Reader Case Study: Debt And Dreams In Queensland, Australia
We’re headed Down Under for this month’s Reader Case Study to chat with Sam and Keith who live in Brisbane Queensland, Australia. Today we’re going to help them figure out how to pay down their debt and save up for their future!
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 also provide updates from our Case Study subjects at the bottom of each Case Study several weeks/months after their story is featured. To see what past Case Study participants have decided to do, check out the Case Study section and scroll to the bottom of the individual posts.
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.
With that I’ll let Sam, this month’s case study subject, take it from here!
Hello Frugalwoods nation! I’m Sam, I’m 40 years old and my husband Keith is 43. We have a blended family with his, my, and our children and they have all lived with us at one point or another. Keith’s daughter Summer is 20 and my daughter Clodagh is 19. Our son Luke is 10. Only Luke lives at home now as our two older chickens have flown the nest. We also have a dog named Gus.
We live in Brisbane Queensland in Australia. Keith and I met in 2006, got married in 2008, and moved our family interstate from my hometown in Western Australia 10 weeks later!
Sam and Keith’s Careers
Keith has a job in the Defence Force, where he has served for over 15 years, which requires him (and us) to move semi-frequently (every 3-5 years), often interstate. Additionally, his position requires frequent travel and he’s gone approximately 6 months of each year sporadically. After having my daughter, I worked part-time as a customer service officer in the state government until having my son. The last 10 years since having my son, I’ve worked for 5 years part-time as a customer service manager and 5 years as a stay-at-home mum. I’ve recently obtained a part-time position in insurance claims with a very reputable member-owned insurance company that’s extremely involved in community works. I view this as a foot in the door.
I am currently studying at university to be a counsellor. I have tried several times over the last 18 years to get a degree and have never finished it. My goal is to work in rehabilitation counselling for people who have suffered injury or disability. I never really intended to go back to work as I was happy being a stay at home mum (maybe this is why I never completed university), but financially we have reached a point where I felt I needed to contribute. After I complete my degree, I should be able to obtain a part-time position that pays approximately $40,000 (before taxes) per year. I currently make $32,500 (before taxes), which is for 25 hours per week including evening shift and weekend work for which I’m paid extra.
For fun, we enjoy camping and kayaking and often go on weekend camping trips in national parks, or to some of the dams and lakes within an hour’s drive from our house. We go for longer camping trips to the beach on holidays. Because we move around with Keith’s job and so do his workmates, we have an ever-changing social circle which can sometimes be hard to break into. I am a very social person and since our mobile lifestyle can often be a bit lonely and friendship-scarce for me, I hate to say no to an invite to anything.
We love to entertain at our place by hosting a BBQ, or by going to other’s houses. But in the last few years our BBQ entertainment has begun to blow out the budget with gourmet meats, snacks and side dishes instead of the basics we used to serve. Also, we find that many–maybe 80%–of our social invites consist of going out to dinner or drinks. Additionally, any invites that include Luke, even the mum and kids invites I get from the mothers of his schoolmates, seem to be at paid places such as water parks or play centres.
We also frequently go out for dinner as a family and like to go out for a drink as a couple or with friends. We find that despite our best intentions, Luke is a bit addicted to technology when we are at home, and we spend quite a bit of money on iPad and Xbox games for him, and updating this technology.
My hobby is cooking, and I am always forcing my family to try out new recipes I’ve made. Keith loves to play golf. Luke plays cricket in the summer for his school team, soccer in the winter also for the school team, and does drama classes throughout the year outside of school. We would love to grow our own fruit and vegetables but have never seen the point since we rent. We live near lots of beautiful lakes and scenic walks and almost every day we enjoy walking the dog as a family.
I undertake regular volunteer work at Luke’s school and serve on several committees there. Keith does community work through his workplace. Additionally, my new job is very active in community work in Queensland and I’ll be running my first fun run shortly, which I have fundraised for.
We feel like we have lived a champagne life on a beer budget and now we are paying for it. We fritter away our income on nothing and never seem to achieve any of our real, longterm goals. We are both becoming frustrated with the way we live but find it extremely difficult to change our patterns of behaviour. We have tried to stop spending before and we are able to for a period but then go back to our old patterns and increasing debt. I read blogs like the Frugalwoods longingly but never seem to be able to put the ideas into practice in real life.
Where the Sam and Keith Want To Be In Ten Years:
- Either own a house and have substantially paid off the mortgage, or, be well on our way to having enough money either saved or in superannuation to buy a house outright upon Keith’s retirement at age 60. Houses in our area cost approximately $350,000 to $550,000 and our price range would be somewhere in between.
- Have 3 months of income in the bank. 6 months would be ideal, but I’d settle for 3.
- Have no debt other than a mortgage (if that).
- Have enough spare income to visit my family in Western Australia a few times a year, which costs $500 per person return flight. If we are interstate from our children by this point, we would want enough spare income to visit them often.
- Be supporting Luke through university or other tertiary education. This would be living expenses only as fees are paid for under a government interest-free loan scheme in Australia that he would pay back when he earned over $51,000 per annum.
Lifestyle and Career:
- All our children will be adults by this point and we will very likely have grandchildren, so we would like to be spending plenty of time with them. This would be the main place lifestyle-wise we would like to find ourselves in.
- We would continue to camp but maybe by this point would have been able to invest in a caravan and continue to holiday within Australia, as we have always done.
- We would like to continue to entertain at home, maybe with the very occasional meal or drinks out with friends, but mostly at home.
- We would absolutely love to be growing our own fruits and vegetables.
- We would still have dogs and be spending plenty of time with them.
- At this point in my life, I would like to be involved in volunteer work in the disability sector.
- We would both like to be working part-time at this point and spending time on family and travel. Keith would like to be part-time, but says it isn’t essential.
Sam and Keith’s Finances
|Keith||$5,497||After taxes and superannuation (retirement) contributions|
|Sam||$2,512||After taxes and superannuation (retirement) contributions|
|Rent||$1,134.00||This includes water. Rent in the area where we live is $2,166; our rent is subsidized by Keith’s work.|
|Keith’s discretionary spending money||$1,084.00||Keith withdraws this monthly for travel costs of approximately $500 per month (this is above and beyond what his work reimburses him for) and the remaining $584 is his to spend on what he chooses (usually entertainment, alcohol, and dining out). He says that his withdrawal of this amount is non-negotiable and that he won’t consider a lesser amount.|
|Loan repayment||$892.67||To Sam’s mum and dad.|
|Private school fees and school purchases for Luke||$650.00||Luke used to attend a public school, which only cost us $32.50 a month. However, we found out he was more than 2 years behind in his education, and additionally was unhappy at the school. This school is a much better fit for him and he has already improved dramatically in the few months of being there. We would make any sacrifice for his future.|
|Credit card repayments||$650.00||This is how much I pay on the credit card debt we owe.|
|Food shopping||$520.00||This is for 2 adults and 1 child. I try to shop frugally but time gets the better of me and I end up shopping at more expensive supermarkets. We do most of our cooking from scratch and don’t buy any convenience food.|
|Keith’s personal superannuation contribution||$352.00|
|Interest free loan repayment||$260.00||To Keith’s work; this is the minimum amount required.|
|Tolls for Sam driving to work||$238.42||This is how much it costs me for the privilege of driving to work and back 5 days a week. If I took roads that don’t charge a toll, it would take me 3 hours a day in travel time for a 5 hour/day job! This way it takes me 2 hours a day in travel time. I can’t take the 3 hours a day travel option or it would double Luke’s before and after school care fees.|
|Petrol for Sam’s car||$216.00|
|Sam’s discretionary spending money||$216.00||I don’t really know what I spend this on!|
|Airfare||$209.00||This is for us to visit my family twice a year, and for Luke to stay with his grandparents on 2 of his school holiday periods (he has 4 school holiday periods a year)|
|Before and after-school care for Luke||$164.65||This is child care for Luke when he isn’t at school|
|Gifts||$125.00||This is for family and friends and when Luke attends birthday parties|
|Car insurance||$116.57||We have a joint policy. We used to have cheapo car insurance, but since Keith’s car needed repairs in a major way, and it cost us $7,000 (and months without his car), we have opted for a much better and more expensive policy. This has an excess of $650 for each car. It includes a hire car option and a free windscreen replacement each year.|
|Savings account for Luke’s car||$109.00||We are saving this money to buy Luke a car when he gets his licence and for the cost of driving lessons. Current balance is $2,000.|
|Sam’s lunches and dinners out with friends||$108.00||I use this money for lunches and dinners out with friends and the occasional drinks.|
|Holiday care for Luke||$93.34||This is child care for Luke when he is on school holidays. His school is on holidays for approximately 14 weeks per year. We also utilise family as much as possible, although that is difficult since we don’t live in the same place.|
|Internet||$90.00||This is for unlimited data. Luke and Keith like to game and the Pay TV uses a significant amount of data|
|Clothes||$84.00||This is for all 3 of us|
|Contents insurance||$81.00||This is our insurance for our household contents. We have added jewellry, 2 laptops, and Luke’s iPad for school as well as home items that will be covered on this policy. This has no excess.|
|Utilities: Gas||$70.00||This heats our water and powers our stove top.|
|Sam’s car registration||$62.20||We pay this every year, it is mandatory in Australia|
|Keith’s car registration||$62.20||We pay this every year, it is mandatory in Australia|
|Mobile phones with Moose Mobile||$53.00||This is the best deal we could find. Keith likes lots of data and we both make lots of phone calls and texts to family and friends who live in other states so we like to have unlimited calls and texts. This is for 2 phones per month. No contract.|
|Sam’s gym membership||$52.00|
|Luke pocket money||$43.00|
|Household supplies||$40.00||I try to make as many of my own cleaning products as time permits.|
|University expenses for Sam||$40.00||I’m lucky that I don’t have any fees or tuition expenses for university that I need to pay right now. I will start paying them at the rate of 2% per year of my pre-tax income when I start earning over $51,000 per year. This amount is for textbooks and stationery. I source my textbooks online or as an e-book, whichever is cheaper.|
|Foxtel TV||$27.00||This is Pay TV. We pay this for 8 months of the year as Keith watches Aussie Rules football and avidly follows a team that he can only get the games where we live on Foxtel.|
|Pet care||$20.00||We are lucky that Keith works with dogs in his career and knows a lot about injuries and how to treat them, so he is able to do some things we would otherwise pay for. This amount covers our dog’s annual vet visit, vaccinations, food and worming and flea treatments that I buy online.|
|Books for Sam’s kindle||$20.00||I love to read and I can’t borrow books for my kindle in Australia from the library so I buy them.|
|Netflix||$4.67||For the other 4 months of the year, we use Netflix.|
|Keith’s superannuation for retirement||$263,000||Retirement is the one area we have no worries as we are already on track for a good retirement. No changes needed here. By the time Keith is 60, and able to access his superannuation, he will receive $60,000-$70,000 per annum.|
|Sam’s superannuation for retirement||$21,386.27||My low amount is due to my stay-at-home mum status for much of my adult life|
|Savings accounts||$0||Yes, that is correct! We save nothing, zilch, nada|
|Keith’s car||$6,000||2001 Nissan Navada Ute, no loan|
|Sam’s car||$6,000||2013 Holden Barina Spark, no loan|
|Credit card||$10,000.00||Owe $10,000 at 18% interest rate. Minimum repayment is $220 per month.|
|Loan from Sam’s mum and dad||$7,004.00||6% interest rate. We took this loan after Keith’s car broke down majorly in November 2017. Minimum repayment is $892.67 per month.|
|Loan from Keith’s workplace||$1,567.54||0% interest rate. Minimum repayment is $260 per month.|
Sam’s Questions For You:
- Where oh where can we realistically cut back in our spending to achieve our goals and get rid of our debt? We know this is going to be the big question for us as we like to spend on what we like with no thought to the future!
- Should we buy a house or continue renting and invest our money to buy a house upon Keith’s retirement? Which would be better financially?
- How can we be social and make new friends each time we move, without spending tons of money?
- Are our goals even achievable at this stage in our lives? Please help!
Mrs. Frugalwoods’ Recommendations
I’m so excited to feature Sam and Keith today! A hearty congratulations to Sam for pulling together all of their financial information as that is no easy task. The first step to making ANY sort of plan regarding your money is compiling a comprehensive breakdown of your spending, your net (that means after-tax) income, your assets, and your debts with interest rates.
Without this holistic picture, there’s no way to set goals or identify your net worth or have any idea what might be possible for you. I unfortunately receive WAY more requests to participate in Case Studies than I’m able to accommodate and so I want to offer this advice to anyone seeking help with their finances: pull this info together–exactly as Sam did above–and go from there. Follow along with each Case Study and analyze your own situation in the same way that we do here as a group. And, by the way, DO NOT estimate your monthly spending. You need to actually track and record every dollar you spend in order to do this exercise correctly. I use and recommend the free expense tracker from Personal Capital. 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.
Ok back to our subject at hand…
Goal Setting and Focus
Sam is very insightful about their current financial situation and she absolutely hit the nail on the head when she wrote the following:
This level of insight is remarkable and I commend her for recognizing this about how she and Keith have been spending their money. I often hope that through a Case Study folks will come to this realization. It’s extremely impressive that Sam is already there! In many way, the hard work is already done because knowing this about yourself is a prerequisite to moving forward.
I agree with Sam’s assessment and I think it’s going to be imperative for her and her husband to come to an agreement over how badly they want to achieve the goals they’ve outlined in this Case Study. Because it’s going to take a lot of changes for them to get there. But, the good news is that they can do it! They’re just going to need to focus and set priorities. I wrote this post last month about financial questions to discuss with your partner and I think it would be a useful exercise for Sam and Keith to go through them together.
Priorities #1 and #2 for Sam
In reviewing Sam and Keith’s finances, my two major concerns are:
- Their debt. Particularly, their high-interest debt.
- Their lack of emergency fund or any form of savings outside of retirement.
#1: Let’s start with their debt.
I am not a fan of debt, but, I don’t care very much about 0% interest rate debt as it’s not actively working against you every month. Debt with a 0% interest rate is a hassle and needs to be paid off, but it’s important to remember that the truly insidious, awful thing about debt is the interest rate. This is why I have Case Study subjects include interest rates with their debt–it’s the most important part! If you’re assessing your full financial picture and creating a debt repayment plan, focus on the interest rate(s) associated with your debt(s).
Given this, you can guess that my biggest concern is with Sam and Keith’s credit card debt, which comes with a whopping 18% interest rate. In case you’re wondering, this is what we would call high interest rate debt and, unfortunately, it’s the worst kind of debt. In light of this–and the compounding amounts of money they’re losing on this every month–I highly recommend Sam and Keith buckle down and pay this off in its entirely as fast as humanly possible.
Next on the debt repayment chopping block should be the debt to Sam’s parents with an interest rate of 6%. Much lower than the aforementioned 18%, but still higher than you want.
I commend Sam and Keith for paying off these debts every month, but I also strongly encourage them to start saving at a much higher rate in order to throw more money at these debts. With their current income level, they should be able to wipe out both of these debts in short order (we’ll get to how in just a minute!).
For the 0% interest rate debt from Keith’s work, they should continue to pay the minimum amount every month until it is paid off. I would not recommend accelerating payments on this debt since, again, the interest rate is zero.
#2: The Danger of Having No Savings
The peril of not having any savings (outside of retirement) or an emergency fund is that you’re in constant danger of going into greater debt. This is the #1 reason why I recommend building up an emergency fund of three to six months’ worth of expenses. Sam and Keith have already experienced the negative impact of not having an emergency fund when Keith’s car broke down and they had to take out a loan from Sam’s parents with a 6% interest rate.
This is a perfect example of why you always want to have savings on hand. Things happen in life–cars break down, jobs lay people off unexpectedly, kids/pets get sick–and you want to be able to pay for these unforeseen, yet entirely predictable, events WITHOUT incurring any debt. Parallel to paying down their debt, I want to encourage Sam and Keith to get serious about building up a robust emergency fund so that they can avoid going deeper into debt.
I know that a lot of folks find themselves in the position of needing to simultaneously pay down debt and build up an emergency fund, so we’re going to talk through how to achieve this two-part goal in just a moment.
I want to give a shout out to Sam and Keith for having money socked away in their retirement accounts–way to go!! Retirement savings are one element of a financially responsible life and they’re doing great in this department.
What I do want to highlight, however, is that Sam said Keith’s superannuation will provide the couple with $60K-$70K annually; however, at present, they are spending over $96K annually. With inflation, they’d be spending even more, which makes for a pretty large gap between income and expenses. It’s also important to remember that retirement savings are but one element of a fully developed financial portfolio. And so, everything we’ve discussed up to this point comes down to…
Reducing Their Spending
Sam asked for our advice on how to cut back on their spending and I am so glad she did because this is the area where she and Keith have a lot of opportunities to win! They can–and should–view this as a competition over who can figure out more cost cutting measures. I highly recommend that Sam and Keith take my free 31-day Uber Frugal Month Challenge together as that’ll help them assess their needs vs. their wants and bring home the reasons why they’re saving more money.
Something I noticed as I read through Sam and Keith’s expenses is that there seem to be a lot of “sacred cows” that they feel they cannot eliminate. While I encourage people to identify their highest and best priorities and spend in service of those priorities, everything cannot be a priority.
Sam and Keith need to do the hard work of acknowledging that they desperately need to cut back on their spending and that they’ll need to collaborate on where to save. They are currently spending almost every single dollar they earn–the epitome of living paycheck-to-paycheck–and Sam readily acknowledged that it’s not getting them where they want to be in life. This will not change until they make changes to their spending and their lifestyle.
I created the below spreadsheet for Sam of all the line items I recommend she and Keith eliminate entirely, at least while they’re paying down their debts and building up their emergency fund:
|Item||Amount To Save||Mrs. FW’s Notes|
|Keith’s discretionary spending money||$1,084.00||Keith wrote that his withdrawal of this amount is non-negotiable and that he won’t consider a lesser amount. However. Folks. This is an ASTRONOMICAL amount of discretionary money every month! Honestly, this outstrips many people’s ENTIRE non-rent/mortgage monthly budgets!! I’m not trying to harsh on Keith here, but there is no other option than for this to be eliminated or drastically reduced. If Sam and Keith had no debt, a healthy savings account, and NO major financial goals, then this would be OK, but in light of their current situation, this is truly shocking. This is one of those situations where I think some tough love is in order and Sam’s going to need to have a very frank conversation about this dollar amount with Keith.|
|Sam’s discretionary spending money||$216.00||Sam’s discretionary spending, while much lower than Keith’s, is still incredibly high. Sam said she’s not sure what this gets spent on, so I encourage her to try and itemize these expenses and find a way to eliminate them all. Identify frugal substitutions, see what she can do without, and prioritize the expenses that need to remain.|
|Gifts||$125.00||It’s time to embrace the ethos of frugal gift-giving! Sam and Keith are simply not in a financial position to spend $1,500 per year on gifts. Here are several posts for inspiration:|
|Savings account for Luke’s car||$109.00||I strongly recommend this be ceased. See below for my rationale.|
|Sam’s lunches and dinners out with friends||$108.00||Whoa buddy! More discretionary spending! I advise Sam to find frugal ways to socialize or, at the very least, start spending much, much less when she goes out. See below for more ideas on frugal socializing.|
|Food shopping||$100.00||Try to reduce by $100/month, to bring their total grocery spending to $420. Posts for inspiration:|
|Clothes||$84.00||Time to embrace a clothes-buying ban! I realize this isn’t always possible with kids, but at the very least, Sam and Keith should stop buying new clothes. And, if they’re not already, Luke’s clothes should be sourced as hand-me-downs or from thrift stores/garage sales.|
|Sam’s gym membership||$52.00||There are lots of ways to exercise for free and I encourage Sam to explore what works for her. A few ideas: hikes/walks outside (yes, year-round), biking (also year-round!), exercise classes/yoga for free on YouTube and other websites (I really like the free classes offered on doyogawithme.com), volunteering at a gym/studio in exchange for free workouts (here’s how I did that at my yoga studio in Cambridge), and so much more! Get creative and eliminate this expense.|
|Luke pocket money||$43.00||This will need to be a wholesale, whole-family frugality experience and a great opportunity to start teaching Luke about money management.|
|Foxtel TV||$27.00||Yet another sacred cow on their expenses list. Again, Sam and Keith will need to decide what matters most to them and how determined they are to stop living paycheck-to-paycheck and start working towards future dreams and goals. Here’s how Mr. FW and I watch TV for free.|
|Books for Sam’s kindle||$20.00||I recommend Sam check out actual books from the library and hold off on buying new ones for her Kindle. This is one of those opportunities for finding a totally free and fun frugal analogue!|
|Total To Save:||$1,972.67|
I fully recognize that these cuts will be hard to make, but Sam and Keith are in a precarious financial position right now with debt, no savings, and a desire to do more with their lives. If Sam and Keith are able to eliminate all of this spending, they’d stand to save a gigantic $1,972.67 per month!
They currently have $17,004 in high-interest debt and, with that level of savings, it would taken them less than 9 months to pay it all off!!! Nine months is not long at all! How wonderful would it be to eliminate all of that debt in under a year!! It would be fabulous, I tell you. Then, Sam and Keith could immediately start working towards financial goals beyond simply the monthly slog of paying bills and paying for things they’ve already bought (which is what debt is, after all).
Don’t Buy Your Kid A Car (even if you can afford to)
I want to raise the question of why they’re saving up to buy Luke his own car. Sam and Keith are currently putting quite a bit of money towards this goal and I’m unclear on why. I completely understand their desire to pay for Luke’s private schooling and also their hopes to help Luke with his university fees, but the car savings plan threatens to derail those other two goals. In my humble opinion, I would advise taking the $2,000 they’ve already saved towards this goal and instead use it to pay off their debt.
I personally bought my own first car when I turned 16 using money I’d saved up from working as a receptionist at my church and babysitting. I bought a used, 1990 Toyota Camry station wagon for cash, which I drove until I graduated from college, at which time I passed the car along to my brother since I was moving to NYC and no longer needed a vehicle. I think saving up to buy one’s own first car is an excellent first financial milestone and a fabulous way to teach kids about how to earn, manage, and deploy their own financial resources. In short, I’d stop saving up for this car, use the money to pay off debt, and if Luke wants a car, he can work and save up to buy one himself.
If Sam and Keith combine the $2,000 they already have in Luke’s car account with the above savings I recommend, they could pay off ALL of their high-interest debt in just over 7 months! Seven measly months! Hooray!
The other side of the equation here, of course, is to increase their income. Sam is working on her university degree (hooray, Sam!!) and projects she’ll earn a higher salary after completing this degree. That is fantastic and I laud her for pursuing a career she’s passionate about. That being said, Sam and Keith should discuss in advance how they want to utilize this increase in income. Based on what Sam said, it sounds like in the past, salary increases have gone towards inflating their lifestyle and not towards longterm goals. I encourage Sam and Keith to outline a plan in advance for how they want to utilize this money.
I recommend that Sam and Keith 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, Sam and Keith should pay off their debts in this order:
- $10,000 credit card debt with an 18% interest rate
- $7,004 debt to Sam’s mum and dad with a 6% interest rate
- $1,567.54 debt to Keith’s workplace with a 0% interest rate
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. Everyone has to carve out a debt repayment program that works for them, but there’s no denying that the debt avalanche approach is the most mathematically sound. Since Sam and Keith are already on top of paying their debts down every month, I think they’ll do great with a debt avalanche.
Don’t Forget About The Emergency Fund!
I just outlined an aggressive path for Sam and Keith to pay off all of their high-interest debt, but as we discussed above, it’s important that they simultaneously build up an emergency fund since it’s incredibly dangerous to skate by paycheck-to-paycheck with no buffer. In light of that, I advise that if Sam and Keith adopt all of the above recommended savings, they should take a portion of the $1,972.67 they save every month and put it into their emergency fund. The remainder should be used to pay off their high-interest debt.
These are competing and equally important goals, which is why I advise they tackle both at once. An emergency fund is typically three to six months’ worth of your expenses. At their current rate of spending, that would be $24,014.16 – $48,028.32. However, if they decrease their monthly spending by $1,972.67, they should target an emergency fund in the range of $18,096.15 – $36,192.30. The less you spend, the less you need to save.
I also want to point out that a lot of Sam and Keith’s monthly spending is currently monopolized by their debt repayments. Once they knock out those two high-interest loans, they’ll save a whopping $1,542.67 per month!!!!!
Let’s do some more math:
|Current monthly spending:||$8,004.72|
|Amount to save through frugality:||– $1,972.67|
|Amount to save after high-interest debt repayments are done:||– $1,542.67|
|New Monthly Spending:||$4,489.38|
That’s almost half of what they currently spend! Sam and Keith’s monthly take-home pay is $8,009, and if they only spent $4,489.38 per month, they’d be on track to save a massive $3,519.62 per month. Now THAT is when Sam and Keith can start thinking about their future plans. In just ONE YEAR, they’d bank $42,235.44, which is a fabulous start towards either their goal of buying a home or investing or traveling or simply living a much more stable, fulfilling financial life. However, it does mean that they need to embrace all of the expense reductions I outlined and also stay on track with first paying off their two high-interest loans and building up their emergency fund.
As you can see, through extreme frugality, it’s entirely possible for them to dig out of their debt and set themselves on a fantastic trajectory. To answer Sam’s fourth question about whether or not their goals are achievable, yes, they absolutely are but only if she and Keith are willing to make these major lifestyle shifts in their spending. Since Sam came to me with this Case Study, I have to imagine she is motivated to make these changes, which means she will succeed! Go Sam go!
Buying A House?
Sam articulated that one of their main financial goals is to buy a home, and perhaps be mortgage-free, in the next ten years. If Sam and Keith earnestly want to do this, they will have to buckle down and incorporate all of the spending cuts I outlined above in order to save up a downpayment. Sam said their price range would be somewhere between $350K-$500K, so let’s run a few numbers on a home that costs $425K:
- A 20% downpayment would be $85,000
- A 10% downpayment would be $42,500
On top of that, they’ll need to have enough money for closing costs, moving expenses, their monthly mortgage payment, property tax, homeowner’s insurance, mortgage insurance, maintence/repairs, and all of the other sundry expenses that invariably crop up when you own a home.
More crucially, Sam mentioned that Keith’s job requires them to move every three to five years, which reduces the likelihood that buying a home will make financial sense. It’s usually not possible to even come close to recouping home-buying costs if you’re moving and selling every 3-5 years. My advice is that until Keith retires, or his job no longer requires them to move frequently, it doesn’t make financial sense to purchase a home.
Furthermore, Sam and Keith’s rent is currently subsidized and it sounds like their mortgage would not be. This will further inflate the difference between what they currently pay in rent and what they would pay in a monthly mortgage. As their present spending is nearly equal to their monthly income, there’s no way they could afford higher living costs, unless they dramatically reduce their spending, increase their income or, ideally, do both.
How to Be Social Without Spending Money
One of Sam’s questions was how to make and maintain friendships without spending lots of money–a topic I love as I am a very social person who spends very little on socializing! Going out for dinner and drinks is just one way to socialize, but it is by no means the only option.
Sam mentioned that she and Keith enjoy camping and outdoorsy things, which are great ways to spend time with friends, often for very little money. Additionally, she mentioned that their at-home parties have grown more lavish over the years, so now’s the time to rein those back in and focus on making tasty food that’s not overly expensive. Also, encourage potlucks! Provide one dish and have everyone bring a side dish or dessert or drinks to share. No reason for the host to feel obliged to serve an entire five-course meal. Spread the cooking duties around :)!
Since this is such an evergreen topic that comes up quite a bit here in Frugalwoods-land, I want to refer Sam to my posts on how to socialize for free (or cheap):
- Maintaining Friendships And Frugality
- Frugal Hosting Ideas For Hanging Out With Friends
- How To Stop Eating Out According To Frugalwoods Readers
- How We Broke Our Eating Out Habit In 9 Steps
In summary, I advise Sam and Keith to do the following:
- Have a very frank conversation about their future plans and determine how committed they both are to making those dreams happen. Taking the Uber Frugal Month Challenge together would be a great first step.
- Decide what expenses they want to eliminate from their budget and then commit to saving that money.
- Pay off their high-interest debt at an accelerated rate, while simultaneously building an emergency fund, using the savings from step #2.
- After their debt is paid off and their emergency fund fully stocked, Sam and Keith can start projecting what they’d like to achieve with their newfound savings. If they’re able to permanently reduce their spending–and ideally also increase their income–they will be able to either buy a home, or invest, or travel extensively to visit family. If not, then they will continue this paycheck-to-paycheck slog that’s not going to allow them to achieve any of these goals.
- Be confident that they can do this!! As I outlined above, Sam and Keith have the income to knock out their debt in a fairly short timeframe. They should feel great about this wonderful opportunity they have to radically transform how they manage their money and, ultimately, their future. Good luck, Sam and Keith! We are rooting for you!
Ok Frugalwoods nation, what advice would you give to Sam? 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? Email me (firstname.lastname@example.org) your brief story and we’ll talk.
Updates from Sam on August 7, 2018:
First I would just like to say how difficult it was to swallow our pride, and reach out to the Frugalwoods community for advice, especially when all of our friends live the same way we do, attempting to choose a contrary lifestyle was pretty scary.
We consolidated our debts onto a 0% interest credit card for 16 months, cut up the card, set up a direct debit plan and cut our living expenses back to the bare essentials. We recently put a tax return straight on that credit card, and I am so proud to say that we are now debt free for the first time in our adult lives!!!!!!! As an added bonus, when we spoke to friends about not wanting to go out and spend money on entertaining, they were so relieved as they too had been feeling the financial pressure.
Amazingly, our social life is better than it has ever been and costs about $10 a week on average. We are now setting up to invest the extra money we aren’t using to pay off debt, to make extra payments into our superannuation accounts for retirement, and also our new goal is to have 6 months worth of income in the bank. We have cancelled the credit card as it is too much of a temptation to use.
Thank you so much! Your fabulous and fantastic Frugalwoods group has completely changed our lives, we are so much happier, and we have so much more enjoyable quality time as a family together, without spending. The stress of being in debt is now non-existent in our lives.
Never Miss A Story
Sign up to get new Frugalwoods stories in your email inbox.