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 Post subject: Mistakes, I've made a few. But I'm trying to fix them.
PostPosted: Tue Aug 07, 2012 8:23 am 

Joined: Tue Aug 07, 2012 7:47 am
Posts: 30
Hi everyone. I am hoping to get some feedback.

A year ago exactly, my husband and I bought our first house. I won't lie, it was an emotionally driven decision and I made some mistakes. I love the house and am so happy we're here, but we need to get our financial house in order.

We got an FHA loan and put down 3.5% which means we're paying PMI ($200 a month). I really want this gone. And obviously I want our debt gone.

My husband got a new job that nearly doubled his income and we haven't used the surplus effectively.

Some numbers for context:

Average take home pay
$6,500

Fixed, essential expenses
Total housing costs (including PMI): $1800
Utilities (average. water, gas, internet, electric) $250
Car insurance: $260
Gas: $350
Home repairs: has averaged out to $200 a month
Auto maintenance: averages out to be $60 a month for two cars

Debts
Mortgage principal: $199,600 @ 4.5%
Credit card: $9300 @ 15% (down from 12,000)
Student loan: $725 @ 2.5%

Savings
We have $25K in 401ks and $1500 in emergency savings. We're 29.

Mistakes/problems:

We spend an ungodly amount of money on food. It is our biggest expense after the house and we routinely slip into bad habits on this front. Last month we spent $1800 on food. We do have some dietary restrictions (we are on a low carb diet, so beans and rice is not an option) but I know there is major room for improvement.
I have been guilty of getting into hobbies and spending too much on them.
Going out with friends, socializing, alcohol always sucks up more money than we'd like.
The house needs a new sewer line (probably looking at $8-9K)

In my corner:

I have an awesome and supportive husband who is willing to help out in any way. He is 100% on board. But I am leading the charge on this project (which is fine with me).

We have no car payments, no cable, and love staying at home and enjoying each other's company.

I had my husband read "Your debt is an emergency" by Mr. Money Mustache and it really helped him put things in perspective. We are currently trying to shut down extraneous spending. No alcohol, no steaks, no Woot shirts (his weakness), no garden supplies (my weakness). We put over 1k towards savings and debt last month, but I know we can do better. My goal is to live on his salary ($4600 after taxes) and apply mine towards our debt and savings. I ran the numbers and we need to accumulate $50,000 to meet my short term goals. It feels huge and impossible.


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 Post subject: Re: Mistakes, I've made a few. But I'm trying to fix them.
PostPosted: Tue Aug 07, 2012 10:47 am 

Joined: Thu Apr 05, 2007 3:05 pm
Posts: 1356
There are lots of ways to tackle this, and I'm sure you'll get lots of suggestions, but here's mine:

Look into You Need a Budget (youneedabudget.com). Even if you don't buy the software, they have a free PDF book available on their website that describes the YNAB methodology, which you can apply without using the software. But the software makes it a lot easier. I recently switched to YNAB after 20 years of using Quicken and I love it.

There are four rules to the YNAB methodology, but the first and last are the most relevant here: 1) give every dollar a job, and 2) live on last month's income.

For the first rule, you basically take every paycheck and allocate the money to specific categories in your budget until every dollar is assigned a job and there's nothing left to allocate. I love this concept -- it means I have to decide what to do with my money instead of just putting it into an account and spending it down.

YNAB recognizes that life rarely works out the way you expect or budget for it, so you're free to shift items around and adjust your budget over the course of the month. But you can only shift among budget items -- so if you spend more on food than you budgeted, that money has to come from some other line item, which means you'll have less available to spend there. This helps to keep you from going overbudget overall. More importantly, if you overspend in one category you'll most likely have to borrow from one of your goals in order to fund the overage. That is an incentive to avoid overspending. If you know you're close to your monthly target for food and going over budget means you have to reduce your progress toward getting rid of your PMI debt, it'll probably motivate you to be more frugal.

Ultimately (and this can take a few months to accomplish), you want to develop a buffer so you're not living paycheck to paycheck, and you can fund all of this month's spending from last month's income. Even if you're not actually "living paycheck to paycheck," having this buffer can be a useful thing. I'm pretty well off and have no debt other than my mortgage...I always thought budgets were for "other people" but now that I've started using YNAB I'm a complete convert to the idea. I feel like my money has more purpose now and I'm spending it more intentionally and wisely. And I feel like I'm making progress to all my goals, big and small.

The YNAB software has only two categories for income: you can categorize it as income for this month or income for next month. I've got my buffer set up already, so when I get paid I categorize it as income for next month. When next month comes, I assign all of the dollars available to budget categories until I have no more money available to budget. And if I didn't spend everything last month it means I have more money available to budget this month, which means I can add more toward meeitng my goals. Rinse and repeat...

The process of budgeting and of being aware how much you have left to spend can be a powerful motivator in helping you rein in your spending. I've tried other budgeting methods and they work too, but YNAB is worth a try -- even just reading the free PDF book may be enough to get you on the right track.

[edited to add a bit more detail]


Last edited by brad on Tue Aug 07, 2012 11:24 am, edited 2 times in total.

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 Post subject: Re: Mistakes, I've made a few. But I'm trying to fix them.
PostPosted: Tue Aug 07, 2012 10:53 am 

Joined: Thu Apr 05, 2007 3:05 pm
Posts: 1356
Oh, and one more thing: The $50,000 for your short-term goals that feels "huge and impossible." Another great book I read recently is "Switch: How to Change Things When Change is Hard," by Chip and Dan Heath. It's actually one of the most useful books I've ever read in my life. One of the many practical lessons in that book is to "shrink the change." Break it down until it no longer spooks you. Instead of saying you need $50,000 to achieve your goals, break those goals down into smaller, individual goals, and figure out how much you need to achieve each one. Spread them out in a realistic fashion and budget for them. Mark them as done as you achieve each one.


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 Post subject: Re: Mistakes, I've made a few. But I'm trying to fix them.
PostPosted: Tue Aug 07, 2012 12:29 pm 

Joined: Fri Jul 29, 2011 8:38 am
Posts: 210
Welcome, Margerie -

I agree with Brad that a budget (even if you don't do it forever) could help you figure out where your money is going. You're spending as much on food as your mortgage...that's crazy! Anyway, tracking your spending for a few months will give you ideas of areas that you can cut.

What are your short-term goals? Just coming up with a number like $50k is overwhelming. Break them down like Brad said.

When does the sewer line have to be replaced? Figure out how many months you have to save for it and put that money aside each month. After that, I'd pick a debt and put everything extra toward it instead of trying to do a little bit of everything all at once.

You may want to start a fiscal fitness journal on the site. It helps to have a place to think out loud (figuratively :) ) and get some suggestions and encouragement. Good luck!


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 Post subject: Re: Mistakes, I've made a few. But I'm trying to fix them.
PostPosted: Tue Aug 07, 2012 12:34 pm 
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Joined: Wed Sep 23, 2009 9:01 am
Posts: 5402
I don't understand how you can possibly spend that much on food. I'm not being critical but rather trying to understand how you spend that much.

Do you eat out a lot?

Is this for just your husband and you are more people?

Where do you buy your groceries?


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 Post subject: Re: Mistakes, I've made a few. But I'm trying to fix them.
PostPosted: Tue Aug 07, 2012 2:15 pm 

Joined: Tue Aug 07, 2012 7:47 am
Posts: 30
DoingHomework wrote:
I don't understand how you can possibly spend that much on food. I'm not being critical but rather trying to understand how you spend that much.

Do you eat out a lot?

Is this for just your husband and you are more people?

Where do you buy your groceries?


It's okay, I don't mind. Honestly if I didn't track the expenses in Mint, I wouldn't think we spent NEARLY that much. It's just two of us and two cats. The figure includes pet food, personal care supplies, toilet paper, etc. But yeah, we eat out too much and order takeout and buy groceries and sometimes waste them. I went through a phase of eating out 3-4 lunches a week, at $10 a pop. My husband often buys breakfasts and lunches. And if we go out with friends, our share can be $80-100. I want to see this month how low we can go. Food is one of the hardest things for me, because it's easier for me to just give up something cold turkey than to try to do it in moderation.

I have tracked our finances in Mint for a few years. It's not perfect (one month it recorded all our expenses as income and they never fixed it--you get what you pay for, eh?) but I have a lot of data available to me. The hard part is changing behavior.

These are my current priorities and goals:

1) I would like $2000 in reserve, then I'd like to aggressively pay down the credit card debt.
2) After that, I'd like to save up for the sewer line. It's really hard to say how urgent it is. I have a hard time evaluating contractors, who would all like the job tomorrow. But I've had it scoped and it looked pretty bad.
3) We're stuck with the PMI for four years, I believe, so we have 4 years to accumulate a lump sum to pay down the mortgage. Rather than pre-pay the mortgage as we go, I'd like to keep this liquid so it can double as an emergency fund while we're saving it up.
4) But I think simultaneously I'd like to work on establishing a true emergency fund, on the order of $20,000.

Oh, and meanwhile we'd like to have kids. :/


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 Post subject: Re: Mistakes, I've made a few. But I'm trying to fix them.
PostPosted: Tue Aug 07, 2012 2:30 pm 

Joined: Thu Apr 05, 2007 3:05 pm
Posts: 1356
margerie wrote:
I have tracked our finances in Mint for a few years. It's not perfect (one month it recorded all our expenses as income and they never fixed it--you get what you pay for, eh?) but I have a lot of data available to me. The hard part is changing behavior.


Here's the thing: Mint, Quicken, etc. are all retrospective programs: they allow you to look back at what you spent and say, "oops," or "I can't believe I spent that much on x." But they don't really help you change. Even their budget modules don't help much in this regard.

YNAB is designed to look forward instead of backward. The guy who created it is a brilliant writer, and I think you can get a lot out of just reading his detailed description of the four rules, starting here: http://www.youneedabudget.com/method/rule-one. Read this and move on to the other four rules in order, and I think it'll all be clear. It's nothing earth-shattering, but I think a lot of what he says will resonate with you and your situation.


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 Post subject: Re: Mistakes, I've made a few. But I'm trying to fix them.
PostPosted: Tue Aug 07, 2012 11:01 pm 

Joined: Sat Jun 16, 2012 8:06 am
Posts: 102
It's nice that you want kids...but they will totally mess up your budget. You need to be realistic about this. If you are currently digging yourself out of a hole, having children too soon will put you back even deeper into the hole than you are now.


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 Post subject: Re: Mistakes, I've made a few. But I'm trying to fix them.
PostPosted: Wed Aug 08, 2012 9:19 am 
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Joined: Thu May 17, 2012 10:05 am
Posts: 1150
Welcome Margerie to the forums! Lot's of great advice from some really intelligent, fantastic people here.

margerie wrote:
The hard part is changing behavior.


Brad gave great advice and mentioned re-evaluating your budget. Make it balance - spend every dollar on paper. And spending spend last month's income this month is a great goal too. For now cutting costs is the thing to do. Taking lunch to work and eating at home is a pain but to get out of debt that may be just the ticket. See this thread too.

margerie wrote:
These are my current priorities and goals:

1) I would like $2000 in reserve, then I'd like to aggressively pay down the credit card debt.

4) But I think simultaneously I'd like to work on establishing a true emergency fund, on the order of $20,000.

Oh, and meanwhile we'd like to have kids. :/


Some things to think about regarding your E-fund: What is your health insurance deductable/co-insurance? What is your husband's health insurance deductable/co-insurance? What is your house insurance deductible? How old are your appliances and vehicles? Is $2000 enough to cover those in case of an emergency? See next post on the expanding the family bit...

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~ Eagle


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 Post subject: Re: Mistakes, I've made a few. But I'm trying to fix them.
PostPosted: Wed Aug 08, 2012 9:22 am 
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Joined: Thu May 17, 2012 10:05 am
Posts: 1150
jaiko wrote:
It's nice that you want kids...but they will totally mess up your budget. You need to be realistic about this. If you are currently digging yourself out of a hole, having children too soon will put you back even deeper into the hole than you are now.


Plan to spend $2000-$5000 on medical expenses between Mommy/Baby deductibles and co-insurance (if applicable) associated with birth. Really depends on your health insurance coverage. Not to mention another $1000-$3000 on baby supplies and the baby room. See this thread. Well at least the first 10 posts or so.

Also consider using emeals.com for planning some meals at least until you get a handle on the $1800 spending.

_________________
~ Eagle


Last edited by Eagle on Wed Aug 08, 2012 1:14 pm, edited 1 time in total.

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 Post subject: Re: Mistakes, I've made a few. But I'm trying to fix them.
PostPosted: Wed Aug 08, 2012 11:07 am 
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Joined: Wed Sep 23, 2009 9:01 am
Posts: 5402
Quote:
These are my current priorities and goals:

1) I would like $2000 in reserve, then I'd like to aggressively pay down the credit card debt.
2) After that, I'd like to save up for the sewer line. It's really hard to say how urgent it is. I have a hard time evaluating contractors, who would all like the job tomorrow. But I've had it scoped and it looked pretty bad.
3) We're stuck with the PMI for four years, I believe, so we have 4 years to accumulate a lump sum to pay down the mortgage. Rather than pre-pay the mortgage as we go, I'd like to keep this liquid so it can double as an emergency fund while we're saving it up.
4) But I think simultaneously I'd like to work on establishing a true emergency fund, on the order of $20,000.


I'd suggest changing these around a bit. Here's why:

The sewer line is a big fat bomb waiting to explode. It might not be a serious problem when it needs to be replaced immediately but it will certainly be an expense that needs to be incurred immediately. You should start saving for that now. And since you can't do anything about the PMI for 4 years, that's a little farther down the list. Paying interest on the credit cards is discouraging but the potential sewer line cost is a biggie.

1) Save up $12000 in an emergency fund. This will give you enough to pay for the sewer line when it become necessary and still have your desired $2000 cushion. Paying for something like an unexpected sewer line repair is an appropriate use for the EF. Unless there is an urgent problem, put off the repair as long as possible while continuing at step 2.

2) Make a plan to save up for the PMI "balloon." Determine how much you will need in 4 years and divide that by the number of months remaining. Save that much per month.

3) Pay down the credit cards with any excess

4) In four years when you make the balloon payment, replan based on the circumstances then.




On another note, be careful with the sewer line. I've been through this and had several different plumbing companies out over about a 2 year period. All but one were either utterly incompetent or blatant liars. They told me things that were completely wrong and were clearly trying to scare us into a bunch of expensive work. Scoping a sewer line nearly always makes it look horribly bad because frankly, teh things look disgusting inside even after just a week. But they can do a cleanout with cutters and stuff many times. They can also replace a small section if that's where the problem is. If you have old clay lines then it is highly unlikely you will need to do anything but replace one section. You can also use the RidX root killer from Lowes about once a month and keep the plumbers away for years. About 6 years ago we had several companies give quotes ranging from about $1600 up to several thousand dollars to replace the sewer line. Then we had one company come in and find the problem then dig up and replace just a section for a whopping $300. That included running a cutter through the whole system. There was an obvious root that had gotten into the pipe which was not visible in the scope. In was what was causing the problems. It took an experienced plumber using a snake rather than the high-tech camera. We've had no problems since then. That doesn't mean you will get off so easily. But I definitely learned to have my guard up with plumbing contractors and to be very grateful when you find a good honest one.

Since you know that the sewer line is suspect and could "go" at any time, make sure to take any steps you can to mitigate further damage in the event of a backup. A sewer will back up into the lowest point above the clog. If you're talking about the a major replacement then you probably have a problem in the main line. That means your backup will be into the lowest drain in the house. If that is in a bathtub you are fine. If it is a floor drain or something you'll want to make sure you ave a dam in place at all times to contain the water. You can buy individual drain plugs to control things. Chances are if you've already had a backup then you know exactly where you are going to have problems!

Good luck.


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