Reader Case Study: Artfully Building a Solid Financial Future in Southern Maine
Lynn is an art teacher in southern Maine, where she lives with her husband Lucas, a carpenter, and their ten-year-old son. Lynn loves teaching art but loves creating art even more and would like to have more flexibility and balance in her life.
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.
Case Studies are updated by participants (at the end of the post) several months after the Case is featured. You all requested an easier way to track Case Study updates and I have heard your pleas :)! I’ve created this page, which lists and links to all of the updated Case Studies.
I probably don’t need to say the following because you all are the kindest, most polite commenters on the internet, but, please note that Frugalwoods is a judgement-free zone where we endeavor to help one another, not to condemn.
And a disclaimer that I am not a trained financial professional and I encourage people not to make serious financial decisions based solely on what one person on the internet advises. I encourage everyone to do their own research to determine the best course of action for their finances.
With that I’ll let Lynn, this month’s Case Study subject, take it from here!
Hello Frugalwoods! I’m Lynn, a 39-year-old art teacher living in southern Maine with my husband Lucas (41), our son (10) and our dog (4). We live in a small 100-year-old house in a close-knit neighborhood in the suburbs. My husband and I met in art college and moved to Maine after graduation. My husband took a job as a carpenter and has been building and remodeling houses ever since. I spent years cobbling together various art and non-art related jobs before returning to school to get my teaching certification.
I’ve been teaching art at a public school for seven years and, while I enjoy it, my dream is to someday have my own art center. Once I’ve finished grad school, I’d like to start teaching private art lessons on the side. My hope is that I can slowly take on more classes and gradually transition out of teaching public school.
Lynn & Lucas’ Early Years
Lucas and I got married in 2008 in the most frugal way possible: by our friend’s mom who was a notary public. We said a quick “I do” and then went out for sushi! The following weekend we celebrated with a cookout for our friends and family. Less than a year later, our son was born. The first few years of parenthood were really rough for us financially as we tried to juggle working lackluster jobs and paying for daycare. I worked part time when my son was very little and Lucas worked for a contractor who sometimes went months without paying him.
We managed to pay our bills, but we were always just barely scraping by. I was constantly worried about money, but I got really good at stretching a dollar. I went back to school for my teaching certification when my son was two.
Lynn’s Student Loan Debt
I have student loan debt from when I returned to school the first time around. I’m enrolled in an income-driven repayment plan that qualifies me for Public Service Loan Forgiveness. I’ve been diligent about filling out paperwork and re-certifying every year, but this debt keeps growing and it makes me very nervous. I am on track to have my loans forgiven in four years… hopefully the program is still there when I am done!
Lynn’s Free Master’s Degree
I’ve been teaching art for seven years and am currently working on an online master’s degree in Art Education. My school district pays for up to four courses per year, so by stretching the coursework out over three years, I won’t have to pay for a single course. I do have to fly out to the college to take an on-campus studio class this summer and next, so I’m paying for my travel and accommodation expenses. When I complete my degree next summer, I’ll have a Masters plus 30 credits and will move three steps up on the pay scale, which means a raise of approximately $11,000. Lucas and I have never been high earners; my teaching job pays the most either of us have ever made (ha!).
Despite never making a ton of money, over the years we’ve managed to pay off our undergraduate loans, both vehicle loans, and about $6,000 of credit card debt from back when we didn’t have two pennies to rub together. I credit a lot of this progress to You Need A Budget (YNAB), which I began using four years ago. Using YNAB, we were able to move from living paycheck to paycheck, to building up a buffer and smoothing out the inconsistencies in Lucas’ pay.
My husband is an excellent carpenter, but as a sub-contractor, his career was plagued with highly irregular pay and several dishonest employers. This past year he decided enough was enough and quit to look for a new job. We’d saved up a decent emergency fund and that, combined with a lot of belt-tightening and a few odd jobs, got us through several months with only one full-time income.
After a brief stint as a Maintenance Technician, Lucas realized he could make more money working for himself, and so a few months ago, he started his own business. He’s been a self-employed carpenter for years, but this is his first time working completely solo, and he loves it! It also allows him to be creative in his work, including building decks, remodeling basements, and creating custom trim and cabinetry. So far he’s been landing jobs by word-of-mouth, but we put together a website and business cards as well (if any of your readers have suggestions for other ways to drum up business, please share!).
Unfortunately, being self-employed again means that his income is totally unpredictable. We’ve talked about the possibility of buying an investment property for him to fix up, but even if we borrowed equity from our house, we still wouldn’t have enough capital and the thought of taking on another mortgage gives me hives.
Lynn and Lucas’ House
We bought our 1920’s 1,100 square foot house back in 2005 during the height of the housing bubble when we were young and optimistic (and clueless) with excellent credit scores and no money down! For almost a decade we were house-poor and underwater as the value of our house plummeted, but we managed to hang in there. We refinanced out of our 30-year mortgage a couple years ago to take advantage of low interest rates and managed to shave off 4 years by switching to a 15-year mortgage.
Since then, the housing market has rebounded and the house is now worth quite a bit more than we paid for it. We’ve done a lot of work to the place and we try to do at least one or two projects per year. This past winter I patched and painted the closets, while Lucas retiled the bathroom and replaced the toilet. This summer we’re painting the formerly faded and peeling yellow exterior a happy blue. We pay for these renovations in cash and do all of the work ourselves.
One renovation we’ve always dreamed about doing is adding a garage/addition to the house. We have no storage in our house other than our small damp basement and a shed, both of which are crammed full of Lucas’ tools. As part of the renovation, we would turn the space above the garage into an art studio. I currently have a small space set up in our enclosed porch at the back of the house, but it is tiny and COLD in the wintertime. I would like to be able to teach private art lessons down the road, and it would be awesome to have a proper studio space.
Lynn & Lucas Love Maine
I love living in Maine. There’s a reason they call it Vacationland – it’s beautiful here! We live fairly close to the ocean and in the summer we go to the beach all the time. My husband takes our son fishing at nearby lakes and streams. We have family who live up in the mountains and we like to go for hikes in the woods.
In the wintertime we like to sled, skate, and play hockey – every year Lucas builds a skating rink in our backyard. We also like to play nerdy board games!
We try to go on one camping trip every summer. We’ve visited Bar Harbor and Acadia National Park in Maine, the White Mountains of New Hampshire, and this summer we will be camping in Canada along the Bay of Fundy in New Brunswick and Nova Scotia.
Now that our son is older, I’ve gotten back into art-making and have sold a few paintings here and there. I like to listen to music and podcasts while I work. In the summertime I paint quite a bit, and usually take an art class or workshop. Unfortunately, during the school year I have much less time for my artwork, other than squeezing in a little between my graduate classes.
Lucas likes to brew his own beer for fun. It’s delicious, but not super cost-effective and it’s one of the first things that gets cut when money is tight. When he was job hunting, he looked into working at a couple of breweries, but the pay wasn’t very good.
Our son plays the drums, and he’s been taking private lessons for the last two years. It’s a great way to channel his boundless energy! At $100/month, these lessons are a huge splurge for us, but one that we feel very strongly about. Since he began, he has learned so much and has really developed a sense of pride in his drumming. I got his drum kit second hand on Craigslist for a steal! Readers who have been paying attention will remember that we don’t have a garage. Our son’s drum kit lives in a tiny office space upstairs; even with the door closed, it’s still a bit loud!
Lastly, I cannot talk about our lifestyle without mentioning our wonderful, crazy, four-year-old black and white lab mix! We adopted her from a local shelter that was having a “puppy sale” – we like to say we got her on clearance! Needless to say, she is worth every penny.
I really enjoy teaching art, I have great students and it’s very rewarding, but the school year can be a real grind. Prepping for, instructing and grading multiple classes of students with a wide range of abilities is challenging. I take a lot of work home with me and I often go to my classroom on Sundays when I need to catch up. And then there’s a lot of other stuff that comes with the job: meetings, emails, reports, data gathering, observations, recertification, etc. It seems like every year, teachers at my school are presented with another new initiative or hoop to jump through (or several). Many of my coworkers are jaded and unhappy.
In the summertime, I feel like a completely different person. I “work” throughout the summer on renovation projects and I usually take at least one class or workshop, but my life feels so much more balanced. I actually have time for my artwork, I am able to visit with friends more, and I get to spend real quality time with my son.
I don’t know if I would ever realistically be able to achieve financial independence, but I would like greater flexibility in my life. My someday dream is to open a small art center/workshop with a gallery where people of all ages can take classes, show their work, and become part of an art community.
Where Lynn and Lucas Want To Be In Ten Years:
- Finances: I would like to max out our IRA contributions and also begin contributing to other retirement accounts (solo 401k, 403b, etc.).
- In 10 years our son will be 20 and either in college or trade school or working. We have no college savings for him (I have read it’s better to “put your own oxygen mask on first” and we need to catch up on retirement big time). If he chooses to go to college, we’ll encourage him to go to community college and/or state school.
- Lucas and I have also talked about purchasing a fixer-upper to renovate and then either selling or renting it for a profit.
- Lifestyle: I would like to be able to travel more. A big trip every year or two, maybe somewhere outside the US. Ideally, I would like to be working less and making more art.
- Career: I would like to have my own art center. Once I’ve finished grad school, I’d like to start teaching private art lessons on the side. My hope is that I can slowly take on more classes and gradually transition out of teaching public school.
Lucas and Lynn’s Finances
|Lynn’s net income||$2,899||Lynn’s net salary minus the following deductions: health and dental insurance, FSA, union dues, car insurance through Horace Mann, and taxes|
|Lucas’ net income||$2,526||This is the average of Lucas’ pay over the past 3 months of working for himself, minus the following deductions: self-employment tax, tools and materials, insurance, etc. His average over this past year with several months of unemployment was $831.53|
|Miscellaneous income||$338||Includes art sales, tax refunds, interest, gifts, rebates, etc.|
|Mortgage||$1,318||This includes property tax and insurance. We have about 12 years left on our mortgage. We have a 15-year fixed-rate mortgage at 2.75% with $128,076 left to pay.|
|Groceries||$546||We shop at Hannaford’s and BJ’s Wholesale.This includes coffee, beer, dog food and some household goods.|
|Lucas IRA automatic deposit||$300||With Betterment. I recently starting contributing the dollar amount of my former car payment as well as what we used to pay for cable.|
|Lynn IRA automatic deposit||$300||See notes above.|
|Gasoline for cars||$210||Lucas drives a lot for work. We also frequently visit friends and family who live anywhere from 30 minutes to 3 hours away from us.|
|Lynn’s Student Loan Payment||$171||With FedLoan Servicing. I’m enrolled in an income-driven repayment plan that qualifies me for Public Service Loan Forgiveness. I’ve been diligent about filling out paperwork and re-certifying every year, but this debt keeps growing and it makes me very nervous. I am on track to have my loans forgiven in four years. This monthly payment will decrease soon since our income dropped significantly this past year.|
|Home Maintenance||$154||For repairs and renovations. This year we did a small bathroom reno and are currently painting the exterior of our house.|
|Car Maintenance||$147||Repairs, inspections, registrations, oil changes, tolls, etc. for both vehicles|
|Heating Oil||$144||Maine is cold. This amount also includes a furnace cleaning.|
|Cell Phones||$137||T-Mobile. This total includes five lines: Lynn, Lucas, Lynn’s dad, a friend who pays for his portion of the bill, and a line for our son’s tablet. *I just read the Frugalwoods MVNO article and will look into this pronto!*|
|Medical||$121||Includes medical and dental copays, prescriptions, contact lenses etc.|
|Son’s Drum Lessons||$100||Our son has been taking drum lessons once a week for two years now. This is a pretty big splurge for us but one that feels very worthwhile.|
|Clothing||$94||For all three of us. This seems high to me, but because I went many years buying very few items, I am having to replace a lot. I HATE clothes shopping and if I find something I like that fits well, I will often buy two. I have been dabbling in thrift store shopping and the online store ThredUp.|
|Restaurants||$89||We eat out about twice a month. We try to pick food that we wouldn’t make at home (sushi, Thai, etc.).|
|Utilities: Electricity||$87||Our electric used to be much less, but we started running a dehumidifier and a sump pump in our damp basement, which both eat a lot of electricity.|
|Vacation||$83||This money goes toward our annual camping trip as well as smaller day trips. Two years ago we travelled to California to visit my sister and her family. Eventually I would like to be able to afford to travel more.|
|Internet||$66||This is High Speed internet through Spectrum. We’re looking into a competitor to see if we can get a cheaper rate.|
|Utilities: Water||$63||This is usually lower except in the winter when Lucas floods the backyard skating rink.|
|Birthdays, Gifts, Holidays, Parties, etc||$62||Birthday parties, shower gifts, Easter, etc. Honestly this seems SO high to me, but both my best friend and my sister had babies in the last year, so that’s a big chunk right there.|
|Son’s miscellaneous||$55||School supplies, allowance, hot lunch once a week at school, iTunes song purchases for drum practice, occasional book fair purchases, etc.|
|Pet expenses for our dog||$54||Includes pet medications, veterinary costs, and general supplies|
|Christmas||$47||Gifts, Christmas tree and decor, stamps for cards, etc. We only buy gifts for the kids in our families, but our families keep growing!|
|Family Entertainment||$38||Bowling, mini-golf, movies, etc.|
|Life Insurance (both Lynn and Lucas)||$34||We each have a $200k term life policy through Horace Mann.|
|Household Goods||$30||Usually bought at Target. Toothpaste and other toiletries.|
|Lucas’ Stuff||$22||Beer-making supplies, art supplies, fishing license, etc.|
|Lynn’s Stuff||$22||Art supplies, school fees, plane ticket for summer course|
|Haircuts||$15||I cut both my husband and my son’s hair. I get my notoriously disobedient hair cut about five times a year by my very talented (and inexpensive) stylist.|
|Charitable Giving||$15||Toys for tots, GoFund Me, and other small donations. Eventually I would like this category to be larger.|
|Netflix||$9||We recently cut cable and are funneling the $50/month savings into our IRAs.|
|Joint Checking Account||$9,808||This is our everything account for: bills, savings, etc. I’ve been trying to build it back up to at least a 3 month buffer. This account earns 4% interest through our credit union up to $15,000.|
|Lucas’ IRA||$9,103||Through Betterment|
|Lynn’s IRA||$6,894||Through Betterment|
|Lucas’ Business Checking Account||$3,242||This account is for Lucas’ tools and materials, taxes, insurance, etc. This account will accrue interest once it reaches $5,000.|
|Lynn’s Pension 401(a)||TBD (see notes)||Lynn’s teacher pension is based on the following formula: Average of 3 highest paid years x Years of service x .02. I’ll be eligible for this at age 65.|
|Lynn’s Student Loans||$34,205||Average interest 6.3%. I pay $171/month in an income-based repayment plan. The balance on this loan keeps growing. If all goes well, it will be forgiven in four years through the Public Service Loan Forgiveness program.|
|Hyundai Santa Fe Sport 2014||$10,000||78,000 miles; paid off as of this spring|
|Toyota Tacoma Access Cab 2008||$7,000||140,000 miles; paid off|
Lynn and Lucas’ Questions For You
1) How should I prioritize saving for:
- Emergency Fund
- Future renovations and/or investment properties?
2) Should we get a Home Equity Loan?
- We’ve decided to hold off on this for now, but, would it be wise to pull equity from our home for a garage addition (or another investment property?). We have about $100,000 in equity.
- We could also sell our house and find a different home that meets our garage/studio needs, but we really like our neighborhood and the real estate prices around here are getting pretty crazy.
3) Investment Property: to piggyback on the Home Equity Loan question, how do people with lower incomes get into investment properties without taking on significant debt?
Mrs. Frugalwoods’ Recommendations
Lynn and Lucas are doing a great job. In reading through this Case Study, it’s clear to me that Lynn has put a lot of effort into turning around their finances and, in doing so, she’s put herself and her family in a great position. I feel like we’re at the beginning stages of an epic success story for Lynn and Lucas if they keep doing what they’re doing.
They’ve been judicious about paying down debt, careful with their spending, smart about saving for retirement, and wise about buying a home they can afford. They’ve paid off their cars and their credit cards, both of which took a lot of work and both of which they should be incredibly proud of!
Lynn’s Student Loan Debt
Lynn mentioned that her student loan debt makes her nervous, but, I think she’s doing the right thing. She’s enrolled in the Public Service Loan Forgiveness program and her loans are on track to be forgiven in four years. This is great news!
Lynn was smart to seek out PSLF and to make qualified payments on her loans all these years. I get the sense that having this debt hanging over her head bothers Lynn, but I think she just needs to tough it out for another four years. The amount of her debt ($34,205) dwarfs their assets and so, in my opinion, the best option is for her to bank on PSLF in four years.
Brilliant Job On The Master’s Degree
Lynn made the perfect, ideal, A+, #1, chief, top, and otherwise best decision here: she is getting her master’s degree for free AND her employer has a transparent pay scale that she will ascend once she completes her degree. I am (usually) against people getting graduate degrees when they’re paying themselves and when there’s no clear career imperative or salary bump associated with the degree. What Lynn is doing is an obvious slam dunk: free school that will = an $11,000 increase in her salary. WAY TO GO, LYNN!!!
I love Lynn’s dream of teaching private art lessons and having more time to create her own art. However, I’m a bit concerned about the fact that this arrangement would entail both Lynn and Lucas being self-employed.
Primarily, my concern is that both of their jobs are not very recession-proof. In an economic downturn, people often cut their spending on discretionary activities. And, for the most part, home renovations/remodeling and art lessons are discretionary. In a bad recession, it’s possible both Lynn and Lucas would struggle to attract clients–just because of the nature of their professions.
Conversely, if Lynn is working as a teacher, she’s much less likely to lose her job in a recession, which would allow the family to weather a period of less work for Lucas. I don’t say this to scare Lynn, or to put her off her self-employment dream, but, it is a very real consideration. At this point, and as Lynn noted, her job is a good counterbalance to Lucas’ self-employment since it’s safe and stable. I’m not anti-self-employment (I’m self-employed, after all!), but I am cautious about self-employment that entails risk and variability, which both carpentry and art entail.
If Lynn and Lucas are able to save up a significant amount of money–perhaps enough to keep them afloat for a year or more without work–then, I think the idea becomes a lot more feasible and a lot less risky.
Another possibility here is to consider Lynn transitioning to self-employment after their mortgage is paid off in twelve years. To be clear, I’m not advising they put extra money towards their mortgage now (because they need to deploy their capital in other ways and they have an amazingly low interest rate of 2.75%, which is just incredible!). But, once the mortgage is paid off, their expenses will be a lot lower, their risk level will be lower, and dual self-employment might very well feel a lot more tenable.
Another Very Smart Thing Lynn Did
Lynn did another very smart thing that I want to highlight: once she paid off her car AND cut cable, she began contributing that $600 to her and Lucas’ IRA accounts. This is such a perfect example of transforming your finances. Instead of losing $600 a month, she’s now investing it to provide a secure future for her and her husband. I want to reiterate what an incredible difference these types of tweaks can make. Over the course of just one year, she and Lucas will sock away $7,200 for their retirement. In two years? $14,400. That’s a serious amount of money. Way to go, Lynn!
Alrighty, let’s review Lynn’s specific questions.
Question #1: How should I prioritize saving for:
- Emergency Fund
- Future renovations and/or investment properties?
Lynn pretty much answered her own question here with this outline of savings priorities. She is spot on that these are the three basic areas where she and Lucas should focus their savings efforts.
Emergency Fund: Lucas and Lynn have $9,808 in their checking account. At their current rate of spending ($4,533 per month), this would cover them for about two months, which is an excellent start! Lynn already identified that a goal of hers is to build this account up to cover three months of spending, which is $13,599. I think she’s correct that this is a priority, especially given the variability of Lucas’ income. Having a larger buffer will give them more peace of mind and will make them less likely to ever go into credit card debt again. Takeaway: Funnel all extra money every month into this emergency fund until it reaches $13,599. Replenish as needed.
Retirement: Lucas and Lynn both have individual retirement accounts (IRAs)–way to go! Their IRAs are with Betterment, which is a robo advisor. This is fine; however, it’s likely they’re paying higher fees than they would if they managed their IRAs themselves, such as through a brokerage like Fidelity or Vanguard.
I’m including the below rundown on IRAs versus Roth IRAs for Lucas and Lynn to review and for anyone else whose curiosity is piqued (I know, I know, what could be more exciting?!? Don’t answer that).
- A traditional IRA is a retirement account that’s pre-tax.
- This means you don’t pay taxes on money you put into an IRA, but you do pay taxes when you withdraw the money in retirement. In general, an IRA is a good idea if you’re trying to reduce your current tax bill (and if you think your future tax rate will be lower).
- There are no income limits. Anyone can contribute to a traditional IRA.
- You need to be age 59.5 before you can withdraw money penalty-free (although there are exceptions).
- More about traditional IRAs here.
Roth IRA (Individual Retirement Account):
- A Roth IRA is a retirement account that’s post taxes.
- This means you pay taxes on the money you put into a Roth IRA, but you don’t pay taxes when you withdraw the money in retirement. In general, a Roth IRA is a good idea if you think your tax rate is likely to be higher in the future (it’s basically the opposite of a traditional IRA).
- A Roth IRA grows tax free.
- You need to be age 59.5 before you can withdraw money penalty-free (although there are exceptions).
- Your eligibility to contribute to a Roth IRA depends on your income and your particular tax situation. Higher income individuals are not allowed to contribute to Roth IRAs.
- I like this Nerd Wallet article on Roth IRAs if you want to read more.
At this point, Lucas and Lynn have a little bit of room to contribute more to their retirement accounts each month, but I encourage them to first build up their emergency fund.
Asset Allocation and Money Management 101
In addition to an expense review, I’ve started including an overall asset allocation review in every Reader Case Study to help folks track where they are. Below are the basic money management steps I advise just about everyone to follow. I’ve made notes of where Lynn and Lucas are on each step and where they can focus more attention.
- Track your expenses religiously. Know exactly what you’re spending every month. If you’re not tracking your spending, you can sign-up for the free service Personal Capital, which is what I use and recommend for expense tracking (affiliate link).
- Lynn and Lucas do this through You Need A Budget (YNAB), which is fine, but which does have a subscription fee. If they’re comfortable converting to a free service (such as Personal Capital), that could be an area where they could save a few bucks. If you’d like to know more about how Personal Capital works, check out my full review.
- Pay off high interest debt. List all of your debts in a spreadsheet and sort by interest rate. Prioritize paying them off in order of highest interest rate first.
- I discussed above that it’ll likely be best for Lynn to wait for PSLF to eliminate her student loans.
- Build an emergency fund. An emergency fund should be kept in an easily-accessible bank account, such as a checking or savings account, NOT in investments, retirement funds, or cars/houses/expensive china. An emergency fund is money you can access immediately in an emergency. I recommend saving three to six months’ worth of expenses (meaning three to six months worth of what you spend every month, which is why it’s important to do #1: track your expenses).
- Lynn and Lucas’ figures are noted above.
- Contribute to retirement accounts. Especially if your employer matches your contributions, putting money into a 401k or 403b is a no-brainer. Here’s more on why: 401ks Are Your Friend: Demystifying Personal Finance Part 3.
- Lynn and Lucas’ figures are noted above.
- Start investing! Investing in the stock market is how you grow your wealth. Without this crucial step, you won’t reap the advantages of compounding interest and you’re unlikely to build your net worth in a meaningful way. I personally invest in low-fee total market index funds through the brokerage of Fidelity. Vanguard offers a similar product. You can do this yourself (it’s just like any other form of online banking) and there are more details here: For the Love of Frugal Hound, Manage Your Money Yourself! (by following The Simple Path to Wealth).
- Explore other options for investing in order to achieve diversification. After completing steps 1-5, you should continue investing in your low-fee index funds (and rebalancing them) on a regular basis (I recommend automating this process) and you can also start to look around for diversification options. This might include, for example, real estate. Mr. FW and I rent out our home in Cambridge, MA for a profit. Renting a property can be a fabulous financial decision and it can also be an absolutely abysmal one. It depends on many factors, including the rate of return you’d receive. For more on renting out properties, I recommend the site BiggerPockets, which discusses real estate investing.
- Analyze your income. Concurrent with all of this should be an analysis of your net income (that means the dollar amount you bring home every month, minus taxes and any other withholdings). In some cases, the best route to financial stability will be to increase your income while also lowering your expenses. Income is the crucial second piece to this equation and, the more you make, the more you can save. That’s a solid math fact.
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.
Question #2: Should we get a Home Equity Loan?
To pay for a garage or an addition to their house, my answer is no. Why? A garage or an addition won’t directly add to their income, but getting a Home Equity Loan will directly add to their debt.
An addition could generate income through Lynn’s potential future of teaching private art lessons. However, I think it’s a bit too amorphous and speculative to link a Home Equity Loan to that potential future income. If Lynn were already teaching private lessons and knew what her revenue was, it’d be a little easier to justify a Home Equity Loan.
Here are the reasons why I almost always veto Home Equity Loans:
- They often include bunch of fees: annual fees, transaction fees, closing costs, and more.
- They charge interest.
- You could lose your home. A Home Equity Loan borrows against the equity you have in your house and so, if you fail to make payments, the bank could repossess your home.
- Note: there are subtle differences between Home Equity Lines Of Credit (HELOCs) and Home Equity Loans, namely that a Home Equity Loan is usually a lump sum paid all at once and it often has a fixed interest rate.
Question #3: To piggyback on the Home Equity Loan question, how do people with lower incomes get into investment properties without taking on significant debt?
I get the sense that Lynn and Lucas are debt-averse and, if you’d like to avoid debt, then real estate investing is probably not for you. However, if Lucas and Lynn would be comfortable carrying debt, then it’s possible they could significantly grow their wealth through real estate investing. Note that I said “possible.”
If this is something Lucas and Lynn want to pursue, I highly recommend they start doing research into the business side of real estate investing to determine if they’re comfortable with that aspect of it, alongside their proficiency in the construction/renovation side of things. Lynn mentioned that the market is getting pretty crazy where they live and so another aspect of their research will need to be whether or not they’ll be able to buy something cheap enough to actually yield a profit if flipped or rented.
Another consideration here vis-a-vis Lynn’s interest in self-employment: a bank is unlikely to lend you money to purchase an investment property if you don’t have a W2 income.
Lynn and Lucas are already living a pretty frugal life, so I don’t necessarily think that cutting expenses will move the needle all that much for them. However, you know I love a good expense review, so let’s get to it!
In every 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 you have to make for yourself. My job is to identify areas where you might be able to save, but only you can decide what 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.
I’ve combed through their expenses and identified several areas of discretionary spending where they could save:
- Cell phones: Lynn noted that she read my recent article about MVNOs (companies that re-sell wireless service at deep discounts) and I strongly encourage her to make the change! I pay $10.65/month with the MVNO Ting, which re-sells T-Mobile and Sprint service. MVNOs are the TJ Maxx of the cell phone service world–it’s the same service, just a whole lot cheaper (those are affiliate links).
- Clothing: at $94/month this isn’t astronomical, but, it is a discretionary expense (to an extent). I think that being aware of this amount and looking for ways to thrift/do hand-me-downs could be advantageous.
- Restaurants: similar to clothing, at $89/month, this isn’t huge, but it is discretionary. One thought here: Lynn mentioned several times that she’d like to be able to afford to travel more and, if they stopped eating out and instead saved this money in a travel fund, they’d have $1,068 saved up in just one year, which could equal a pretty nice vacation.
These are the only major expense categories that jump out at me. I think switching cell phones will be the easiest way to save an extra $100+ per month.
Lynn and Lucas are on the right track. They are doing all the right things: they’ve paid off all of their debt (except for Lynn’s student loan), they’re contributing to IRA accounts, they have an emergency fund that they plan to increase, and their spending is low. I think they’re a perfect example of how it’s possible to turn around your finances and put yourself in a great position. Lynn and Lucas are at the beginning of a longterm success story. If Lynn and Lucas keep doing what they’re doing, they’re going to be in fantastic shape.
Here’s the summary of my advice:
- Student Loan: continue making qualified payments in the PSLF program and apply for loan forgiveness in four years.
- Emergency Fund: work to build their emergency fund up to at least three months’ worth of expenses.
- Retirement: once the emergency fund is fully funded, direct more money into their retirement accounts.
- Expenses: investigate switching cell phone service over to a much cheaper MVNO. Consider clothing and restaurant expenses–might these go toward vacation travel instead?
- Self-employment for Lynn: consider the ramifications of two variable-income careers and what level of savings would make Lynn and Lucas feel secure and confident before taking the dual self-employment leap.
- Put yourselves on autopilot: Lynn and Lucas are doing so many things perfectly right now and, for the most part, they just need to keep on keeping on.
Ok Frugalwoods nation, what advice would you give to Lynn? 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 (email@example.com) your brief story and we’ll talk.
Updated by Lynn on 3/12/20:
Hello again Frugalwoods! Here’s our Reader Case Study Update:
Lucas has been busy, busy, busy with his carpentry business and has been in high demand among his customers. He has raised his rates twice since he started and no one has even batted an eyelash. He’s making more money but working fewer physical hours overall (he usually takes an admin day once a week to organize, order materials, set up deliveries, etc.), which puts less wear and tear on his body than with his previous subcontracting gigs. With the increase in his wages, we were quickly able to rebuild our emergency fund and add a little bit more to our monthly IRA contribution.
Since things have been going well, we have decided to hold off on the investment property idea for the time being. I am two courses away from finishing my Master of Art Education degree and my salary will increase significantly with the next school year. We’re planning to maintain our current level of spending and funnel the difference into retirement, travel, and saving for an addition to our house.
Upon reflection, I realized that while I still daydream about running my own working studio/art center down the road, I need to focus on making my current teaching job work better for me in the here and now. I ended up taking on the role of Department Chair (which comes with a small stipend) and have been actively advocating for change. In fact, I just finished writing my Capstone Research paper for my master’s degree on exactly that: improving and growing the art program at my school. I am currently working on getting an Art Club (and another stipend) going for next year, but if that falls through, my backup plan is to offer a continuing studies art class at my local community center.
Thank you so much to Mrs. Frugalwoods for running my Reader Case Study! It has been such an amazing experience – not only for the financial advice from you and the Frugalwoods community but most especially for all of the encouragement and positive feedback. I am very excited to see what the future holds for us!
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