Newbie budget help please.

Smonet · October 2013

I posted an intro yesterday. I've looked at my current expenses and am wondering if you could critique it. Basically, we are spending everything each month. I have no budget at all, except I try to put 1,000.00 into savings. However, most months I only get 200 or 400 in there, and many months need to borrow from it. I had saved up 7,000.00. But we painted the house for 3,000.00 last month and it seemed I needed to borrow some to cover cc bills, and now next month I am looking short again. I am just overspending. I did sign up with mint.com and have it tracking everything I've spent and what category it is in. It looks like most of it is in eating out and shopping for things at Target, Costco, Gap and Amazon.

How do I create a budget to get my extra spending in order and save?

These are my goals:

1. I'd like to get a large e-fund up and running. 30,000.00 would make me comfortable.

2. I also would like to plan for our next vehicle-DH gets an all expenses paid high end company car. I am driving his '04 Nissan truck which is paid off. But I know when we have baby #2 I can't fit 2 carseats in the truck. The plan is to TTC after our current LO turns 2-next July. So, I have maybe 2 years before I need a different vehicle.

3. I would like to focus more on our retirement. I have a simple IRA that I contribute to and my employer matches 3%. I contribute 5% currently. This will switch to a 401K with a 4% match in 2014. I have 15,000.00 in it currently. I also have 15,000.00 in the stock market-currently all in Apple Stock. Should I do something more conservative with it? It has grown 10,000.00 in the past 3 years with the stocks I've owned. I don't feel knowledgeable in stocks but was given a trust fund of 50,000.00 in stocks when I turned 23. I used part of it to buy house #1-which I still own, and everything but the last 5,000.00 to buy our current home. The 5k has grown to 15k since then. We kept my house #1 and rent it out. It costs us a couple hundred dollars a month rented out, but when its paid for I look at it as a source of income then and during retirement. DH also has a 401K that he contribute to and his employer matches. New for him in 2014 is an additional Roth with a 4% match.

4. We want to rebuild on our current lot. We priced out a remodel in stages but the end number is the same as rebuilding. We took out a home equity line of credit for 110,000.00 planning to remodel, but decided to just wait and rebuild. Cost will be around 250,000.00 when we do it.

5. Need to budget for landscaping. We live on a lake and our lakeshore is eroding so it is more a necessity than a want to rip rap the shore and plant native plants. Could be around 10k, and need to do it soon.

4. I would like to plan for my maternity leave in 2 years, as well as be prepared to spend another 1,000.00 a month on daycare ice.

Thank you for taking the time to read this far. I have seen others post, and the specific questions that are asked, so I'm trying to give details.This is what it looks like.

Take home pay each month including rental income, after taxes, health insurance and retirement account deductions.

5917.38 DH AVG/MTH (paid every other week)

3064.36 Me

1150.00 Rental (Renter pays all utilities)

10131.74 Total

Bills/Expenses that I know and are planned for, I've factored what they are a month for the ones I pay 1 time a year or every other month:

22.55 Trash

205 Rental Assoc. Fees

61.25 Sewer/Recycling

100.50 Gas Utility

61.38 Landline/Internet-just switched from internet only being 79.00

1000.00 Mort #1 on rental (I factored 1+ extra payment each year into our monthly payment-so we are overpaying)

245.00 Home equity line of credit (I took the 2nd mortgage that was balooning soon at 8% interest and moved it to our HELOC with a rate of 4 plus prime. The balance is 20,000.00)

2795.40 Primary home Mortgage (also paying a 13th payment each year factored into this amount. 30 year fixed at 4.5%-hoping to drop PMI after we gain another 30K in equity)

490.00 0% interest loan with 8 months left on a furnace/ac unit we replaced in the rental last month. I figured I should take advantage of 0%.

82.00 average electric

151.27 Verizon-cell phones. We already get a discount and for 2 smart phones I can't get cheaper with our contract.

52.20 Direct TV (would love to cancel but DH stands hard on this one)

33.00 Insurance policies on rental

62.79 Auto insurance

896.00 Daycare (I am maxing out a dependent care account through DH's employer. this $ is taken out tax free but factored into our takehome each month.)

140.00 Cleaning man

200.00 Boat storage/boat lift costs

124.42 Life insurance

*153.91 Gym membership. We don't go so I'm planning on putting it on hold. I'm locked in as a VIP and get a discount so I hate to lose it if we decide to go back. My sister works there in corporate and its 12.00 a month to hold it until we make a final decision to let it go. Hold won't go into effect until December.

My leftover is 3255.07 and I spend 275.00 a month on gas for our cars and I am aiming to spend only 800.00 on groceries (I do buy mostly organic, local foods and feel that is very important-if this seems high.

For medical both our employers give us 2400+, this usually covers everything up to our deductible, however this year with a child we used it up and DH had a hospital stay so I think thats why we came up short last month. I had to pay some out of pocket. Without the hospital stay we would have come in without any out of pocket at year end.

We only have auto costs on the truck, and luckily most months there aren't any.

One more question. We purchased life insurance policies in the amount of 1 million on each of us. Is this adequate, even with my income and our current home mortgage? If something happened I want to be prepared for myself and our LO, what changes would you make with after LO 2 comes along?

Any advice? Anywhere I'm sucking it up besides shopping too much? Thank you so much if you made it through

anssett · October 2013

To my eyes you're spending way more than your income should be trying to spend. You have a gym membership you don't use. You have someone cleaning your house, and direct TV, and 3 mortgage payments (2 houses and the heloc) and boat storage! I'm not saying any of these things alone is wrong to have, but my income seems comparable to yours and there's no chance in hell I'd spread myself that thin.

You aren't contributing nearly enough to retirement. It should be closer to 15%. You should also start thinking about your kids college savings, if you plan to help them. Save up for a new car in cash, but don't buy 'new', but 'new to you' (>2 years old but in good shape). Cars depreciate so quickly it's insane to pay full price.

I'd be really concerned if I was in your shoes. Saving up a 30K E-fund sounds noble, but is that really 6 months of required expenses or 6 months of lavish living supporting extra houses and boats?

TarponMonoxide · October 2013

I suggest coupon clipping and saving on groceries where you can.

Make one main meal for the week and eat that all week, with variations.

Make something like a turkey breast, chili, lasagna, to name a few.

Get rid of the extras, like the maid service.

A 30K emergency fund will take you nowhere. YOu'll need to have much more than that in savings as a just in case. Sad sign of the times. YOu can't live for a year on 30 grand, unless you are in some very inexpensive part of the country.

Consider finding a second job, with part time hours. IF you have a hobby that can be profitable, turn it into something where you can make money from it.

Rainzzzy · October 2013

I would absolutely not keep $15,000 in one stock, Apple or anything else (especially not Apple though as it is way too hyped and fueled by emotion). The key with investing isn't really aggressive versus conservative, but more diversification of risk. Keeping all funds in one company's stock is not diversified at all. You've made a good return on it, but nothing is keeping it from crashing next week. I would suggest moving that sum into a mutual fund.

I would second the recommendation that you should be investing 10-15% into your retirement account (10 as the absolute minimum, 15 per is more ideal). I would also take another look into what your retirement IRA is invested in, and make sure they are mutual funds and not individual company stocks. If you are unsure of which mutual funds to select, a fund targeted toward an anticipated retirement year would be a good start (such as a 2045 fund if this is around when you plan to retire). Targeted funds are more aggressive the farther out the anticipated retirement is so a 2035 fund would be more conservative than a 2055 fund.

I would also suggest getting a lot more aggressive with the emergency fund building. $7,000 is not even one month's take home pay. At your income level you should be saving a lot more than 500-1000 a month. Of course you realize this which is why you've been tracking your spending these last few months

The good news is at your income and spending level there is plenty of room to make changes and find extra cash to save every month. Taking a hard look at where your money is going was a great start, but now the real work begins as this is where cuts need to be made. There isn't much you can do about fixed costs, but your variable costs like groceries, and shopping are areas for improvement. I would zero in on what you are spending for clothes and household goods during retail shopping. Can you make some of your own cleaning products (simple vinegar and water in a spray bottle is great for counters, mirrors, and windows). Can you meal plan around what is on sale/in season to cut grocery costs and use up everything you buy? If a lot of your clothing money is for the baby can you try some resale shops? You can score some very gently used baby items this way.

hoffse · October 2013

My thoughts:

1) Ditto PP - 100% invested in Apple stock is a terrible idea. Apple shot way up a couple years ago and their growth has been sluggish since then. Be grateful you've made as much as you have in it, sell that ASAP, and then diversify with a mutual fund portfolio. Those tend to grow at about the same rate as the market grows generally (some will beat the market by a small margin). That means you're pretty much in the same boat as everybody else - if the stock market goes to hell, your mutual funds will as well - but if the market has had crazy growth like it's had the last couple of years, your funds will do the same. You don't want to be tied to one stock, though, particularly in the technology sector which gains and loses popularity at a moment's notice.

2) I feel like I'm missing something, but it seems to me that you are losing money on your rental property when you consider the mortgage, the insurance, and the rental fees associated with that property. If it were me, I'd probably get rid of that house because it's not a great investment for you. You did say you were pre-paying that mortgage, so I would drop pre-paying it and then see if you are suddenly in the black on that property... but even if you are, it doesn't look like it would be by much.

3) On that point, I would stop pre-paying your primary mortgage as well until you get some other things under control. 4.5% is a great interest rate and historically it's ridiculously low. Not all debt is bad - many on this board disagree because they don't like the feeling of being in debt, but mathematically a 4.5% mortgage should not be prepaid if you intend to stay in that house for 7-10 years and if you will take your extra cash each month and put it toward something like retirement.

4) Speaking of retirement.... you're not contributing nearly enough. How old are you? If you are over the age of 30, you probably need to be contributing closer to 20% than 15% given how little you have in those accounts right now. By the age of 35 the goal is to have 1.5x your then-current salary in retirement. For people who wait until they are 30 to really make retirement a priority, this means starting at 20% instead of 15% and continuing at 20% for the rest of your working life unless there is some windfall that happens to help you make up the difference.... you already spent your windfall (the trust fund), so you need to be looking hard at your retirement.

5) Get rid of the cleaning person. I really believe that if you can't clean your own house, your house is too big. I also think that living on a lake is not the best financial choice because the maintenance costs are a lot higher than a regular house due to water. I'm not telling you to move, but if you ever do, you might consider how much you spend per month on varies lake-associated expenses that you could save by living on dry land.

6) I also don't see any costs associated with a boat other than the dock fee... and at the very least you should be paying (high) insurance on that. Boat insurance usually covers things like drowning (which is why it's so high)... and it's required by law in most states. Check this out if you aren't paying for it already.

7) Organic - sigh. I know it's important to some people, but $800/month on food is absolutely crazy given that probably 90%+ of it is consumed by you and your H. I'll admit that H and I don't go organic for most things, but we spend about $300-$400/month on groceries for 2 adults, and we do shop at places like Whole Foods and Fresh Market a couple times a month. I really believe that the only way you really know that the foods you're eating don't have chemicals, etc. is to grow the stuff yourself. I you can't or won't do that, then you're playing organic roulette due to the way that designation is given to foods. So for us, that label isn't worth the price premium. If you insist on buying everything organic, do take a hard look at how much you're buying out of season, throwing away, etc. Food waste is a big issue in the US, and by freezing or canning those organic foods before they go bad, you may find yourself spending less without compromising on your own rule. If you are big meat eaters, also look into buying a half cow or something - that will give you a ton of meat at a much lower price per pound than your regular grocery store. Granted, you need a freezer for this to work but it pays for itself pretty quickly.

8) Save for retirement first. Then your e-fund, then your other goals. I don't subscribe to the notion that high-income earners need 6 months cash on hand in an e-fund because that would have you holding a lot of cash liquid without growth. H and I keep about $10K cash on-hand for things like car repairs, etc. and we keep the rest in the market so that we get enough growth to help keep up with both inflation and our incomes. In the event that we lost our jobs, we would liquidate those investments, but we're in a secure field (law), so it's unlikely to happen. We're much more likely to need those investments for some medical emergency. If you are also in a secure field, I would keep enough cash on-hand for those small emergencies that pop up a few times a year and then invest the remainder.

hoffse · October 2013

And yes, do consider college savings for your LO. Check out the 529 accounts if you don't have one already.

I know, I know - a lot of people believe that college should be 100% covered by their child because that's what happened to them. Well guess what? College tuition grows by about 6% per year. While I do think they will eventually have to slow that down or risk pricing themselves out, it doesn't seem to be happening any time soon. By the time your LO is ready for college, the average state school will cost about $40K/year.... and private schools will be closer to $100K unless the tuition hikes stop.

So you might ask yourself this question: 1) at the age of 18 were you capable of making the choice to take on, say, $100K of debt (conservatively) and would you have really understood what that meant for your future after graduation? And 2) did you then need to go for a master's, doctorate, professional degree, etc. to make you competitive in the job market? So was the $100K investment the end of your education expenses, or was it really a stepping stone?

529's work like Roths - you basically stick after-tax money into the market which grows tax free, and their distributions are tax free as long as you use that money for education expenses. I think it's fine for parents to require their children to pay for part of college - then they are invested in their own education, and they're a lot less like to party it away. But personally, I would have a hard time saddling my 18-year old with $100K+ of student loan debt with the understanding that there would probably be more to come for him/her to actually be very competitive in the job market.

Here's a 529 calculator if you want to see what saving now will do:

http://www.savingforcollege.com/college-savings-calculator/

hoffse · October 2013

One last thing, re: insurance. For now you are probably ok. In general you want about 10x your annual income in the case of death, possibly a bit more with a small child. H and I each have enough to cover funeral expenses, to pay off both of our student loans in full, and we went ahead and included enough to pay off the mortgage on a house that we haven't purchased yet (we generally know what our budget will be for that) because we are so young that it didn't raise the premium very much to do that. That would leave us with no debt in the event that one of us died, and the other would be fine living on one income going forward.

If we are able to have children, we will take out additional life insurance to cover the costs of having those children until the age of 25 plus college. Plus we will be giving ourselves some additional buffer with that, because you can really only estimate those costs - you never know whether it's going to be more or less than expected. We are going to use 25 as the ending age instead of 18, because that's the about the age that most people graduate from law, medical, or business school. We want enough to help support them with that (either through gifts or personal loans) if those are careers they choose. My parents were able to provide personal loans to me and my H for a portion of our law school debt, and it's going to save us about $40,000 in interest, even though we will be paying them back in full. We'd like to be able to have a similar arrangement with our own children, and that requires having cash on-hand.

While you are young life insurance is so cheap that it makes sense to buy more than enough to cover your family. Also, make sure you are buying term life insurance.

Smonet · October 2013

anssett,

Thank you for your input. I'm canceling my gym membership. I have not put much thought into retirement besides investing in real estate, I am looking into upping our contributions. I have decided to make this vehicle work-as long as I can and not buy anything until I have to. At that point I'll buy what I can afford to pay cash for used. Also, my son has 2 529 accounts started for college that he is fortunate enough to have his god mother and grandparents contributing significantly to. We realize we should also contribute at some point. I think my biggest area to save is food, and I'm tackling that asap.

TarponMonoxide With meal planning and shopping on sale with coupons I know I can shave much wasted cash to put away. Thanks!

Rainzzzy We will see what comes of Apple tomorrow, however I've decided to take the 10k I made recently and sell it and invest in something more conservative through my broker. My IRA is invested in a 2045 fund geared towards my retirement year, but I realize now I need to contribute more than I have been. I appreciate your tips, I'm using them to make some changes!

hoffse Thanks for your input. On the mortgages I always thought paying an extra payment on a 30 year and bringing it down to a 15 year was so smart in regards to what I'll pay in interest. I guess I feel that if my house is paid off in 12 years I will have 2,000.00 freed up to contribute to a retirement (I do realize I need to come up with more NOW and I'm hoping to make that happen). This is something I'm going to look into, I thought it was what I should do, but obviously I'm not sure what I should be doing

On the rental property: it is not a money maker now (and I'm upside down on it as it was my primary residence before I got married so I'm an accidental landlord) That will also be paid off in about 15 years and at that point all rental income is income-especially when I'm retired. I have looked at this 200.00 I put in out of pocket each month as part of my retirement.(plus I don't have another choice at the moment.) Insurance on the boat is 100.00. It was a small once a year payment so not factored into my budget-I forgot. I will look into additional life insurance after LO comes.

Our dream has been to live on the lake, and we are living the dream at quite the expense. The good thing is we bought a foreclosure and owe about half of its value, so if need be, and the market is stable?, we can use equity for retirement as plan B.

Thank you! I will be making many recommended changes and consulting our family financial planner-who I should have met with earlier. I always felt I was doing so well and making good decisions-being debt free besides mortgages, investing in real estate, not carrying a car payment. However, following what my parents do (take many risks which all paid off big time) maybe isn't what is in my best interest. Thanks again! I look forward to learning more from you guys.

hoffse · October 2013

Glad to help. The way I see mortgage debt is this:

4.5% on (let's say) a $400K mortgage over 30 years has you paying about $330,000 in interest. To drop this to 20 years, you have to pay an extra $500/month or so. Doing this, you have now paid $208,000 in interest, for a $122,000 savings.

Before this sounds like a fabulous idea, you need to see what you would have made by putting that $500/month into the market. On average, over all years, the market has seen about a 7-10% return. Let's call it 7% to be conservative. So over 20 years you would have made $262,000 at a 7% return. Over 30 years you would have made $614,000 or thereabouts. Keep in mind these figures are average. Some years it can suck (2008) and some years you can be looking at a return of 20% or more (2012 and 2013 so far).

So that's why I wouldn't pre-pay a low-interest mortgage. Because I would rather spend an extra $122K in interest to make $614K in investments. I'm about a half million dollars ahead, and that seems like a lot of money to me.

I have a couple caveats to this rule, though:

1) If your monthly payment is just too high to be really sustainable, pay that debt down no matter the interest rate. You don't want 30 years of pain, after all. That said, housing expenses are one of those things that most people have to accommodate in life - it's not credit card debt or even student loan debt. So if it's sustainable, I'm not inclined to pre-pay.

2) If you are very likely to spend that $500/month instead of investing it, then you net $0 in savings over 30 years. And in that case, it's obviously better to save yourself the interest on your mortgage by prepaying that loan.

Obviously the way you ensure you aren't spending that extra $500/month is to increase your retirement contributions that are automatically taken out of your paycheck. Then the cash is never in your hands to begin with.

Just my $0.02. Your financial person may disagree.

Xstatic3333 · October 2013

I have a couple of tips on eating local and organic. This is important to us as well, but we do it for around $250 a month. A big part if this for us has been joining a CSA (stands for Community Supported Agriculture). We pick up vegetables weekly from a local farm for six months out of a year. Our share is $600 and meant to provide for a family of 4, but we freeze a lot for the winter.

I'm vegetarian, which definitely keeps our costs down, and H is ok with lots of meatless meals. I'd suggest going meatless a few meals a week if you can stomach it. If not, the farm where we buy H's meat offers a meat CSA with a similar price breakdown; about $100 a month for a family of four. Maybe your area has something similar.

In general, avoid shopping organic at "regular" grocery stores. They are cheaper if you shop for conventional food, but in our area WF is much cheaper for organic staples as long as you stick to store brand and resist all the temptations. An exception is milk and eggs, which are a great deal at BJ's, our local bulk retailer. Overall though, the best value when we have time seems to be buying right from farms.

GL! Even with you LOs you can definitely cut that grocery bill big time. Stick to in-season and on sale stuff. Bulk cooking is a great idea as well.

Newbie budget help please.

Re: Newbie budget help please.

Choose Another Board

Search Boards