Reader Profile: EM

The following is the latest post in my "Reader Profiles" series. Each post in this series details the financial situation and challenges of an FMF reader. The purpose of this series is to help us all identify with people like us (in similar situations -- not all will be, of course, but eventually I'm sure you will find someone like you here), get to know the frequent commenters on the site, and hear some financial wisdom/challenges from people other than me.

If you're interested in contributing to this series, then drop me an email. The series seems to be very popular with readers and I need a steady stream of new ones to keep it going.

Also, please leave constructive comments, questions, and so forth. Simply telling someone what a mess they have, how they have made poor decisions, and so forth is not helpful. There is a way to say, "That was a mistake, but here's what you can do to correct it" that both acknowledges the problem and offers a solution. It's this sort of feedback that this series is intended to solicit.

Next in the series is FMF reader EM. She answered my questions (in red below) as follows:

Please tell us a bit about yourself.

I’ve been an avid reader of FMF for a while now and absolutely love anything about finance/personal finance. After reading so many reader profiles, I’m always amazed at how successful some people are at my age (or even younger!) and thus it has made me somewhat hesitant to “air my dirty laundry.” But, I am at a point in my life where I am open to feedback and suggestions so that hopefully someone opens my eyes to strategies that I may have overlooked.

A little about me - I’m a 28-year-old single mom to an awesome 7 month old daughter. I live in a metro area and currently am renting a 1-bd apartment. I graduated with a business degree in Finance and started my professional career as a Consultant but now mostly work as a Data/Business Analyst. Unfortunately, all of my immediate family is back up north, so now that I am a mother, it poses a new challenge not having that type of support around but the little one and I are making it.

I too grew up in a single parent household and learned early on that I wanted to make sure that I not only got a good education but applied it to a career that would make me self-sufficient and independent. I didn’t learn too much about savings, investing, debt, etc. but around the age of 18 became somewhat obsessed with learning as much as possible about every aspect of Finance – so much so that I changed my major sophomore year of college. I feel like I am armed with so many tools but at times can’t apply them due to other constraints, which is a frustration of mine. And being someone who is immersed in personal finance, I feel guilty that I am not in a better financial position at this point in my life.

Describe your financial situation (who works in your family, how your income is (general), how your expenses are, etc.).

I currently make $63,257 (such an odd number, I know) before taxes and other deductions, which has the potential to change first quarter of the year when raises are released. I also have the potential to receive quarterly bonuses in the range of $300-400 (after taxes) and I received an annual bonus which came to around $4,200 (after taxes) last year – not sure what it will be this year. I previously mentioned that I’m a single mom, so I am the sole provider/income earner and do not currently receive any child support.

A breakdown of my assets, income, expenses is below:

Assets

• 401K: 1200

Monthly Expenses

• Car Note: 595.88
• Credit Card 1: 178
• Cell: 49.55
• Student Loan: 166.04
• Line of Credit: 85 (will be paid off in March)
• Power: 65 (varies month to month but on average is around 60-70)
• Water/Sewer: 50 (varies month to month but on average is around 45-55)
• Daycare: 240
• Tolls: 25
• Credit Card 2: 37
• Credit Card 3: 36
• Medical Bill: about 35 (added to 100 from an HSA, will be paid off in March)
• Rent: 1004
• Cable: 130 (I recently changed my service, so I estimate this is what the monthly bill will be after taxes)
• Car Insurance: 164.83
• IOU (Personal Loan): 100 (will be paid off in March)
• Gas: 360
• Food/Misc (Incl. Baby): 400

What are the current financial issues you're facing (saving, paying off debt, etc.)?

Rent is an expense that makes me cringe every time I write the check. I’m well aware of other apartment complexes offering lower rent, however, I would definitely have to sacrifice safety, accessibility and peace of mind – things I’m not willing to put at stake, especially with a little one. It’s definitely more than what I want to pay for a one bedroom, however, my financial situation has definitely changed having become a mom doing everything on my own.

Also, I really want to get rid of at least two of my credit card balances. Being off from work for about 7 weeks during maternity leave almost cut my monthly pay in half, not to mention the accompanying medical/hospital bills and baby expenses, which ate up a lot of my discretionary income plus some (hence the increase in credit card usage). I estimate that my tax refund will be around 3900 and plan to use it to pay off: credit card 2, credit card 3, personal loan, line of credit and pay for some auto repairs and set aside at least 1000 for moving expenses/deposit, etc. (current lease ends this summer).

Eventually, I would like to get my savings up to par and plan to use some of my annual bonus to fund it so that this year, any unexpected expenses won’t cause me to break out a credit card to cover.

What are your plans for the future (retire early, build your career, etc.)?

Fund my daughter’s college savings plan, continue to pay off credit card debts and then put more towards savings and future expenses. Career wise, I’m not necessarily “happy” with what I am doing now, but I haven’t really had the time to map out a new plan. Hopefully this year I can sit down and properly assess where I would like my career to go and then the steps to get there.

What's your best piece(s) of financial advice and/or your general philosophy on personal finances?

It’s pretty cliché in the personal finance arena, but definitely to “spend less than you earn”. At one point I went from making $45k per year down to $10 per hour with no benefits, yet I never missed a bill payment and even significantly reduced some of my debts. I was forced to “cut the fat” and curtail frivolous spending. It also challenged me to find sources of entertainment and ventures out with friends that wouldn’t break the bank. It’s amazing what you can achieve when there’s proper planning and some wiggle room.

Comments

[My Financial Independence Journey]

If you're in a metro area, then your rent isn't that bad. My rent makes me cringe too but the alternatives are places I would not want to live predominantly for safety reasons.

You have a substantial amount of debt on your list, and I think you need to work on cutting that out as soon as possible. Using your tax refund for this is a good idea. I would also cut your cable. $130 a month is ridiculous.

[Carole]

I would try to find a suitable job near immediate family as that would help a lot with baby care. That's probably not an option or she would have done it. Another thought is to try and find a compatible room mate with a child and share responsibilities. All in all, she's seems to be doing a good job of handling things on her own.

[JimL]

The rent is probably not bad. Keep in mind that a home would be much more expensive when you factor in taxes and maintenance.

What is way out of line is the car loan. What are you driving? Also, I was surprised to see you have needed auto repairs when you have that level of a payment. That amount of monthly payment is more common with a newer, high priced vehicle. You really need to focus on this expense.

The other thing you need to do is adjust you withholding. You are getting too large of a refund and that is like giving the government an interest free loan. With the proper adjustment, you take home pay will be higher and you can use that to accelerate your debt payments.

[Paul]

The car payment, car insurance and gasoline should drop dramatically with a reasonable, slightly used small vehicle. For example, I just purchased a one year old compact car for approx 75% of the new price, and it only had 10K miles (it was a rental car). My car payments are only $372, and that's for a 3 year payoff.

[Noah]

You are getting a real deal on daycare. $240/month is very low. In my area, it would be about $900-1100/month. I agree about ditching cable TV. How do you have that much time to watch TV while taking care of a 7 month old? Switch to Netflix instead :)

[GranTorino]

First, $240 a month (if the US) for daycare is amazing. Good job on that frugal front.
I would consider focusing as much as possible after the credit cards on beefing up the HSA. Even with excellent insurance coverage, I know how having a toddler is legion amounts of well child visits and, then, even with good luck, at least 3-4 sick child visits per year, if for no other reason than to "appease" the daycare. Again, I am assuming this is the US. As such, one simple emergency room visit for a simple "accident" could destroy your savings-unless the HSA stands ready. Use the cable money as mentioned above to fund the HSA.
Good job though as a single mom working very hard!

[minimalist]

Can you please list your total liabilities and interest rates, so we can help you tackle your debts? Why don't you receive child support? If your only asset is your 401k balance of $1,200, then you need to build up an emergency fund because even cashing out your 401k probably wouldn't even cover your rent after taxes and penalties. However, there are also safety nets available, such as unemployment insurance and WIC. I would try to move closer to work to reduce car, gas, and toll expenses. I would get rid of cable (I use an antenna and get network programming (CBS, NBC, FOX, CW, PBS, etc) in HD for free + Netflix for $8 a month.

[Paul]

Others hit it already.

@JimL the refund may be due to the baby.

But otherwise he's right, the car payment (plus repairs!) are the worst thing I see. That's huge % of your income there. And you have a baby. I would work to fix that immediately. You could cut that car payment in half!

I would consider cutting tv. You don't have time to watch it anyway, and you're paying a huge fee for channels you never watch. Keeping the internet and ditching tv might cut that payment in half as well.

I hope your return gets you out of debt like you suggested. That will make a big difference.

[EM]

@Paul

You're correct, the refund is mostly due to the baby. I was at the same withholding last tax year and owed about $400, which wasnt too bad. But since I had her, I left the withholding as it was because my income didnt change too much.

@JimL

I've actually considered trading in my current car - 2008 Lexus IS 250 for something with a lower payment. I had it pre baby so at that point in time, the car payment didn't seem to eat up that much of my monthly income. Also, with regards to the auto repairs, its really more like "maintenance." The vehicle is approaching 90K miles (I drive about 500 miles during a work week ..includes commute between home, daycare and work) and I need to have the back brakes done and some other maintenance items.

I'm working on replying to the other comments ....thanks alot everyone!!!

[Meg]

You don't say what your emergency fund balance is, but if it is anything less than $5,000 I would make that my first priority - before even paying off your debt. Once you have that you can start paying off the balances, but I'd make it a priority to get to $10,000 in an emergency ASAP. That's just over 3 months of bare minimum expenses. Sure there are government programs to help if you lose your job, but now that you have a baby you are much less flexible (you can't just abandon your apartment and crash with a friend for awhile if you lose your job, for example). So a good emergency fund that covers 3 months of expenses and your full health insurance deductible is key.

Otherwise I second the other commenters with regard to the auto expenses. Buy a reliable but older car and get a 5 year loan and cut your payment as soon as you can (I realize you may be upside down right now or have other restrictions preventing this currently).

Good luck! You're doing great for being a young single mom!

[Kurt @ Money Counselor]

If you're getting a $3900 tax refund, you might consider re-doing your W-4 and reducing withholding. You could and should direct the extra take home pay to paying down your debts, highest APR first. When the lower withholding kicks in, set up with your payroll department an equal automatic deduction from you pay directed to your own Debt Payoff Savings Account. Each month drain that savings account and send everything in it to creditors. (This assumes you've got an emergency fund. If you don't, best to establish at least a modest one first.)

[Luis]

Looks like your expenses are approaching $3800 per month. With your salary, does this cover your expenses? I ask just in case you are running a deficit. If so be aware that you may be shifting your debt from one vehicle to another. You really need to increase your cash flow by the following ideas:

1. Trade in your car for one that is cheaper and higher MPG.
2. Shop for cheaper car insurance (2k per year is a lot, are you a safe driver? S.D. discounts?)
3. Trim your cable bill
4. Perform a debt snowball on all your debts
5. Put an emergency fund in place.
6. Create a plan of action. Get specific and don't get to hearing yourself saying, "hopefully this year I can sit down and..." just do it :)
7. Work hard, ask for raises, job hunt, never settle for a pay cut.
8. After you have more cash flowing move to an apartment closer to where you work. At this point you should be to afford something more than $1000/month especially since gas will go down.
5. Shop for a good day care. Day care expenses will go up but that's ok. I'm actually scared for the safety of your child with current D.C. expenses so low!
6. After your Emergency fund is up look at increasing your 401k contributions!
7. Contribute to Roth IRA
8. With shorter commutes, look for side income jobs.
9. Any extra cash flowing after all this? Then start a 529 plan for your daughter.

I am completely awed at everything you do as a single mom, my hat goes off to you! I hope you find some or all of my ideas worthy of your consideration. Good luck!

[retirebyforty]

Wow, your daycare cost is amazing? How did you pull that off? Our daycare was $1250/month.
Your car expense seems high. Your transportation cost is more than your rent. I'm wondering why you're paying so much for gas if you live in a metro area. Can you move closer to work?

I think you're doing ok in general. Just keep working on paying off those debts for now.

[Kay]

It's hard to give a lot of good advice given that we don't know more details... such as when you'd be due to pay off some of these debts at the current rates you're paying.

That said... cut out cable and Netflix or Hulu it... that will help give you probably at least $75 more a month, and put it towards your emergency fund.

As for the car. I know many are saying to trade down to a cheaper car. I'd say it depends on how long you'll be paying it off at the current payment. You mentioned it's an '08 Lexus... but with 90K miles, and you drive a LOT (Oil changes, OUCH!). On one hand, you have a good, reliable car that you can drive another 10 years at least. It might be expensive for the next year or 2 but after that, good resale value. On the other hand.... at 25K miles a year for commuting daily is going to mean that unless you're willing to keep maintaining the car, it probably only has 5 years or so in it and will only be worth a few thousand dollars at that point (200K miles). So I'd recommend something more fuel efficient and as cheap as possible - if you're going to run the hell out of it, maybe get something like a Honda Fit or something that was never that expensive to begin with but has great reliability, and run that into the ground. Depending on how much you've paid down on the Lexus, you might have enough equity to buy a basic lightly used Fit for cash outright, or close to it! Insurance would be much lower too. That's the problem with cars... their costs go up exponentially the nicer car you want!

Whatever you do, please do focus on YOUR 401K/Roth contributions before you even bother with your daughter's college education. She will be able to figure out a way to pay for college, but don't burden her with the fact that she'll have to support you in your old age.

[Strick]

Very nice Salary for 28.

The going from $45K to $10/hr to $63K flux is one I'm familiar with, I think it helps to gain perspective with spending/needs apart from ones on pay (i think its much more normal to blindly spend 85-100% of what you make without thinking about it, which is easy to do when income is steady).

Rent seems reasonable, car payment does not unless that happens to be a very compact loan (24 month?). You can constantly drive a good new car on a lease for about $250/month even factoring in down payment, and leases aren't exactly cheap.

[Walden]

I think you're doing a great job in general, especially for a new mom with little to no support, and I bet you can get to a place where you feel happy and secure relatively quickly. A few things that stood out for me are:

I don't think your rent is too bad. If it's convenient and safe, I would forgo moving (and incurring any extra expenses) for another year.

The car payment is high, how many more payments do you have to make? Can you trade it in for something less expensive?

It looks like several debts will be paid off in March, freeing up around $200/month. I would suggest putting that straight into savings to build an emergency fund at least up to $2000, then channeling to debt payments.

I agree with other commenters to cut cable as well, unless your cable package also includes internet. Do you have a laptop or tablet? The $8 streaming Netflix deals could provide lots of entertainment for much less.

If you do get that $3900 tax refund, I would finish up your emergency fund, pay off some debt, and put the rest into a ROTH IRA.

You didn't mention how much remains on these credit card and student loan bills, but once your expenses are down a bit and you have a basic emergency fund, I would split any extra money between debt repayment and retirement investing.

I know you want to provide the best for your daughter, but I would hold off on a college fund for her until you are solidly on your feet.

Good luck!

[EM]

So many great suggestions and comments -- thanks again and keep them coming (I'm taking notes).

Also, per request, here is some additional information that may help:

LIABILITIES (remaining balances as of 2/1/13):
Auto Loan 18,795.12 (60 mo loan; 36 mo rem @11.99%)
Credit Card 1 1,968.22 @9.99% (plan to pay balance in full next month)
Credit Card 2 7797.70 @21.24%
Credit Card 3 1304.48 @17.24% (recently paid this balance in full last week!! so as of today 2/13/13 balance is ZERO)
Student Loan 30,130.21 @6% (a consolidated loan inclusive of undergrad and a graduate degree. currently on a graduated repayment plan where the payment will increase every two years to accelerate payoff)
Line of Credit 395 @0% (paid balance in full last week; balance as of 2/13/13 is ZERO)

More information per some of the comments i've seen

- My daughter is in an in-home daycare, the provider takes care of about 3-4 children daily. I inquired about the weekly cost and was informed that she wanted to be competitively priced and fulfill the need for more affordable childcare especially for single income homes. Prior to my child being born I visited several daycare centers (tend to anywhere from 6 to 10 babies) and the fees were from 250 - 275 per week ($1000 to $1100 per month), which was simply way out of my price range plus I wanted more individual attention for my daughter since she would be starting childcare at 7 weeks old (shes currently about 8 1/2 months old). I feel very comfortable with the person who cares for her, only thing is that the woman moved further from her previous location which adds to my daily commute. But changing daycare to a closer location doesnt justify the fuel/time expense.

- Another note I wanted to add with regards to the mileage I put on my vehicle (plus tolls). My job will be moving locations at the end of April/early May which will cut at least 70 miles (roundtrip) off of my commute and eliminate the toll expense. I will also have the option of using the train to get to work, which I project will cut my gas expense by almost 75%

[EM]

@minimalist

I actually have a court date set in the coming month regarding child support so i should hopefully start receiving a monthly payment soon. This should help with expenses.

[Brooklyn Money]

EM, I think you might be a good candidate to consolidate your debts with lending club. You might be able to get a much better rate and pay off your outstanding credit card and auto loan. If you have a good credit score, I would check it out.

[AC]

EM -- great salary for a 28 year old, and given the challenges of being a single mom I think you are doing very well balancing the variables of when to pay more (safe neighborhood/higher rent) and getting good deals on other key items (your childcare expense is well below average). One thing I noticed is your credit card debt -- is there a way for you to transfer the 7800 balance from CC2 to the much lower interest CC1? I hate to see you paying down cheaper debt at 9.99% while having such a high balance at 21%. (Congrats on paying off CC3 btw).

Best of luck with your court date, having child support coming in will certainly help you to move more quickly towards your financial goals of being debt-free and starting a good nest egg.

[JimL]

Thanks for the additional information. I would definately get rid of the car. Find something cheap and take advantage of the train. Divert previous payments from paid off credit cards and eliminated/reduced car payments towards remaining credit card. You may even want to see if you can transfer the baba once to a low interest rate card. After the last card is paid off, get intense on the student loan.

If you can getbthe child support, that will help you with the living expenses and you can divert the savings to an emergency savings account.

Adjust your withholding to account for the baby.

With this plan, you should be debt free in about 3-1/2 years.

[Walden]

Hi EM,

What a great update! Congratulations on paying off ccard 1, ccard 3, and the line of credit! That is awesome, and should free up about $300/month for you. If you combine that with the savings you'll be seeing from your reduced transportation costs and split between savings and debt, you'll be in *such* a stronger place by the end of the year.

I wouldn't move your daughter from daycare, it's a great price and if you are happy with her care that's all that matters!
I would still look into trading in your car. By the time you're done paying it off it will have a lot of miles. Better to try for something cheaper now and save up for your next purchase (after debt repayment and funding retirement).

[Kay]

Good stuff! Keep it up, and thanks for more details! :)

I'm glad you're paying off CCs and will have a shorter commute. Keep in mind with the train that you'd still have to drop your daughter off at daycare... not sure if that makes your train commute easier or harder, but I know (midwest US background here) that I wouldn't want a baby on a train every day as she starts to get bigger! But with 3 more years left on the car, I'm afraid it's probably a good idea to get out of that situation now and trade down to something a bit cheaper.

Good luck on getting child support... I don't know how much it would be, but I think it'd be a wise choice not to budget for having it each month (even once you are getting it), just in case the guy doesn't come through on any specific month. Instead, put it towards your savings each month and count it as extra money you weren't expecting!

[Luis]

EM,

Your loan on the auto has a balance of 18k remaining but I imagine the currently value must be much less (i'm guessing 13k?). If you sell you will have to come up with 5k to pay off the bank. In other words... you cannot sell your Lexus without out of pocket cash. In the meantime I'd recommend you buy gap insurance for your vehicle. Then, refinance to a lower rate if possible.

I feel like you have a low credit score. How else would you have your largest balance on your highest interest card without incurring a few missed payments? If your credit is indeed low, make a plan to never miss bill payments and work hard to improve your score since you will one day be ready to purchase a home. High scores make that possible.

Be ready with all your expenses to present to the judge like the mileage to day care, the detailed gas expenses incurred from home to day care, day care to work, and back again, and everything else in superior detail.

[EM]

@Brooklyn Money

Funny you mention looking into a Lending Club. I actually got some information in the mail a few days ago about one. Any other time I would usually throw pieces of mail like that in the trash, but this one I kept so that I can look into it further. Its from "Lending Club" -- ever heard of them?

[EM]

@Luis

Last time I checked my credit score it was average -- 680. A while back, when I was about 24 I got into a real estate deal that went bad, long story short, the loan was defaulted and went into foreclosure. So this will be on my credit for another 3 years. I assume each year it plays less and less of a factor. I have never missed any credit card, auto loan, line of credit or student loan payments.

And thanks for the tips on the court date. I've been keeping track of expenses in a spreadsheet (by type, date, amount), receipts, medical bills, etc.

[Luis]

@ EM

With that score you should be able to get lower rates on your auto loans. I have a recent auto loan under 3%, my score was in the 720 range.

[minimalist]

$7,797.70 credit card balance @ 21.24% is outrageous! You can try to apply for a Chase Slate card available with 0% APR for 15 months with no balance transfer fee (Google search it). However, you cannot transfer balances from a Chase card to the Chase Slate card. If you get denied, you can try to get approved by calling the reconsideration line to find out the reason for denial and explain any deficiencies. I'm glad that your work will be moving closer to you because your transportation costs are more than your rent right now.