Though I try to keep the “Ask the Readers” column general so that the advice can apply to many people, sometimes I get specific questions that seem important enough to be addressed. That’s the case this week.
A young GRS reader named Rebecca dropped a line the other day looking for help. She’s just getting started in life, but feels overwhelmed by personal finance. She worries about money all of the time. Here’s her story:
I am 24 years old and currently work full-time, but only making $12/hour. I get paid once a month, which sucks. But the reason I am writing this email is because I need financial advice. I will tell you all my bills that I have:
- I have $11,000 in student loans. I make bi-weekly payments, sending in $100 every two weeks. I’m nowhere near making a dent in that debt.
- I have a $296 car payment, which hopefully will go down with the next car I get. I want a 2012 Camry, but I can’t afford the monthly payments without leasing and I don’t want to lease.
- $76 cell phone bill.
- I have a savings account at a local credit union, which I put $200 in every month. But the $1600 I have in my savings is going towards a down payment on my next car. That means I will have to start over on building up my savings account and I don’t have an emergency fund.
- I opened up a Roth IRA with a local credit union in December because I needed somewhere to roll over my $360 that had built up in my 401k at Best Buy, so I put $200 in every month. I only opened it with the credit union because everywhere else had a “minimum”. I want to move to Vanguard when I hit $1000, but I don’t know if that is the best place to move to.
Besides my regular bills, I set aside $80 for gas a month, pay medical bills if I have them, and if I even have enough money left over I buy groceries when I stay at my boyfriend’s house. I live paycheck to paycheck and I don’t want to do that. I need help. I want out of debt. I want to be comfortable (if not more than comfortable) with money. I don’t want to worry about money anymore; it’s all I ever worry about.
Do you have any financial advice for me? Because I need a lot. I thought the Roth IRA was a smart move, because I don’t even get retirement where I work right now, but I don’t even really understand everything I should about it. When I did some research on it, it seemed to be the best option for me compared to a traditional IRA.
I think maybe I should find another job. I feel underpaid here. I’ve only been here four months, but have accomplished quite a bit. I get full insurance, but I don’t get retirement, paid vacation, or anything. Earning $12/hour and only getting paid monthly is terrible.
To start, I think Rebecca is a prime candidate for using the Balanced Money Formula, one of my favorite personal finance tools. To refresh your memory, this simple budget framework contains just three categories. It looks like this:
This budget uses take-home (after-tax) dollars as a starting point. Here’s a breakdown of the three categories:
- Needs are things you must pay no matter what: housing, food, utilities, transportation costs, insurance.
- Wants are everything else: cable television, restaurant meals, concert tickets, comic books, clothing beyond the basics, etc.
- Saving comes last in this plan. Everything left after you take care of Wants and Needs is set aside for the future. (If you want to get out of debt, that’s also tackled here.)
Going with some rough numbers, Rebecca’s $12 an hour translates to $24,000 per year before taxes. Guessing a 25% tax bite leaves Rebecca with $18,000 per year, or $1500 per month. Using the Balanced Money Formula, that means her targets should be to:
- Spend less than $750 per month on Needs.
- Spend up to $450 per month on Wants.
- Save the rest, with a target of more than $300 per month. (And remember: With the Balanced Money Formula, debt payments count as saving.)
And what is Rebecca actually spending?
It’s tough to say for certain, but we know she’s spending at least $376 (or about 25% of her income) on her car — and that’s only for the car payment and the gas! We also know that she’s setting aside $600 (or about 40% of her income) in debt reduction and savings.
So, based on this, I have three recommendations for Rebecca.
First and foremost, she should do everything possible to get her transportation costs down. They’re outrageous. The car payment and the gas alone take 25% of her take-home pay. Add insurance and maintenance, and the number is probably more like 40%. This is a tremendous drag on Rebecca’s budget, and she should do whatever she can to cut this number drastically. Buy a beater. Bike. Explore public transportation.
Second — and I can’t believe I’m saying this — Rebecca might actually be one of those people who ought to save less than she is right now. It’s admirable that she’s saving 40% of her income, but it’s also making things feel pinched.
I do not think she should touch the $1600 she’s already saved. Instead, she should use this as her basic emergency fund (using it only for emergencies). But I do think it’s okay for her to stop contributing the $200 to savings if it will help take some of the financial pressure off her shoulders. If she wants to use that $200 in a productive way, she could put it toward her student loans. Then maybe it would seem like she’s making a dent in them.
Finally, I agree with Rebecca that it’s a good idea to find some ways to make more money. I don’t think she should quit her job at the moment, but she might try to find a second job, make money from a hobby, or sell some of the things she owns. At this stage, every dollar of extra income will help her out.
That’s what I would do if I were in Rebecca’s situation. What would you do?
What advice do you have for Rebecca? Do you agree that she should ditch her car? Or am I off target? And what about the cell phone? Looking back at your own life, what moves would you have made differently when you were 24 years old? What did you do right? How can Rebecca go from worrying about money to feeling confident about her future?
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What about housing costs? Does she live with her parents? She says she buys groceries when she stays with her boyfriend, but that sounds as if she doesn’t live with her boyfriend. What about groceries the rest of the time?
There’s too little information given, although I agree that her car and cell phone are costing her too much. She can’t afford her current car–which she is still making payments on–and she wants a brand new one?
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Yeah, I agree that more info is necessary (and to ditch the car). I wonder what hobbies may turn into additional income or if speaking to her manager may turn into a raise. It never hurts to ask or to express interest in moving up in the organization where she works. I also wonder if she is working on a degree or paying off loans. If she is working on a degree, a small job on campus may help with her bills and provide new networks.
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I agree about the car and that we don’t have enough information to provide much advice. Cutting the cell phone is nice, but the way to seriously reduce your fixed costs is to focus on her housing and her car.
I would like to know more about her housing situation and the type of car she has that costs $300 per month. She should definitely reconsider whether it’s worth the $300 per month for her.
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I think that proportion of her income going towards transport is outrageous! Especially considering that she is already talking about $1600 down-payment on her next car! In my opinion, she should not be thinking about buying a new car, but look at getting a used one – if a car is even necessary.
She should also consider the possibility of car pooling with others at work, or look into public transport. That is such a massive drain.
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I want to think that car is her weakness. she’s fond of nice and shiny cars. I also think we shouldn’t take away this pleasure from her, just because she’s not a high income earner and in debt.
Thousands of people are earning side income these days, even people who can’t manage his/her personal finances are writing personal finance blogs to have additional income.
Cell phone cost definitely can be reduced. I see young people on phone key pad always, I think she’s one of them and that’s why it takes $76 per month. I doubt if millionaires spend that much on cell phones.
Over all I tend to agree with JD, except that car payment thing. I believe she’s driving a better than average car at this moment. She should continue doing that and find extra income for her new car, till the extra income is not there she shouldn’t have the new car.
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Sure, she should buy a new car, why doesn’t she– provided she’s willing to live in it, never drive it anywhere, clothe herself with potato and flour sacks, eat wild pigeons, and work 2 extra jobs for the next 10 years.
Yes, of course, I exaggerate, but only to make a point: we live in the free world, people have a choice to spend their money however they want, but with freedom comes responsibility, which means we live with the consequences of our choices.
Money spent somewhere is money you can’t spend elsewhere, and it isn’t very smart for a person with low income to put their whole paycheck into a shiny car, just like it isn’t very smart to use the lottery as a retirement plan, though people do it all the time.
Time spent somewhere is also time you can’t spend elsewhere– if you’re working extra jobs just to own a car, you might miss out on the opportunity to actually go places with it, to take up studies to further your career, to save capital to start a business, or to simply enjoy being 24.
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Yeah that car payment doesn’t make sense for her income. Even if you ignore taxes, it’s over an hour’s worth of pay each day just to pay for that car. Hopefully insurance is included in her numbers, or it’s even worse.
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No new car…if she is close to paying off the one she has she should just keep it till it dies. At that point she will have a little bit of an emergency fund. She can also use her car payment as a way to pay down her student debt faster.
She should see if there are different options for her phone.
Where exactly is she living and what are the costs involved there?
She has youth on her side so I definitely think it would be wise to find a second source of income. A job or selling stuff would be the most immediate way of getting money.
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I get the impression she’s leasing… depending on the deal to buy the car outright, she should consider buying that car or a cheaper car rather than re-upping for a lease. Also a cheaper phone plan is a no-brainer.
Also, she’s got a degree, so I’d focus on maximizing your earning potential, which $12 is far short off.
I started out making that out of school 10 years ago and now make $64k… Her income’s going to grow but that should be her primary focus while avoiding bad financial decisions at this time.
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“she’s got a degree”
She has student loans but she didn’t say explicitly that she has a degree. A good number of people start college and quit and end up with loans and no degree. She may have a degree but we don’t know for sure.
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If you want to stop worrying about money, kill the debt you have any don’t add any more..,
A new car? No way.
You need something cheaper, not more expensive. Drive a beater until it dies. Adding a new car payment is a terrible idea.
In the near term I would also save less and stop the funding of the IRA. I’d put that money toward the student loan until it is gone. If you put $600 on it per month you would be done in roughly 18-20 months. I bet you could make that 12-14 months if you really tried.
In my opinion, being debt free with money in savings is the best way to reduce the money worries.
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yes, no new car. Just looked it up and a 2012 camry MSRP is $23,000. Someone making $24,000/yr shouldn’t be buying a $23,000 car.
If she needs a car, keep the one she has. If she needs a newer car, because the one she has is dying and a money pit, then buy a reliable used car (e.g. Civic or Corolla). Definitely don’t buy new.
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JD,
How come you don’t recommend getting a new job or raise?
I’m 25 and I know if that situation came to me I would have to either talk to my work and explain that the low wadge was draining me emotionally or find a better paying job.
She is not living extravagantly except with the phone IMO. Simply going from 12/hour to 15 would make a world of difference.
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Oh, there’s no question that I think Rebecca should find a way to make more money. But based on the info she gave us, I’m not sure that earning more is the biggest issue here. (It’s an issue, yes, but not the biggest one.) Instead, I think getting some of her costs down would help her more, and would be easier to do in the short term.
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Re: OP’s job
The OP’s email isn’t informative regarding her job. Maybe she loves it, and it’s fulfilling to her. If that’s the case, then she should definitely cut expenses so she can “afford” to work at her job.
And even if she hates the job and wants out, it might still be many months before she gets a better-paying job. In the meantime, she’ll need to make-do with the salary she has, and that includes cutting her car and phone expenses.
http://traderjoesreviewer.blogspot.com
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I would encourage Rebecca to find ways to make herself more indispensable at work, then go to her boss and plead her case for a raise because she’s earned it, not because her low pay is draining her emotionally.
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I would encourage Rebecca to find a new job, not ask for a raise at a retail store – Best Buy. I mean if that is your only choice for now then ask for a raise, it certainly never hurts. But remember that retail pays lower than most industries. Try to get a job related to your studies. Check out PayScale for a rough idea of how much different jobs tend to pay… and their ceiling amounts… and where these jobs tend to take you in the future.
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She mentioned needing to roll over her 401k which typically happens when you either quit or lose your job, so I assume she’s not working at Best Buy anymore. Also $12 sounds too high for a retail job.
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I agree that she would benefit from adopting the 50-30-20 plan (I wish I had at 24!) I would suggest that she read Elizabeth Warren’s book “All Your Worth: The Ultimate Lifetime Money Plan” where she lays out the plan. I read it this January, and while I was already making significant progress with my finances, this book helped me refocus my efforts, and re-prioritize my Emergency Fund then go back to tackling my debt.
I would suggest that she not touch the $1,600 for a car, and keep it for emergencies. I think it could alleviate some of her stress if she knews she wasn’t going to touch it for a new car.
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You say you want to get out of debt, debt is stressing you out, and yet you are pro-actively planning to sign up for more debt via a new car??!! That’s crazy. Stop getting yourself into debt if you want to get out.
Your car costs are insane. Cars depreciate. You’re not going to get wealthy while your biggest asset is something that goes down in value.
You don’t deserve a new or even almost new car until you’re out of debt and earning much, much more money.
Sell your current car. Ditch your plans to get a new car. And buy a cheap, used car that’s really ugly but still functions. Maybe an old Taurus or Civic. Avoid dealers. Buy your car through craigslist or a garage sale. Ideally spend $1000-2000. Anything you’ll have to spend on repairs and upkeep on an older car will be much less than the depreciation you’ll take on that new Camry in just the first year.
Better yet, if you life in a city with public transportation, stop owning any car and walk, ride a bike, or use public transit.
Also, you can get a cell phone for at least half that much per month. It might not have as many features or be as fancy of a plan, but it will get the job done.
Your life right now is crazy. You are a financial slave to your boyfriend. What if you want to breakup with him eventually? Given your current expenses and income, you’d be in a crisis to try to add rent to the mix.
Right now, pretend you have an average rent payment. Cut your expenses to the point that you could pay rent each month. For as long as you don’t have rent, put that money toward debt.
Also, get a second job. And a third job. You’re young and can work more. And maybe one of those other jobs will lead to something you love more and that pays more.
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WHOA! Where’s the part where she’s a financial slave to her boyfriend?!? That’s an ugly thing to say, and I think you’re being unfair to the OP and her boyfriend.
Maybe I’m seeing the OP through my own experiences, but I’m thinking the OP doesn’t live with her boyfriend, but DOES spend a significant amount of time there, so feels that she should help out by picking up stuff from the store.
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I agree with all of margot’s comments except that I don’t see where she gets the OP being a “financial slave to her boyfriend.” Nevertheless, OP does not mention rent, so either she’s living with boyfriend, parents, or someone else — regardless of who, margot’s idea that the OP should pretend she pays rent, cut her expenses to that point, and put the “rent” money towards debt instead I think is a good one.
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Based on the profile, I concluded that she’s living with her boyfriend . (If that’s wrong, then my original point is obviously moot.) When someone lives with a boyfriend and literally can’t afford to move out, that makes them dependent in a terrible way.
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She only says that she pays for groceries when she stays with her boyfriend, but there is no mention of where she lives otherwise, and no mention of how much rent she is paying. My guess is that she lives with her parents or has neglected to mention her rent, which should be a huge chunk of her expenses, right? I valued my freedom in my twenties and chose to go carless for 7 years (in rainy Eugene OR, no less) rather than live with my parents back East. Every wet bike ride or walk I took was worth that freedom. This person may have different priorities, but I’d be budgeting to get out of my parents’ house first, assuming she does live with her parents.
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One more thing- the only time she buys groceries seems to be when she has enough money left over, and only when she stays with her boyfriend. So, two giant necessities are not even really included here as part of her budget: food and housing. This person does not have a realistic idea of how much life should cost if she is living rent free and getting food paid for. Or we are missing some big pieces of the picture.
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When I was 24 I had just purchased a new (to me) car which increased my monthly payment and insurance costs. In retrospect that decision appears to be the cause of several years of financial stress and missed opportunities.
I find that interpreting bills as hourly income, instead of wondering what else I could spend that money on, really helps.
So for me the car stands out. We don’t know how close that vehicle is to being paid off. Once that goal is achieved, that’s like getting a $1.70 per hour raise. Assuming a cost of $3552/year and working full time 52 weeks, 2080 hours/year. $3552/2080 = $1.70 (rounded down.) In Rebecca’s case, this is like getting a 14% raise.
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Because my answer was long already, I had to edit out my own experience. When I was young, I too bought a car, and my transportation expenses were like an enormous anchor for years after that. It was a huge mistake, and I regret it. Kris, on the other hand, drove a used car for a long time. She had paid cash for it, so had no car payments. That helped reduce the financial stress in her life.
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I have to say that this doesn’t have to be like that for everyone.
I bought my first car when I was two months from being 23 ( I didn’t get my license until I was 21 for various reasons and drove my parents vehicles for a while until they divorced and I was forced to get my own car). I bought a brand new 2007 Toyota Prius costing $26200 with an initial 6 year, $461/month loan.
I was making $15/hour at that time, working mostly full time.
Why did I do this? I drove a lot for work at the time and got mileage reimbursements for it, that alone paid the car payment and gas every month, and being a brand new car, it needed next to no maintenance (I still own the car 6 years later, other than tires and regular self-done oil changes and other minor maintenance, it’s still going strong). Insurance was also relatively low (as low as a 22 year old single male could be in the US…).
I eventually worked my way through various jobs up to a very well paying, very well respected job. I was still in college when I bought the car, but in retrospect, it was probably one of the best decisions I’ve ever made. I still love that car, I feel a sense of connection to it.
I did pay it off much sooner than the 6 years, I refinanced it after 18 months from 7.99% down to 5.24%. As my income grew, I kept paying more and more towards it until after 3 years almost to the day, it was mine free and clear.
A car is a sense of freedom, if you live in the US and not in a major city, a good car is mandatory for long term success. From my experience, after commuting by bus and train in the Philadelphia suburbs to get to college, I must say it’s not a reliable or viable form of transportation.
The bottom line is, an expensive car payment doesn’t have to always be a concern. Buying a high quality, reliable new vehicle can be a good choice depending on the circumstances.
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Or you could have gotten a new (previous year model) Hyundai Accent (what we chose) at ~11K (what we paid, 4 door automatic, because that was all the cash on hand we had) or likely a Honda Fit and paid a ton less, both initially and in terms of interest, and still have (and enjoy) the car today without having taken on anywhere near the monetary risk. What if you’d lost your job before your payment was up? What if your income didn’t grow? What if your housing costs went way up?
The (true) gas mileage is also not that much different, nor are the maintenance costs.
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“I drove a lot for work at the time and got mileage reimbursements for it, that alone paid the car payment and gas every month”
So your employer was basically paying for the car because of work. Thats an exception and most peoples employers don’t pay for their cars.
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Agree with Marsha at #1. Not enough information given. Housing is a huge expense– unless she is planning on never paying for housing she needs to save at least some portion of a housing payment so it won’t come as a shock if she suddenly finds herself on her own for living expenses (an emergency fund is a great place for that money).
At $12/hr, buying a new car when you already have one doesn’t make any sense. Drive the one you’ve got until repair expenses are looking to be larger than buying a new used car. (And yes, there’s nothing wrong with buying a new car IF YOU CAN AFFORD ONE. Being able to make a monthly payment is not being able to afford one.)
It also doesn’t say what the interest rate on the student loan debt is. If it’s low, then retirement might be a better place to stash that money. A little now goes a long way later. And that emergency fund may need to be bulked up.
Without education and career information it is difficult to suggest how to make more money. What are the opportunities in the area? Is this an entry-level dead-end job or is it one with potential for advancement? Is it one where you need to take classes to advance? Getting a higher wage rate may be a better long-term strategy than working part-time at a minimum wage job would.
Yes, Vanguard is a great place to put your IRA. Get a target-date index fund from them for the date you’re hoping to retire. (Our Monday post is on that topic.)
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I agree with Marsha-no new car and erally, we need a few more pieces of information to better understand this situation.
With the info given (and based on myself being in a similar situation two decades ago) I’d get a second job. My second job (one 8 hour shift a week) used to pay my rent. That was a huge burden off of me.
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When I was 24, I was making a lot more money than Rebecca is – and yet I managed to spend like crazy, save nothing, AND incur huge credit card debts (all while living at home!) So when I read about a young person who already has a savings plan and an IRA (while making $12 an hour) and is not racking up huge personal debts – a person who actually reads personal finance blogs like GRS – I am really impressed. All the suggestions here are great – and bear in mind that eventually, you will probably want to add rent to the equation – so maybe you can pay off your debt as quickly as possible while you are still at home. I would probably make extra payments to that, and when it is gone – voila! You have your rent payment. Good luck, Rebecca!
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Agreed – great job on taking the initiative on your financial well being. I made really silly decisions in my younger days, pre-Internet, before you could get advice (and great personal finance blogs like this), so I had no idea what I should or should not be doing with my money. At a young age, your habits now will determine the way you spend and save for your life, and you will be making more money down the road. Keep reading and learning and you will be fine – no need to worry.
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First off, the realistic nature of her situation is that she can’t afford the car she has now and especially a new car. Just because she wants a new car doesn’t mean she should or can get it, theres nothing wrong with a used car. Also sounds like she is leasing which is just terrible for her, she should buy used and in 5 to 10 years if she puts her degree to work can think about getting a new one.
Next, living at her boyfriends might not cost her rent but she should still give him something towards his rent/mortgage whether its just $100 to show she is taking responsibility for her situation. It doesn’t look right that she is saving/getting a new car but only time to time pays for groceries if she can afford it. Also, taking this into account, what happens if the relationship ends?
Now, the saving too much isn’t correct, just what she is saving for and how is incorrect. Creating an emergency savings is correct, especially considering her living situation. Obviously saving for the car is off. But she shouldn’t be cutting back on the retirement either. The question is why are you rolling over to an IRA. Does she still work at BestBuy. If she does and they have a 401k match she should definitely reallocate the money she is putting the $200 she is putting towards the Roth into the 401k, she not only will get more towards retirement but it will effectively lower her gross taxable income which will allow her to take home a little more, or increase her contributions more (I assume the first option is more appealing.) It sounds like people told her the right things to do with her money but she really doesn’t understand it. I would recommend her reading up on how and why to save for retirement, I know from experience its not something people talk about as much or pass on, people are more willing to teach you how to change a tire than how to save for retirement, partly cause they are unsure themselves (luckily for me, my parents are blue collar spend what they get but my friends were always interested which got me.) Learning why she should be saving would help her.
Lastly, the other big issue is that she is underpaid and overqualified if she has an associates or bachelors. The real solution to her problems it to upgrade her working situation and increase her salary. Might be easier said than done, but it needs to be a focus, to be complacent where she is will just make things more difficult.
So to wrap it up, no to new car (get used and get rid of her current lease if thats what she has), yes to savings (maybe change it if can get 401k match), get a new job, help pay for rent and read up more on saving/retirement (she is already here reading and asking questions so it shows she is interested.)
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I’m in my fifth post-college year of earning around $24k/yr and I would love to give Rebecca lots of specific advice but there is far too little information given! What her living situation is (rent?) and where she lives (metro area? expensive?) would be a start.
Honestly, I think she has enough room to work with this budget, even with the current car payment. But she CANNOT buy a new car. Without any explanation given, she needs to pay off her current car (if she’s close) and drive it forever or sell it and buy something cheaper and more fuel-efficient. That would free up the $1600 to become an emergency fund.
After the car situation is taken care of, I would increase the student loan payment rate so it actually feels like it’s going somewhere. I like that she’s putting in $200 to a Roth IRA and I don’t think she necessarily needs to reduce that, or maybe just to $100/month. There are probably other places in her budget that she can find room to cut, like eating out and entertainment, so that she can increase debt payment.
It’s also important to progress in her career, so she should have a plan to advance or find a job that will promote her regularly.
I hope we get some more details from Rebecca! I just want to encourage her that it IS possible to live a nice life on that salary, especially if you get rid of debt payments!
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Yes, yes, and yes.
Without knowing where she lives and what her housing costs are, any financial advice risks being irrelevant. JD’s max of $750 on “needs” won’t work if, say, she has to pay for an apartment in most US cities.
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Been there (still sort of there). I have an enormous student loan debt and am doing a mixture of the Dave Ramsey and Suze Orman plans making the minimum payments on some loans, and funneling lots of extra money towards a few (the smallest, and the one with the highest interest).
I’m with everyone on the transportation costs. I live in a city where you MUST have a car. And I do so much driving for my current job(s) that I cannot have a beater (I’m not opposed to beaters, but I drive 1-2 hours/day with no way to get home if stranded. Also, if the transportation is not reliable, I lose 90% of my income). So, I DID have to buy a good-quality used car in order to keep making money. My car payments are no-where near that, and I am a bit unsure why they’re so high for her, especially because I got a relatively new used car with excellent mileage.
Personally? I’d take JDs advice. Build the emergency fund a bit more (I’d feel more comfortable with $2500-$3000, especially to cover pricey car repairs) and then I’d stop contributing to that and $100/month to the IRA. Then, I’d send the extra $300 to my loans. That quadruples what she’s paying. Even if she only does that for 6 months, that’s $1800 extra she’s put into her loans, and she should definitely start seeing a difference.
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I would recommend that Rebecca ditch the car, stop saving for retirement and throw everything she can at that student loan. Once she gets that monthly amount back she can start saving again. I think Rebecca also needs to rethink her expectations. A 2012 Camry? why? What does that do for her except keep her in debt and trying to keep up with the Jones’. I agree with J.D…BEATER! I think she needs to learn how to live more frugally. Plenty of advice on this site, and others, for that.
Brendan
themoneybeast.blogspot.com
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I agree with the general advice given. Many have already brought up the point about housing and other means of transportation.
I was in a similar situation from ages 18-23…I was living out on my own, working for a low hourly rate and I resided in a ridiculously expensive city. I didn’t have a car or student loan, but my rent was more than half of my income.
I agree that being frugal, having a budget, etc. is a good thing, and absolutely necessary for someone making that amount of income, but I think she should focus on making some big long-term changes too.
The 11k in student loans seems low, and probably not for a full 4-year university. I’m guessing she either didn’t finish, or it’s just from a community college (not a bad thing, when I went back to school at 23, I started in a community college before transferring to a state university).
She might want to consider finishing school, or going back for a degree she can actually get a job with. I felt a sense of defeat when I did it. I had to move back home, and I had even less money for myself, but I finished 2 undergrad degrees (Finance, and Risk Management) in about 4.5 years, scored a job before I graduated and paid off all my student loans within 10 months of working.
The best part – I was so used to living on so little, all of my monthly expenses (and luxuries) are covered by half of my pay. That includes rent, food, utilities, cell phone bill, etc. And for the time being, I still don’t have a car. I can still stand public transportation, so I’m sticking it out for as long as I can.
There’s only so much you can do from the frugality/budgeting perspective. You really need to make some moves towards a new job/career.
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I don’t think there’s any indication that she didn’t finish school, she might’ve just had excellent financial aid (which helped me graduate from an expensive private college with much less debt than hers) or been able to pay a lot along the way at a relatively affordable school (in-state tuition meant that my husband wound up with just a little bit more than hers). Not everyone takes out 100% of their college costs in loans.
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I agree that not everyone takes out 100% of their college costs in loans (I surely didn’t.) And even with your point taken – my point about making moves towards a better career/job path still stands.
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Definitely not enough info to give much useful advice. What is the interest rate on the student loan? Is she living with her parents? Will she be living at home for the next little while?
I’d like to know more about her current car loan before telling her to buy a beater that might end up costing her more. How much longer are the $296 payments for? Might she be better off keeping it?
If she isn’t paying rent, then her situation isn’t dire, although it certainly needs some improvement. Good job on doing some saving and thinking about the future.
The one piece of advice I can give is to work on your human capital, which is your ability to make money. Get a better job, maybe a 2nd job, educate yourself more etc etc.
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I agree completely on ditching the car. I am about to complete a Master’s degree that was payed by me not owning a car and biking everywhere. I also ditched my smartphone for a cheap pre-paid, went from $70/month to $25/month. I also do a little handyman work at my building for reduced rent.
It is possible to live small, you just need to reconsider your line between needs and wants.
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Rebecca, I think we should be looking at USED camrys. For comparison I make about 65k per year and I’m going to be looking for used for my next car! And that’s only if something happens to my 10 year old hail damaged trailblazer.
And FYI, this isn’t because I live in NYC or something, I live in a small town with very low cost of living.
I’m not 100% sure, but I think the insurance will be less on used also!
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200/month for an 11k student loan seems quite high, especially with interest rates so low right now. either it used to be 20k and she’s already knocked off 9k, or she only has a 5-10 year repayment period.
student loan interest is tax-deductible, and the rates for a consolidated loan are quite low. i’d suggest looking for a 20-30 year consolidated loan on the balance of the 11k. that should lower the monthly payment to something like 80-90 a month.
then, if she gets some cash in the bank, she can pay off chunks of the student loan, which will reduce the repayment period without affecting the monthly payment.
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Student loan interest is NOT tax deductible. I thought it was too until a couple days ago when I did my taxes.
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I hope you haven’t filed yet. Under most circumstances, student loan interest IS deductible.
http://www.irs.gov/taxtopics/tc456.html
However, to my mind that’s not a good enough reason to extend the term of her debt. If we say she’s in the 25% tax bracket, she may get 25% of her interest back, but if she pays off the loan earlier, she keeps 100% of the interest she would have paid. And she wouldn’t have to pay any fees associated with the consolidation.
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Agree with everyone: it is tax deductible. I pay A LOT of interest and thank goodness it’s deductible (still paying as much off as I can, but it is a help when I file my taxes).
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Student loan interest IS tax deductible.
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Ill agree with the others. You should be able to acess a form online that tells you your student interest and then deduct that.
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Student loan interest IS deductible (line 33 of 1040). BUT there is an income limit. ($75k single / $150k married) Chase may make too much money to claim the deduction.
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Yes, my now-husband didn’t know student loan interest was tax-deductible because he made too much money to deduct it. Now that we are married, it is also worth noting that you can’t deduct student loan interest if you file separately.
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It is worth noting that the % you can deduct decreases as you approach the income limit. It is a very simple worksheet/formula and worth every former student’s time to calculate.
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Like I’ve commented other times, some people DO need a smartphone for their jobs.I’m one of them. I don’t need games and crap like that, but I’m on the road a lot and a good percentage of my work comes in through email.And if I don’t get the email fast, I lose the work.(My iPhone paid for itself within 24 hours of my purchasing it.) That said, if her job doesn’t require that degree of connectivity she should ditch the fancy phone and get a cheapie.
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But be aware there could be a cancellation fee.
Also she could get a prepaid smartphone and still save money. I think some are about $50 per month.
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If you bring your own smartphone, Simple Mobile has a $40 unlimited everything plan. You do need an unlocked T-Mobile compatible smartphone, but those can be had for under $200 used. In 6 months the savings would have paid for the phone.
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I typically don’t comment on theses posts but I felt this one merited discussion. I feel for Rebecca: I was in her shoes just four years ago.
In short: I earned $45,000 (2x as much) and I lived in Washington, DC (where an apartment is $1,200 in a bad part of town). I had no car, and I was drowning in debt.
This situation is one that calls for saving money on things, but for sure this is also a situation that calls for earning more money. $24k is NOT enough to live on. I realize the economy is in the crapper; I know it’s hard out there. But I would most certainly earn more in any way I could.
It will be difficult to start but once she gets going, she’ll feel much better and be much more comfortable with her financial situation. $24k is a paltry salary with what today’s costs are.
I also agree with the rest of JD’s advice in this case.
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Very much agreed on the car. My husband and I make $80,000 per year — and saved up enough to buy a car cash — but we would still never choose a 2012 … And that’s with no payments on our current car!
Being open-minded and flexible about transportation is SUCH a great way to get ahead financially — and not doing so can make it nearly impossible. My husband bikes to work every day; I used to ride a scooter. It was chilly, but it’s also the reason we were able to buy a house!
Good luck, Rebecca! You’re very much ahead of many of your peers in that you’re worrying about saving, and you’re asking for advice in the right places. Taking that advice is the hard part, but do so and in a few years, all of those peers will be wishing they’d been as smart as you!
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I was going to say something similar. My husband makes around $75,000, and last year when we needed to buy another car, we decided we couldn’t afford a Toyota, much less a new one. Instead, we bought a used 2010 Kia with cash for $13,000. Perhaps it’s the age difference here (we’re in our mid to late thirties), but you should drive around something that gets you from point A to point B. I find it interesting that she even insists on a Camry. Why not the cheaper Corolla or even the Yaris?
What is your motivation for wanting a new car you clearly can’t afford? Is it an internal desire? Or is it fueled by how you grew up? Or perhaps your friends drive nicer cars? I think it might help you to determine the real reason you want this car.
I also am amazed at what people spend on phones, but then again we have a DVR and big cable package but only $10 a month phones. I guess we all have different priorities. But the reality is you can’t afford the phone either.
One question I have is – if you do take on the new car debt (despite the loads of advice you are getting to NOT do that), what happens if your presumably free living situation goes away and you have to pay hundreds of dollars a month in rent? Will you just have them repossess the car? On your income you certainly can’t afford both the car and rent. At the moment, you are car poor, which in my opinion is even worse than being house poor. At least with the house, it’s hopefully not a depreciating asset.
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1. Sell your current car and find something older that gets excellent gas mileage (gas prices aren’t going down anytime soon.)
2. Put the leftover car money into your former car savings (now emergency savings.)
3. Go to a site like eSurance and see if you can get lower car insurance (I did this and saved $100 a month!)
4. Use your phone as your internet to avoid having to pay for both (checking email, surfing, etc.). I joined my family’s plan and saved about $50 a month.
5. Consolidate your student loans at a lower monthly payment. Student loans are a huge burden to hang over your head, but the interest is low and it’s better than worrying about money constanlty.
6. Find a new job! You should be able to find something that pays more and has better benefits. If not, find a part-time gig to moonlight. Waiting tables and bartending have pretty good income from tips.
7. Leave your current retirement savings where it is and start a new Roth IRA with a company like Vanguard. The costs you’ll pay them to manage your investments will be well-spent with greater returns.
8. Make sure your money is in a high-interest savings account. I use ING Direct, but I’ve heard good things about Ally and others. Using an online account keeps your savings accessible, but not too accessible.
Those are just my suggestions from personal experience, I hope they help!
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Do not buy a brand new car, that is INSANE. Either keep the one you have, or downgrade.
Get a 2nd job that pays more per hour.
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Regarding the cell phone: Virgin Mobile, baby! I have a smartphone (which yes, you do have to buy separately and at full price, so there’s some upfront cost) and pay $25 a month for 300 minutes and unlimited texting and “unlimited” data (I think the cap is in reality about the same as everywhere else).
Although…I just checked the site and somehow that plan doesn’t seem to actually exist anymore, which is weird since it’s only month-to-month with no contract and you’d think they’d forcibly bump me up. At any rate, they cite a $35 a month plan for the same thing, or people generally say that you can ask for an unlisted thing if you know it exists and sometimes they’ll give it to you anyway, so maybe try for the $25 one!
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They raised the price last year for that plan to $35, but for what you get (especially if you use a smartphone mostly for data and not talking), it’s still a great deal.
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I know I’m just joining the chorus, but if you can at all, get out from under the car debt.
Just not being dependent on the car 100% can make it cheaper – if you can carpool, walk, bike, or bus 90% of the time and only drive the other 10%, you can drive an older, less-reliable car, and if it breaks you can wait until you have the cash to fix it, too.
Cars can be necessary sometimes, but they are a huge cost for a small income.
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It depends on her cell phone contract. If she had to cancel to get out of the plan that would require at least $250. Another option would be to find out if her cell phone provider gives a discount through her work. Usually all you need is a work based email to provide them, which could save her 20% a month off her bill. Also, if this is her only way of internet it’s not a high price for her to pay. If you had a $30 a month cell phone bill but another $40 internet bill at home, that is about what she is paying now. While it is a lot to pay, depending on how she is using it, it could be a smart value.
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One of the reasons the student loan feel like they aren’t going anywhere, is that the bulk of the payment is going to paying the interest that has accrued daily since the last payment. Whenever she sends extra money, she needs to write a check and mail it (I’ve heard people suggested paying for certified mail) to the loan company with explicit instructions to apply the extra to the principal. This process has to often be followed up with an email confirming that you want the money applied to the principal and then a look to insure that it was. Student loan companies will not tell you that they can apply the amount to the principal (trust me, I’ve asked 6 times in the past 2 weeks), but they have to if you request they do (this assumes you are putting more than your monthly payment and any fees, of course).
If you consider a new job, keep in mind that paid health insurance is a huge bonus — check to make sure that the salary boost of a new job will be an actual boost and not just be redirected towards health care costs (i.e. monthly payments, yearly deductibles, etc.).
For the cell phone bill, can you create a family plan with anyone? The companies usually define “family” pretty loosely — using the same area code is often the only criteria. Also, see if your phone company will give you a discount bc you’re an alum — I get 15% off my bill bc they have some arrangement with my university. And pay attention to your monthly data rate — we lowered our rate bc I only go over 2 times a year; the overage then is cheaper than a higher plan year round.
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If you’ve already paid your interest for the month, what else COULD they apply it to?
I’ve never had a problem with extra payments going anywhere other than to principal.
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Some companies apply it to *next* month’s payment (including interest) instead – we had that problem with one of the servicers of our mortgage, took us a few months to figure out, and a friend had it repeatedly with her student loans as long as she did electronic payment.
It’s super shady, but it happens if you don’t watch out.
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Student loans are notorious for NOT applying extra payments to the principal. Instead, they just push back the date of your next payment. So, you might save a little bit in interest for the next month, but not as much as it would long term if they applied the payment to the principal right away.
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Slightly off topic, but…
For purely selfish reasons – THANK YOU for delving into this cautionary tale about student loan payments. I had never heard about this pitfall before, so, out of curiosity, I checked up on my own student loan account just now and discovered – to my dismay – the EXACT same sneaky trap you’re talking about.
This is on a Federal loan through the Department of Education.
Last Fall, I enrolled in a full-time Master’s program. At the time, I had about $15,000 in student loans (at 5.88%) left over from my undergraduate degree and I was making automatic monthly payments of $200 ($50 over the minimum). The monthly $200 was financially comfortable for me, so I intended to continue paying on my old loan during my Master’s program. Thanks to the wonders of graduate assistantships, I wasn’t taking out any additional loans.
However, when I returned to full-time student status in the Fall, my loans went into deferral automatically (completely without notice of any kind) and I foolishly didn’t notice that my automatic payments had been stopped without any action or consent on my part (I blame the obscene amounts of homework for my budgetary absent-mindedness). In February, I finally caught on and restarted my $200 payment policy.
Unfortunately, about $500 interest had accrued unchecked during the preceding months. I chalked that up as the cost of my inattentiveness. When I restarted my monthly payments in February, I figured I was back on track – set it and forget it, right?
WRONG! Thanks to the warning on this thread, I discovered that 1) 100% of my $200 payment in February had been applied to accrued interest (ouch!), and (this is the kicker) 2) because I had overpaid, the scheduled date for my next “automatic” payment had been kicked back to September 2013. Yes, that’s a 3 in the 2013. After a little digging around the account website, I discovered a rather well-hidden check box to permanently opt out of this behavior.
This strikes me as borderline deceptive; a great way to drive up interest revenues for the loan servicing agencies.
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@George – if you have time, call your Senator & Representative and tell them so. They’re the ones with the power to change how federal loans are administered.
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OP may want to check if any ‘extra’ has indeed been going to a surplus account. Unless her student loans have an extra long term or an unusually high interest rate, $2600/yr toward $11,000 loans should be making a dent.
Or possibly OP is measuring herself harshly against standards such as ‘I should have zero debt’? In which case, OP you may want to 1-take a pause to congratulate yourself for being so responsible so far and 2-look more into your anxiety about money so that you can feel in control of your situation and make informed decisions.
$24,000 certainly is not a lot of income today in the US, but the amount of savings that you are wringing out of that income at the moment is actually impressive for your stage of life imo. OP, please know that I am impressed with your diligence and a little concerned that your incredible rate of savings may be a symptom of your money anxiety…so a mixed blessing? But you have the courage to ask for advice/help, so that is a good sign too!!
Aside, when I paid off my student loan thanks to an unexpected bonus at the time (over 15 yrs ago now), the servicer did *not* stop taking my automatic payment out of my bank account.
That’s right, I had to tell them to stop – even though I no longer owed them any money! They did finally refund my ‘payments’, but it took many letters, calls, etc. Don’t worry, I let my State Attorney General and Consumer Protection Agency know all about it.
Borrower beware, right?
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@GEORGE
Where is that checkbox? I have the same loan type. Thanks!
I didn’t know about this either, wow.
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I’m so glad you pointed that out about the health insurance. That is probably worth close to her salary, especially in peace of mind. And being young does not mean that she can’t get sick or hit by a bus.
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Yeah, I have loans that do that. A few I can ask online to apply to the principle, and I do that, but others I have to send a check. It’s obnoxious.
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I agree that we don’t really have enough info. If she lives in a city with public transit (or someplace small enough where she can walk to work), then the car really should go. If a car is really a necessity for where she lives, then I would go the Click & Clack route of driving it into the ground, not buying a new model in the near future.
And I would make increasing income the second step–it’s SO much easier to do when you’re young and don’t have kids to take care of than it is when you’re older and may have more family (kids or elders) responsibilities.
Not to mention the time value of money–extra $ she makes now will be worth a lot more later.
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You’re stressed because you have completely unrealistic expectations. Your car is way too expensive. When I made $20k/year after I first graduated, I drove a used car that was paid off.
Why are you trying to buy a new car? Is there a reason you feel like you need or deserve one (not trying to be sarcastic here, the answers will hint toward the real source of your stress). As a therapist I’d say it’s likely you’re displacing your stress about other things onto money which is more tangible.
You say you’re living paycheck to paycheck, but you aren’t. You have money in savings and contribute to retirement. Paycheck to paycheck means you spend your last dollar at the gas station on the 28th and cross your fingers until the 1st. What, in your mind, does NOT paycheck-to-paycheck living look like? You worry that all your savings will go toward your new car… don’t buy a new car, and your problem there is solved.
As for your job, what are your qualifications? Is it realistic for you to make more elsewhere?
Lastly… why is it money that you’re worrying about? It may seem like a strange question on a personal finance website, but most people your age are doing much less with their money (making minimum payments to loans, not saving for retirement, not thinking about emergency savings) and are spending their time worrying about other things like relationships and careers and what have you… so why is money your main worry? Where would you have to be financially to be happy and relaxed? What is it about that scenario that makes you feel calm? I think addressing your anxiety is at least as important as addressing your finances – it was the very first sentence you wrote.
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About the cell phone, obviously she needs to be aware of the contract penalties involved, but that could be a great way to save a good chunk of money every month. My husband and I are around her age, so I get the importance of a smartphone to our peers. Not that it’s not still a want rather than a need, but it’s not as easy as saying “ditch your cell phone”. Here’s what we do:
My phone is part of my parents’ family plan. With all costs included I pay $34 per month for unlimited calling, texting and as much data as I’ll ever use. It’s a hassle to have to call my mom every time I need to do something with my phone because it’s her account, but when I looked into an individual plan, I would have more than doubled my costs with no real gain except independence, so for me it’s worth it. If she’s living at home and her family all has separate plans, she should see if she can roll them together and save everyone money. (Note: this only works because my parents both have phones, and would have them with or without me, so the additional lines are $10 each plus extras. Obviously, there’s no point in getting new lines just to qualify for a family plan.)
My husband is a techie, but went a very long time on a Motorola Razr dumbphone. When we could afford it, he checked out all the plans and ended up going with one from T-Mobile that is no-contract $32/month (all taxes included in that) for unlimited texting and data (throttled after 5GB). The catch is that he only get 100 minutes of talk per month, but he works around that through Google Chat’s free calling feature. He bought his phone off Craigslist for a ridiculous discount and ended up paying about the contract price for a high end phone with no contract.
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Just be wary of really good discounts on Craigslist. Where I live, that’s usually a sign that the item was stolen.
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Your mom can add you as an “authorized user” which makes this sort of sharing plan really easy.
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Everyone keeps pushing for a used car. I am not sure that is the best plan, the current market for used cars is terrible. They either have a huge amount of mileage, or they cost almost as much as a new.
She should finish paying off her current car loan and then drive that car until the wheels fall off.
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Not trying to argue, but I need to correct you there. Used cars have always been cheaper, and as far as I can tell there have never been more or better choices available (especially with craigslist). there are always great deals out there if you look. I live in the Boston area, make over $100K per year, and I would never pay more than $3000 for a car. You just don’t have to. There are hundreds of cars with low miles that can be found in this price range if you look around on craigslist and don’t care about driving the newest or flashiest thing. I’ve even bought several cars for under $1000 and resold them for a significant profit, just because people are desperate to sell.
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I agree with the many people who suggest that the car is too big a drain on her cash flow. A few years old used car, or preferably something she could afford without a monthly payment, would save a lot. I’d also go with a pay-as-you-go phone for now…much lower monthly cost. Don’t stop retirement savings, though…at age 24 it’s the prime time to save because of the time horizon to retirement and growth opportunities.
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I make $25K and live in Boston (so expensive!), so I kind of know what this feels like. But I feel like I’m less stressed out than she is (probably because I don’t have a car!). Assuming she has to have a car, I’d join in with everyone else to say absolutely do not buy a 2012 car. Personally I don’t think *anyone* should buy a new car if they have any concerns about money at all. It’s just pointless and the first years of depreciation are killer. (If you really want something newer and more reliable, find like a 2009 or something, and that would be way cheaper but not that much worse.) But I’d definitely keep the current one as long as it’s not unsafe. If replacing it is or becomes necessary, I’d buy a used Civic or something. (In college I spent $5,000 for one that was eight years old and pretty much awesome — I have no idea why people would pay more than that for a car even if they have the money — and you could probably find one cheaper. And those things last forever!)
It sounds like she’s paying more than the minimum on the loans (at least if they’re federal ones) which, while awesome, I don’t think she’s actually in a good financial position to do. I feel horrible for saying this (and maybe I’m destroying my own life too), but I would cut back on the loan repayments if possible AND the IRA contributions at least until the car is paid off and there’s a decent emergency fund. I understand she probably feels like with that debt looming she’s can’t really get her life going properly until it’s gone (I have the same tendencies), but this is one situation where I would just say that this kind of debt is intended to take 10 years to repay, and it’s not inherently failure to do so. Or at least to spend a couple years just making minimum payments and then doubling down when that becomes feasible.
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Well, first, we dont know the living situation. Are we living with mom and dad? Living with Boyfreind? Paying any kind of rent at all to mom and dad, or contributing to expenses? Im going to say here and now that the 200 bucks from the IRA should either be redirected to mom and dad or put in the money pot, or put into regular savings. IRAS and retirement planning is good put at this point in your life you are trying to buy financial freedom.
Keep the 200 going to savings, but as everyone else has said FORGET ABOUT THE NEW CAR. Work with the car you have, pay it off and keep it until it dies. then buy another used car with what you have on hand. No one needs or deserves a new car. Ill go even further and ask if you can sell the car and get something cheaper. You dont want to have to worry about money? Get rid of the car payment.
Others will disagree but I would either look at a deferrment of the loan or try to cut it in half untilt he car payment is elminated. Either put that money into savings for now and start paying the loan when the car payment is gone (and dont get another car payment). Take the 200 from the IRA and put into savings or else contribute it to mom and dad’s grocery bill.
By taking the steps above you add an additional four hundred dollars to your budget. Ideally someof that goes to a savings/emrgency freedom fund and some goes to living expenses.
Finally, consider what you can do in the short term and long term to increase your bottom line. Start a business on the side? Sell stuff you dont need? Find ways to increase skills without spending money? Take advantage of free job training on the job?
But dont get into any more debt, and get rid of what you have. period.
Others will disagree but I might look at a deferral on the student loan, until you have no car payment and then put the that money to the loan and savings.
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Rebecca,
First and foremost, kudos to you for actually thinking about your financial situation and looking for information & advice! I was hopeless at age 24; it’s good to see people smarter than I was, taking positive action.
I agree with others that we don’t have enough information to go on. I can make assumptions, which may or may not be correct. Since you don’t mention rent as an expense, it sounds like you’re living at home and occasionally visit your boyfriend. (If that’s so, you are good to pay for groceries when you stay with him.) We don’t know if you live in an area where a car is required or not; for now, I’ll assume that a car is a necessity rather than a want.
Each of us has to decide what are our “needs” vs. what are simply our “wants”. A dependable car may be a need; a 2012 (new) Camry (specific model) is a want. The harsh reality is that when one has only so much money, one MUST be clear as to which is which.
So IMHO your first step is to list all your categories of expenses and things you’d like to buy, and separate out what are needs from what are wants. It’s o.k. here to put down EVERYTHING, as long as you also note which is which. (For example, for me a recent purchase of new sweatpants was a need because my last pair turned holey, but a new pair of jeans would be a want because I already have several good pairs.) You may also find that a category is a need (401K) but the amount spent on it is a want ($200 instead of $100).
If you don’t already have a budget or spending plan, you should create one. Gerrold Mundis’s book, “How to Get Out of Debt, Stay Out of Debt, and Live Prosperously” has IMHO an excellent section on creating a spending plan.
Think over your lists of needs and wants, and choose what you want to cut from the wants list. J.D. and others refer to this as “conscious spending” – that you make choices about how you spend so that you’re moving towards your goal.
Speaking of, write down your exact financial goal. While we all have a vague sense of what we want to have happen, it helps a LOT to write it down in one or more succinct sentences. Mine is, “To pay off all credit card debt within 3 years and the mortgage within 20 years, and to go back to get my Master’s without incurring any debt.” It’s o.k. to have more than one financial goal but if you do, look for conflicts in the goals (where pursuit of one doesn’t allow the other).
I agree with others that, if possible, you should find ways to bring in more money. The job market IS tight, but there are still opportunities. Do you work in your career field? If not, can you use your college’s career office to help search for such a job? Are there advancement opportunities in your current position? Sometimes advancement can occur if you strive for excellence in your job, even if it looks like a dead-end position. Can you work part-time? It sucks to moonlight, but it can really get you through a tight spot and help you get ahead; just remember it’s temporary!
Finally, on the car loan, can you refinance the loan to either lower the interest (speeding up the time it will take to pay it off) or lower the payment so it’s more manageable (but will extend the life of the debt)? I agree that you should aim to keep that car as long as possible. Don’t forget to keep it tuned up, get oil changes, and repair as needed at a reputable garage, all of which will extend the life of your car.
Good luck! I’d love to hear in six months or so how you’re doing.
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I definitely agree with the others… the cell phone bill is much too high, and the transportation costs are ridiculous.
If it were me, I would get a second job or start a ‘side hustle’ to bring in some extra cash, try using anything (scooter, bike, public transportation) but the car, and switch to a pay as you go phone.
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I do not think Rebecca should have a car payment at this time, especially for a 2012 vehicle. Those new Camry’s are awesome, but you know what’s even more awesome? Not worrying about where the car payment is coming from.
Here is what I would do to avoid a car payment:
- That $1600 for your next car’s down payment? That is now your emergency fund. Keep socking it away! You’re way ahead of the game!
- Make sure your current vehicle is safe & in good repair. [I'm assuming it is b/c you have payments on it. But have your mechanic give it the once over and make sure you keep up with regular maintenance like rotating tires & oil changes.] Drive your current vehicle until it dies.
- Continue to pay down your current car note.
- Once it’s paid off, keep saving that amount for your next car. This can be in a different savings account, something with higher interest and that isn’t easy to access so you can’t just access the money.
- If you keep saving the “car payment” for your next vehicle [at least five years from now], you will have enough cash to pay for it, without needing a loan. You might not be able to to afford a “dream car,” but if you keep doing this, I promise you, you will be able to afford your dream car for cash one day.
I’m guessing Rebecca lives at home, and that’s how she’s able to save so much.
I also second JD’s recommendation of a prepaid cell phone.
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Hey Rebecca, I hear you on the worrying a lot about money thing. I’m 26, make $20K/yr, and will for the next 3 years (back in school for a specific career track). Sometimes it freaks me out that I just can’t save much in an objective sense, especially when I read on blogs like this about people our age maxing out their 401ks (I don’t even HAVE a 401k, just an IRA, and certainly don’t max it out), or when people give advice like “give up the smartphone” and “stop eating out so much” when I’m already very thrifty about basically every category of spending people recommend cutting, with the exception of budgeting to visit family a couple times a year, attend close friends’ weddings, and donate to charity…and those things are more important than a slightly higher balance in my retirement account, I think. So yes, having a limited income simply makes it hard to get to the point of financial stability that’s the holy grail for blogs like these – “no matter what happens I’ll have money in the bank to cover it, and hopefully I’ll put in a couple decades at work and then be done for life”.
But I’ve been realizing that attempting away enough money that you will never be insecure is both unrealistic (you can never be prepared for EVERYTHING) and lacking faith in your loved ones and God to provide. That may not be important for you, but for me, I’ve realized that worrying about money too much is actually turning into a moral flaw.
So I have no practical advice here about how to mange your finances, but am more commenting about managing your worries with strategies I find helpful. When I notice myself doing it, I have started making a conscious effort to be thankful that I have money to worry about, and that there are all sorts of wonderful non-financial things as well. I also talk to people who I think have good financial values or are in good financial shape and they help me get perspective – e.g. my parents are amazing savers who helped me through college and are doing well with their retirement fund, but didn’t have money to start retirement savings until they were in their 30s, and my in-laws pretty much gave away any extra they had to charity and the church for decades of their adult lives, but are happily working in their 70s in jobs they enjoy and didn’t have until later in life. You’re doing well, you just might need to get a perspective on ways to deal with insecurity apart from just putting more money in the bank now.
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Well said.
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I think that lots of people can relate to the worry that money can bring and trying to save on a lower income can be extremely difficult. Some excellent points of advice.
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I agree about the car and cell phone – WAY too expensive. And the idea of purchasing a new car is crazy.
Some comments have mentioned that there’s not enough information about her housing costs. I agree, but I’m also wondering about her education. She mentions student loans – what is her degree in? Is she making $12/hour in a field related to her education? Is there hope for a promotion with more education, training, experience? Is she unable to get a job related to her degree? If so, that’s the perfect place to start with side jobs.
I think this is, more than anything, an income issue. The 2nd job is paramount for her right now. And, since she obviously has some college education, I think it’s important to start putting that to work.
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I’m glad you wrote to GRS because that there is sign of a SERIOUS disconnect.
A new Camry costs something like a full whole year of your gross pay– $12*8hrs*5days*50weeks = $24K a year. That’s gross pay before pretax deductions, payroll and income taxes, etc. etc. I don’t know what your actual take-home pay is but it’s gotta be less than the price of the car:
A new camry starts at $22K and goes up quickly, look:
http://www.toyota.com/camry/
And that’s just for a car! You want a lot of other pricey things too.
I can’t review the details of your whole budget, but your problem is not a matter of math, or money– it’s a matter of psychology. Champagne taste on a beer budget is going to cause a lot of stress. You want the status signs of a higher income level, so you’re in a constant state of bluffing, hoping your bluff won’t get called. That’s gotta account for a lot of sleepless nights.
Lower your sights in the purchase department or increase your income, or find a way in between, but remember that *nobody* can get everything they want in the amount they want. Scarcity of resources is a basic fact of life, and we must always choose.
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edit: The details with the numbers, etc., are already discussed in the article and the comments so i’ll spare the repetition. All I wanted to emphasize with my post is the need to realistically connect your desires with your means.
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One thing I learned about money management at her age was to never in you life buy a car on credit. Until you can pay cash for a new car, I suggest she buys a decent used car so you will never pay a loan on a car. I ran around in a wreck for about 5 years and by then, I paid cash for a new car. Once you have any car that is paid for, always stash cash in some account that could easily fund a new car for the rest of your life. I also agree with others to ditch the expensive cell phone plan. In my home, we have a regular traditional monthly plan from the local phone company that costs about 37.00 per month. In addition, we have prepaid phones that cost 20.00 every 3 months that we seldom use outside the house. Each one of those phones have a huge available balance so we never need to pay more than the lowest prepay fee every 90 days.
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Rebecca,
I’m not much older than you and was in your position not that long ago.
First, I totally get why you want the 2012 Camry, it is awesome. But it’s sort of like 2 carat diamond earrings – you can’t afford it right now, but someday you’ll get it.
Second, your problem is that you have too many goals. You want to save for a new car, pay off the student loans, save for retirement, and save up an emergency fund. All are great goals, but on your income, you can’t afford to do them all at once. You have to pick one, work towards it, and when you are done go on to the next – like a debt snowball, but a goal snowball.
What you choose to prioritize first is up to you. Pick whatever will make you feel least anxious. Here’s what I would do in your position (your mileage may vary!):
1. Save up 3 months of income as emergency fund — $6,000.
2. Pay off remainder of car loan. Or, if car is a lease, buy a cheap used car for about $5,000. Either will free up that car payment for other goals.
3. Fund ROTH for the year — $5,000.
4. Pay off student loans — $11,000.
Those first 3 goals add up to $16,000 – more than half your income. You can’t get them all done in one year. That is why you are stressed out – you need a 2-3+ year plan for your goals. That might seem like a long time, but you have at least 40 working years ahead of you. There’s plenty of time!
And of course, work on a long term plan for your career, one that will be professionally fulfilling and sufficiently remunerative.
Best of luck!
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Goal Snowball! I love it! And I am going to shamelessly appropriate it for my own use.
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I personally disagree about prioritizing retirement savings over paying off debt. To me it seems like being on a ship in the middle of the ocean that’s filling up with water and trying to make reservations for dinner in your port city instead of, you know, trying to patch the hole in the boat. Fix the urgent issues and then worry about the stuff that’s way out in the future. I know someone will make a compound interest argument against this, but I still think this is the right call (plus, you’re paying compound interest on the debt anyway).
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To me, it’s not about compound interest – it’s a question of, will a person ever be out of debt?
If the plan is to pay off one car in order to buy a new one, pay of student loans in order to get a mortgage, etc., there won’t be a time when debts are gone and it’s the right time to save for retirement.
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Thank you for listing the emergency fund first. $1600 is a good start, but all it takes is one major car repair and poof, there goes your savings. I really feel Rebecca would feel less like she’s living on the edge if she had a healthy cushion to fall back on.
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Rebecca -
I think you are doing great in your life and I love that you are asking these questions early on.
Here is a quick strategy for you.
1. Sell the $296/mo car immediately.
2. Use your $1600 in savings to buy yourself a good used car. Have a friend help you out if you’re not certain about how to do this. I bought my car for $1300 3 years ago and drive it every day over 100 miles and race it on the weekends. Maintenance has been nothing more than routine which you’ll have on any car. A used Honda Accord, Toyota Camry or Mazda 6 are all good reliable choices.
3. Use the $200/mo you’re putting in your savings account, the $200/mo you’re putting in your Roth IRA and the $296/mo you used to be paying for your car and put it towards your Student Loan along with the $216/mo ($100*26 weeks/12 months=$216) you’re already putting towards it. That’s $912/mo and your student loan is paid off in ONE YEAR!!!
4. At the end of that year, start saving $912/mo (or even $800/mo so you have an extra $112/mo to breathe with) and you’ll have another $10,000 saved up in no time.
At your current rate of payment ($216), you’ll have that $11,000 student loan paid off in 4 years and 3 months… If you follow my advice, in that SAME TIME you’ll have saved $46,716!!
Even if you are skeptical about the used car… lets think worst case scenario here… buy another used car every single year. At the end of this scenario, at $2000/year in car expenses you’ve spent $8000 and saved $38,716 instead.
Any Questions?
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I, too was stunned by her transportation costs and her cell phone costs. Your advice on the prepaid phone was spot on. We did live quite well before smart phones came into being. Also, there is no need whatsoever for a new car. Get a used car and own it outright asap.
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Cellphones suck! Bill per month always seems to be high. Switch to pay as you go or if still on contract move to lowest contract plan with no data. Use it for emergencies and when you are lost/meeting up with a friend. I really like paying for the Internet, getting an Internet phone, a boxy box for TV programs. I pay $45 for monthly Internet, $5 for Internet phone (though u can buy hardware that connects to Google Voice which is $0 per month) and $0 for TV (boxy box will take all free TV programs off Internet for you).
Financing cars is expensive. Old crappy car or public transportation will do you much better.
I’d consider working on getting a better paying job too. If you earn under a certain amount of money expenses and saving will always be kinda hard! Food, housing and transportation don’t become more expensive when you get paid more so this could obviously make the biggest impact on your finances. Just remember not to spend more cause you make more. A common mistake that all of us make at any age! Think small andsave big
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The first time I bought a new car was when my company got purchased, I got a roughly $20,000 bonus, and I got a raise to $75k/year. It was the first time I didn’t feel like a brand new car was unaffordable to me ( the car I bought was in the same general price category as a camry).
Now I make roughly twice what I did then, and I’m not buying a new 2012 car because I still have the old one, and it’s totally fine except that it doesn’t have gps or Bluetooth. (actually I did buy a new car this year for my wife because we have a kid now and a bigger car was really a lot more practical, and hers was getting old. I still drive the same car I bought after that raise).
But I make over five times what the author does and I did not take the new car purchase lightly.
She does not need a new car. She should take the amount she’s contributing to savings and use that to pay off her existing car. When that’s paid off, then she can save again. When she doubles her salary, then she can buy a 3-year-old Corolla. When she doubles it again she can buy a brand new Camry.
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I actually have the same advice you suggested: earn more money and save less. And get rid of the stupid car, and lower that outrageous cellphone bill.
Why does she want a new car anyway?? She can’t just save to buy things, I’m glad you suggested her savings should be earmarked as an emergency fund.
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