Reader Profile: MK

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 MK. She answered my questions (in red below) as follows:

Please tell us a bit about yourself.

I am a 28 yr old female. For the past five years I have been living in Washington, D.C. and am currently the office manager for a small law firm. I finally started getting my act together 2.5 years ago when I began using a budget. I started an emergency fund, got out of credit card debt, and started making extra payments to my student loans. I also started saving for retirement. I am single and living in a two bedroom apartment with a roommate.
 
Describe your financial situation (who works in your family, how your income is (general), how your expenses are, etc.)

Income: $3480 take home pay/mo (I just got a significant raise two months ago, so my take home is up about $300 which went a little to lifestyle inflation ($100), but mostly savings/retirement)

• Rent: $1295 (includes all utilities, cable/internet, and parking)
• Student loan: $480 (Minimum payment is $270. All loans are 2.75% and under)
• Cell phone: $75 (I have to have the data plan for my work email)
• Car & Renter's insurance: $80
• College: $50 (saving money to help cover my little sister's book expenses when she goes to college next year)
• Food (groceries, restaurants, alcohol): $420
• Gas: $100
• Personal care/entertainment/household: $130
• Slush/Vacation Savings: $250 (used for irregular expenses such as new clothes, car repairs, yearly vacations, gifts, etc.)
• Retirement (Roth): $450 (about 12% of my after tax income)
• General Savings: $100 (a chunk of this ends up going to the charity that I also volunteer for)
• Christmas: $50

Additional info: I have a car, but it's been paid off for three years and still runs pretty solidly, so I am hoping to get another 5 years out of it. My employer pays an amount equal to 5% of my salary into a profit sharing account each year.  I do not have access to a 401K. 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.
 
Assets:

• Emergency Fund: $6,000
• General Savings: $2,000
• Slush/Vacation Fund: $1,400
• IRA: $3,500
• Roth: $9,000
• Profit Sharing Plan: $11,500

Debts:

• Student Loans: $19,000 (started at $45,000)

I contemplated moving to a less expensive apartment this year, but after figuring in the moving fees, increased driving expenses, and how far out I would have to go to pay less (the DC metro area is expensive and the commuter traffic is horrific), I decided to stay put another year.

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

I feel like I have a pretty good balance, but I am struggling with whether to be more aggressive with my student loans even though they are at 2.75%.  Part of me thinks instead of paying the extra amount I should be putting the money in an investment account since I can likely beat that in the market.  But part of me also hates having that debt over my head and it could be paid off in 3 years if I continue at this rate.

I am also trying to deal with not getting sucked into too much lifestyle inflation. It's hard not to say yes to every dinner and night out, since a lot of my friends spend every penny they make or just have a higher income than me.

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

To complicate my life, I am considering a career change.  I am currently volunteering 16 hours a month with an organization that helps women and children dealing with domestic violence and homelessness.  I love working with the clients and children, and it is definitely the highlight of my week.  I am considering going to work for the organization full time, but it would involve a pay cut of nearly 40%.  It would be a huge lifestyle adjustment and would basically be like starting over. 

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

Use a budget!  People think that it is a naughty word, but it really helped me get my life under control.  I feel so much better now that I know where my money is going. It also allows me to splurge occasionally and I love paying all cash for any vacations (as opposed to college when I just charged them because I thought I "deserved" it).  Also, save early.  I wish I hadn't gotten into credit card debt in college and instead gotten on the PF train sooner.

Comments

[Brandt]

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.

[Freedom Fighter]

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.

[Mrs PoP @ Planting Our Pennies]

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.

[JNEW]

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

[Kurt]

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!

[Old Limey]

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.

[Steve]

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.