all of those things, taxable investing is often the best thing to do long-term.

[elm21]

you should not be able to get a loan for a $700k home on $3400/month post-tax. If someone does give you the loan, it will be very expensive, and you will be likely to lose the house.

I agree. We can't afford a house in our current area. We would have to move, but we LOVE where we live now.  I don't mind renting, but it seems like this may be my only opportunity to have a 20% downpayment.  I just don't want to make a bad financial decision of not becoming a home-owner in a less expensive city, verses paying rent and being very happy in my current city.

[SwordGuy]

Can you find similar work in a less expensive city?  Ditto for your wife?

Because what you have now is not working. 

How much do you expect your wife to make once she goes back to work?   Here or in a lower cost city?

Because if it isn't very much, that $20,000 will end up getting used up over the next decade unless something else changes the financial trajectory you are on.

[elm21]

Here's what I would do:

I would go with Option 1. Paying off the loans will improve your cashflow by $320/month, making it much less likely that you'll need to resort to credit cards in the future. An emergency fund can also be a good idea, especially when your income is unpredictable. $20k is a reasonable amount. Maxing out your IRA is also a good idea; your income is low enough that you probably owe little (if any) tax with two kids, so Roth is probably better than traditional until your wife starts earning money again. Once you have finished all of those things, taxable investing is often the best thing to do long-term.

This is what I was leaning to as well. A fresh start.  What does 'taxable investing' mean?  Is that just the money I use to invest after taxes as opposed to a 401K?  My employer offers a 401K and I believe 3% match but I have not contributed yet.

[seattlecyclone]

you should not be able to get a loan for a $700k home on $3400/month post-tax. If someone does give you the loan, it will be very expensive, and you will be likely to lose the house.

I agree. We can't afford a house in our current area. We would have to move, but we LOVE where we live now.  I don't mind renting, but it seems like this may be my only opportunity to have a 20% downpayment.  I just don't want to make a bad financial decision of not becoming a home-owner in a less expensive city, verses paying rent and being very happy in my current city.

Renting is not an inherently bad financial decision. In your situation, I would absolutely recommend that you continue to rent for at least the next few years in your current area. However a 20% down payment is not permanently out of reach. If you pay off your credit card debt, you'll have an extra $320/month that you can put toward your savings. Once your wife gets back to work, most of her pay can also go toward savings. Depending on how much she earns, you could have a 20% down payment in just a few years if you keep control of your spending and make saving for a house into a priority.

[seattlecyclone]

Here's what I would do:

I would go with Option 1. Paying off the loans will improve your cashflow by $320/month, making it much less likely that you'll need to resort to credit cards in the future. An emergency fund can also be a good idea, especially when your income is unpredictable. $20k is a reasonable amount. Maxing out your IRA is also a good idea; your income is low enough that you probably owe little (if any) tax with two kids, so Roth is probably better than traditional until your wife starts earning money again. Once you have finished all of those things, taxable investing is often the best thing to do long-term.

This is what I was leaning to as well. A fresh start.  What does 'taxable investing' mean?  Is that just the money I use to invest after taxes as opposed to a 401K?  My employer offers a 401K and I believe 3% match but I have not contributed yet.

Taxable investing means investing in a regular investment account outside of an IRA, 401(k), or other tax-advantaged space. You didn't mention before that you have access to a 401(k). I would recommend you start contributing to the 401(k) account to take advantage of the employer match instead of opening a taxable Vanguard account. Since you have so much in cash right now, it's okay to increase your 401(k) withholding to the point where your paycheck doesn't quite pay for all of your expenses anymore. When you spend down your cash savings in this manner you can think of it as "transferring money to your 401(k)."

[elm21]

Can you find similar work in a less expensive city?  Ditto for your wife?

Because what you have now is not working. 

How much do you expect your wife to make once she goes back to work?   Here or in a lower cost city?

Because if it isn't very much, that $20,000 will end up getting used up over the next decade unless something else changes the financial trajectory you are on.

We really really love where we live now.  We are hoping and planning on the extra income my wife makes when she starts to work to contribute to retirement, etc.  She could probably earn $45k at a company, but really wants to start her own business (food truck or small little ice cream shop).  We would continue to live off my wages and save hers, so our finances should improve in the next few years.

[elm21]

Here's what I would do:

I would go with Option 1. Paying off the loans will improve your cashflow by $320/month, making it much less likely that you'll need to resort to credit cards in the future. An emergency fund can also be a good idea, especially when your income is unpredictable. $20k is a reasonable amount. Maxing out your IRA is also a good idea; your income is low enough that you probably owe little (if any) tax with two kids, so Roth is probably better than traditional until your wife starts earning money again. Once you have finished all of those things, taxable investing is often the best thing to do long-term.

This is what I was leaning to as well. A fresh start.  What does 'taxable investing' mean?  Is that just the money I use to invest after taxes as opposed to a 401K?  My employer offers a 401K and I believe 3% match but I have not contributed yet.

Taxable investing means investing in a regular investment account outside of an IRA, 401(k), or other tax-advantaged space. You didn't mention before that you have access to a 401(k). I would recommend you start contributing to the 401(k) account to take advantage of the employer match instead of opening a taxable Vanguard account. Since you have so much in cash right now, it's okay to increase your 401(k) withholding to the point where your paycheck doesn't quite pay for all of your expenses anymore. When you spend down your cash savings in this manner you can think of it as "transferring money to your 401(k)."

Sorry I didn't mention the 401K earlier, I forgot about it until I read your post. I updated my original post. Do you have any resources to learn about how I should contribute to my 401K, like where, how much, just up to the 3% or more, etc?  Also, what if I don't plan to be at the company for more than 1 or 2 years, should I still contribute to 401K? I think I should start looking for more stable work.  Thank you.

[JenniferOnFIRE]

Ditto Option 1.  Don't even think about buying a $700k home or rental property at this stage of the game.  Your capital investments will be there for you, hopefully even larger, available to consider using for home ownership after your operating finances are in better shape.

Next step is to improve your spending and cash flow profiles.  You know work will occasionally be slow, so you need to prepare for that in advance, rather than planning to tap your emergency fund or carry credit card balances in this expected situation.  So, plan to save the $320/month of eliminated CC payments and not carry CC balances at those interest rates again.  Additionally, see what you can do to reduce your $940/month food bill (e.g., eliminate convenience foods, buy in bulk at CostCo).  And that's a good choice to look for a better job.

Create a budget plan for your income that includes savings and investments:

• Secure the 401(k) match (if you will be there long enough to get vested - your plan administrator can tell you what the schedule is).  If you do contribute to a 401(k) and leave the job, DO NOT cash it out; instead, arrange for a custodial transfer into an IRA.
• Short-term savings to deal with your variable income and to cover unexpected expenses like car maintenance and medical bills
• Mid-term savings for big ticket items like a replacement (used) car
• Investment toward increased earning potential, like continuing education
• Long-term savings toward eventual financial independence and retirement

Baby steps will get you there - first step is to see the need and make a plan.  Good luck!

[elm21]

• Short-term savings to deal with your variable income and to cover unexpected expenses like car maintenance and medical bills
• Mid-term savings for big ticket items like a replacement (used) car
• Investment toward increased earning potential, like continuing education
• Long-term savings toward eventual financial independence and retirement

Thank you.  Can you give me an idea of what 'short-term', 'mid-term' and 'long-term' mean?  Is that where I put the money, like my Capital One account is short-term?  If so, what would be considered 'mid-term'?

[lemonlime]

For what it's worth, here's my two cents:
Pay off the debt, start saving the recouped debt maintenance payments for slow months. Then, Don't Do Anything Else. Spend the next six months to a year remaining out of debt, and really learning everything that you can about personal finance, including discovering what you and your wife together really want out of life, and then make decisions on what to do with the rest of your windfall. Don't make any decisions until you've had plenty of time to get up to speed so you can manage your new responsibility/tool (the money) and to let emotions settle.

[JenniferOnFIRE]

• Short-term savings to deal with your variable income and to cover unexpected expenses like car maintenance and medical bills
• Mid-term savings for big ticket items like a replacement (used) car
• Investment toward increased earning potential, like continuing education
• Long-term savings toward eventual financial independence and retirement

Thank you.  Can you give me an idea of what 'short-term', 'mid-term' and 'long-term' mean?  Is that where I put the money, like my Capital One account is short-term?  If so, what would be considered 'mid-term'?

Those are indicators for when you might need the money, which helps guide where you store it, based on risk and liquidity.  Short-term is measured in months and is kept in a savings or checking account.  Mid-term is measured in years and is ideally kept in something that pays a higher yield than a savings account, but is safe and not locked in for too long - a money market account or short-term CD in the old days, but hardly worth it in today's environment.  Long-term is measured in decades and is put in the market, like in an index fund, which provides the best long-term growth but is subject to value volatility (you don't want to be forced to liquidate your portfolio during a downswing in the market). 

The most valuable thing for you at this point is to do some serious thinking about your current situation, your goals, how to prioritize them, and how to achieve them.  Make your goals SMART (Specific, Measurable, Actionable, Realistic, and Time-Bound) and write them down.  Post the list on your refrigerator.  Sit down together and monitor your progress weekly.  You can accomplish great things if you work together as a team toward a shared goal.[/list]

[Goldielocks]

Congrats on your opportunity!

My two cents:

Pay off cc's, then cut them up but don't cancel them
Use $320 per month to pay down student loan.

Then think about what you want.

I note that with a wife at home, you are still paying $800 per month for food, and $140 for household/target.  Even though total income is $3400 unreliable per month. This explains why your cc's are creeping up on you. Your saving grace is relatively low rent, which says that you don't demand fancy per se as a lifestyle choice.


I would not start a business until you can get your personal finances in order, else business and personal finances will get confused, kid situations can be difficult around a business, etc.  Likewise don't touch it except to pay off existing debts or it will inflate your lifestyle and be gone before you can make best use of it.

This money is your means to start over..  If you don't think your job pay and security will increase rapidly in next few years, then you need to seriously consider moving to a lower cost town in California, or better yet out of state.

You could likely find an equally good job, and maybe that ice cream truck ( summer only stand) for you wife to manage in a small summer resort town, for example.  Many small towns would have that $50 k down payment and leave a very small MTG...  Ideal situation for launching a business.   You can always plan to retire (early back to where you are now in 12 years with kids in college).

If not a big change first,, then one of two things will happen- you will start eating through that fund in less than 5years, or your wife will be stuck in a full time job that she does not like, for the money.   Hopefully she will like it though... But chances are she will always want that business and never get it.

If this is too negative, it is not meant to be.. I have moved twice out of state, and moving is not a horrible thing you can't undo, sometimes it is a bit worse that current, but often it can be much better!

Good luck!

[elm21]

I note that with a wife at home, you are still paying $800 per month for food, and $140 for household/target.  Even though total income is $3400 unreliable per month. This explains why your cc's are creeping up on you. Your saving grace is relatively low rent, which says that you don't demand fancy per se as a lifestyle choice.

You could likely find an equally good job, and maybe that ice cream truck ( summer only stand) for you wife to manage in a small summer resort town, for example.  Many small towns would have that $50 k down payment and leave a very small MTG...  Ideal situation for launching a business.   You can always plan to retire (early back to where you are now in 12 years with kids in college).

Yes, I think that food budget can be reduced, and no, we don't require a fancy lifestyle and are already bare-bones as it is, just need to beef up the income to save.  Any additional money will go straight to savings and not lifestyle increase.  We love where we live because the kids are in a great school, so we do not want to move now but will be happy to in 7 years once the youngest finishes elementary, as opposed to moving now and then returning here later when the kids are in college.  But your idea about the small summer resort town is very intriguing.  I will definitely look into this.  Thank you.

[okits]

For what it's worth, here's my two cents:
Pay off the debt, start saving the recouped debt maintenance payments for slow months. Then, Don't Do Anything Else. Spend the next six months to a year remaining out of debt, and really learning everything that you can about personal finance, including discovering what you and your wife together really want out of life, and then make decisions on what to do with the rest of your windfall. Don't make any decisions until you've had plenty of time to get up to speed so you can manage your new responsibility/tool (the money) and to let emotions settle.

This +1000.

The high interest rates on your debt make me ill, just looking at the numbers. With the cash on hand to discharge your debts, paying high rates of interest is just an unnecessary expense.

Second step is to cool your heels and really learn about investing and wealth accumulation.  I see a few points that show a lot of thinking with your heart, not your head (e.g. only chance for a 20% down payment, wife wants to forego $45k yearly pay for her own small business).  In order to protect your windfall and family finances you need a greater understanding of what your choices are and how they affect you.  If neither you nor your wife are very well versed in business or financial matters you need to become so before starting a business.  Small business losses can vaporize a modest net worth and you need to understand that risk and how to mitigate it.

[former player]

$800 a month on food is not "bare bones".  $140 on eating out is not "bare bones".  $110 on phones is not "bare bones".  $140 on household (on a rental, so no maintenance in that) is not "bare bones".

You've several hundred a month you could be saving on all of that before you get to "bare bones".

[larmando]

Yes, pay off debt. A downpayment just means "I'll as more debt", not the best idea in your situation. Kill debt first, then you can consider the rest, after some clear planning as everybody is saying.

[Captain_Burrito_Pants]

If you were to keep the money as a down payment instead of paying it off you're essentially financing a house on a credit card which is insane.

Further, a mortgage for a $700k house would be more than your income.

Pay off all your debts, put some emergency fund in the bank, contribute to your 401k up to the match (automatic 100% return!) and invest, invest, invest the rest.

[Spondulix]

For what it's worth, here's my two cents:
Pay off the debt, start saving the recouped debt maintenance payments for slow months. Then, Don't Do Anything Else. Spend the next six months to a year remaining out of debt, and really learning everything that you can about personal finance, including discovering what you and your wife together really want out of life, and then make decisions on what to do with the rest of your windfall. Don't make any decisions until you've had plenty of time to get up to speed so you can manage your new responsibility/tool (the money) and to let emotions settle.

This +1000.

Yep, I totally agree also. Paying to get into a house isn't going to change your financial situation - it's going to make it more stressful. I'm in SoCal also, where home care is expensive too (this is something a lot of potential homeowners don't realize). Just to give you an idea of some costs I've had at unexpected times: $5k new HVAC (very old system died). $1300 water heater (same). $200 for an emergency plumber cause sewage was coming out in the front yard. These aren't expenses you can just put off to your convenience. How about covering earthquake damage? On a 700k house, earthquake insurance doesn't cover the first 15% of the home cost - that means you'd need over $100k to repair your own home before you'd get a penny from insurance.

It's going to be an adjustment to not have debt, and the temptation is going to be to spend it. You might eat out an extra meal, or buy more for the kids. That's why I like the above advice - learn to manage your new financial situation, then focus on building wealth. When you live under the confines: "I have $3400 a month and no extra" there's guilt (or consequences) for putting expenses on a credit card. When your situation is: "I have $500/month extra and don't know what to do with it," spending is completely a matter of self-control.

Being freelance, I would make an emergency fund and a "slow-month" fund. Emergency should cover major unpredictable expenses. If you're freelance, fluctuating income is a known expense (not an emergency). You can manipulate your cash flow/budget so you will never need a credit card on a bad month again. To do that, I would put together a YEARLY budget (not a monthly one) and budget everything from kids birthday presents/xmas presents to fun activities that only come up a few times a year. Then, break that budget into 12. At the end of the month, check how far off your actual spending is from your budgeted spending. If you calculate right, some months will be over and others will be under. Then, you can move money to that account (or take from it) as needed.

[sarah8001]

For what it's worth, here's my two cents:
Pay off the debt, start saving the recouped debt maintenance payments for slow months. Then, Don't Do Anything Else. Spend the next six months to a year remaining out of debt, and really learning everything that you can about personal finance, including discovering what you and your wife together really want out of life, and then make decisions on what to do with the rest of your windfall. Don't make any decisions until you've had plenty of time to get up to speed so you can manage your new responsibility/tool (the money) and to let emotions settle.

$800 a month on food is not "bare bones".  $140 on eating out is not "bare bones".  $110 on phones is not "bare bones".  $140 on household (on a rental, so no maintenance in that) is not "bare bones".

You've several hundred a month you could be saving on all of that before you get to "bare bones".

I second both of these. Before I started educating myself on finances, I wasted every windfall I ever received. I highly recommend putting the money in an account that is not linked to any debit cards or check books, and thinking about it for a nice long time (six months to a year). You could try making written plans for the money each month, or written goals, then reviewing them to see how your thought process keeps changing.
Also, with spending like that, you could probably easily reduce your monthly budget and increase your financial health. Keep reading MMM! Eventually reducing spending will be natural to you as you discover that some of the things you were spending money on really aren't worth the hours you work to pay for them.

[ShoulderThingThatGoesUp]

Am I doing the math right that you make $20/hour in Southern California? That's not an unachievable number in much lower-cost places. That said, you're paying $1500/month in rent so you should be fine, but you're spending $140/month eating out, $800/month on groceries, etc...you can't afford that either.

I've seen that you should expect to lose money at a new business for three years. Obviously you guys can't afford to lose money by having your wife go back to work. And since your income is unstable, her getting a stable job with predictable inflow would be worth a lot in terms of stress and planning.

[Merrie]

For what it's worth, here's my two cents:
Pay off the debt, start saving the recouped debt maintenance payments for slow months. Then, Don't Do Anything Else. Spend the next six months to a year remaining out of debt, and really learning everything that you can about personal finance, including discovering what you and your wife together really want out of life, and then make decisions on what to do with the rest of your windfall. Don't make any decisions until you've had plenty of time to get up to speed so you can manage your new responsibility/tool (the money) and to let emotions settle.

I agree with this. Definitely pay off the debt (those interest rates are killer!), save what you are spending on debt payments, don't incur more debt, and let the rest of the money ride for a little while while you figure out more about personal finance. And watch that lifestyle creep. Pretend you don't even HAVE that money. No "Well, we have 60k in the bank, we can totally go out to eat". You have a chance to get everything in order. Be smart about it. You will still have choices in another year or two; there is nothing so important that you have to do it now.

I know your kids like their elementary school, but IMO that is not a good enough reason to stay in a place if everything else is not working well. There are other elementary schools. Maybe even better ones. Certainly ones that will be comparable from their perspective. Yeah, it sucks to leave all your friends, but for longer-term family happiness it's worth it. And your younger one hasn't even STARTED elementary school... ? You don't know how that'll go. For all you know s/he could have issues at the school that older sibling likes. Really there are so many question marks I would not hang your hat on "I can't move because of the kids' school." It would be one thing if your kid were, say, a junior in high school and you wanted to wait until they graduated. A grade schooler will bounce back.

[elm21]

For what it's worth, here's my two cents:
Pay off the debt, start saving the recouped debt maintenance payments for slow months. Then, Don't Do Anything Else. Spend the next six months to a year remaining out of debt, and really learning everything that you can about personal finance, including discovering what you and your wife together really want out of life, and then make decisions on what to do with the rest of your windfall. Don't make any decisions until you've had plenty of time to get up to speed so you can manage your new responsibility/tool (the money) and to let emotions settle.

I agree with this completely.  My biggest concern with the new money was if I was missing an opportunity to put it into something that would ultimately make more money down the road (like buying a small condo), or if paying off immediate debt was the best option.  I want to pay off the debt and agree that this new money is a 'tool' so I wanted to gather some idea so the wife and I can have these exact conversations.  But your suggestion seems like the reverse, to find out what 'we' want and make that happen as opposed to feeling like 'we have to buy a house' with this money because that is what is recommended by The Jones.  I like this suggestion.  Thank you.

[elm21]

Second step is to cool your heels and really learn about investing and wealth accumulation.

Agree 100%, which lead me here.  I have now learned about John Bogle, but do you have any recommendations for books that I should begin with?  I like blogs, but they are a little hard to read to get me from point A to point B.  I would appreciate a clear resource for an absolute beginner if you have one, or perhaps your one personal favorite. Thank you!

[Bracken_Joy]

1.  Keep $20k in savings for emergency. Pay off credit card and student loan debt in full. Invest $11k in Roth IRA. Invest remaining $25k in Vanguard index funds.

Newsflash: Your debt IS an emergency. http://www.mrmoneymustache.com/2012/04/18/news-flash-your-debt-is-an-emergency/

Pay off the CC debt, bump up your payments on the student loans, invest some. Then figure out how to increase your income or reduce your expenses (ideally both), otherwise your CC debt will creep back up again. Maybe go to a cash system for a while if you need to learn to flex your frugality muscles harder.

[elm21]

$800 a month on food is not "bare bones".  $140 on eating out is not "bare bones".  $110 on phones is not "bare bones".  $140 on household (on a rental, so no maintenance in that) is not "bare bones".

You've several hundred a month you could be saving on all of that before you get to "bare bones".

Yes, I agree with the food budget and we will work on that, but in my defense, it is SoCal, where healthy foods are really expensive and people pay those prices so it keeps driving prices up.  For example, 3 years ago we used to buy Quinoa from the bulk bin for less than $2/lb, now, everyone here is on a Quinoa craze and the price rose to around $8/lb.  Same with the Almond Butter we used to buy, fresh for $3.99, now it is $8.99 but I refuse to buy.  The price change doubled overnight and it is like no one noticed and they still continue to buy.  I was recently at the farmers market and there was a stall selling 'gluten-free' granola for $10 for a 2 ounce package and people were buying it!  Our eating habits haven't changed much, but in the last few years, our food expenses have increased by around 30% for the stuff we typically buy.  They are charging more, but giving less.  The $140 household is mostly kid-related stuff like school stuff, fundraisers, teacher-apprecition, birthday party gifts (usually $10 gift card but I have two kids), but there is room for improvement and I will review and fine-tune this.  $110 on cell phone is for 4 phones and the cheapest plan I could find for 4 phones, but I saw a post about cell phones so I will read that.  $140 eating out is $35 Sunday dinner for family of 4 which didn't seem extravagant at the time, but as our focus changes, we can review that.  It sure did feel like bare-bones while we were living it, but it is all about embracing a new way of life right?  Thanks.

[justajane]

Are the two extra phones for the kids? If they stay at home with your wife, why do they need phones?

I was floored yesterday at a birthday party when two girls asked my six year old why he didn't have his own phone. I can possibly understand older kids having one, but this seems like a frivolous expense, unless there are extenuating circumstances we don't know about.

Many small businesses fail or fail to turn a sizable profit. IMO it is too risky for you to take this windfall and put it into an ice cream truck or something else for your wife.

If quinoa has gone up so much, can you find an alternate grain that doesn't cost as much? The main way to lower a grocery bill is to be flexible about what you eat. If beef is expensive that week, I don't buy it. If chicken is on sale, I do. If a food becomes too trendy and therefore goes up in price (Greek yogurt I'm looking at you), I eat an alternative. Obviously there are people who can afford to eat whatever they want whenever they want. You might live in a city with a lot of people like that. Or they are up to their eyeballs in debt and you just don't know it. But most of us (including me and you) have to make choices, in order to boost our savings or get out of debt.

[elm21]

1.  Keep $20k in savings for emergency. Pay off credit card and student loan debt in full. Invest $11k in Roth IRA. Invest remaining $25k in Vanguard index funds.

Newsflash: Your debt IS an emergency. http://www.mrmoneymustache.com/2012/04/18/news-flash-your-debt-is-an-emergency/

Pay off the CC debt, bump up your payments on the student loans, invest some. Then figure out how to increase your income or reduce your expenses (ideally both), otherwise your CC debt will creep back up again. Maybe go to a cash system for a while if you need to learn to flex your frugality muscles harder.

I hear you LOUD AND CLEAR.  I read it and watched the video.  Made me ill.  Thank you for this link.

[Goldielocks]

I know what you mean about the kid stuff costing so much...  But fundraisers and teacher appreciation gifts -you can really opt out and put that to your student loans.  It was awkward the first time we did that, but after 6 months, no big deal and other parents started to come around and have sense...  And we also are in HCOL area, but our family income is 3x yours.

I would keep the $10 gift cards, tho...that is about the least you can get away with.. And make cards for teachers and friends.

Trust me, it only gets worse, and you may be trying too hard to keep up with the jones in this neighborhood that you really like.  Is everyone around you at or less than your income?  If not, you are setting yourself up for a life of continual self-restraint, and no one likes that. 

[elm21]

Are the two extra phones for the kids? If they stay at home with your wife, why do they need phones?

Obviously there are people who can afford to eat whatever they want whenever they want. You might live in a city with a lot of people like that. Or they are up to their eyeballs in debt and you just don't know it.

No, the phones aren't for the kids they are for our moms.  Yes, I will have to look into food alternatives.  This last line made me laugh as I live in Los Angeles and it is amazing how things aren't really as they seem.  Leased luxury SUVS and using credit cards to buy $9 juices at the local 'juice bar'.  There are a lot of people who can afford that because there is big money out here, but I have a feeling that most of the people who frequent these places can't afford it and do so to be trendy.  We are not at all trendy, nor try to keep up with that, but the part about looking for alternatives when our usual stuff goes up is more accurate.  I can't tell you how much stuff we have already had to stop buying because of ridiculous increases.  The other day at the farmer's market, there was a stall with a woman selling dried beans for $5 a pound.  They weren't even organic.  Just the regular beans you would buy in a bag at the store for $1 or so.  That is why we were entertaining the ice-cream truck or food truck or similar.  Trying something with a low initial investment but potential for profit because here, people buy $9 juices and $10 granola snack packs. We would need to learn about business, yes, but it seems like many people are doing it here.

[elm21]

For what it's worth, here's my two cents:
Pay off the debt, start saving the recouped debt maintenance payments for slow months. Then, Don't Do Anything Else. Spend the next six months to a year remaining out of debt, and really learning everything that you can about personal finance, including discovering what you and your wife together really want out of life, and then make decisions on what to do with the rest of your windfall. Don't make any decisions until you've had plenty of time to get up to speed so you can manage your new responsibility/tool (the money) and to let emotions settle.

This +1000.

Yep, I totally agree also. Paying to get into a house isn't going to change your financial situation - it's going to make it more stressful. I'm in SoCal also, where home care is expensive too (this is something a lot of potential homeowners don't realize). Just to give you an idea of some costs I've had at unexpected times: $5k new HVAC (very old system died). $1300 water heater (same). $200 for an emergency plumber cause sewage was coming out in the front yard. These aren't expenses you can just put off to your convenience. How about covering earthquake damage? On a 700k house, earthquake insurance doesn't cover the first 15% of the home cost - that means you'd need over $100k to repair your own home before you'd get a penny from insurance.

It's going to be an adjustment to not have debt, and the temptation is going to be to spend it. You might eat out an extra meal, or buy more for the kids. That's why I like the above advice - learn to manage your new financial situation, then focus on building wealth. When you live under the confines: "I have $3400 a month and no extra" there's guilt (or consequences) for putting expenses on a credit card. When your situation is: "I have $500/month extra and don't know what to do with it," spending is completely a matter of self-control.

Being freelance, I would make an emergency fund and a "slow-month" fund. Emergency should cover major unpredictable expenses. If you're freelance, fluctuating income is a known expense (not an emergency). You can manipulate your cash flow/budget so you will never need a credit card on a bad month again. To do that, I would put together a YEARLY budget (not a monthly one) and budget everything from kids birthday presents/xmas presents to fun activities that only come up a few times a year. Then, break that budget into 12. At the end of the month, check how far off your actual spending is from your budgeted spending. If you calculate right, some months will be over and others will be under. Then, you can move money to that account (or take from it) as needed.

Really good advice.  Thank you.  I like the slow- month fund.  The yearly budget makes much more sense.  (also, we were never going to buy a $700k house, I was saying that if we wanted to buy a house we would have to move because houses here start at that price.)

[Bracken_Joy]

1.  Keep $20k in savings for emergency. Pay off credit card and student loan debt in full. Invest $11k in Roth IRA. Invest remaining $25k in Vanguard index funds.

Newsflash: Your debt IS an emergency. http://www.mrmoneymustache.com/2012/04/18/news-flash-your-debt-is-an-emergency/

Pay off the CC debt, bump up your payments on the student loans, invest some. Then figure out how to increase your income or reduce your expenses (ideally both), otherwise your CC debt will creep back up again. Maybe go to a cash system for a while if you need to learn to flex your frugality muscles harder.

I hear you LOUD AND CLEAR.  I read it and watched the video.  Made me ill.  Thank you for this link.

It's a bit of a shock to the system to reframe how you see debt. Don't worry, my hair is on fire right there with you. A lot of us are still there. But changing your thinking is such an important step.

[elm21]

I know what you mean about the kid stuff costing so much...  But fundraisers and teacher appreciation gifts -you can really opt out and put that to your student loans.  It was awkward the first time we did that, but after 6 months, no big deal and other parents started to come around and have sense...  And we also are in HCOL area, but our family income is 3x yours.

I would keep the $10 gift cards, tho...that is about the least you can get away with.. And make cards for teachers and friends.

Trust me, it only gets worse, and you may be trying too hard to keep up with the jones in this neighborhood that you really like.  Is everyone around you at or less than your income?  If not, you are setting yourself up for a life of continual self-restraint, and no one likes that.

Thank you for your insight.  Yes, just this week we 'opt-ed out' of a 'mandatory' fundraiser.  My son (who we are now teaching MMM ways) said we should skip it.  We live in a mixed area, so it is not so much about keeping up with the jones, but more just the HCOL in general.  For example, sales tax is almost 10%, gas is probably highest in country (we bike mostly), so I think we don't really feel sticker shock because we have become desensitized to it.

[Dee18]

You may want to check out Zero Waste Home to see another California family with two kids.  That site made me really downsize my wardrobe and my food waste.  Bea, the author, is clearly at one end of the spectrum.  She a great counterweight to the feeling one should keep up with the Jones.  As for food, try ethnic groceries in your area.

[elm21]

You may want to check out Zero Waste Home to see another California family with two kids.  That site made me really downsize my wardrobe and my food waste.  Bea, the author, is clearly at one end of the spectrum.  She a great counterweight to the feeling one should keep up with the Jones.  As for food, try ethnic groceries in your area.

Excellent resource. Thank you.  We are pretty minimal with wardrobe and not buying, bringing in unnecessary things, but honestly, the food consumption and waste we have is remarkable.  I will read more and share with my family, but I think her ideas about food can really help us.  Thanks for the reminder about alternative grocery stores.

[Merrie]

You can stockpile good gifts for other people's kids when they go on clearance. Unless it's a close friend, you can and probably should give them something that's fairly generic that a lot of kids would like. My kid is 3 and I bought several large (10" or so) toy trucks at a very good price and kept them in the back of the closet and doled them out for birthday party presents for other kids in her age range. My other go-to is art supplies... even if they already have some, who can't use more?

The only catch is you probably can't give the same gift to too many kids in the same social group.

[Catbert]

Random thoughts from another Southern Californian:

Shop Sprouts and ethnic grocery stores.  Sprouts does have some pricey things, but shop their weekly sales. 
Go to the farmers' market right before it ends to look for bargains.  Practice asking vendors if the have any "juicing fruits/veggies", "cooking tomatoes" "great market closing bargains" or other code phrases for cheap items b/c they won't make it another market day.

Unless your wife has a culinary background and/or MBA forget the food truck/ice cream store idea.  The failure rate for new food establishments is tremendous.  When I was younger it was bookstores and small cafes that everyone dreamt of having.  Before that it was florist shops and boutiques.  Most people who achieved their dream lost it within a few years. 

When your wife goes back to work your family needs a steady paycheck.  Not sporadic money and a bunch of steady bills (truck/space rental, ingredient costs, salaries and mandatory taxes/insurance for her employees, etc.)     

[Sibley]

$800 a month on food is not "bare bones".  $140 on eating out is not "bare bones".  $110 on phones is not "bare bones".  $140 on household (on a rental, so no maintenance in that) is not "bare bones".

You've several hundred a month you could be saving on all of that before you get to "bare bones".

+1

Cut your groceries in half, at least. No more eating out. Go read some of the communication threads here and attack the phones. Make sure you're tracking your expenses so you really know what you're spending.

As for your job, you have a wife and two kids to support right now. You can't afford a unstable income. Find something better.

[Spondulix]

Random thoughts from another Southern Californian:

Shop Sprouts and ethnic grocery stores.  Sprouts does have some pricey things, but shop their weekly sales. 
Go to the farmers' market right before it ends to look for bargains.  Practice asking vendors if the have any "juicing fruits/veggies", "cooking tomatoes" "great market closing bargains" or other code phrases for cheap items b/c they won't make it another market day.

Great advice. Another way I've managed to save money on food out here is to not buy everything organic:
 - http://www.eatingwell.com/food_news_origins/organic_natural/15_foods_you_dont_need_to_buy_organic

An onion is 50 cents at Trader Joes, a buck at Whole Foods, and like 10 cents at my local Mexican market. I look at farmers markets as a treat for items that are in season. It's a supplement to your normal supply, and entertainment.

Jons has crazy produce deals like Sprouts (most of Sprouts produce isn't organic). I like the Asian markets (especially 99 Ranch Market) for bulk rice and certain produce (onions, garlic, ginger, etc).

[Spondulix]

As for your job, you have a wife and two kids to support right now. You can't afford a unstable income. Find something better.

This isn't fair advice because we have no idea what his line of work is. Full-time (especially if he's in LA) is not necessarily better. My first year freelance, I worked 1 day a week and made as much money as I did in a full-time 40 hr/week job. After a few years (building more relationships and work opportunities), it was a no-brainer to be contract.

Someone earlier said he's only making $20/hr - it could be that he's making $500/day but only working 7 days a month. Maybe he's on for a week and off for 6. Maybe he's earning nothing up front and getting money on the back end (royalties, residuals, etc).

[Bracken_Joy]

Also, from: http://www.mrmoneymustache.com/2013/09/20/wealth-advice-that-should-be-obvious/

"

2. Windfalls are for buying Freedom, not Jet-skis

Almost every hard-working person ends up with a lucky break or two in his or her lifetime. You might get a raise or a bonus at work. A hefty insurance settlement for cosmetic hail damage on your car. A gift or an inheritance from family or friends.

Most people promptly go out and spend these windfalls.
“Thanks for your generous gift! I took my lady out to the restaurant we thought we would never visit!”

“The annual bonus was hefty this year, and I’ll remember it every time I see that new Infiniti G37x sitting in my driveway”

“Shoes, shoes, shoooooes!”

and other such blunders.

No. None of it. When you get a windfall, it goes straight to your highest-interest debt, or your mortgage, or to buy your next chunk of index funds or your next rental house. Why would you inflate your lifestyle, when you haven’t even bought your freedom yet? Windfalls should be viewed as giant Groupon discounts on Freedom Itself.

For a windfall over $5000, you may get yourself one gourmet coffee or a Chipotle Burrito, but that’s about it."

Not that you're considering just blowing the money, but still felt relevant.

[okits]

Second step is to cool your heels and really learn about investing and wealth accumulation.

Agree 100%, which lead me here.  I have now learned about John Bogle, but do you have any recommendations for books that I should begin with?  I like blogs, but they are a little hard to read to get me from point A to point B.  I would appreciate a clear resource for an absolute beginner if you have one, or perhaps your one personal favorite. Thank you!

I recently read Millionaire Teacher by Andrew Hallam.  Very easy-to-understand book about finances by a guy who became a millionaire on a middle-class salary. Good basics on investing.

Millionaire Next Door is more of an analysis of data around existing millionaires, but you can infer some causation from the common traits (frugality, for instance.)  "Being rich" looks and feels differently than many people expect, so this gives an evidence-based picture of what it's like.

Good for you for being open to the suggestions (and face punches) doled out here. Willingness to change and learn from those whose success you'd like to emulate is important.  Be sure to update us on your progress!

[elm21]

For a windfall over $5000, you may get yourself one gourmet coffee or a Chipotle Burrito, but that’s about it."

Ok. Now I get all the face punches about my grocery, eat out bill haha!  I'm learning!

What is eye-opening is that it felt like we were living frugally because we have no cable and no lattes, ride bikes, etc and even the dining out is one meal for a family of 4 for under $35 at a cheap mexican restaurant, but I can now see what a difference that one weekly meal makes.

[elm21]

I recently read Millionaire Teacher by Andrew Hallam.  Very easy-to-understand book about finances by a guy who became a millionaire on a middle-class salary. Good basics on investing.

Millionaire Next Door is more of an analysis of data around existing millionaires, but you can infer some causation from the common traits (frugality, for instance.)  "Being rich" looks and feels differently than many people expect, so this gives an evidence-based picture of what it's like.

Good for you for being open to the suggestions (and face punches) doled out here. Willingness to change and learn from those whose success you'd like to emulate is important.  Be sure to update us on your progress!

Thank you! My library has a copy!

[TXScout2]

Option 1, none of the others are even close, or a variant of option 1 like this:

1) Pay off all credit cards immediately
2) Refinance student loan through SoFi, get interest rate lowered to ~4%  (you said you consolidated but that won't prevent you from refinancing)
3) Invest the rest of the money (priority: emergency fund, then 401k, then taxable account) and pay off the student loan with the money saved from the credit cards being paid off.

[sarah8001]

Yes, I agree with the food budget and we will work on that, but in my defense, it is SoCal, where healthy foods are really expensive and people pay those prices so it keeps driving prices up.  For example, 3 years ago we used to buy Quinoa from the bulk bin for less than $2/lb, now, everyone here is on a Quinoa craze and the price rose to around $8/lb.  Same with the Almond Butter we used to buy, fresh for $3.99, now it is $8.99 but I refuse to buy.  The price change doubled overnight and it is like no one noticed and they still continue to buy.  I was recently at the farmers market and there was a stall selling 'gluten-free' granola for $10 for a 2 ounce package and people were buying it!  Our eating habits haven't changed much, but in the last few years, our food expenses have increased by around 30% for the stuff we typically buy.  They are charging more, but giving less.  The $140 household is mostly kid-related stuff like school stuff, fundraisers, teacher-apprecition, birthday party gifts (usually $10 gift card but I have two kids), but there is room for improvement and I will review and fine-tune this.  $110 on cell phone is for 4 phones and the cheapest plan I could find for 4 phones, but I saw a post about cell phones so I will read that. $140 eating out is $35 Sunday dinner for family of 4 which didn't seem extravagant at the time, but as our focus changes, we can review that.  It sure did feel like bare-bones while we were living it, but it is all about embracing a new way of life right?  Thanks.

So, I get the need to have special family nights (raised Mormon, Family Home Evening anybody?) but maybe there are cheaper ways to get the same time together. Maybe something like every other Sunday you have homemade mini pizzas and games at home, and on the odd Sundays you eat somewhere that lets kids eat free or super cheap. When I was little I LOVED homemade pizza nights because I had a whole pizza all to myself and I could put whatever I wanted on it (I went through an anchovie loving phase where my pizza was basically considered inedible by everyone else in the family), and it can be super frugal if you make your own pizza dough or pick up English muffins to use as crusts at a bakery outlet. As for eating out, I know it's not a popular option with adults, but Old Country Buffet was one of my fave places as a kid, because I could choose whatever I wanted. Here they have a "kids eat free" night, and they always have coupons for BOGO free on adult meals, so that could be pretty frugal. I bet you could get that 140/month down to 75/month. I don't know about you, but if someone paid me 65$/month to eat pizza at home with my family in front of How to Train Your Dragon, I'd be all over that sweet deal!

[NICE!]

Yeah, it sucks to leave all your friends, but for longer-term family happiness it's worth it.

It sucks for kids that age to leave their friends for all of 10 minutes. The second they get on a playground, in a sport, or back in school, they're golden.

I really don't understand people's perspectives on not moving kids. High schoolers? Ok, I'll listen (even though I went to 3 and wouldn't trade my experiences for anything). Middle schoolers? Meh...maybe. Elementary school? Get out of here with that, kids are way more flexible than adults, especially at that age.

Back to the OP - I agree with the chorus. Nail the debt, have a big E-fund, fill up that IRA and WAIT.

[Bracken_Joy]

Yes, I agree with the food budget and we will work on that, but in my defense, it is SoCal, where healthy foods are really expensive and people pay those prices so it keeps driving prices up.  For example, 3 years ago we used to buy Quinoa from the bulk bin for less than $2/lb, now, everyone here is on a Quinoa craze and the price rose to around $8/lb.  Same with the Almond Butter we used to buy, fresh for $3.99, now it is $8.99 but I refuse to buy.  The price change doubled overnight and it is like no one noticed and they still continue to buy.  I was recently at the farmers market and there was a stall selling 'gluten-free' granola for $10 for a 2 ounce package and people were buying it!  Our eating habits haven't changed much, but in the last few years, our food expenses have increased by around 30% for the stuff we typically buy.  They are charging more, but giving less.  The $140 household is mostly kid-related stuff like school stuff, fundraisers, teacher-apprecition, birthday party gifts (usually $10 gift card but I have two kids), but there is room for improvement and I will review and fine-tune this.  $110 on cell phone is for 4 phones and the cheapest plan I could find for 4 phones, but I saw a post about cell phones so I will read that. $140 eating out is $35 Sunday dinner for family of 4 which didn't seem extravagant at the time, but as our focus changes, we can review that.  It sure did feel like bare-bones while we were living it, but it is all about embracing a new way of life right?  Thanks.

So, I get the need to have special family nights (raised Mormon, Family Home Evening anybody?) but maybe there are cheaper ways to get the same time together. Maybe something like every other Sunday you have homemade mini pizzas and games at home, and on the odd Sundays you eat somewhere that lets kids eat free or super cheap. When I was little I LOVED homemade pizza nights because I had a whole pizza all to myself and I could put whatever I wanted on it (I went through an anchovie loving phase where my pizza was basically considered inedible by everyone else in the family), and it can be super frugal if you make your own pizza dough or pick up English muffins to use as crusts at a bakery outlet. As for eating out, I know it's not a popular option with adults, but Old Country Buffet was one of my fave places as a kid, because I could choose whatever I wanted. Here they have a "kids eat free" night, and they always have coupons for BOGO free on adult meals, so that could be pretty frugal. I bet you could get that 140/month down to 75/month. I don't know about you, but if someone paid me 65$/month to eat pizza at home with my family in front of How to Train Your Dragon, I'd be all over that sweet deal!

One of the couples that frequents the forums buys costco frozen pizzas in bulk and has a 'pizza and movie night' every friday. (The Frugalwoods also have a blog that's worth checking out). There are options for special meals and special family nights for cheap! Or make the dough and let your kids do the toppings... we did that when I was a kid.