We’re headed to Arkansas in this month’s Reader Case Study for a discussion with Emily and John, a young couple with a two-year-old and two dogs. Unfortunately, it’s a cancer diagnosis that prompted Emily to request a Case Study, but I’m optimistic that the Frugalwoods community can offer this young couple support, advice, and insight.
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: 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: At Age 57, It’s Not Over Yet! (Lucy’s story, published January 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.
With that I’ll let Emily, this month’s Case Study subject, take it from here!
Hello, Frugalwoods nation! My name is Emily, I’m 36 years old and I live in Arkansas with my 37-year-old husband, John, our two dogs, and our two-year-old son. We thought we had life figured out and were comfortable in cruise control until a health scare flipped our lives upside-down and made us question everything. We’d like to share our story to inspire others to pay off debt early in life, have an emergency plan, enjoy life, and… of course we also have some questions for you!
John & Emily’s Early Years
John and I met in 2005 in Chicago. He was in dental school and I was finishing up my undergraduate degree in business management. We spent our first few summers traveling around the U.S. and South America on a student budget: we camped, ate at grocery stores, and explored off the beaten path places.
We got married a few years later. My parents gifted us $10k that we could either put towards our wedding, or keep for another goal. Neither of us were into event planning–and John was living off his student loans—so we had a small, frugal wedding with close friends and family. It was perfect for us and we saved the money for a down payment for our first house.
When John graduated from dental school in 2008, he had $210,000 in student loan debt. I didn’t have any debt as my parents had generously paid for my education. Next up, we needed to decide where to put down roots. We’d always talked about moving to the mountains of Colorado, Washington, or Oregon. We did a lot of research on dental jobs and the cost of living in these areas and couldn’t come to a consensus on where to move. When a good opportunity opened up in Arkansas–where both of our families live–we jumped on it. John accepted a three-year contract with a signing bonus. Our plan was to spend those three years figuring out where we really wanted to live and pay off some of his dental school debt.
Their First Home
We bought our first home in Arkansas for a modest $150,000. We penny pinched and tightened our budget to pay off the $210,000 of student loan debt in almost exactly three years, just as we’d planned. While we thought Arkansas would be a brief way-station for us, ten years later, we’re still here. And we love it! We’ve met a lot of awesome friends and fallen in love with our town and the surrounding natural beauty. It’s truly a hidden gem in the Midwest. The low cost of living and access to nature check the boxes for what we want. Additionally, both of our families live near us, which is wonderful for us and for our young son!
Hobbies, Careers, and Their Second Home
In our free time, we enjoy endurance mountain and road biking, running, hiking, and boating. John is settled into his dental practice, bringing home $120,000 after taxes, and I work in sales and bring home $48,000. At my previous gig, I was able to get a free MBA through my employer. I love my current job as it’s very flexible and the pay and benefits are good.
A few years ago, we bought our dream house on lakefront property for $645,000. We paid a premium for the location, but we absolutely loved it.
The Health Crisis
In the fall of 2017, John was diagnosed with liver cancer. The news blindsided us. Everything had just started to fall into place with our lives and we were building our family. We were presented with a lot of unknowns from the doctors—treatment timeline, effectiveness, and outcome. We quickly transitioned into emergency mode and started planning for a very different type of future.
Due to some underlying conditions that John had prior to his cancer diagnosis, he would have eventually needed a liver transplant; however, because of the cancer, he may not be able to get a transplant. We don’t know if the cancer or the liver failure will end up being his biggest issue. We feel like our hands are tied at this point as his doctors haven’t been able to give us any concrete timelines.
The prognosis for this type of cancer, combined with his liver disease, isn’t good, but his doctors keep saying that medicine is changing and that due to the many variables in John’s case, it’s unknown what/when something will happen that might help him. Nobody knows if John has a year, 5 years, 10 years, or more. He just finished his treatment for the cancer, so now we’re in the mode of “wait and see.” At present, John is feeling pretty good and recovering from chemo and radiation treatment. We’re trying to live as normally as possible and don’t talk about it a lot, but it’s in both of our minds all the time and factors into our financial planning and decisions. Since the diagnosis, it’s been REALLY hard to plan/talk about the future because of the uncertainty. Plus, it’s not exactly a fun topic. However, realistically we all live with this uncertainty because we could be hit by a bus tomorrow! Somehow putting it in that perspective makes me feel better.
Due to John’s preexisting liver condition, we’ve never been able to get reasonably priced life insurance on him. We decided to save our money and focus on building our investments instead. We also value the bit of life insurance that we get from our employers as it isn’t biased against pre-existing conditions.
The Decision To Downsize
We were thankful that at the time of John’s diagnosis, we had saved up a $100k emergency fund–a mix of cash and investments, but we decided not to touch it and to instead sell our house. The decision to sell our “dream home” ended up being an easy one. Financially, it made complete sense and any emotional attachment we had to the home was dwarfed by the other emotions we were going though. In the end, we decided that it’s just a house and not worth any financial strain it might bring.
We wanted to sell our home ourselves in order to avoid paying realtor fees of $30K-$40k. We staged the house, took pictures, and posted it on Zillow’s Make Me Move. By the following weekend, we had two full-price offers. It happened so much faster than we had anticipated, but we plowed ahead and closed on the house just one month later. We cleared $350k on the sale and depositing that check felt pretty awesome.
We were able to turn around and pay $300k cash for our new (65-year-old) home, so now we’re mortgage free. (Yes, we did consider living in a pimped out Sprinter van and traveling the country or moving to Costa Rica, but that’s not practical with John’s cancer treatment schedule).
Questioning How We Use Our Time
John and I have always been very focused on working hard, making a lot of money, and saving a lot of money. For our whole lives we’ve followed the tried-and-true formula for success: getting the right education, climbing the ladder, and running the rat race. Financially, it all played out as promised. But then cancer happened, and this has caused us to look at life with new eyes and think about how we want to spend our time.
Although we’re now debt free (except for a 0% car loan, which we are choosing not to pay off early), we don’t know what the next few years hold for us. We’re trying to prepare financially for a number of different and unknown scenarios. We’re also focused on being optimistic and enjoying life. It’s a challenging balance.
Questioning How Much We Want/Need To Work
Being debt free has also given me the luxury to reconsider work and how it fits into my life, and I’m on the fence about what to do. I defiantly want to retain the security of my well-paying job with benefits, but I want to slow down. I work 40 hours a week, but would love to cut down to 32 hours and spend more time with our son.
I carry our healthcare benefits, and 32 hours is the minimum I can go down to and maintain coverage. This would result in approximately $16k less in take home pay from me. My work is pretty flexible right now, so that’s why I’m so on the fence about whether or not it’s worth it for me to cut back.
Where Emily and John Want To Be In 10 years:
Lifestyle and Career:
- I used to have a plan for 10, 20, even 40 years into the future, but it all seems so unclear right now. Ideally, we would be continuing to do a lot of what we do now. John would be healthy and working just three days a week—spending his free time biking, boating, and golfing. I’d be at my same company, probably in a more senior role with more flexibility for remote working.
- We could take long trips in the summer during which I could work remotely. Our son would be 12 and maybe we’d even have another child. I’d also like to be more involved with community organizations that I was previously involved with.
- We might want to have another child, but that isn’t an immediate goal. We’ve decided to reassess in a year to see where things are with John’s health
- We plan to stay here in Arkansas for the longterm and have no plans to relocate.
- We want to pay for our son’s college education and be able to help get him get started in life, like my parents did for us. We do plan on requiring that he has a job–as we both always did growing up—and pays for his own car or car insurance.
- Other than saving for retirement and college, we don’t have any big financial goals in the future that are different from what we’re currently doing.
Emily and John’s Finances
|John’s Income||$10,000*||After taxes and 401k max.|
|Emily’s Income||$2,800||After taxes, 401k max, FSA childcare, HSA contributions, and health insurance.|
|Interest||$100||We get 2.25% back on one of our accounts and 1.5% on another.|
*John’s income will reduce to $6,666 starting in June when John reduces his hours to 3 days a week
**Their monthly income will reduce to $9,566 starting in June when John reduces his hours to 3 days a week
***Their annual income will reduce to $114,800 starting in June when John reduces his hours to 3 days a week
|Car payment||$753.00||0% interest car payment; 3 years left until it is fully paid off.|
|Daycare||$700.00||We pay $40/day and sometimes grandma watches him.|
|Medical||$675.00||We reach our out of pocket max of $6,000 every year. This covers that plus additional expenses such as vitamins, probiotics, and over the counter items.|
|Vacations||$600.00||We are prioritizing vacations right now.|
|Groceries||$532.00||I try to bargain shop, but I think we just eat a lot of food.|
|Household Items||$475.00||This includes home improvement, furniture, décor, kitchen things, cleaning supplies, lawn mower, ladder, hoses, fertilizer, toilet paper, dish soap, sandwich and trash bags, etc. We don’t need any more furniture or décor, and I think we’re set on equipment, so I hope to see this number go down.|
|Sports/Hobbies||$433.00||Biking and sports gear, race fees, tires, parts, team clothing, special gloves, helmets, and other equipment.|
|Taxes on house||$423.00||We pay this annually, but budget monthly|
|Utilities||$215.00||Electricity and Gas|
|Work-related expenses||$175.00||License renewal, CE courses, and staff gifts/lunches.|
|Dining Out||$162.00||We try to limit dining out and feel comfortable with this dollar amount.|
|Gasoline for cars||$155.00||Gas for our two cars. This is the average per month, so it includes longer trips.|
|Life Insurance||$127.00||We have some life insurance through our employers, about $200,000 on John and $150,000 on me.
We have two additional policies that we pay for every month though other parties: $82/month for $100,000 of life insurance on John and another $45/month for AD&D on John–this wouldn’t cover anything related to cancer. The value is $300K (this policy also covers $150,000 on me–less because I’m not the head of household). I don’t have any additional policies on myself.
|Fast Food||$110.00||I’d like to reduce our fast food spending|
|Home Insurance||$98.00||Through Progressive|
|Dogs||$75.00||Vet visits and food for our two dogs|
|Clothing||$69.00||We don’t buy clothes and shoes often, but this is the average per month, including boots and shoes.|
|Car Insurance||$67.00||For both of our cars, though Progressive.|
|Boat||$65.00||We own a boat and this is the cost for winterizing, maintaining, and gas (average monthly cost)|
|Child Expenses||$60.00||Diapers, used clothing and toys, carseats, gear, misc items.|
|Cell phones||$46.00||We have Straight Talk with unlimited data. Each of our phone plans is 45.95, but my work pays for mine.|
|Administrative||$35.00||Fees for licenses, passports, checks, etc.|
|Entertainment||$32.00||Concerts, movies, yoga classes, art classes, fun social events|
|Crafts||$28.00||Supplies throughout the year (fabric, paint, pens)|
|Personal Care||$25.00||Great Clips hair cuts for John, 3 cuts a year for me at the Salon School for $10, Misc makeup, lotions, etc. I rarely buy makeup.|
|Gifts||$19.00||The monthly average of the whole year.|
|Netflix||$10.50||We like to watch shows a few times a week.|
|Amazon Prime||$8.25||I save money (and valuable time!) with Amazon. No more mindless browsing at Target! Plus the movies are great.|
Monthly After-Tax Investments
|Roth (back door)||$916||Lump sum contribution ($5,500 x 2) averaged per month|
|Vanguard Mutual Funds||$900||Automatic monthly investments into Vanguard mutual funds|
|529 College Savings Plan||$267||We save approximately $3,200 per year towards our son’s higher education (this is the maximum that the state offers in income tax deduction).|
|Monthly after-tax investments total:||$2,083|
|Annual after-tax investments total:||$24,996|
Amount Leftover Every Month
|Amount leftover every month after all expenses and after-tax investments||$4,599.25||This is used for additional investments, home improvements, and discretionary spending.|
|House||$300,000||We are mortgage free!|
|401k (John)||$231,500||John gets a $2,000 contribution from his employer per year|
|Mutual Funds (through Vanguard)||$108,500||Brokerage account, 100% mutual funds|
|401k (Emily)||$108,150||My employer doesn’t contribute|
|High yield savings account (through Goldman Sachs)||$61,000||This is our emergency/saving account. 1.6% return; no fees.|
|Roth (John)||$49,000||Max out every year.|
|Roth (Emily)||$48,000||Max out every year.|
|Brokerage account (through Charles Schwab)||$37,000||Brokerage account, mixture of individual stocks ($8 per trade, no fees).|
|Esop + Profit Sharing (Emily)||$28,800||Instead of a 401k match, my company allocates about $6k/year between an ESPO and Profit sharing account.|
|High yield checking account||$17,000||Checking/$15k of emergency money. We maintain at least $15k in this account due to a guaranteed 2.25% return on the first $15k.|
|529 college savings account||$8,880||Our son’s higher education fund|
|2017 Mazda CS6||$30,000||We owe $25,430 on this car. We decided to buy new because of the 0% interest rate.|
|2013 Toyota Forerunner||$17,000||Paid off|
|Owed on 2017 Mazda CS6||$25,430||Our car payment, which we are choosing to continue to make payments on because of the 0% interest|
Emily’s Questions For You:
- Should I reduce my workload to 32 hours a week, or stay at 40 hours in order to stash away that extra $16k per year?
- We’re really focused on enjoying life right now, but trying to balance that with a saving/wealth-building mindset. Can we afford to maintain our current spending and work less? Or, should we be thinking about this differently?
- Can anyone who has gone through a cancer diagnosis let me know what else we should be thinking about?
- Should we be investing our money any differently?
- Should I loosen up about our money and stop agonizing over expenses because we’re doing well? Or should I try to save even more because of the unknowns?
Mrs. Frugalwoods’ Recommendations
I want to start off by thanking Emily for opening up her finances and life to us in this Case Study. It’s difficult to discuss money and it’s even more difficult to discuss challenging health issues and she has done both with grace and aplomb. I applaud Emily and John for being so open about their circumstances and for seeking out advice during what is surely a tumultuous time in their lives.
Emily and John have done a lot of things right and I want to congratulate them for their fiscally responsible decisions to:
- Pay off their debt
- Save up an emergency fund
- Contribute to their retirement accounts
- Invest in the stock market
Very well done on all of these fronts! These four steps are the first four steps that almost everyone should take in an effort to improve their financial situation.
I also want to highlight John and Emily’s prudent decision to sell their $645K home and purchase a much less expensive home to live in–mortgage free!!! Emily really hit the nail on the head when she said: “In the end, we decided that it’s just a house and not worth any financial strain it might bring.” Such great insight and such a great decision. They’re now mortgage free and thus able to direct their money into their savings. This excellent decision has provided them with quite a few more options than they might otherwise have at this stage in their lives.
Work Life Balance
I am so glad that Emily and John have made the decision to prioritize quality of life and to look for ways to spend more time together as a family and less time working. This is the perfect illustration of my advice to always save more money than you think you’ll need because you never know what’s going to happen in life. Since John and Emily had the ability to save over the years–after paying off their debt in spectacular fashion–they’ve given themselves flexibility in how they think about their time and their work schedules. By earning good salaries and being mindful about how they use their money, John and Emily are demonstrating the freedom you can create for yourself when you’re not in debt and not living paycheck to paycheck. While no one wants a cancer diagnosis to be the thing that brings them to this realization, John and Emily have put themselves in a good position to take advantage of working less at this stage of their lives. If you ever needed an example of why it’s imperative to whip your finances into shape ASAP, please take John and Emily’s story to heart.
Ok, let’s break down the reduction in hours and pay that John and Emily are considering. John is already on track to reduce his hours to 27 hours per week (woohoo!) and Emily is pondering reducing her work hours to 32 hours per week, which would allow her to retain the family’s healthcare benefits, but would give her more time at home. Here’s what those reductions would look like in terms of their income:
|After-tax Net Income||Current Monthly Income||Monthly Income with JOHN ONLY Reduced Hours||Monthly Income with John AND Emily Reduced Hours|
|Interest (cash back)||$100||$100||$100|
Of course the other side of this equation is their spending. At present, John and Emily spend $6,217.75 per month on expenses and $2,083 per month on after-tax investments (way to go on investing!!). This is a grand total of $8,300.75 every month (or, $99,609 per year). According to the above chart, they could easily maintain this level of spending and investing with John reducing his hours, but would be overspending by $201.75 every month if Emily also reduced her hours. However, I still think it’s very possible for Emily to reduce her hours if the family can commit to reducing some of their expenses.
Emily reducing her work schedule in order to spend more time with her family is ultimately a personal choice that she alone can make. This is really a question of money vs. time: Would she rather spend more and work more or spend less and work less?
In order to help Emily and John figure out how they might make a reduction in her hours tenable, let’s take a look at their expenses.
John and Emily are absolute pros at tracking their expenses. This is one of the most thorough, thoughtful and complete rundowns of spending that I’ve ever seen (and I’ve seen a lot of people’s expenses over the years!!). Emily told me that she’s been judiciously tracking their spending for several years and has a great idea of exactly what they spend. You’ll note that she has accounted for one-off large expenses that we all incur, such as a lawnmower, along with the more standard groceries and utilities bill expenses.
Looking at just one month of spending DOES NOT give you the full picture of your true annual spending since we buy different things every month. Just take a look at my wild and crazy April spending for an example! The only way to truly know what you spend in a year is to track every single month for many years. This is why I use and recommend Personal Capital for the task of tracking expenses–I find it a lot easier to automate and track through their website than writing it all down myself. However you do it, financial management starts with knowing what you spend. 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.
All that to say, HUGE CONGRATS to Emily for having a thorough handle on what her family spends every month. Now, let’s see if we can identify some areas for savings in order to allow Emily to reduce her work hours.
In every single Case Study, I like to point out that what you choose to save or not save is a very personal decision. Cutting every last expense is NOT the right answer for everyone and I am NOT an advocate for making yourself miserable in the process of achieving financial stability. I AM an advocate for values-based, goal-oriented spending. I think it’s important to assess whether all of your expenses bring you fulfillment and a good return on your investment.
I think it’s also important to question if your rate of savings will help you to achieve your long-term goals. But what you spend on? That’s a very personal choice and one that you have to make for yourself. My job is to point out areas where you might be able to save, but only you can decide if that level of savings is right for you. If you’re struggling with where to save more and how to map out a longterm financial plan, I encourage you to take my free 31-day Uber Frugal Month Challenge.
If Emily decides that she wants to reduce her work hours, she will need to cut back the family’s spending by at least $201.75 in order to break even every month (assuming she wants to maintain her current level of after-tax investments, which I advise doing).
Here are some areas where John and Emily could consider reducing their spending:
- Unfortunately, their largest monthly expense–their $700 car payment–isn’t easy to reduce or eliminate. While I’m glad they have a 0% interest rate, this is why I advocate for buying used cars. It isn’t just the interest rate that gets you with a new car, it’s also the incredible mark-up and resulting depreciation of a new car. I have several posts on why buying used is wise for anyone currently considering buying a car. However, this is already done for John and Emily and I wholeheartedly agree with their decision not to pay this loan off early. Since the interest rate is 0%, there’s no financial reason to pay it off early.
- Their daycare bill is extremely reasonable and it’s wonderful that grandma helps out in that regard!
- At $600, their vacation line item is pretty expensive, but I also completely understand that they are prioritizing vacations right now. I wonder if they’ve looked into travel hacking? Since John and Emily are so organized and responsible with their money, they might find great benefit in using credit cards to earn travel points. If they’re interested in getting into travel hacking, I recommend the free Travel Miles 101 course and using this site to search for a card that’ll best fit their needs. And for travel rewards cards specifically, check out this list curated by my friend Brad (from Travel Miles 101). I respect Brad’s work in the travel rewards space and I trust his advice on which cards will reap the best benefits.
- $532 for groceries for three people isn’t shabby at all, but when you add in their other two food categories–dining out at $162 and fast food at $110–that’s a whopping $804 on food. Emily noted that they’re happy with their dining out budget, but would like to reduce the fast food category. That sounds like a great idea and a good place to start. There’s nothing wrong with spending this much on food, but, if Emily is sincere in her desire to work less, this is one of the easier areas to reduce. Here are a few posts for inspiration:
- At $475, household items is another area that seems ripe for reduction. Emily mentioned that she hopes this number will go down soon, so it sounds like she already has her eye on it. Might be another easy area to shave off some $$$!
- $433 for sports & hobbies seems like a lot to spend per month (that’s $5,196 per year!), but, I am a major proponent of values-based spending and if this is something that brings John and Emily joy, then it’s worth it. I do wonder if there might be any opportunities to barter and trade for any of these items instead of paying for them?
- For cell phones, $46 isn’t terrible, but there are several low cost providers that are cheaper. I recommend John check out Ting, Republic Wireless and Boom Mobile to see if he can get a better deal. I pay $19.99/month for Boom, and the other two are often even cheaper (I have Boom because it’s the only one that gets service out here in rural Vermont). This could be an easy way to save every month!
In general, since Emily has a very specific goal here–to work fewer hours–and a very specific dollar amount by which they’d need to reduce their spending in order to break even ($201.75), I don’t think she’ll have any problem identifying areas where they can make up this difference by saving more.
Emily asked about their investments and, in general, I think they’re doing a terrific job. Once again, having an emergency fund, traditional retirement accounts, and a brokerage account is the perfect trifecta of money management for most people. Well done, John and Emily!!
One thing that jumps out at me is that John and Emily have two different brokerage accounts (one at Vanguard and one at Schwab) and both a checking and a savings account. Since I’m a fan of simplicity, I’d combine these accounts from four down to two. In general, I recommend investing in low-fee index funds and Vanguard is an excellent brokerage to use for this. At their level of assets, I recommend VTSAX, which is Vanguard’s low-fee total market index fund. Index funds mean that you’re invested across the entire stock market and low-fee means you don’t pay a ton in fees, because you manage your account yourself.
I would close the Schwab account because I’m not a fan of holding individual stocks and would rather see all of their money in index funds, since this is the most diversified way to invest. For more on this approach, I highly highly highly recommend the book, The Simple Path To Wealth.
Then, as far as I can tell, the $61K and $17K cash accounts could be combined. Since their checking account is high-yield, I see no reason to have two separate accounts here, but I might be missing something. Additionally, I want to note that $78,000 is a HUGE amount of money to have liquid (and not invested). However, I completely understand why John and Emily have such a large amount of their money liquid. They have a great deal of uncertainty in their future and having cash on hand is a good idea when you’re facing health uncertainties like they are, or when you’re planning on putting a downpayment on a house, or buying a car, or any other situation that might require a massive influx of cash. So while I think it’s fine for John and Emily at present, it is something for them to keep an eye on since, in the future, they may wish to allocate more of this money into their investments as opposed to keeping it liquid. In general, I wouldn’t keep this much money liquid unless I had a specific reason to do so for the simple fact that they’re missing out on potential market gains if the money was invested.
Another topic I want to spend some time on here is life insurance–more for the edification of anyone reading this and less for John and Emily. Since John and Emily are unfortunately grappling with John’s cancer, I want to point out that this is a reason to carry life insurance. There are endless unknowns in life and life insurance is a way of buffering against some of these calamities. No one likes to think about their mortality in such granular terms, but having life insurance is a fairly easy step you can take to ensure that your family–particularly if you have dependents–is taken care of should you pass away unexpectedly.
How much life insurance do you need? Most people should carry enough life insurance that, if they passed away, their partner and family would be able to maintain their existing lifestyle indefinitely. For single people without dependents, life insurance is usually unnecessary (unless you have any other family members you are financially responsible for). Emily noted that they’d been unable to get robust life insurance on John due to his pre-existing liver condition, but that they do have some insurance.
However, since they don’t have enough life insurance to replace John’s salary for the longterm, I encourage Emily to consider how she might either adjust the family’s spending or increase her income (or both) to provide for herself and her son should John pass away. Emily’s current income is $2,800/month, but the family’s spending is $6,217.75 per month (plus the $2,083 per month in after-tax investments). Since they are mortgage-free, Emily has a lot of flexibility in examining their spending and we outlined a few ideas for reduction above. It’s also true that Emily has a fantastic safety net–$78K in cash and $145,500 in investments–but she won’t want to draw down all of this to cover living expenses. And, while it’s a robust net worth, it’s not enough to provide for the family for the longterm. Thus, while I agree with Emily and John’s decision to reduce their working hours and focus on enjoying life together as a family, they can make this a much more financially viable option by reducing their spending as well.
What I want to point out here is that life insurance (and emergency funds and investments) are not just for people with cancer. They’re not just for people facing a known obstacle or health crisis; they are for everyone because you absolutely never know what’s going to happen in life.
If you don’t have life insurance and are wondering if you should get some, there’s a website called PolicyGenius that offers a free online insurance calculator and policy comparison tool. What I like about PolicyGenius is that it has you take a quiz that asks specific questions about your income and your spending as well as other details about your life. And then, unlike most life insurance calculators on the internet, PolicyGenius doesn’t require you to input any personal contact information in order to view the results of your insurance needs quiz. This means they’re not going to inundate you with tons of spam trying to sell you insurance you don’t need.
Most other online calculators require you to input your email address because they want to sell it to a bunch of brokers who will then hassle you mercilessly for time and all eternity. Instead, PolicyGenius utilizes an algorithm to match your situation to specific insurers who will insure you, and it clearly displays how much this coverage will cost. You’re not locked into buying life insurance by using PolicyGenius; rather, they give you an idea of what life insurance would cost for you from a bunch of different companies. It’s a way of learning what you need and then comparing costs between different insurers. All in all, it’s a pretty low-stakes, easy way to assess your life insurance needs. (Full disclosure: we receive a small amount of money if you end up buying insurance through PolicyGenius, but I’m only telling you about them because their service is free and I think they do a good job).
In closing, John and Emily are doing great and I recommend they do the following:
- Decide if Emily would rather work less and spend less or work more and spend more (there’s no right answer here, it’s all about what Emily values most at this point in her life).
- If Emily wants to reduce her work hours, I advise she identify where they’ll be saving that additional money from every month BEFORE she drops down in hours, so that they’re not blindsided by overspending in their first month of lowered income.
- Since Emily’s salary won’t cover all of their living expenses should John pass away, she should be thinking about how she plans to cover these expenses on her salary alone. Increasing income and/or reducing expenses will be the answer.
- Enjoy life! I love, love, love John and Emily’s focus on positivity, optimism, and time together. I encourage them to work through items #1-3 and then enjoy life with their son and dogs!
Ok Frugalwoods nation, what advice would you give to Emily? She and I will both reply to comments, so please feel free to ask any clarifying questions!
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Update from Emily on 10/29/18:
John ended up being approved for a liver transplant–something we’d once been told would never be an option. The tumor in his liver appears to be dead, and there are no signs of metastasis. He’s in advanced liver failure now due to the chemo, radiation, and PSC, and we are waiting for a transplant.
We temporarily relocated to another state two weeks ago to wait for a liver. Once he gets a transplant, we will need to be here for an additional couple months while he recovers. We’re renting a furnished apartment and just brought a few clothes with us. We re-homed our dogs a couple months ago, which was a big stress relief. I’m taking intermittent FMLA to care for him and working from home part-time. I decided not to reduce my work hours. I’m still contracted at 40 hrs/week, but with the intermittent FMLA that I started this week, I’m working 24 hours per week so that I can care for John. I can use a total of 12 weeks (60 days) of FMLA in a calendar year, so using it at this rate will mean I can work 24 hours per week until mid-April.
Our son is being cared for by grandparents while we wait for a liver–we miss him so much and hope he will be able to join us soon. Our friends and coworkers raised money to help us pay for living costs, and insurance is covering the cost of the transplant. Now we wait and hope he gets a liver in time! Hopefully my next update will have positive news!