Reader Case Study: Getting Blood from a Stone
The other week while enjoying a day of catching giant fish on Lake Tahoe, I got another interesting question from a reader. I think this one is worth answering online, because the situation probably sounds familiar to many people.
I have a situation that only your level of badassery can cut through. Let’s get to it.
1. I am married, in my late 20s, and employed as a public school teacher.
2. My wife is a stay-at-home mom to our newborn baby
3. Our only debt is a 38k mortgage (15/yr fixed @ 6.25%) on our home, which is in pretty good shape (i.e. doesn’t need any major repairs or upgrades).
4. We have roughly 18k in cash on hand with 16k in retirement accounts (401k/Roth IRA/Pension).
5. My salary is 50k, which is pretty much the max that I can earn as a public school teacher.
6. We are cash-flow positive, but not by a huge sum:
a. Charity – $240
b. Mortgage/Insurance/Property taxes - $486
c. Home maintenance fund – $200
d. Utilities (water, electricity, prepaid cell phones, internet) – $275
e. Groceries – $340
f. Auto fuel and maintenance – $200
g. Insurance (life, termite, auto, teacher liability, id theft) – $170
h. Pet – $60
i. Medical fund – $100
j. Misc – $50
k. Child fund – $200 (This is budgeted, not all is spent)
l. Car savings – $100
Total Spending – $2421/month
Income – $2520/month
Note: My wife occasionally makes some extra money from grant writing, and we usually use that for entertainment since it’s clearly not present in our base budget.
Basically, we operate under the America’s Cheapest Family plan. Each of those categories represents its own budget. For example, our Insurance fund has over $500 in it right now and will continue to accumulate until various debits are applied, such as for car insurance, etc.
I have a very small side business (web design) that I am trying to grow.
I would really like to pay off our mortgage; however, I am struggling with figuring out how to go about it. Do I take a second job? I would say “cut expenses,” but I just can’t find it in the budget. The “charity” amount is really a non-negotiable for us.
This is an interesting dilemma, because we have a family who is running a pretty tight ship in my opinion, yet they have no money to spare. The underlying problem is that they have an ambitious plan: a single income earner at $50k, trying to support two other people AND a dog, AND a house and a car.. all with a charity budget that is twice as large as the savings budget.
Let’s start with income:
Our friend Teacher lists his income as $50k/year before tax ($4166/month), yet is showing take-home pay of only $2520/month. That implies $1646 in deductions, or 33%. That is much higher than the tax rates I’m familiar with, since using the “married filing jointly” tax status you should be paying 13.3% in federal tax. Even after adding SS/medicare and state tax and assuming a high-tax state like California, I calculate a take-home pay of about $3400 per month.
So there’s a thousand dollars a month that is probably going at least partly into pension or retirement savings. That brightens the picture quite a bit, since that’s about 30% of what would otherwise be the take-home pay. If that much is really being saved, the simple math behind early retirement puts Teacher at less than 28 years from retirement – before any improvements are made.
And you could definitely use MORE income. As a general rule, I feel that any family earning less than $100k per year would benefit from increasing their income if at all possible. Above that level, there is plenty for both spending and saving for financial independence in a reasonable time frame, so at that point I usually encourage looking to frugality before going overboard searching for even higher income. But for you, some extra cash would definitely come in handy. Your web design side business might be the ticket if you are a good promoter, as would any number of other jobs – especially during the summer if you have the time off like most teachers. Your wife may be able to expand her side hustle business from home as well – during the baby’s nap time, or on evenings and weekends and eventually during school hours.
I’m also surprised to hear about the low pay for teachers in your area. This may just be bad public policy that you’re stuck with, but you might want to poke around the system for extra pay. I have met many, many teachers from different parts of the US who earn $60-90k by the time they have been working 10 years or so. But if you love the job and there’s no way to squeeze out more pay, we can still make it work.
The cash and investments:
You have an exceptionally expensive mortgage at 6.25%. Since it’s on your primary residence, you should be able to get this below 4% if you shop around. Due to the small balance, it would be wise to pick a bank that will charge you no closing fees to do the refinancing. You should still do the math on any potential re-fi deal, but going from 6.25% to 4% on a 38k balance will save $855 per year.
Next, you have $18k in cash on hand. Why?? Even I rarely keep more than $3k in cash! If you dump this immediately into your mortgage, it will save you $1125/year in interest at 6.25%, and still $720/year even after you refinance to 4%. You have a stable job, so losing it with no notice is unlikely. If you did lose that job, you’d still have many months of unemployment insurance to back you up.
Keeping $18k in cash on hand when you have that mortgage is exactly like floating a neverending $18,000 cash advance on a 6.25% credit card and then stuffing the money under your mattress. It makes no sense. If you really want financial flexibility, open up a line of credit on your house, keep the balance at zero, and consider that to be your untapped emergency fund.
And the Spending:
You are an efficient family, but in a tight situation like yours it is still worth putting everything up for review. Do an annual shop-around for house and car insurance, and use higher deductibles if practical, since your budget of $170/month indicates you are spending much more than me (my house and car insurance is about $50/month combined).
Your car fund for fuel, maintenance, and replacement is at $3600/year, perhaps double my own spending on cars. This is directly proportional to the amount of driving you do – is the car ever used for commuting trips under 10 miles or local errands that could be handled by bike part of the time? As I’ve mentioned many times on this blog, bicycles are rolling cash machines and I estimate that taking up biking earns and saves about $93,000 every ten years over the long run. Even just using a bike with trailer for grocery shopping would be a good start.
The Pet Budget: At an annual cost of $720/year, I would not consider myself wealthy enough to be hosting dogs and/or cats at your stage, although it is of course a personal decision.
Equally personal is the charitable donations decision. I know you said it is non-negotiable, but just for fun let’s plant an idea. You could view charitable contributions as a lifelong goal rather than an immediate monthly need. There is something to be said for getting yourself financially established first, then using your increased strength to give more later. That was my own strategy – I saved like hell and ignored outside causes throughout my 20s. Then I was able to quit working entirely and now I have both my time and some money available to try to do some good – for the rest of my life!
Yours is not the easiest situation in which to find free cash. But I believe it can be done. Good luck and let us know how it goes!
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