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 JP. He emailed me his financial story as follows:
My wife is 29 and I am 33. We rent in a relatively low-cost western US town. She works in the medical field and I work in law. We have been married for four years, and are expecting our first child this summer. Our hope is that when the baby comes, my wife will be able to stay home full-time for a few years, and we may even try to have another child during that time.
We starting dating in college (her in undergrad and me in graduate school) and often joke that but for taking out enormous student loans, we would have never met…laughing about the loans keeps us from crying about them. When we got married, we had approximately $130K in student loan debt. We’ve managed to pay off about half of that in the last four years, leaving us with one consolidated federal loan of $64K at 6% remaining. We also purchased a new car this year because my old car (our only car) finally gave out. For the purchase, we plunked down 80% of the total purchase price from our savings, and financed the remaining $6K at 0% over three years. We have no other debt, and our credit scores are very solid.
Together we grossed about $110K this year, but I earned about 80% of that income. My wife contributes 6% of her income to an employer sponsored 401K, and her employer provides a 150% match (up to 6%), as well as a profit sharing contribution. I contribute about $10-12K annually to my 401K. We both would rather be paying off the student loan as opposed contributing to retirement, but reducing our taxable income through 401K contributions is really the only tax deduction we can get right now. After payroll deductions and taxes, we bring home approximately $6K/month. My firm has an excellent benefit program and helps cover a sizable portion of our health insurance premium. They also provide me with excellent vision, dental, ST and LT disability and life insurance.
Our monthly budget is a follows:
$1200/month in rent and utilities (water, heat, electric, and garbage);
$527/month in minimum student loan payment (again, $64K remaining at fixed 6% rate);
$350/month in groceries (we cook most all of our meals);
$200/month in auto loan (again, $5K remaining at 0%);
$130/month in insurance premium (car, renters, liability);
$120/month in gas;
$100-150/month on miscellaneous expenses (household items, medical co-pays, oil changes, etc.)
$800/month is individual money ($400 each for things like clothes, entertainment, gifts, recreation, etc.)
After several starts and fits, we set up our budget and finances by first tracking our spending for several months. We then opened a joint checking account, a joint savings account, and two individual checking accounts (one for each of us), and two individual saving accounts (again, one for each of us.) We now direct deposit our paychecks into the joint checking account. Immediately after each of our respective payroll deposit (we each get paid twice a month), we have automatic transfers set up to move money from our joint checking to our joint savings account ($520 following each of my paycheck deposits, and $170 following each of my wife’s paycheck deposits.) In our journey to become financially independent, we learned that you have to PAY YOURSELF FIRST. We then have automatic transfers to our individual checking accounts (again, $200 to each of our individual checking accounts after each pay period.) Our budgeted expenses come out of what is left in our joint checking.
The money that we transfer to our individual checking accounts each month is our “own” money. In other words, I can spend, save or give away my $400/month on anything I like, and my wife can spend, save, or give away her $400/month on anything she likes. This seems to work for us. It gives us both some autonomy and discretion, and we don’t feel like we are micromanaging each other.
After all of our bills are paid, and our transfers come out, there is almost always money left over in our checking account. We call this our “slush fund.” We skim it off every couple months or so and put it into savings, pay down debt, use it to cover unexpected costs, take a vacation or donate We generally make good decisions with our “slush”, but sometimes we fritter it away— lifestyle inflation is a very real thing and something that we need to constantly guard against.
Our overall financial picture is much better than it was a few years back. We finally have a positive net worth, and feel that we are starting to get some control over our financial situation. We have approximately $75K invested in growth stocks between our two 401Ks, and have about $25K cash in the bank. We have paid off nearly $70K in student loan debt in the last three years, but I am disappointed to admit that we have lost momentum on that front. Plus, with a baby on the way, I am particularly nervous and frustrated about our debt load, and the prospect of being the only income earner for the foreseeable future scares the crap out of me.
We also keep thinking that maybe we should buy a home since we are going to have a child. We have been tracking local real estate prices and interest rates pretty religiously for the past three years, and have probably looked at 50 houses over that time. We can get a house that suits us for approximately $150K, and with 20% down, we would be paying approximately the same as what we are now for our housing expenses. We haven’t purchased anything yet because: 1) we felt we had too much debt to justify buying a house; 2) prices and rates have just kept falling; and 3) we are not 100% certain we want to stay here forever.
With regard to that last point, we live in a vibrant community with low crime, low taxes and good schools, and we are surrounded by nature and great recreational opportunities--some of the best in the world in my opinion. We also have a great network for friends here and are involved in the community. Despite these qualities, our respective families live far away, and there is very little diversity of opinion and culture here. We are an interracial couple, and we really want our children to grow up knowing a lot of different kinds of people and having various cultural experiences. We are concerned that if we plant roots here (i.e., buy a house), our children will struggle being bi-racial in a relatively homogenous locale.
Finally, we know there is room to cut in our budget, and know that buying brand new car was not a great financial move from most perspectives given our huge debt burden (it is a cool car though and gets GREAT gas mileage.) Our particular hope, however, is that all of the great readers on this site can offer us some feedback and different perspectives so that we can re-evaluate our situation and keep moving forward—being a lawyer, I have thick skin so feel free to be candid. Also, thanks for the opportunity to tell our financial story.
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 JP. He emailed me his financial story as follows:
My wife is 29 and I am 33. We rent in a relatively low-cost western US town. She works in the medical field and I work in law. We have been married for four years, and are expecting our first child this summer. Our hope is that when the baby comes, my wife will be able to stay home full-time for a few years, and we may even try to have another child during that time.
We starting dating in college (her in undergrad and me in graduate school) and often joke that but for taking out enormous student loans, we would have never met…laughing about the loans keeps us from crying about them. When we got married, we had approximately $130K in student loan debt. We’ve managed to pay off about half of that in the last four years, leaving us with one consolidated federal loan of $64K at 6% remaining. We also purchased a new car this year because my old car (our only car) finally gave out. For the purchase, we plunked down 80% of the total purchase price from our savings, and financed the remaining $6K at 0% over three years. We have no other debt, and our credit scores are very solid.
Together we grossed about $110K this year, but I earned about 80% of that income. My wife contributes 6% of her income to an employer sponsored 401K, and her employer provides a 150% match (up to 6%), as well as a profit sharing contribution. I contribute about $10-12K annually to my 401K. We both would rather be paying off the student loan as opposed contributing to retirement, but reducing our taxable income through 401K contributions is really the only tax deduction we can get right now. After payroll deductions and taxes, we bring home approximately $6K/month. My firm has an excellent benefit program and helps cover a sizable portion of our health insurance premium. They also provide me with excellent vision, dental, ST and LT disability and life insurance.
Our monthly budget is a follows:
$1200/month in rent and utilities (water, heat, electric, and garbage);
$527/month in minimum student loan payment (again, $64K remaining at fixed 6% rate);
$350/month in groceries (we cook most all of our meals);
$200/month in auto loan (again, $5K remaining at 0%);
$130/month in insurance premium (car, renters, liability);
$120/month in gas;
$100-150/month on miscellaneous expenses (household items, medical co-pays, oil changes, etc.)
$800/month is individual money ($400 each for things like clothes, entertainment, gifts, recreation, etc.)
After several starts and fits, we set up our budget and finances by first tracking our spending for several months. We then opened a joint checking account, a joint savings account, and two individual checking accounts (one for each of us), and two individual saving accounts (again, one for each of us.) We now direct deposit our paychecks into the joint checking account. Immediately after each of our respective payroll deposit (we each get paid twice a month), we have automatic transfers set up to move money from our joint checking to our joint savings account ($520 following each of my paycheck deposits, and $170 following each of my wife’s paycheck deposits.) In our journey to become financially independent, we learned that you have to PAY YOURSELF FIRST. We then have automatic transfers to our individual checking accounts (again, $200 to each of our individual checking accounts after each pay period.) Our budgeted expenses come out of what is left in our joint checking.
The money that we transfer to our individual checking accounts each month is our “own” money. In other words, I can spend, save or give away my $400/month on anything I like, and my wife can spend, save, or give away her $400/month on anything she likes. This seems to work for us. It gives us both some autonomy and discretion, and we don’t feel like we are micromanaging each other.
After all of our bills are paid, and our transfers come out, there is almost always money left over in our checking account. We call this our “slush fund.” We skim it off every couple months or so and put it into savings, pay down debt, use it to cover unexpected costs, take a vacation or donate We generally make good decisions with our “slush”, but sometimes we fritter it away— lifestyle inflation is a very real thing and something that we need to constantly guard against.
Our overall financial picture is much better than it was a few years back. We finally have a positive net worth, and feel that we are starting to get some control over our financial situation. We have approximately $75K invested in growth stocks between our two 401Ks, and have about $25K cash in the bank. We have paid off nearly $70K in student loan debt in the last three years, but I am disappointed to admit that we have lost momentum on that front. Plus, with a baby on the way, I am particularly nervous and frustrated about our debt load, and the prospect of being the only income earner for the foreseeable future scares the crap out of me.
We also keep thinking that maybe we should buy a home since we are going to have a child. We have been tracking local real estate prices and interest rates pretty religiously for the past three years, and have probably looked at 50 houses over that time. We can get a house that suits us for approximately $150K, and with 20% down, we would be paying approximately the same as what we are now for our housing expenses. We haven’t purchased anything yet because: 1) we felt we had too much debt to justify buying a house; 2) prices and rates have just kept falling; and 3) we are not 100% certain we want to stay here forever.
With regard to that last point, we live in a vibrant community with low crime, low taxes and good schools, and we are surrounded by nature and great recreational opportunities--some of the best in the world in my opinion. We also have a great network for friends here and are involved in the community. Despite these qualities, our respective families live far away, and there is very little diversity of opinion and culture here. We are an interracial couple, and we really want our children to grow up knowing a lot of different kinds of people and having various cultural experiences. We are concerned that if we plant roots here (i.e., buy a house), our children will struggle being bi-racial in a relatively homogenous locale.
Finally, we know there is room to cut in our budget, and know that buying brand new car was not a great financial move from most perspectives given our huge debt burden (it is a cool car though and gets GREAT gas mileage.) Our particular hope, however, is that all of the great readers on this site can offer us some feedback and different perspectives so that we can re-evaluate our situation and keep moving forward—being a lawyer, I have thick skin so feel free to be candid. Also, thanks for the opportunity to tell our financial story.
I think you are doing great on the expenses side of things. I don’t see anything on how much you are saving? Income is 6K expenses are just below 4K, 2K left over going where? Also before you buy a home, I think it will be best to have saved at least 30% of the purchase price, 20% down payment and 10% contingency mortgage fund. If you are concerned with diversity in your town, do not buy until you have the baby and let things play out afterwards. See how the baby is received by the community before leaving such a great place as you described it.
Posted by: RichUncle EL | January 25, 2013 at 09:18 AM
I think you are doing very well on the expense as well. Have the baby first and see what happens. I think it's still a good opportunity to buy a house now. The real estate market is turning around pretty quickly. Last year, CA started turning around and now OR is turning around pretty quickly.
I wouldn't worry about carrying a mortgage as long as you buy a reasonable size house. You'll have equity and you should be able to sell if you need to move. Assuming we're near the bottom of the market which I think we are.
Posted by: retirebyforty | January 25, 2013 at 09:57 AM
My biggest suggestion would be to switch your student loan payment ($560) with your "play money" ($800). You would really start to see some movement on your loan balances going down with that choice, and you would still each have $280 a month to play with.
If you are aggressive with your student loan payments, you will be getting a 6% return on your money used to pay that down. Most people right now would kill for a 6% return on their money.
Good luck.
Posted by: sasha | January 25, 2013 at 10:18 AM
Have the baby and WAIT. We just had our first a month or so ago, and it's amazing the kind of financial / spending thoughts that go through your head as you confront the conflicting impulses of (1) wanting your little dude to have the best of everything; and (2) setting a good frugal example.
We've resolved to stay the course for a year.
Posted by: elb | January 25, 2013 at 10:29 AM
You said "We both would rather be paying off the student loan as opposed contributing to retirement, but reducing our taxable income through 401K contributions is really the only tax deduction we can get right now". Aren't you deducting the interest on the student loan when doing your taxes - up to $2,500, even if you don't itemize. I would try to pay down at least a bit more a 6% loan - it's still high compared to current mortgage and savings rates.
You don't mention how much you have in savings - can you actually do 20% down payment, can you pay off some portion of the loan? But in general I would wait and see how you feel about the community after your child is born,
Posted by: Ivy | January 25, 2013 at 10:29 AM
JP,
I think that it is great that you are paying yourself first, but when you put the money into a discretionary spending account it may be spent rather than saved/invested. If you automatically set aside savings and discretionary spending separately then you can ensure you reach your savings goal and can spend all of the discretionary money without any guilt.
Since your student loan is at 6% and you have $25K in the bank- I think it would be very reasonable to put additional saving toward getting rid of that debt.
As for buying a house, I wouldn’t unless you are sure you want to be there- the transaction costs on a house are large so you only want to get a home if you are sure you want to be there long term.
Living on one income is possible especially since you make 80% of the income. I would try to save all of her income until the baby arrives. If you can’t cut out 20% immediately then ease into it by cutting your spending down each remaining month with the goal of only living on your salary when the baby is due.
If you do buy a house don’t buy too large/expensive of a home- a large fixed expense plus the maintenance is a real budget buster. It is also more work to clean a larger home and costs more to heat or cool it.
-Rick Francis
Posted by: Rick Franics | January 25, 2013 at 11:02 AM
JP,
You have done some wonderful financial moves in your recent past, congratulations! I especially like how you paid down half your student loan debt in just 4 years! You should be able to finish it off in 3 years if you keep the paydown rate the same. Also, big props on consolidating your federal loans, high FICO scores, and keeping organized banking accounts.
Also I believe from looking at your profile that you can afford to start a family. I'm guessing that monthly your slush fund is at about $1300? That will probably all go to the baby once he or she has arrived. My only concern is how much you have in emergency funds? I see you pay yourselves $520 and $170 per month respectively. What is your total liquid savings?
I see places where you can free up some money to help you accelerate your net worth at a faster rip. You said, "We both would rather be paying off the student loan as opposed contributing to retirement, but reducing our taxable income through 401K contributions is really the only tax deduction we can get right now." This is not entirely true. You have the student loans and the ROTH IRA going for you. If I were you I'd reduce my 401K up to the company match and then divert $458/month to the Roth in your individual name. A Roth will not reduce the tax rate you pay, but it has better overall tax ramifications than a traditional IRA in that earnings grow tax free! Add in the fact that at $110K/year family income you are not at such a high tax rate to worry about tax rates too much. I say, be more concerned about maximing your net worth.
I think you can increase your wife's own financial security by increasing her retirement contributions. It is great that she gets 150% match and probably totals $3300 per year in contributions! Add her own Roth IRA account and shes got an extra $5500 going in to her retirement! This will leave her with about $900 per month for expenses and such.
Pick Vanguard index funds for both your Roth's (yet another advantage of a Roth) as you cannot pick such funds in a 401K. Does your wife really have a 401k? Usually employees in the medical field have other types of plans available.
The main thing to be concerned about in whether to buy a house or not is the duration you plan in staying in the current city you live. Don't worry about home values dropping as the bubble has already been burst and small up and down fluctuations should not be concerning to the home buyer. Since you are not rooted it does not hurt to look at potential job prospects in other areas of the country you desire to live, work, and play. Your job is very flexible in that regard and there are plenty of similar cities that provide wonderful outdoor activities and landscapes such as where you reside now.
Finally, you can tighten the budget further if you truly want. Maybe not now, but $400 spending money each per money will definitely be too much when you two have children. The best of luck to you both!
Posted by: Luis | January 25, 2013 at 11:33 AM
Congratulations JP on the new addition in the works. My wife and I are looking at our first one around the same time.
I would recommend to pay off your student loans, and even consider using some of your cash in the bank and fun money.
You are wise to consider closely looking at expenses for when you will be the single earner. Given the car will be another 2 years to pay off, would there be any value to try and sell it and switch to a used car? Just a thought and without knowing much about the market, it may or not pay off.
Keep up the focus on saving and you will have all your debts cleared soon plus have more options to buy a house. I'd also say don't get stuck in too big a space since it will be many years before your child grows up.
We are thinking along the same lines- staying in our 2BR 2BA condo until a few years when the child gets older and then we will need to find a bigger space.
Best of luck.
-Mike
Posted by: Mike Hunt | January 25, 2013 at 11:53 AM
Def congrats on the new kid on the way! Don't be scared by people saying you'll be spending $1300/mo on the kid - you can do that if you want, but we have our second kid on the way and I can't imagine spending that much on both combined! My wife is a stay-at-home Mom and we manage just fine - she'd rather be home to spend quality time with them than out working so they get brand new everything! The only way you spend that much is if you build up a huge college fund for them or need to get daycare/etc, IMHO. You look like you're in great shape to be a single-income family, whether or not you decide to buy a house (and even there, your baby won't care if it's in a house or an apartment for at least a few years!).
Posted by: r_meister | January 25, 2013 at 01:43 PM
Really impressed that you paid off $70k of student loans in 3 years!
Posted by: Paul | January 25, 2013 at 02:56 PM
Congrats on the upcoming baby. It's truly life altering in ways you can't even begin to imagine. As someone who started having a family a decade ago, I wasn't prepared for the childcare/preschool expenses. In my high cost of living area on the east coast, preschool was upwards of $6500 per year for half day. If your wife stays at home, there comes a point when you want the child to be 'socialized" with other kids and that's when it becomes expensive to deal with a non working spouse, paying the preschool bills and having non-mortgage debt hanging over your head. I would definitely recommend finding a way to pay off your student loan debt before buying a house.
Posted by: indio | January 25, 2013 at 02:58 PM
American car insurance is so much cheaper than what I pay in Canada.
$400.00 per month for personal stuff seems like a lot. you could probably each halve the amount you spend and still really enjoy your life. You could direct that saving to a house downpayment or toward whatever vehicle your government allows you to save for post-secondary education in.
Posted by: Jane Savers @ The Money Puzzle | January 25, 2013 at 03:26 PM
"We are concerned that if we plant roots here (i.e., buy a house), our children will struggle being bi-racial in a relatively homogenous locale." Don't buy a house if ownership of that house will then determine where you live. Should be the other way around. (Which means things like don't get in a situation were you could end up way underwater and unable to buy your way out of it). Owning a house is great, but its not the american dream. The american dream is pursuing what you want where you want.
Posted by: Strick | January 25, 2013 at 04:39 PM
Very good profile.
One item I didn't see mentioned in detail was life insurance. With one income and kid along the way, you need to think seriously about it and the amount you get at work (1-2x salary) will not leave much. In addition you wife should have some too.
On the house, the key date you should be targetting to have made a house/location decision is by the time your kid(s) hit school. I'd suggest using next couple of years to decide where you want to be, and how big a house you'll need.
Posted by: M | January 25, 2013 at 06:05 PM
I agree with Sasha about switching your student loan payment amount and your "personal" money amount - get some momentum going on that loan paydown again.
I also agree with saving all of your wife's income between now and when the baby comes - then you will know that you can handle the single-income, plus you will have some money set aside for the initial baby costs - crib, car seat, etc. And, I also think $1300/mo is way too high an amount to spend on a baby, unless as someone else mentioned, you're starting a college fund right away.
Congrats on the baby coming!
Posted by: Julie | January 26, 2013 at 01:03 PM
I don't think that you should be in a rush to pay off the student loan debt. Hoard your cash for now until you know what your budget will look like with a child (or two). You will never regret having a fat emergency fund.
Besides, 6% is a fabulous rate historically (mortgages were 7% just a few years ago and up to 18% in the past two decades!!). In a few years as the fed unwinds their quantitative easing policy, inflation and rising interest rates will be an inevitable side effect. Once you can get 6%+ in a money market account again you may be kicking yourself for paying that loan off so aggressively.
Regardless of what you think rates will do though, I wouldn't make extra payments on that loan until you are maxing out retirement accounts (including spousal IRA once she isn't working) AND maintaining a year's worth of expenses in cash.
Posted by: Meg | January 31, 2013 at 03:56 PM