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October 04, 2013

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Looks like you have a great budget (and good job working on retirement savings) and you are tackling your debt well. I think it's great you want to change careers (and a shame that so much social work is underpaid), but obviously that would put a stop to all your savings and mean minimum debt repayment only.

If it were me I would keep plugging away at the debt... I know at the current rate that is more than 3 years off, but once that is no longer hanging over your head I think the career change could be possible.

I was in a similar situation as you at age 28, and waited to do a career change until I was 31. I waited because (and you may want to consider this as well) I was in a relationship and sharing resources with someone was the best way to fund my career change. We were in a sort of quid pro quo scenario, and once her career took off it was my turn. Please don't read that as me saying you need to find someone to "take care of you", I just simply mean pooling resources allows much more flexibility for a couple.

I don't understand this part: "Due to income limits I usually can only put a small amount into a regular IRA for a little tax break, so instead I put the rest into a Roth."

MK is a single filer and I don't see how her AGI can possibly be above the $58,000 threshold for deduction phase-out. Furthermore, this $58,000 AGI limit is only applicable for a person contributing to a retirement plan through work, which MK states she does not have.

I'd probably wait until debt has been taken care of before taking a position that would require such drastic changes to the budget. And I'd echo that having a partner, or even a roommate to split bills and rent, can increase flexibility pretty dramatically.

Lastly, if you're pursuing a low paying career, have you asked yourself why you're living in such a high COL location? It's not going to make life impossible, but it will be a significant challenge and if you're having trouble saying no to going out to eat with friends, it's only going to get harder if your income drops 40% and you remain in a place where spending of that magnitude is the norm.

Hi MK:

I have to tell you right off the bat, I smiled broadly and paused when I read that you save $50/mo to help your little sister pay for books when she goes to college next year. That is really sweet. Your parents did something right and I am PROUD of you!

OK-Back to business--I always find it interesting to look where your $ goes as a percentage of your take home-- it can be enlightening. Here is yours:

rent 1295 *37.21%
loan st 480 *13.79%
cell 75 5.79%
ins 80 6.18%
food 420 *12.07%
gas 100 2.87%
house 130 3.74%
slush 250 7.18%
roth 450 *12.93%
save 100 2.87%
xmas 50 1.44%

house/slush/save/xmas *15.23%


You can see the big percentages are your rent, loan, food and Roth. The rent and food are areas you should work to lower. And your rate is great on the loan-- I say pay the minimum and invest the money. At your age the extra few years of compounding will be huge in the end.

But what I found interesting is the combination of the house/slush/save and xmas "funds" is a whopping 15%-- or about $500/month being spent on "stuff". If you start to pay the minimum on your student loan (saving $210/mo)and lower your food/gas budget a bit-- It looks like you could save most of that $500 to an investment account every month. That is $6000/year.

Here are a few other thoughts:
* ask your employer to pay for your cell phone (or at least the data cost) if you truly use it for work.

*Is the car really needed? its costing you $180/ month for gas & ins plus repairs (and parking etc..) Dc has great public transportation and zipcars you can rent by the hour if you need it once in a while. Dump the car and save $2500/year in expenses-- plus if you sell it-- you get to put the value of the car ( $5K? $10K) in an investment account to grow!

* Regarding the charity job and the possible 40% reduction in income. Don't do it--- yet. I know that sounds harsh-- but I think you can help the charity more if you are personally on solid financial footing. Keep your job-- and grow your career. Keep volunteering and donating money. See if you can get some of the lawyers at your job to donate time pro-bono to do work for the charity. Many lawyers and firms are required to do some charitable pro bono work. See if you can direct that effort to the charity you care about.

Once you are on solid financial footing-- then you will be in a much better position to help others.

That is about it-- I have spent my allotted time and need to get some "real work done".

Best of luck to you.

JNEW

I appreciate you get satisfaction from your volunteer work, but do you enjoy it enough to change radically your lifestyle? That's what you'd have to do if you made the career change and took the 40% pay cut. That's a personal choice, but do a post-change budget, based on your new income, and get a feel (on paper) for how you'd have to live before making the move.

I know DC is rich with carsharing service. When your current car does die or need a major repair, you could save yourself some $$ by not replacing it and carsharing instead. That's assuming you can get to work by transit.

The call between paying off the student loan faster and putting more into savings is a close one given the low rate on your loan. Perhaps split your budget excess 50-50 between the two. And you can do things like direct any 'windfalls'--a tax refund for example--to loan repayment. I also lived in the DC area when I was your age, and opportunities for fun abound. Work hard to keep that lifestyle inflation in check, but enjoy too!

MK:
My 55 year old daughter was the office manager for a small law firm that specialized in evictions. Her boss provided a SEP-IRA for all of his salaried employees. I understand that if the boss wants a SEP-IRA he also has to offer it to his salaried employees as well as also making the annual contribution which is the same percentage as his own. Thus my daughter has never put a dime into her SEP-IRA and yet today it is valued at $1.8M. About 2 years ago she decided to move to Maui and is still on the payroll telecommuting to handle all of the billing. The salaried employees also receive a monthly bonus based upon the income the office generates each month.
It's commendable that you are willing to take a huge pay cut to go full time with your volunteer work but over the long term that will result in a huge lifestyle change as you get older because of the reduction in earnings. You are going to have to make a decision about what's most important to you. I am not a charitable person so it was never an issue for me, plus I loved my work as an aerospace engineer, but it will be a big decision for you, especially if you have plans for marriage and children.

If you really want to make the job change make sure to live off/budget off of the new take home first for at least 6 months so you know what you're getting into. I've found projected budgets don't mean much, 6 months of spending reports and living the budget will. Changing lifestyle voluntarily is an interesting challenge, doing it out of necessity can be depressing and scary for many (i.e. don't quit your job and THEN start looking for an affordable apartment situation).

The $1K or so you'll hide from yourself each month to make this realistic would be good to have in your emergency fund anyway.

You're doing great.

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