Welcome to this month’s Reader Case Study in which we’ll address Audrey’s questions about her family’s financial future. Case studies are financial dilemmas that a reader of Frugalwoods sends to me requesting that Frugalwoods nation weigh in. Then, Frugalwoods nation (that’d be 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).
P.S. Another way to support each other on our financial journeys is by participating in my Uber Frugal Month Challenge! You can sign-up at any time to join the over 9,500 fellow frugal sojourners who are taking the Challenge.
I probably don’t even 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 all endeavor to help one another, not to condemn.
With that I’ll let Audrey, this month’s case study subject, take it from here!
Hi, I’m Audrey! I’m 35 years old and I live in a suburb of upstate New York. My husband and I have been married for almost 11 years and we have two wonderful girls, ages 4 and 6. My husband is a teacher and I work for an insurance company.
We bought our home over 9 years ago and have done a lot of work on it over the years: full kitchen and bathroom renovations, a bathroom remodel, new plumbing, a new sewer line, a new roof, landscaping, electrical, furnace, heat and hot water. We DIY as much as we can, but we do leave certain projects to the professionals.
Our younger daughter will finish day care in June and after that, she’ll be home for vacations and summers with my husband and our oldest daughter. Having a teacher for a spouse offers the huge perk of reliable and free child care! We spend as much time together as a family as we possibly can. One of our priorities for our daughters is to have good experiences as a family, including vacations. They’re both set up with 529 plans and we’re on track to pay for their undergrad at a state school.
As a family, we enjoy local events, day trips, and took our first vacation to Disney World last year. We plan on going back in 2018 to check out the Frozen ride, meet Moana, and enjoy the nice weather when the Northeast is freezing cold. My husband and I also have a trip booked to New York City to see Hamilton.
We’re mindful with our money but we don’t penny pinch on everything. For example, I refuse to budget for groceries. We buy organic and by Saturday afternoon, our fridge is very empty. I try to buy nicer clothes and shoes for the four of us so that they last longer. We also reuse quite a bit of our older daughter’s clothing and winter gear for our younger daughter.
Where I Want To Be In 10 years:
- Finances: debt-free and retired from my current company.
- Lifestyle: happy, healthy, raising our two children, and working part-time or in a field that I really enjoy and perhaps involves my all-time favorite hobby: sewing!
- Career: I don’t mind working, I just don’t want to stay with my current company forever. I’ve been there over 12 years and would like to leave when I have 20 years of service in 2024.
The Exterior Renovation
We have a large exterior renovation planned this June for our house and garage. Currently, we have wood siding and a wood porch, but the Northeast winters have taken a toll on our 80+ year old home. We bid the project out to two contractors and both came in around $70,000. We’ve met with a bank and are applying for a HELOC of $60,000 and our appraisal is scheduled. We’ll be using our emergency fund to pay the $10,000 difference upon the project’s completion, which is estimated for the end of July. Our house is valued at $176,500 and due to the special tools required for this exterior renovation, we won’t be doing the work ourselves. We hope to have the HELOC paid off by 2020.
The project entails removing all of the wood siding from the house and replacing it with Hardie clapboard siding and Restorations Millwork azek trim, replacing the porch floors, columns, and railings, the front door, the garage door and the garage door frame. The project is so expensive because we’re not putting new siding over the existing siding–they’ll be stripping the house and garage, checking for any soft spots, wrapping the house, and re-siding everything.
My husband and parents painted the entire house in 2010 (when I was very pregnant with our oldest) but the paint is chipping and the wood has seen better days. We’re hoping that the house will be more maintenance-free now that my husband will have both girls with him all summer.
Take-home (Net) Income
|Monthly combined take-home||$8,700||From both Audrey and her husband; health and dental are deducted from Audrey’s check pre-tax.|
|Annual combined take-home:||$104,400|
|401k||$131,840||I contribute 12% with a 1.5% match. I increase contributions 1% per year. I also have pension with my employer, which peaks after 30 years of service.|
|403b||$8,915||He contributes 10% with a 0% match. He also has a state pension, which will provide 60% of pay upon retirement.|
|Roth IRA||$40,856||Need to finish funding 2016 but we are waiting until our HELOC is established. Monthly withdrawals for 2017.|
|Total Retirement Savings:||$181,611|
|Children’s Savings Accounts||Amount||Notes|
|529 Plans (for college)||$21,019||Each child has her own account. This is the total saved for both. We hope to cover 4 years at a local public university for each of our daughters.|
|Savings Accounts||$4,783||Each child has her own account. This is the total saved for both. Goal is to have this available when they’re teens and ask us for money for extras. Funded with birthday/holiday money from family.|
|Total Children’s Savings:||$25,802|
|Emergency Fund||$25,018||A money-market account with 0.05% interest. I don’t like when it dips below $20,000.|
|CDs||$30,423||5 CD ladder at $6,000 each. Rates vary from 1.3% for 12 months to 2.3% for 5 years. CDs renew in the summer.|
|Vacation Fund||$6,313||Building this to go on trips as a family. Interest rate is 0.75%. Funded with tax returns, small yearly bonus from work, etc.|
|Mortgage (includes escrow)||$1,358||$85,225 remaining; 4% interest. 15-year mortgage. Payoff 2025.|
|Day care||$1,067||Average for Jan – June 2017 (last payment will be in June). We use the Dependent care FSA account at $5,000/year pre-tax.|
|Misc. expenses charged to credit cards||$1,000||We charge pretty much everything. This category includes: small home improvements, home and car maintenance, medical co-pays, shoes, gifts, memberships, donations, entertainment, eating out, etc.|
|Auto Transfer to Roth IRA||$917||Split between 2 accounts|
|Vehicle #2 payment (2016 Subaru Forester)||$570||$22,215 remaining; 1.49%. 4-year loan. Payoff 2020.|
|Vehicle #1 payment (2015 Subaru Forester)||$505||$14,967 remaining; 0.9% interest. 4-year loan. Payoff 2019.|
|Auto Transfer to 529 Plans||$350||Split between 2 accounts|
|Target (household/hygiene items, home decor, clothing, gifts)||$183||I have a Target Red Card for free shipping and 5% off purchases. I want to get this down to $100/month if possible. This is the average from 2016.|
|Gas||$180||For both vehicles|
|Cell Phones||$169||Unlimited data/text for 2 leased (only option with our provider) phones. We do not have a landline.|
|Utilities||$168||Average for Gas, Electric, and Water|
|Car Insurance||$109||For both vehicles. We pay annual premium every July|
|Cable/Internet||$102||Internet and 23 channels|
|Old Navy/Gap/Banana Republic/JCrew||$50||I buy clothes for all four of us from these stores. Our cards get us free shipping/rewards/discounts.|
|Life Insurance||$41||We pay our annual premium every February|
Audrey’s Questions for You:
- I think all of our debt can be paid off by Spring 2022. We’ll start to snowball payments as the cars are paid off (in 2019 and 2020) to the HELOC, and then direct all payments towards our mortgage. Ideally, I would work until 2024 in order to reach 20 years at my current company and then “retire.” I will work after this “retirement,” but I’m guessing it will be for roughly half of what I make now (if even that much).
- Do our current finances seem like this is feasible?
- My husband will still work and will be able to carry our health insurance. Right now I make about twice what he does, but his salary will reach my current salary in 5+ years (he is part of a teacher’s union with contracted salaries).
- Do you have any tips on our current savings? Should the CDs be moved to something with a higher return? Does the current emergency fund seem like a good amount for a family of four?
Mrs. Frugalwoods’ Recommendations
I commend Audrey and her husband for doing such a great job of examining their finances in a holistic manner. I’m really impressed with this detailed rundown of their assets, debts, and expenses. Well done, Audrey! This also makes Audrey’s an excellent–and fascinating–case study since she has so generously shared her full financial life with us. Knowing where you stand financially–and mapping out a years-long plan like Audrey has–is prudent and smart. Kudos!
I want to preface my advice with the following: If Audrey and her husband both planned to work lucrative jobs until traditional retirement age, I wouldn’t advise they change much. However, the equation changes quite a bit based on: 1) Audrey’s interest in quitting her job and taking on part-time work, and 2) their desire to renovate their home’s exterior.
I know that Audrey isn’t specifically asking for advice about their planned exterior renovation, but, since it’s not a done deal yet, I’m going to share that I advise against their current plan of taking out a home equity line of credit (HELOC) in order to fund this renovation.
In general, Mr. FW and I consider elective renovations (anything that’s not required in order for a house to be safely habitable) to be luxuries. They’re completely fine to do, and we’ve done them ourselves, but they should be paid for just like any other luxury: in full with cash. In my opinion, it’s financially risky to take out a HELOC of this size ($60K) for something that’s not mandatory. It’s kind of like going into credit card debt for a vacation. You can do it, but it’s not the wisest allocation of your resources.
As a fellow New Englander, I completely understand their desire to implement a more maintenance-free exterior. However, Hardie board is the absolute top of the line in exterior cladding. Yes, it’s the best, but it’s also incredibly expensive. Given the value of their home ($176,500), it doesn’t make fiscal sense to spend $70,000 on the exterior. It’s like buying a Tesla when a Prius would suffice. Additionally, if Audrey and her husband have any thoughts of ever moving, it’s highly unlikely they’d get a return on their investment. It’s just too expensive an upgrade for the price point of their home.
A few alternatives to Hardie board that Mr. Frugalwoods and I brainstormed:
- Choose a mid-range, more affordable vinyl siding. There are quite a few different options that look vastly better than the dingy vinyl siding of yore. It’s highly durable and comes in different colors and textures.
- Pay a professional to paint the exterior every 5-10 years. Obviously it’d be cheaper to paint it themselves, but if they don’t want to do that again, paying to have it painted is a fine option. They won’t reach the cost of the renovation on these repeat paint jobs.
- Sidenote: if they’re going to have all of the siding removed, make sure to add a few inches of foam board insulation in order to reap the benefit of a more energy-efficient home with lower utilities.
If they’re still set on Hardie board, here are our recommendations:
- First, embrace extreme frugality for the next few years and then pay cash for the renovation.
- Get more contractors to bid the job and see if they can find a better rate.
- Do as much of the work themselves as possible (demo, etc).
- Have the house painted now and wait until the next construction recession. Bid out the job at that time and pay cash for what will certainly be a lower bill.
It’s not that Hardie board isn’t fabulous, it’s just that taking out a HELOC for such an expensive renovation is risky–particularly in light of the overall value of their home.
Expenses and Savings
A few top line notes:
- If Audrey’s husband plans to continue working until traditional retirement, which I believe he does, then their goal in the next few years should be to reduce their spending such that his income alone can cover their expenses.
- Although Audrey plans to continue working in a different capacity, since she likely won’t know in advance what her earnings will be, it’s best to plan for making $0 and then consider anything she does earn as gravy.
- This approach will set Audrey and her husband up to robustly fund their vacation account, take more trips as a family, and invest the excess. No one has ever been sad that they’ve earned more money than they anticipated!
At their current rate of spending, they can’t swing it on one income. Even if they pay off their mortgage and cars before Audrey transitions her work, their monthly expenses still hover at $5,052 and, with inflation, will likely be even higher. If Audrey’s husband brings home $4,350/month (half of their current take-home since Audrey reports he’ll be making what she does by 2024), this isn’t going to work. But never fear! We have options!
There are two factors that could make this feasible:
- Audrey wants to continue working, but in a more fulfilling job. They could swing this if she’s bringing home enough to supplement her husband’s income. The trick would be knowing how much she’d make in this new job before taking the plunge.
- There are plenty of areas where they can cut back and save more money every month.
- What I advise is doing #2 and hoping for #1. Better to have more money than expected!
In the same vein, to Audrey’s question on their emergency fund, the only way to know how much you need in an emergency fund is to know how much you spend every month and hence, how much you’d need to cover your expenses in an emergency. There is no magic savings number for everyone–it’s entirely calibrated on how much you spend. Luckily, Audrey has an excellent record of their spending! (sidenote: this is why it’s so crucial to track your spending. I track mine through Personal Capital, which is free and easy to use). If you’d like to know more about how Personal Capital works, check out my full review.
Savings Accounts Side Note
One of the easiest ways to optimize your money is to keep it in a high-interest savings account. With these accounts, interest works in YOUR favor (as opposed to the interest rates on debt, which work against you). Having money in a no (or low) interest savings account is a waste of resources because your money is sitting there doing nothing. Don’t let your money be lazy! Make it work for you! And now, enjoy some explanatory math:
- Let’s say you have $5,000 in a savings account that earns 0% interest. In a year’s time, your $5,000 will still be… $5,000.
- Let’s say you instead put that $5,000 into an American Express Personal Savings account that–as of this writing–earns 1.70% in interest. In one year, your $5,000 will have increased to $5,085.67. That means you earned $85.67 just by having your money in a high-interest account.
And you didn’t have to do anything! I’m a big fan of earning money while doing nothing. I mean, is anybody not a fan of that? Apparently so, because anyone who uses a low (or no) interest savings account is NOT making money while doing nothing. Don’t be that person. Be the person who earns money while sleeping. Rack up the interest and prosper. More about high-interest savings accounts, as well as the ones I recommend, here: The Best High Interest Rate Online Savings Accounts.
At their current monthly spending rate of $7,485, their emergency fund of $25,018 would last them 3.3 months.
For me, this is cutting it a bit close. I prefer at least six months worth of living expenses in an emergency fund, because an emergency fund is just that: for emergencies you can’t predict or anticipate. A job loss, a health crisis or any other unexpected expense would wipe out their emergency fund in a hurry.
Based on these calculations and Audrey’s desire to retire early/change jobs, I recommend that Audrey and her husband cut back on their monthly spending.
I’d reduce/eliminate the following:
- Their car payments are draining $1,075 every month. I’d find cheaper, used cars they can pay cash for and eliminate these payments entirely. In general, buying a car that’s even a few years old will yield tremendous savings over buying a brand new vehicle from a dealer. We too live in the Northeast and needed an AWD vehicle and so we paid $12K (in cash) for a 2010 Subaru Outback station wagon. More on that here.
- The $1,000 per month on eating out, memberships, gifts, etc could likely be eliminated in its entirety, if not greatly, greatly reduced.
- The $50/month on clothing could also be reduced. I recommend shopping used/scouting hand-me-downs for the girls and a clothing ban for Audrey and her husband.
- I’d find a less expensive cell phone provider, such as Ting, Republic Wireless or Boom, which should cover them both for circa $40/month.
- I’d eliminate cable and just keep internet. Here’s how we watch free TV.
- I’d shop around for cheaper car insurance.
- Groceries are in pretty good shape already so I wouldn’t sweat those too much, especially since Audrey specifically mentioned she doesn’t want to frugalize their groceries.
- Audrey mentioned she’d like to get the “Target” line item for household goods down to $100/month, which sounds like a great plan.
- In general, I recommend they read Uber Frugal Month: The Ultimate Guide To Saving More Money Than You Ever Thought Possible for more ideas on how to reduce their spending without sacrificing their quality of life.
Even if all they did was eliminate the $1,050 spent on entertainment, eating out, and clothes, that’d be an extra $12,600 saved each year. If they were able to save this additional amount every month, I think they’d be in a much more comfortable position for Audrey to retire or reduce her income. The beauty of lowered expenses is that you simultaneously need less to live on and you save more. Additionally, they could then invest these savings.
To Audrey’s question on CDs, I recommend liquidating these when possible and instead investing in low-fee index funds, which have the advantage of being diverse (since they’re invested across the entire stock market) and more aggressive (and thus typically yield a higher return than CDs). CDs are a very conservative and extremely low-yield investment vehicle. Since Audrey and her husband are young, I’d funnel this money into higher risk, higher yield index funds. More on investing here.
Regarding paying off their mortgage early, I know that some folks enjoy the psychological boost of paying off a mortgage, which is perfectly fine, but it’s often not mathematically beneficial. Their interest rate is nice and low at 4% and I wouldn’t try to accelerate payments because their money will be better utilized in investments (see above).
All in all, I’d say Audrey and her family are doing really well and have the potential to do tremendously well if they reduce their expenses, delay/alter/pay cash for this exterior renovation, and find higher rates of return for their investments. I think it’s important to point out that Audrey and her family are in a wonderful position and have made great financial decisions over the years. What we’re talking about today is taking them to the next level of financial security for their future. So, kudos to Audrey and thank you for serving as this month’s case study!
Ok Frugalwoods nation, what advice would you give to Audrey? She and I will both reply to comments, so please feel free to ask any clarifying questions!
Would you like your own case study to appear here on Frugalwoods? Send me your story via email (firstname.lastname@example.org) and we’ll talk.
Updated May 4, 2018 with Audrey’s decisions:
Kids’ 529 plans and their savings: $36,497
Monthly income: $7,651
Income dropped due to retirement contribution changes to hit the federal max on our 401k and 403b.
Monthly Expenses: $3,359
Both cars are paid off, day care is done, and we decreased our monthly bills. We continue to simplify at home–bills, purchases, and belongings.
We closed 7 credit cards (they were always paid in full but it was another easy way to simplify) and froze our credit with the bureaus.
Monthly 529 plans and Roth IRA auto transfers: $1,267
Monthly expenses + monthly auto transfers: $4,626
We have about $3,000 extra per month. Right now, this goes to saving for the exterior work we need for the house.
We went on 2 vacations that were funded with our vacation account. We’re planning on another trip later in the year.
From a lot of the comments we received, we are not moving to be closer to work that is about 20 minutes (local traffic) away. There are no sidewalks or walkability in these neighborhoods. The houses and properties are 2-4x the size, purchase price, maintenance, taxes. It does not feel like home there. We do not want land, animals, or a larger home–we are looking to spend less time on household chores and more time with our family and travel. Our house allows us to accomplish our goals and have a peaceful, organized home to enjoy. We are not looking to move away or out of state. We have a lot of family that is close by, we have stable jobs that are in different fields (both have pensions), and the cost of living is affordable. In short, we love where we live!
Exterior work will begin soon, 10% down payment has been paid for. Work will be in 3 phases. Once the exterior work is complete, we will open an investment account that will be accessible prior to 59 1/2 to provide flexibility for our family. We have about 7 years left on our 15 year mortgage (balance is now below $75,000) and we’ll reevaluate my career path once we get closer to being mortgage free.