Reader Case Study: Social Workers Who Need To Get Solvent
We’re scooting over to upstate New York in this month’s Reader Case Study to help Sue and Dan–a social worker and a professor of social work–get out of debt, save up an emergency fund, find a way to pay for home repairs, and save for their kids’ college expenses.
Case Studies are financial and life dilemmas that a reader of Frugalwoods sends to me requesting that Frugalwoods nation weigh in. Then, Frugalwoods nation (that’s you!), reads through their situation and provides advice, encouragement, insight, and feedback in the comments section. For an example, check out last month’s case study.
I provide updates from our Case Study subjects at the bottom of each Case Study several months after a Case is featured. You all have requested an easier way to track Case Study updates and I have heard your pleas :)! Here’s list of all the Case Studies that currently have an update provided at the end of the post (and a hint that if you’re a past Case Study participant who hasn’t sent me your update yet, send it on over–your fans want to hear from you!):
- Reader Case Study: Earn More, Spend Less, Or Both? (Julie’s story, published October 2016)
- Reader Case Study: Stay Home With Baby or Return To Work? (Kelly’s story, published November 2016)
- Reader Case Study: The Case Of The Over-gifting In-Laws! (Grace’s story, published December 2016)
- Reader Case Study: Renovations and Vacations (Audrey’s story, published January 2017)
- Reader Case Study: Help Me Decide How To Pay Off $185K In Student Loans (Bridget’s story, published February 2017)
- Reader Case Study: The Grad School Dilemma (Emily’s story, published March 2017)
- Reader Case Study: Can We Buy Our Dream Home? (Jack & Elizabeth’s story, published April 2017)
- Reader Case Study: We Have A Van, Now We Need A Plan! (Florence & Anna’s story, published May 2017)
- Reader Case Study: To Buy Or Not To Buy In Sydney, Australia? (Jemma & Greg’s story, published June 2017)
- Reader Case Study: Starting From Scratch In Canada; Where Do I Go From Here? (Alison’s story, published July 2017)
- Reader Case Study: Moving To Europe From South Africa, Trying To Make Ends Meet (Clara’s story, published August 2017)
- Reader Case Study: Should We Stay (In San Francisco) Or Should We Go Now? (Melanie & Kurt’s story, published September 2017)
- Reader Case Study: Having A Quarter-Life Crisis in Nashville, TN! (Steph & Zach’s story, published October 2017)
- Reader Case Study: National Park Rangers Figuring Out Finances (The Ranger’s story, published November 2017)
- Reader Case Study: At Age 57, It’s Not Over Yet! (Lucy’s story, published January 2018)
- Reader Case Study: Debt And Dreams In Queensland, Australia (Sam & Keith’s story, published March 2018)
- Reader Case Study: Single Psychologist Saving In NYC (Lauren’s story, published April 2018)
I probably don’t need to say the following because you all are the kindest, most polite commenters on the internet, but, please note that Frugalwoods is a judgement-free zone where we endeavor to help one another, not to condemn.
And a disclaimer that I am not a trained financial professional and I encourage people not to make serious financial decisions based solely on what one person on the internet advises. I encourage everyone to do their own research to determine the best course of action for their finances.
With that I’ll let Sue, this month’s Case Study subject, take it from here!
Hi Frugal Friends!
I’m Sue and I’m 47, my husband Dan is 54 and we have a son who is 13, a daughter who is 11, and a dog who is 3. We live in upstate New York and my husband is a social work professor and I’m a social worker with the state of New York. I love reading Frugalwoods, especially the Reader Case Studies, and feel honored to be chosen as a case study because I am overwhelmed by our finances. I am ready to stop living paycheck-to-paycheck, stop having no savings, and stop having little confidence in my ability to change any of that!
I don’t care about material things, but this changed drastically after having children because I want to give them the world. After our mortgage, we spend most of our money on food and our kids. Even though our incomes have increased over the years, we still spend what we earn (and then some) and have no savings, and our credit card debt has crept back up after having a zero dollar balance and no credit cards just three years ago. Additionally, we have no money for needed home repairs on the older house we bought three years ago. After reading the Frugalwoods’ story, I can say that I do not have the frugal gene per se, and was never taught anything about saving money. I hope that I can learn to implement some of the frugalness you all have and maybe even get joy out of it someday!
The Stress Of Living Paycheck-To-Paycheck
We live paycheck-to-paycheck, which I understand is adding stress to our lives, or at least to my life, although we do live more comfortably than in our early days as a family. My husband and I started racking up debt right when we began our relationship and when we got married in 2003. At the time, I was in grad school for social work and Dan was working towards his PhD in the same field. We both took out the largest amount available in student loans, which was a total of $200,000 between the two of us. We had no savings, but thankfully my husband got his first job as a social work professor in August 2004. Then, our first child was born in October 2004. Somehow it all worked out, but looking back at how much money we spent during this time is cringe-worthy. ‘Ignorance is bliss’ was definitely the philosophy of my financial life.
For the next six years, we moved to three different states following better jobs for my husband. During those six years, we deferred our student loans and tried to live on one income. I stayed home with our two children, aside from working part-time for two years after our first child was born.
In 2010, after living in the south for six years, we decided to move back to my hometown in New York, which is one hour away from New York City. We rented homes for three years in my hometown because it has a good school district and family lives nearby, which was beyond helpful with the children after being away from family for the first six years of their lives.
We were fortunate to be able to purchase our first home three years ago. We have an FHA loan and so only had to put 3% down, which was gifted to us by my mother. Our home is already worth more–at least $30,000 more–since we purchased it in 2015, but there are several repairs that are needed that we haven’t been able to afford.
Sue and Dan’s Hobbies
Dan and I like camping and hiking and I also enjoy photography. This is an area that I get frustrated about, however, because when we do want to do something out of the norm–even if it’s just a long weekend camping–it feels like such a crunch to our budget that we can’t do it.
Right now we have a pop-up camper and camp at Assateague State Park every summer right on the ocean and if we could, we would camp and hike as much as possible.
For my hubby, he mainly likes watching sports and the news on TV for his leisure activities, which is the main reason why we still have cable TV. We would probably go to the movies, dinner or a play for date nights once a month if we had extra income. I would like this to be in our budget as we tend to forget to put ourselves in the budget, and we want to have more time together that is not kid-related!
Where We Spend Money
1) Family-related events, holidays, and gifts
We love to spend money on food and gifts for family gatherings such as birthdays and weddings (we’ve had four weddings this year!), along with holidays, and this all tends to add up. Our large families are always generous with gifts for our children and I don’t think I started buying clothes for my kids until my son was 6 years old! Even if we give a small gift to each extended family member, there are a lot of people, so it adds up! Our kid’s friends’ birthday gifts and my kid’s birthday parties are also an added expense, but something we like to give them and find enjoyment in. Again, everyone is so generous and I feel we need and want to reciprocate when we can. We have discussed cutting back in the gift-giving area and this Christmas, for example, we gave our son his lacrosse gear as his present along with the $200 registration fee for playing lacrosse.
2) Our kids’ sports and activities
Our kid’s sports activities are another area of significant expense. I don’t see much room to cut back here because these activities are such a source of joy for them with their friends and teammates. Plus, since Dan and I are friends with the parents, it doubles as a hobby for us as a family. Since our son is almost 14, Little League baseball and CYO basketball are coming to an end next year, so we will see some decrease in sports expenses in the future.
3) High-quality food
The third spending area I could use help in–besides expenses for our kids and families–is buying high-quality food. I was diagnosed with an auto-immune condition two years ago and have chronic joint pain and fatigue, but the good news is that eating a very strict diet keeps the symptoms at bay. So I am now vegetarian, moving toward vegan, but eating a lot of organic fruits and vegetables is very costly. We have also been gluten free for many years now as my son started us on a gluten-free diet 10 years ago due to digestive issues. So, food costs have always been high for us, but now are even higher. I don’t see how I can decrease spending in this area, but I am willing to learn.
I like the idea of getting a pressure cooker (thank you for that story😊) but I find that working a 40-hour week takes a toll on finding time to cook these meals, and I spend money on salads for lunch or take-out dinners when I’m not organized with food. I also see vegan cooking as a hobby I love, so that is a plus when I have the time and energy to spend on it.
Maintaining Our Health
I go to acupuncture and the chiropractor when I can and feel this is needed. My health- insurance co-pays for these are $20 a visit. I would probably go more if I could. I’d like to go to yoga classes and lift weights, but we recently got rid of our gym memberships because we never went and were trying to cut costs. However, I don’t see myself ever working out at home, so this is a future goal! Maintaining my health is a priority, and I worry about my husband in this area too, so I would like to have money for a gym membership. I’ve learned that Planet Fitness is $10 a month.
Where Sue and Dan Want To Be In Ten Years
Careers: I’ve worked as a social worker for New York state for six years, which provides decent health benefits at a relatively low cost. I currently have eight years towards my pension as I was a teacher for two years prior to marriage and starting my social work career. If I work for 25 total years, and retire at age 64, I will get 50% of the average of my last three year’s salary. That being said, I’d rather retire at 60 when my husband retires at 67. We both have the ability to get additional work in private practice as psychotherapists and we have that goal for the future when the kids move out of the house. But for the next seven years, before both kids start college, we would like to maintain our current work schedules so we can be with our kids as much as possible, attend their games and shuffle them around, and have some downtime at home before they are out of the house forever! They truly are, and have been, our main focus and we both love being parents and giving them all the time we can.
- Lifestyle and Retirement: Dan and I would love to travel and camp in beautiful areas of the country, at least for part of the year. When I think of retirement, I’d like to live part-time close to family and travel with a small camper the other half of the year, and maybe even have a tiny house near our kids! I feel we will be ok as far as retirement goes, provided no unexpected life events come up (haha). Dan has a retirement plan with TIACREF but we still want and need to cut back and save for things! My dream is to save for an annual trip to a different country with our kids each year, or at least for them to be able to go on trips with their school, such as to France and Costa Rica, which are two trips that the high school offers.
- Pay off our debt
- Establish a decent saving account for emergencies
- Create a savings account ($5,000 a year, if possible) for making needed repairs to our older home
- Save for our two children’s college expenses
Sue and Dan’s Finances
|Dan||$5,080||After taxes, 403b contributions, Medicare, and Social Security|
|Sue||$3,735||After taxes, health insurance, deferred compensation contributions, Medicare, and Social Security|
|Summer class payment (once per year)||$2,200||Annually in July for the summer courses Dan teaches|
|Mortgage||$2,265||30 yr FHA loan at 3.75%, bought home in June 2015|
|Food/Groceries||$1,600||Includes household supplies, such as laundry detergent, shampoo, etc.|
|Dan’s student loan payment||$740||Monthly minimum payment|
|Gas/oil changes/tires for two cars||$500||Gasoline is about $100 per week and the rest is for oil changes, etc. Dan commutes 3 hours a day (1.5 hrs each way) 3 days per week.|
|Car payment #1||$425||2012 Prius C Car loan with $3,231 remaining at a 7.89% interest rate|
|Sue’s student loan payment||$360||Monthly minimum payment|
|Car payment #2 (projected)||$300* (projected)||Our 2006 minivan just died and we are budgeting $300 per month for a car payment on a new-to-us used car|
|Sports and camps for our two kids||$300|
|Cell phones through Verizon||$225||For three cell phones|
|Misc: usually camp and gifts||$205|
|Orthodontist||$200||One kid down, one to go!|
|Utility: natural gas||$175||Gas is expensive in the winter to heat the house|
|Utility: electricity||$175||Electricity is expensive in the summer for the air conditioning|
|Cable/Internet||$125||$70 is internet; $55 is cable|
|Dan’s life insurance||$110|
|Tumbling classes for our daughter||$100|
|Birthday and wedding gifts||$100|
|Our kids’ birthdays||$100||This is for both the kids’ friend birthday parties and a large extended family gathering for each of their birthdays|
|Dog costs: boarding, food, etc||$100|
|Best Buy credit card||$80||Minimum monthly payment|
|Co-pays for doctor visits||$60|
|TJ Maxx credit card||$50||Minimum monthly payment|
|Capital One credit card||$50||Minimum monthly payment|
|EZ Pass||$50||For tolls|
|Sue’s life insurance||$20|
|Sue’s Long Term Disability insurance||$20|
|Continuing education training/license renewal||$10|
|Total monthly spending:||$9,150||*note that this is with the addition of a projected $300 payment on a second car, which we have yet to purchase|
|Dan’s 403b||$100,000||Dan contributes 4% ($245.85) of his salary every month and the University matches it at 8%.|
|Sue’s Pension Plan||See notes||I am 8 years into paying into this. At age 67 my pension will be $37,870 annually; at age 62 pension will be $30,911 annually .|
|Sue’s Deferred Compensation Plan||$600||Deferred comp is a pretax investment in Vanguard separate from my pension. I can put up to 10% of my income into it. I just started contributing to this last year and recently increased my contribution to 2%, ($100 a month), which is taken out pretax.|
|Mortgage||$227,183||30 yr FHA loan at 3.75%, bought home in June 2015|
|Dan’s student loan||$114,950||5.5% interest rate|
|Sue’s student loan||$69,952||3.5% interest rate|
|2012 Prius C Car loan||$3,231||7.89% interest rate|
|Capital One credit card||$1,216.75||20.65% interest rate|
|TJ Maxx credit card||$964||28.49% interest rate|
|Best Buy credit card||$700||0% interest, as long as I pay the $80 monthly minimum payment|
|Car payment for second car||TBD||Our 2006 minivan just died and we are budgeting $300 per month for a car payment on a new-to-us used car.|
|Debt Minus Mortgage:||$191,013.75|
Sue’s Questions For You:
- Please help us figure out a plan to:
- Pay off our debt
- Establish a decent saving account for emergencies
- Create a savings account ($5,000 a year if possible) for making repairs to our older home
- Save towards college for our kids. We are fortunate that the kids can go to college tuition-free, because Dan is a professor (if the kids are willing to attend the college he works at). However, that doesn’t cover room and board and other expenses that we should probably be saving for (only five years until our oldest goes to college!). If we could save $5,000 a year for our kids ‘college room and board, I would feel much more secure about providing them something should they choose to go away for college and not to Dan’s school.
- How can we meet these savings and debt repayment goals?
- I have a deferred compensation option at work that I can put up to 10% of my salary into pre-tax. I just started contributing to it last year and recently increased my contribution level to $100 per month. This is invested with Vanguard and is available if an emergency arises. How much should I be putting into this savings account?
- We have a 30-year mortgage (at 3.5%) and also pay $10,000 per year in property taxes. In seven years, both of our kids will be out of high school and, since we won’t be reliant upon our excellent school district any longer, Dan and I could move to another town–still within a half hour of family and work–which would significantly lower our mortgage and taxes. Should we plan to do this? Or, should we try to switch to a 15-year mortgage soon for our current home? I don’t know if we should since we have such a low interest rate currently. With FHA loans, we have extra mortgage insurance costs that may be eliminated if we got a different mortgage. We haven’t paid 20% of our home yet and I was told that needs to happen in order to refinance.
- Our 2006 minivan just died and we are budgeting $300 per month for a car payment on a new-to-us used car. I’m thinking we need an SUV with the third row for carting kids around as well as winters in New York. We’d like something that’s a few years old at the most (likely a 2015) and around $15,000 if possible. What do you recommend?
Mrs. Frugalwoods’ Recommendations
I want to start off with a big congratulations to Sue for pulling all of this information together and for her willingness to put herself out there and ask for our help. This is not easy to do and she has done it! Sue should feel proud of herself for taking this first step towards creating a better future for her family. Just knowing how much you spend every month, how much you make, what your debts are, and what your savings are is a massive hurdle for many folks. P.S. If you’re not tracking your expenses like Dan and Sue have, I use and recommend the free tracking tool by Personal Capital (affiliate link). Round of applause for Sue!
Putting Others First
What really stands out to me in reading through Sue’s description of their lives is that she and Dan are extraordinarily generous, kind, and giving people. They routinely put others before themselves–through their careers as social workers, by giving their kids amazing childhoods, in giving gifts to family members, by throwing great family parties–and I think this is an ingrained aspect of their personalities. Dan and Sue’s altruism and genuine commitment to raising their kids well, and fostering strong family relationships, is enviable and shines through in how happy they are with their family life. In this way, they’ve succeeded in creating a wonderful life.
Unfortunately, the downside is that this approach has come at the complete expense of their financial future and fiscal stability. Since Sue came to me asking for advice, I feel it would be a dereliction of my duty if I didn’t tell it to her straight. And I’m going to do that today.
I love being a cheerleader for people’s dreams and I adore telling people that they are making wise financial choices, but I also feel a real responsibility to offer sincere and realistic advice when it is asked of me. I wouldn’t be doing Sue–or anyone else in a similar financial situation who is reading this–any favors by sugar coating how dire their situation is. With the level of debt they have, their absence of savings, and minimal retirement savings, I’m deeply worried about Dan and Sue and I sincerely hope they can take this advice to heart today, because if they don’t, their future is in serious jeopardy.
Emergency Game Plan
Dan and Sue have spent so much of their lives (and money) focused on other people and now–right now, today–the time has come for them to focus on themselves. I would characterize Dan and Sue’s situation as a financial emergency. It’s a slow-moving emergency, and one that they might not be aware of on a daily basis, but I very much assure you it’s an emergency.
Sue and Dan need a game plan for turning around their financial lives and, frankly, they need to do it quickly. They are firmly in middle age and in no position to retire or even be financially solvent at this point. However, don’t despair! I’m so glad Sue came to me when she did because she and Dan CAN (and, in fact, must) reverse a lot of this damage. I want Sue to feel confident in her ability to make the changes she needs to make because I know she can do it! And more to the point, she has to.
Dan and Sue, here’s your quick game plan, all of which we’ll review in greater detail:
- Reduce your monthly spending by a lot and/or increase your incomes
- Pay off your high-interest debt (all of the credit cards and the car)
- Save up an emergency fund
- Aggressively pay off Dan’s student loan while building up retirement savings
- Pay off Sue’s student loan
Reduce Expenses ASAP
I think we can all get caught up in the assumption that if something is “good,” then it’s OK to spend money on it. We all buy into this idea that the only “bad” spending is spending on stuff that’s “bad,” such as cigarettes or drugs. But that’s not the case. Any spending that puts you into debt is bad spending. Debt is debt and no creditor gives a fig how you got into debt.
We can all have sacred cows–things we absolutely will not sacrifice–and that’s perfectly fine and normal! Sacred cows often define who we are and articulate the values we hold dear. But not everything in our lives can be a sacred cow. Unless you have limitless resources, you have to prioritize, and, further, you have to make cuts in places where it might hurt. Otherwise, you doom yourself to an endless stream of debt and paycheck-to-paycheck stressors, which Sue articulated she tired of.
What I hear in Sue’s writing are a lot of justifications and defenses of their spending, all of which are legitimate. But it really doesn’t matter how legitimate her defenses are because she and Dan simply cannot afford their lifestyle. They’re spending everything they make, and more, and unfortunately, there’s no way to square her financial goals with constant justifications. She and Dan will have to make some tough choices. And they need to make them soon.
Ideas for Saving
When I review expenses in Case Studies, I usually frame my suggestions as optional. This time, however, I’d be lying if I said I thought these savings were optional. The only other option for Dan and Sue is to dramatically increase their incomes, which I also think is a great idea. I suggest that Dan and Sue take my free, 31-day Uber Frugal Month Challenge, which is designed to help you save as much money as you possibly can–they need it!
W need to stop the bleeding ASAP and so I recommend that Dan and Sue enact the following cuts immediately:
#1: Spend Less On Food
At $1,800 per month (for groceries and take-out combined), food is the first and ripest category for reduction. I see that Sue lumped in household supplies with their food and I recommend she start tracking those expenses separately so that she has a better sense of what they’re spending on food (I do this by running two transactions in the self-check-out lane: one for food and one for everything else).
First and foremost, it’s time for Dan and Sue to prepare all of their meals at home. They simply cannot afford the $200 per month in take-out/restaurant meals. It’s not in their budget at this time. Sue mentioned that it’s tough to cook every night along with working full-time and I completely agree! No one has the energy, fortitude or time to cook every night of the year. No one! Mr. Frugalwoods cooks for us a whopping ONE NIGHT PER WEEK. You read that right: he cooks once a week. He whips up a huge (truly, huge) batch of (usually vegetarian, often vegan) soup, chili, stir fry, etc and then we freeze all of the leftovers. We then defrost previously cooked meals to eat throughout the week for variety. You can have a different meal every single night of the week but only cook once a week. Sue and Dan need to prep their meals ahead of time, freeze the excess, and learn to love the leftover. I have a treasure trove of posts on frugal cooking, but the two I most highly recommend to Sue are as follows:
As far as vegetarian and vegan cooking goes, we find that this is cheaper than eating meat! Mr. FW and I do still eat meat on occasion, but it’s so much cheaper not to. So don’t despair, Sue! In general, you want to start with an inexpensive protein (dried beans are what we usually use) and then layer in veggies and spices. Serve over brown rice with a side salad and voila! As for that side salad? I make it ONCE A WEEK. You read that right: every Monday (or sometimes Tuesday) I chop veggies for a gigantic salad, which we keep in the refrigerator and eat all week long. It stays fresh and delicious and that way, my prep work is efficient and my time well spent. Our salads include plenty of “cheaper” veggies, such as: red onion, roasted sweet potatoes, cucumber, green pepper, and tomatoes along with the more expensive organic salad greens. I make a homemade dressing of spicy mustard, apple cider vinegar, and olive oil.
The point here is that Sue and Dan need to come up with a much stricter food budget and a more articulated meal plan. I strongly encourage her to peruse all of the articles both here and on other sites (such as Budget Bytes) for food budget reduction ideas because they cannot continue spending this much every month just to eat. It is possible to eat frugally and healthfully, but you do need to cook it yourself, plan ahead, and buy bulk, raw ingredients.
#2: Spend Less On The Kids
As a parent, I completely empathize with Sue’s desire to give her kids the world. We all want our children to be happy, healthy, and fulfilled. Most of us would give anything for that. And Dan and Sue have given everything for that. I wish there was another way around the quagmire they find themselves in, but they are going to have to reduce their spending on their children. If they don’t, Dan and Sue stand to be a longterm financial drain on their kids. With the level of debt and absence of savings that Dan and Sue have, they could very easily find themselves needing to depend on their adult children for financial support. What I would ask Sue and Dan to visualize are two scenarios:
- Make the decision to reduce spending now–much of which will be in the arena of things for the kids–and put themselves on solid financial footing.
- Picture themselves in 20 years needing to approach their son and daughter–who will likely be starting their own families–to ask them for cash to pay rent and buy groceries.
I, personally, would opt for option #1. When your kids are in their 30s, they’re going to be tremendously grateful that you got your finances together when they were teenagers and that you’re not needing to move in with them as they start their independent lives.
Since I’m big on planning, I suggest Dan and Sue brainstorm how they want to explain their financial situation to their children right now and how they want to frame the reductions in their spending. I recommend focusing on values of self-reliance and responsibility. It’s a great teaching moment for Dan and Sue, who I get the sense are natural teachers and excellent parents. Rather than viewing this as a devastating experience for their kids, I encourage them to see it as an opportunity to teach them about financial responsibility since I imagine Dan and Sue don’t want their kids to find themselves in a similarly dire situation when they’re adults.
#3: Eliminate Gifts and Parties
All gift-giving needs to either be ceased or reduced. I hear Sue’s desire to give to others and I love that she’s so generous with her family, but at this point, she and Dan can’t afford it. This is harsh, I fully realize, but gift-giving might be an area that’s easier for Dan and Sue to reduce than the sports and camps for their children. This also includes reducing spending on their children’s birthday gifts and parties. Dan and Sue might even want to propose an option to their kids of: sports or gifts/birthday parties/Christmas. I like their plan of giving their son his lacrosse gear and registration fee for Christmas and they need to expand that thinking to all other areas as well.
Here are a few posts for inspiration on frugal gift giving:
- Reader Suggestions Of Frugal, Fun, Inexpensive, and Festive Holiday Gifts
- How To Give Frugal Gifts With Joy And Generosity
- A Frugal Valentine’s Day: Do Instead Of Buy
- Our Festive and Frugal $100 Christmas
This Is Going To Be Tough
I fully realize that these changes will be tremendously challenging for Dan and Sue. What we’re talking about here is a wholesale lifestyle renovation. But at this point, they cannot afford not to do this, unless they want to become financially dependent on their kids or other relatives. I strongly encourage them to make these changes now so that they can look forward to the retirement they’re dreaming of. Which brings me to my next point…
Dan and Sue’s Dreams Are Awesome
I absolutely love Sue’s articulation of their hoped-for retirement: traveling the country and then staying near family. It’s a simple, but wholly wonderful, idea. And if they can seriously buckle down and save vastly more than they spend, they can make it happen. But right now? I don’t see how they’ll ever stop working unless they radically change what they spend (and likely also increase their income).
In looking at the level of Dan’s 401k, as well as Sue’s pension, they’d have substantially less to live on every year than what they currently spend (which is $109,800 annually). Plus, they have nearly $200,000 in debt. So let’s turn this ship around today and get Dan and Sue on stable footing. I’ve made a spreadsheet for them of just how much they could save every month if they made the drastic, radical cuts I’ve proposed:
|Item||Current Spend Rate||Proposed Amount to Save||Proposed New Expense||Notes|
|Groceries||$1,600||$1,000||$600||Work to reduce this substantially. I put in a reduction of $1,000, which is aggressive, but doable. It’s cheaper not to eat meat, so embrace that vegetarian/vegan approach fully! Meal plan and prep for the week ahead of time.|
|Car payment #2 (projected)||$300||$100||$200||If they must get a second car, I advise they keep the payments as low as possible.|
|Sports and camps||$300||$300||$0||If Sue and Dan dearly want to continue sports for their kids–which I understand might be a priority–then they will need to make dramatic cuts in other areas and also consider increasing their income.|
|Cell phones through Verizon (three phones)||$225||$165.03||$59.97||I put in what I pay per month for my phone ($19.99) through BOOM mobile x their three phones. I also suggest exploring Ting and Republic Wireless as their rates might be even lower.|
|Misc., usually camp and gifts||$205||$205||$0||Eliminate entirely|
|Eating out/take out||$200||$200||$0||Eliminate entirely|
|Utility: natural gas||$175||$25||$150||See if reductions can be made by turning the heat lower in the wintertime. See this post for more ideas.|
|Utility: electricity||$175||$25||$150||See if reductions can be made by turning the AC on less in the summertime.|
|Cable/Internet||$125||$55||$70||Eliminate cable, which leaves the $70/month for internet. Call around to see if any other company offers a better rate|
|Water||$100||$25||$75||Look for opportunities to use less water.|
|Tumbling for daughter||$100||$100||$0||Eliminate entirely|
|Birthday and wedding gifts||$100||$100||$0||Eliminate entirely|
|Our kids’ birthdays||$100||$100||$0||Eliminate entirely|
|Dog costs: boarding and food||$100||$25||$75||Can this be reduced at all? Can the dog go camping with you to avoid boarding costs? If not, could the dog stay with a friend or family member in exchange for you watching their pet when they’re away? More on frugal pet care here.|
|Clothes||$50||$50||$0||Eliminate entirely. Time to embrace a whole-family clothes buying ban! If the kids need new clothes, perhaps those could serve as Christmas or birthday gifts. Also, everything should be coming from the used market!|
|Haircuts||$20||$20||$0||Eliminate entirely. Time to embrace the home haircuts! Here’s more about home haircuts!|
|X Box||$10||$10||$0||Eliminate entirely|
|CE training/license renewal||$10||$10||$0||Can this be reimbursed through work? If so, eliminate entirely.|
I realize that it’s easier said than done and that me writing out these eliminations doesn’t take into account Dan and Sue’s truest priorities and what they value as a family. And I wish there could be more of a middle ground here, but the issue is that they are a mere eleven years from retirement with no savings, very little retirement savings, and massive debt. I do not want the Dan and Sue of the future to be unable to do the things they want to do in order to enjoy life. What I’m proposing here is a very drastic level of cuts and Dan and Sue will have to find what works best for them. I wouldn’t expect them to eliminate every single one of these items, but I hope they’ll do some exploration into what might be tenable and feasible given their dire financial circumstances.
Now that the elephant of spending is out of the way, I want to take some time to address each of Sue’s questions:
1) a. Pay off debt
This question is largely addressed by the above discussion of reducing their expenses. If Dan and Sue are able to enact all of the savings I outline, they’d be on track to save a monumental $2,725,03 per month. This is a phenomenal amount of money and they could WIPE OUT their high-interest debt in a flash! Here’s how:
Employ The Debt Avalanche!!!
I recommend that Sue and Dan employ what’s termed the “debt avalanche” approach to paying off their debts. According to this methodology, you should pay off your debts in order of interest rate. The reason I HIGHLY recommend this method is that it’s the most mathematically sound and will save you the most money. Based on the debt avalanche approach, Sue and Dan should pay off their debts in this order:
- TJ Maxx credit card with $964 at a catastrophic 28.49% interest rate
- Capital One credit card with $1,216.75 at a still-catastrophic 20.65% interest rate
- Prius car loan at $3,231 with a 7.89% interest rate
These high-interest debts total a meagre $5,411.75. I recognize that this amount doesn’t feel “meagre” to Dan and Sue, but, if they were able to save the $2,725.03 per month that I propose, they’d be able to knock out all of these debts in LESS THAN two months!!!
After these debts are knocked out, Dan and Sue should treat themselves to something lovely, but inexpensive. Go out for a cheap dinner, see an inexpensive movie–do something to celebrate getting their lives back! Sue mentions that she wants to be able to prioritize her and Dan more and this would be a great epitomization of that goal. PLEASE do this for yourselves, Dan and Sue! You owe it to yourselves to be happy, to put your relationship first, and to be rid of these debts.
The other common debt repayment program–the debt snowball–advocates for paying debts off according to the size of the debt itself, irrespective of the interest rate. The idea is that you’ll get a psychological boost from paying off smaller debts first and be more motivated to then pay off your larger debts. The problem with this approach is that you could be paying tons in interest every month by not focusing on your highest interest debt. Lucky for Sue and Dan, their debts just so happen to align with both snowball and avalanche methodology since their highest interest debt is also their smallest! Given this, they’ll be able to reap both the psychological and mathematical advantages!
Additionally, Sue needs to look closely at the terms of her 0% interest rate Best Buy card because I imagine it’s not fixed at 0% and might skyrocket at some point in the future. She should know when this interest rate will pop up and pay it off IN FULL before that time comes.
1) b. Emergency Fund
Sue is spot on that they need an emergency fund and this should be goal #2 right after they wipe out that high-interest debt. Dan and Sue have already experienced the trauma of not having an emergency fund–that’s why they have debt–and so I know this will be a top priority for them. Without an emergency fund to handle the unforeseen–but entirely predictable–“emergencies” of life, such as a car breakdown, a roof repair, or a job loss, you’re at constant risk of sliding even further into debt. An emergency fund serves as your buffer against financial catastrophe and is a mandatory part of everyone’s finances. Yes, everyone!
An emergency fund is typically three to six months’ worth of your expenses held in an easily accessible checking or savings account. At their current rate of spending, that would be $27,450 to $54,900. However, if Sue and Dan are able to decrease their monthly spending by the $2,725.03 that I projected above, they should target an emergency fund in the range of $19,274.91 – $38,549.82. And as they pay down their debts, they’ll have even fewer expenses every month. The less you spend, the less you need to save.
Once they have this emergency fund built up, they’ll need to keep it that way. It’s not to be spent on birthdays or Christmas or dinners out. It’s there in case of a true financial emergency and, if utilized, should be replenished with the next paycheck.
1) c. Savings for home repairs
As Sue noted, at this point there is simply no money for home repairs and I would advise that they first pay off their high-interest debt and build up their emergency fund before beginning to save for these repairs. I wouldn’t do anything to the house that’s not strictly necessary from a safety perspective since they just do not have the cash to handle anything extra at this point. If they can, it might be wisest to delay making any repairs until they’re ready to sell so that they’re able to command top dollar in their asking price. I also recommend they DIY as much of the repair work as possible since that’ll save them a ton of money.
1) d. College for kids
I am so thrilled that Dan works for a university and that their kids can get free tuition by attending his school! This is fabulous! With their own student debts still looming large, Dan and Sue don’t have the financial capacity to pay for their kids’ college and so, providing them with free tuition is a fantastic gift. At this point, they can’t afford to save for their kids’ room and board and there’s just not enough runway to save before their kids go to college. But I wouldn’t fret about this–Dan and Sue are giving them the wonderful gift of free college tuition, and for room and board, the kids can either take out loans or explore the possibility of working as resident assistants or in another capacity on campus that’ll help defray those costs (I worked at my campus writing center and Mr. FW worked at the campus art museum–I still think those are the best jobs we ever had!).
The bottom line here is: You can take out loans for college, but you cannot take out loans for retirement. Any money that Dan and Sue are able to save needs to be put towards paying down their debt (including their own student loans), building an emergency fund, and saving for retirement. At this late stage, there just isn’t enough time or money for them to pay for their kids’ college educations.
2) Deferred Compensation Plan
I’m delighted to see that Sue has been saving into her employer’s deferred compensation plan. I don’t think, however, that there’s any room for her to add more to this plan at this stage. There are simply too many other demands on their money for this to be feasible.
It would be ideal for Dan and Sue to have savings and investments other than just their retirement accounts, but at this point–with their current income, debts, and current spending rate–there’s no room in their budget for it. After Dan and Sue are able to pay off their debt and save up an emergency fund and pay for needed repairs to their home, they can explore expanding Sue’s contributions to this plan. Sue should check out which funds she’s invested in at Vanguard, and what the expense ratios are on those funds, as she’ll want to ensure they’re as low cost as possible.
3) Should we refinance our house?
In a word, no. They could consider it once they have enough equity, but they’d have to fully refinance and mortgage interest rates are higher right now, so this is unlikely to make sense.
I was thrilled to read about their idea of moving once their kids are out of high school and I wholeheartedly endorse this idea! This could be a real game-changer for their finances since their current mortgage and property taxes are pretty hefty. I emphatically urge Dan and Sue to downsize to as small a place as possible with as low a monthly payment as they can find. Lowering their cost of living will dramatically aid them in their scramble to pay off their student loan debt (and save for retirement) before they retire. I love that they’ve already been thinking along these lines and I 100% agree that this would be a wise course of action.
Something that also jumped out at me is Dan’s three-hour commute. I wonder if they could move closer to his office in order to reduce the tremendous $500/month gas and car maintenance expense? If so, and depending on where Sue’s office is, I wonder if they could also downsize to just one car after their kids are out of the house? This would be provide them with another dramatic leap in their savings and would make their retirement dreams much more realistic.
4) What used car should we buy?
Ok I’ll ask the obvious question first: is there ANY chance at all that they could scrape by with just one car? I’m going to assume not because of Dan’s monster commute and the kids’ activities, but I gotta throw it out there since they really cannot afford another car.
If they absolutely must have a second car (and I own two cars myself, so I totally get it), then we’ve got to figure out a way to get Dan and Sue a new-to-them second car that’s super inexpensive. I’m afraid that their current car budget of $15K, with a $300 monthly payment, is way out of their reach. As we saw in the above expenses spreadsheet, if they were to add a $300 monthly car payment on top of their current monthly expenses, they’d be spending $9,150 per month while only bringing home $8,815. You can’t run a $335 deficit every month.
Unfortunately, this is another example of why it’s dangerous–and expensive–to have debt and no emergency fund. If Sue and Dan had the cash saved up to buy a used car, they wouldn’t have to worry about incurring an interest rate and a monthly payment. But as it is, that’s what they’re going to have to do. Sadly, debt begets more debt and with interest rates piling on, it’s easy to dig your way into a very deep hole of debt. Which is why I want Dan and Sue to really consider making these cuts from their spending! Their debt–and the resulting stress and pain–is reversible! It is not a life sentence. Ok back to the car issue…
I highly recommend they look into getting another small, fuel-efficient, used car similar to their current Prius, perhaps a Honda Fit? I’m here to tell you that my Prius with studded snow tires can handle almost every dirt road in rural Vermont in the depths of winter. It cannot handle every dirt road and not after epic ice storms, but I don’t think Dan and Sue live near any dirt roads. All that to say, AWD is not strictly necessary and, if they feel it is, they’ll need to find a cheaper solution than an SUV. Packing this level of debt on top of their existing debt load would be unwise, so I strongly advise they find the cheapest drivable solution possible. I’m hoping readers will chime in here with makes, models and years that they recommend!
Sue didn’t ask about this specifically, but she did mention that she and Dan are both qualified to work in private practice as psychotherapists, which is fabulous news!!! Earning more would be a great help to Dan and Sue in all of the above outlined goals and would help them get there faster. Frugality will only take you so far–at a certain point, you can’t reduce your spending any further and the only option is to increase your income.
I know that Sue and Dan are loathe to take time away from their kids, and I deeply respect that, but if there’s the possibility of seeing patients just one day a week, I urge them to explore it. At the very least, they should be up and running with private practice the minute their youngest jets off the college. I also want to make a note here about lifestyle inflation. Sue mentioned that as their incomes increased over the years, their spending increased right along with it. Sue and Dan cannot do that again. If they increase their incomes, they still need to decrease their spending in order to make themselves solvent and able to retire. Their professional backgrounds have put them in this excellent position of being able to take on this additional work and they should leverage it–at the very least to pay off the student loans that qualified them to do so!
Attack Student Loan Debt
After Dan and Sue pay off their high-interest debt, build up their emergency fund, and pay for any pressing home repairs (and I mean seriously pressing), they should turn their attention to the joint goal of:
- Paying off their student loan debt
- Saving more aggressively for retirement
Dan and Sue are currently paying $1,100 per month in student loan debt, which would gobble up a retirement budget pretty quickly. Since the interest rate is higher on Dan’s debt, I advise they funnel extra money into this debt until it’s gone and then put that money into Sue’s debt. I briefly considered the Public Service Loan Forgiveness Program (PSLF) since Sue would likely qualify as a state employee, but I don’t think it would make sense given how close she is to retirement age and how (relatively) small her debt is at this point. Under PSLF, her debt wouldn’t be forgiven for another 10 years (during which time she’d still need to make payments) and I imagine she’ll have the debt paid off by then.
Unless either of their employers offers any sort of student loan forgiveness/repayment scheme, I don’t have any magic to offer on their student loans–they just need to be paid off through the reliable methodology of lowered spending and increased income.
When Can They Retire?
I’ll be honest, it’s looking kind of grim right now. However, it doesn’t need to stay that way!! If Sue and Dan can eliminate their existing debt, remain debt-free (other than their mortgage), avoid going into debt for their kids’ college educations, and downsize from their current home, then I think it’s going to work out! It is wonderful that Dan’s employer offers a 2-to-1 403b match and he should increase his contribution level after the high-interest debt is paid off and the emergency fund built up. I wouldn’t wait to increase his savings until after the student loans are paid off for the two-part reason that they have relatively low interest rates and are fairly substantial sums of money.
Investigate The Pension
One thing that makes me nervous about Sue’s retirement plan is that she is wholly dependent upon her pension. Sadly, we’ve seen too many examples of pension plans not paying out in recent years and I would hate for that to happen to Sue. Unfortunately, state pension systems are becoming infamous for not funding their future payouts.
I don’t know anything about the health or viability of the New York State pension plan and so I urge Sue to do some research into how well-funded her pension system is and how likely it is to pay out what she’s projecting. There are a lot of years and a lot of opportunities for the pension system rules to change before she retires and so I advise she assess the risk and the likelihood of her pension coming to fruition.
I was relieved to see that she is paying into social security since this will provide her with a modicum of support (some pension plans entail not paying into social security, which can put people in dire straits if the pension plan goes under).
Get Rid Of The Credit Cards. Forever.
Here’s some advice I rarely give: Dan and Sue need to cut up their credit cards. Sue noted that they were out of credit card debt just three years ago but that it has crept back up. In light of this, I highly recommend that Dan and Sue go on an all-cash (and debit card) diet. No more credit cards at all. I think the temptation of credit is just too strong and, if Dan and Sue keep swinging in and out of high-interest debt, they’ll never be able to get on top of their money. They need to spend way less than they earn and the easiest way to do that is to withdraw the cash they need and when it’s gone? They can’t buy anything else.
I am confident that Dan and Sue can get this all together because Sue expressed several times how tired she is of this paycheck-to-barely paycheck cycle and how much she wants to change. All you need in order to make a change is: 1) the desire to do so and, 2) a clear action plan of how to get there. Sue has the desire and I hope that today we’ll provide her with the clear action plan. I am rooting for Sue and Dan with all my heart and I genuinely hope they’ll take this advice seriously and start making positive changes in their financial life before it really is too late. Dan and Sue have built a wonderful, loving family and they enjoy their lives–I want them to be able to continue this enjoyment into retirement and to feel confident that they’ll be financially taken care of.
In summary, here’s what I advise Sue and Dan to do:
- Reduce spending ASAP by following the above recommendations and taking the Uber Frugal Month Challenge
- Explore taking on patients in private practice
- Pay off all high-interest debt
- Build up an emergency fund
- Aggressively pay off Dan’s student loan while building up retirement savings
- Pay off Sue’s student loan
- Continue saving for retirement
- Downsize and move to a cheaper home/apartment as soon as their youngest graduates from high school
- Enjoy a well-funded retirement together!
Ok Frugalwoods nation, what advice would you give to Sue? She and I will both reply to comments, so please feel free to ask any clarifying questions!
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