Reader Case Study: Questioning The Financial Future With A Partner In Debt
Olivia recently bought her first home in the DC metro area and she loves her neighborhood and bike commute to her job at a nearby university. However, her boyfriend was fired from his medical residency program last spring and she’s trying to help him figure out his next steps while weighing her own financial goals. Olivia has requested our help in sorting through the complications that have recently arisen in her life.
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Case Studies address financial and life dilemmas that readers of Frugalwoods send to me requesting advice. Then, we (that’d be me and YOU, dear reader) read through their situation and provide 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. Visit this page to find links to all updated Case Studies.
I probably don’t need to say the following because you folks 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 Olivia, this month’s Case Study subject, take it from here!
Greetings Frugalwoods! I’m Olivia, I’m 31, my boyfriend Jacob is 36, and we live in the Washington, DC metro area with my cat. I work at one of the many colleges in the DC area doing program evaluation for outside-the-classroom experiences. Jacob was in a medical residency program, but was fired from in May 2019 and is currently unemployed (more on that in a moment). We met at a mutual friend’s birthday party a year and a half ago and have been together ever since that night. (Let me tell you – I snatched him up quick after he explained his beer choice by comparing unit prices!). I bought my first house in March 2019 and Jacob moved in two months ago (in October 2019). My parents and sister both live nearby and I really love my new neighborhood.
Jacob and I aren’t married or even engaged, so one reason I’m submitting this Case Study is to get feedback on our path forward together, particularly in terms of how it will affect my financial goals. This isn’t a Case Study about Jacob’s financial life and goals, but rather about how what he brings to the table might affect me if we get married. I’d like to know how I can improve my situation in preparation for the possibility of marriage, and also for the possibility that Jacob and I don’t stay together. There are a lot of unknowns right now and I’m trying to think about, and plan for, two completely different futures. I also have questions about going from living by yourself to living with a partner.
I was single for a very, very long time before meeting Jacob. He’s certainly not perfect by any means, but I think we balance each other out extremely well in terms of our strengths in a way that we are still learning to manage. I’m much less relaxed and much more stressed with him in my life, but I also laugh more and am more social, healthier, and happier. I do want to say that his firing brought us A LOT closer. It seems crazy now that I have a house to deal with as we consider how to cope with his firing, but back in the winter/early spring of 2019, I wasn’t in a place to plan my future around the assumption that Jacob and I would stay together long term. I bought my house because it was absolutely the right decision for me if Jacob wasn’t in the picture.
I’ve been in my role for just under three years–and received a raise in September–but I’ve been with the same employer for about five years. While working at this university, I pursued a second Masters degree (for free!) in Applied Statistics. My first MA is in Higher Education.
While I am absolutely underpaid for my statistics skills compared to what I could make in a corporate setting, I am well paid for working at a university in a non-academic role. Plus, my retirement and time-off benefits are fabulous!
Day to day, I manage national surveys, interview students about their experiences at the university, mentor graduate students interested in research, and analyze data in an effort to better understand how emerging adults develop in college and how we can foster this growth with a more efficient use of funds. It’s a more than 40-hour per week job (easily 50 hours, sometimes more), but for the most part I like my coworkers, the variety, and the work.
Jacob’s Unemployment Situation
Jacob has ADHD and a processing deficiency, which in part led to him being fired in early May from his medical residency program. He received pay and benefits through the end of June, but since then has been living off savings. He appealed the decision and, the day before Thanksgiving, we received final notice that the appeal process is concluded. He’s still fired, but they gave him a few more months of credit so he can more easily transfer to a different residency program and not have to go back through the match process. This is good because it gives him a bit more control over where he ends up. He’s now in the process of asking faculty to convert their appeal Letters of Support to Letters of Recommendation and looking into transferring to another residency program.
Jacob has a lot of medical school debt as well as debt from a master’s degree that helped him get into medical school. For both the MA and medical school, he took out loans to cover tuition and living expenses. Given that, he has about $290,000 in student loan debt. He’s in the National Health Service Corps (NHSC), which had been paying him $30k per year in residency for his student loans and would give him a larger lump sum after he has worked in a high need area for several years. Since his firing, he requested a leave of absence from the National Health Service Corps and they’ve granted him one through next summer. As long as he is able to transfer to another program before then, he won’t be in default on his NHSC agreement and won’t owe any backpay to them.
The worst case scenario for my financial life is that Jacob moves to another part of the country to finish his training. We’ve assumed in all of our conversations that, were this the case, I would not follow him and that we would do our best to make long distance work. Because of his commitment to NHSC, it’s possible that even after he finishes training he won’t be able to move back since he’ll have to find a job in an area that qualifies as “high need” per the NHSC’s standards. This prospect leaves me in a rough spot financially if I want our relationship to last. While it could all work out just fine, it could also mean selling my house soon after buying it.
After I’ve done so much to right my own financial ship, this is a scary place to be. Jacob and I started talking about him moving in because of his financial situation, but we also felt it was the right thing for our relationship given how we felt about each other. I’m not charging him rent while he’s unemployed, but he is covering all grocery shopping costs. We’ve talked about him getting a job during this time, but decided that managing his current situation and searching for a new residency program is a bigger priority for him than having a small source of income.
Right now my hobbies consist of getting my house set up and accomplishing some admittedly basic DIY improvement projects that always take longer than expected. Prior to moving here, I had a work study position at a yoga studio and did yoga at least twice a week. I don’t think I’ve been to a single yoga class since I bought my house, despite having the cheapest studio I’ve seen in the DC area within walking distance! Jacob spent most of his summer and fall working to tame the front and back yards. A previous owner installed a bike ramp that took up most of the back yard, and after weeks of swinging a pick-axe and a hammer, we converted the ramp into three small steps, giving us a much larger back yard. We also bought some plants at the farmer’s market and flowers from a local nursery. Next year, we hope to put in some raised beds and harvest more than the 10 tomatoes we grew this year, but we’ve enjoyed the process and learned a lot!
Olivia’s Longterm Goals
I consider myself lightly in the early retirement category as far as my future goals. I’m not stressing or trying to save every penny to get there as soon as possible, but I’d really enjoy being able to get up every morning, do yoga, have a cup of coffee, tend the garden, actually finish a New Yorker, and enjoy some silence. Right now, it’s not uncommon for me to have coffee for breakfast and forget to eat lunch until 3pm (if at all) because I have so many meetings and so many people asking me so many questions that I’m the only person in my department with the skill set to answer.
I’d like to complete a yoga teacher training program one day and maybe take an extended vacation (over a month) somewhere. I’d also like to get my PhD because I love learning and doing research. A big enticement for pursuing a PhD is that, in my current job, I know a little about a lot of topics. A PhD program would allow me to delve deeply into one topic and finally feel like I’m an expert in something. I wouldn’t accrue any debt for a PhD because in my field, an assistantship that pays tuition and a stipend is common. I envision two potential scenarios for getting my PhD: I could be a part-time student and continue working in my current job (in which case my employer would pay), or, I could be a full-time student and take a pay cut by working part-time.
I’m interested in all of the following PhD programs: Higher Education, Student Affairs, Evaluation/Statistics, Information Studies, Survey Methodology, Education Policy, Education Leadership…. and probably some others. Right now, I’m leaning towards Information Studies and Education Policy, but that’s assuming I stay in my current role and attend a program part-time. If I waited a few years until Jacob is working full-time on a physician’s salary, I might be leaning towards a different type of program assuming we spent a couple years dealing with his loans and were in a good enough financial position to drop my salary down to the $30k range that PhD students typically make for assistantships. Having already done a MA program part-time funded by my employer, I know that I can complete a program while working full-time but I also know that I would treat it more as something to “get through” rather than “learn from,” and I’m not sure I want to “get through” the PhD. I’d rather learn as much as possible.
Looking To The Future
In thinking about my future, if Jacob and I don’t get married, I see myself in this house and at this job for a long time. If we do get married, most of that goes up in the air as he’d like to live closer to his family in Vermont. Plus, some of the other goals he has would require us compromising. The biggest is that his parents parents are part of an LLC–with some family friends–and they jointly own a vacation property in the Northeast.
Ideally, I think Jacob would like to purchase partial ownership as he has strong emotional ties to the property. However, this would likely require a significant amount of money. There are several other differences between us that we’d need to resolve, such as how we might raise children and fund their education, but we are at the early stages of discussing these topics and figuring out where we stand. One of our biggest strengths as a couple is our open communication and honesty, so I’m not particularly worried. It’s possible that once he starts making a physician’s salary and paying back his loans in earnest, he’ll reevaluate some of his current habits and goals like the vacation property, but time will tell
Jacob and I both want kids and, given our ages, this is a priority for both of us to start talking about seriously and soon. However, it also seems impractical to have kids before Jacob’s residency is over; plus, I would personally like to be below $100,000 on his debt before having kids, which feels like a distant goal at this point.
Olivia Loves Where She Lives
My house is in an amazing community in the DC metro area. It’s a planned cooperative where the streets are organized around a central retail area with lots of walking paths and tunnels under the road. In about 5 minutes, we can walk to the grocery store, the library, the community gym and pool, a yoga studio, a couple restaurants – one of which has a different music performance every day – and the farmer’s market.
Plus, when we’re inside the house looking out the windows, we pretty much only see trees! My biggest complaint about the house so far is that the birds wake me up too early in the summer! We feel so lucky to be where we are.
Additionally, moving here has enabled me to bike to work most days of the week, which is the most consistent cardio I’ve ever done in my adult life. We also have some friends in the community – just the other night we walked to a friend’s house to play board games and drink wine. Driving, we’re about 20 minutes from my parents and about 40 minutes from my sister who is about to get married and wants to have kids soon. The house is a two-bed, one-bath with very little storage. I had a whole room dedicated to yoga before Jacob moved in, but that room is mostly storage now. I have a list of house projects I’d like to do, but these are on hold for the foreseeable future. All in all, I feel like I’m in a great house in a wonderful location.
The upside is that I bought a house by myself at age 31; the downside is that I did not put 20% down. I was in a situation where I needed to find new housing and knew that I could not live with roommates anymore. In DC, this is pretty cost prohibitive. I loved the neighborhood I lived in previously, but renting there would have been close to $2k/month and my commute was an hour. I found my current neighborhood based on thinking about my life if Jacob and I didn’t work out.
Given that, I pay the mortgage by myself, I don’t need a car here, there are affordable daycares nearby, and the elementary and high schools are both within walking distance. I’ve decided that I will have a child by myself (eventually) if Jacob and I break up. Being a somewhat single woman with aspirations of having a child (potentially while single), the idea of living in a cooperative where most routine maintenance is taken care of was extremely enticing.
Here’s the rundown of the house’s value and what I paid:
- Appraisal Value: $179,000
- Sold at: $178,000
- Original Loan Amount: $160,200
- Current Loan Balance: $156,387
- Equity: $22,613
A downside of this house is that it does not have A/C, but I submitted the paperwork to have a mini-split system installed and we’re tentatively scheduled for install in mid January! This will have the added bonus of reducing my winter heating bill as I have electric baseboard heaters, which can be costly. I anticipate the mini-split will increase the house value quite a bit, which would help in getting to 20% equity. I currently pay extra on the mortgage every month to help facilitate this.
While it looks like I have the cash to drop on the mortgage to get to 20%, I wanted to instead pay to have the mini-split installed in 2020 since it’s part of a renovation program managed by my housing cooperative. I could technically not go through the cooperative for the mini-split installation, but that would involve finding contractors, getting board approval, and managing the process myself. It was important enough to me to get these renovations done (mini-split system installed, through wall a/c removed) without the added back and forth with the board for approval and finding a contractor to manage the renovations. Further, I appreciate the clear cost estimate that the cooperative renovation program provides as opposed to an individual contractor, which lore tells me will often goes over budget.
Here are the costs for all updates occurring as part of the mini-split installation:
- Mini-split installation: $7,260.00
- Close through-wall hole for current window unit A/C & patch to match interior/exterior: $611.60
- Install bathroom exhaust fan: $820.60 (required for rebate)
- Co-operative processing fee: $150.00
- Pepco rebate (air flow improvements from updates done by previous owner): $150.00
- Pepco rebate for mini-split install: $2,500.00
Total after rebate: $6,192.20
My expenses have really gone up over the past year or so. I attribute this to several things: 1) there were some basic house startup costs and I’ll admit not all of these fell into the “need” category, 2) general “dating someone less frugal than me” reasons although it could be much worse, and 3) the stress of dealing with Jacob’s employment situation. In all honesty, #3 is what’s making it hard to tackle #1 and #2.
There are days where I put in 10 or 11 hours at the office and then come home and spend the evening reading emails from Jacob’s lawyer and looking over documents. I’m happy to do this and I’m good at it, but it means that I don’t think about what I’m eating for lunch the next day and by the time the weekend rolls around I’m so burnt out I can’t bring myself to spend Sunday meal prepping, which then starts the cycle of spending all over again…
We’ve certainly improved over the months in this area as the shock and immediacy of the crisis has worn off and become a part of our day-to-day life. I’ve also resigned myself to making sure we have more things like mac and cheese and ramen noodles on hand.
As you’ll see below, by design I’m basically breaking even (or going into the red) every month, due largely to house start-up costs. I’ve received a few gifts of money from family that I’ve been using to cover the difference between my income and expenses My mom gifted me $1,000 to congratulate me on buying my house. Additionally, a family member recently passed away and left me $2,000. I’ve put these gifts into my emergency fund account and use that to cover any shortfalls each month. I will also use my emergency fund to pay for the mini-split installation and then will readjust the amount I keep in that account.
Olivia’s Credit Card Strategy
I love to travel and so I pay for almost everything with my Capital One® Venture® Rewards Credit Card, which earns me points for free airfare (this is an affiliate link). I have another credit card that only has my monthly Netflix payment set up to automatically pay each month. I keep that card because I’ve had it since I was about 17 and I’m pretty sure my excellent credit score is due in part to the length of time I’ve had this card.
Olivia’s Spending Strategy
Given that I’m in the fortunate situation of being able to put money towards both a 403(b) and a 457 retirement account, my goal each month is to have my monthly take-home pay stay as close as possible to my monthly spending. I think my emergency fund is healthy and my current strategy (which is up for debate!) is to maximize my pre-tax retirement contributions. If I needed to dip into my emergency fund for something, I would drop my 403(b) contributions until the emergency fund returned to a satisfactory level, but I would never touch my 457 contributions.
If I ever have “too much” money in my checking or savings account, I’ll sweep some into my Roth IRA. Now that I’ve bought the house, that extra money might not go towards the Roth IRA but perhaps something towards more exciting (dishwasher, anyone?). My thought is that this is preferable to lower regular pre-tax contributions to retirement and ending up with a surplus of cash that I can’t go back and put in a pre-tax account. This means I’m rarely saving cash while I have fairly healthy retirement accounts. I’ve never been completely confident that this is the best plan, but it’s the strategy I’ve been following for the past few years.
|Olivia’s Income||$2,753.03||Olivia’s net salary minus health insurance, 403b and 457 contributions, and taxes.|
|Mortgage and PMI||$837||Interest rate of 4.38%|
|Co-op fee||$654||Includes property taxes, some house maintenance and improvements, and common area maintenance.|
|Home & Yard||$400||This is what I spent in September, which was mostly house start-up costs (3 bags of cement, a couch cover for a free couch, stringers for porch stairs we are DIYing, plants). I’m winding down in this area with the procurement of a fire pit from Freecycle!
For the past month, the only charge I’d classify in this area was a Christmas tree from the local Fire Department. Other than that, this category is now down to $0.
|Extra Mortgage Payment||$163||I did not put 20% down on my house, so I pay a little extra each month to help reach this goal sooner.|
|Travel||$150||Included a visit to the Virgin Islands to visit my dad who is living on a sailboat! And a trip to Bangkok and Perth (thanks to my Capital One® Venture® Rewards points, my flight to Bangkok was totally free!).
This is the monthly average of October 2018 to September 2019.
|Utilities: Electric||$137||I have a single A/C window unit for the entire house and ran it a fair amount our first summer. I don’t have winter data yet, so this is the October 2018-September 2019 utility average including what I paid at my previous house (higher than the average since I moved).
I hope this’ll be lower once my mini-split is installed in mid-January 2020.
|Eating out||$137||I know this is ridiculous. Since meeting Jacob, this has increased both because he’s not as frugal as I am and because of the Crazy Life Events that have limited my time to meal plan and prep, resulting in more food purchased at work than I am comfortable with.
This is the monthly average of October 2018 to September 2019.
|Car insurance||$87||Through Erie|
|Cat!||$55||This is the monthly average of October 2018 to September 2019.|
|Alcohol & Bars||$51||I’m usually pretty good at separating alcohol from the general eating out budget.
This is the monthly average of October 2018 to September 2019.
|Utilities: Water||$46||This might include an overnight or two with the hose leaking + two leaky faucets (one we have replaced and we have plans to do the next one).|
|Clothing and accessories||$42||Includes two pairs of black pants from the Loft for work that I had been searching for for years. I wore these pants every day to work this week!
This is the monthly average of October 2018 to September 2019.
|Cell Phone (service for one phone)||$37||Through Ting. In reviewing the past couple bills, it looks like I’m “medium” on almost everything, yielding $30 of usage before taxes.
I keep data turned off for all apps most of the time, but there are a few things that have increased my usage: being a car owner, my raise at work comes with the feeling that I need to be available all the time, plus one of my closest co-workers has an Android, which means all of their texts come in as SMS as opposed to iMessage (I have my mom’s old iPhone).
|Internet||$35||Intro rate for Comcast; internet only|
|Gas for the car||$19||I don’t drive for my daily commute, which keeps this super low. This is the monthly average of October 2018 to September 2019.|
|Home insurance||$16||Through Erie|
|Gifts||$15||For birthdays, weddings, etc. This is the monthly average of October 2018 to September 2019.|
|Entertainment||$14||This is the monthly average of October 2018 to September 2019. Includes cover fee to see a friend’s graduation from Improv school and axe throwing for a co-workers birthday.
**I will note that this increased dramatically in October 2019 because Jacob wanted to go to Six Flags for his birthday – wooooweee talk about expensive!**
|Haircuts||$11||This is the monthly average of October 2018 to September 2019.|
|Groceries and household supplies||$0||While Jacob is unemployed, he’s covering all groceries as his “rent” – we’d split the mortgage and co-op fee if he were to get a job in the area.
This usually includes household supplies as well although we haven’t really figured out what we’re doing in this area for the long term.
|Monthly subtotal:||$2,945||My goal is for my take-home pay to match my expenses. I don’t actually go into the red; rather, I invest a lot of my paycheck in my pre-tax retirement accounts.|
|Account||Amount||Notes||Interest/type of securities held||Name of bank/brokerage|
|457 retirement account||$48,185||I contribute the max to this.||81% VINIX; 19%VBTIX||TIAA|
|403b retirement account||$35,609||With my raise in September, I now contribute about $650 per month here. Before I learned the beauty of the 457, I was putting money here and not in the 457.||78% VINIX; 22% VMCPX||TIAA|
|403b retirement account||$29,051||This is where my employer contributions go. My employer contributes 7.25% annually – not a match, just free.||65% VINIX; 30% VMPCX; 5% VBTIX||TIAA|
|Money Market Savings Account||$23,821||This is my emergency fund ($15,000) plus money for home renovations organized by the co-op community.
I will pay for the $6,192.20 installation of my mini-split from this account.
|Cash; 0.85% annual percentage yield||Navy Federal Credit Union|
|Roth IRA retirement account||$15,043||I’ve had this for a long time, but this is the first year I’ll max my contribution.||All in VTSAX||Vanguard|
|Checking Account||$3,528||I’ve been carrying extra cash here as I adjust to the costs of homeownership, but I don’t think I need this much in here.||Cash||Navy Federal Credit Union|
|Item||Outstanding Loan Balance||Interest Rate and Loan Terms||Notes|
|Mortgage on primary residence||$156,387||4.375%; 30-year fixed-rate mortgage||Because I live in a housing cooperative, I technically bought a membership in the cooperative that comes with the right to occupy and make changes to my unit.
This also means that there were only 6 board approved lenders I could choose from, which means it’s a slightly higher interest rate than had I gone with something more conventional.
|Vehicle make, model, year||Valued at||Mileage|
|Toyota Corolla 2005||$1,500||182,000|
|Total:||$1,500||Fully paid off|
Where Olivia Wants To Be in Ten Years
- In 10 years, I’d like to be close to financial independence. Since I’m intentionally taking the slower path, I know this goal will take longer to reach than 10 years, but I’d like to be on track.
- While I want to be financially independent at some point, I like my job and am not in a rush.
- Ideally, I’d like financial independence to happen whether or not Jacob and I stay together. Jacob is not interested in early retirement.
- If Jacob and I get married, I’d want us to be debt free in 10 years.
- I want to live in a walkable neighborhood (such as where I am right now!), go to yoga maybe five days a week, and spend lots of time cooking and reading.
- I want to have kids, either with or without Jacob.
- I want to reach a point in my job where I don’t wake up every day at 5:00am due to stress and start working.
- I envision I’ll most likely be in my current position or one extremely similar (in terms of work and organizational hierarchy).
- If I’m not, I’ll probably be in a full-time PhD program or doing something like AmeriCorps, which would cover basic living costs while I let my investments grow and transition to early retirement.
Olivia’s Questions For You
1) Regarding my house:
- To what extent should I prioritize getting to 20% equity in the house given my current situation? I know I need to do this ASAP, but given the uncertainty about Jacob’s employment situation, I’m wobbling.
- When you add up all my retirement contributions, I’m contributing over $38,000 per year. I know Frugalwoods generally doesn’t advise decreasing retirement contributions in order to save for a down payment, but at this level, I can’t help but wonder if I should drop some of my retirement contributions until I reach 20%? And if so, from which account?
- Since I have to pay for the house to be appraised in order to have PMI removed, I am assuming that I should not count on the mini-split or other changes to impact my LTV at all. I should only ask for PMI to be removed once I have hit a solid 20% based on the original loan and appraisal, right?
2) Regarding my partner:
- What suggestions do you have for supporting an unemployed partner?
- I’m confident for now about my decision to not charge Jacob rent, but what do you think?
- How do you cope with the uncertainly around moving in the direction of sharing your life with someone, but not being there yet? I see his huge scary debt cloud coming towards me, but we’re not at the point where I can do anything about it, and all the while, the debt just keeps growing…
- If I marry Jacob, would I have to give up on my early retirement goal? This is the biggest question weighing on me right now. I’m not working towards early retirement at a rapid pace, but I also don’t want to give up that dream entirely.
Mrs. Frugalwoods’ Recommendations
Olivia is doing a fantastic job!!! At 31, she’s debt-free, owns her own home, and has retirement savings that would make most 50-year-olds jealous. I’m deeply impressed with the hard work Olivia put in to get herself in such excellent financial shape. She should feel proud of what she has accomplished and take a moment to revel in the good decisions she’s made over the years. I get the sense that Olivia might be a tad like me–always looking to the next goal and the next thing to achieve. While I 100% understand this impulse (and live with it daily… ) I encourage Olivia to take some time to reflect on the stunning financial accomplishments she’s made during her 20’s. Her twenties, people. Let’s reiterate that she is thirty-one. A mere babe and already in better financial shape that many people twice her age.
I want to start with Olivia’s second set of questions regarding her relationship with her boyfriend, Jacob.
Olivia’s Relationship With Jacob
Let’s start with some disclaimers:
- I am not a relationship expert (I’m not a financial expert either, but I play one on the internet).
- I don’t personally know Olivia or Jacob, I’ve never met them, and so I don’t have full insight into their relationship.
- I’m basing my opinions only on what Olivia wrote in this Case Study, which obviously doesn’t contain the full breadth of their relationship.
What jumped out at me over and over in Olivia’s Case Study were her concerns about Jacob and their potential future together. This is not to say that there aren’t wonderful and fulfilling aspects of their relationship, but those didn’t shine through in her write-up. I realize that this Case Study is just one small snippet of Olivia’s life, but here are some of the things she wrote about Jacob that gave me pause:
He’s certainly not perfect by any means, but I think we balance each other out extremely well in terms of our strengths in a way that we are still learning to manage. I’m much less relaxed and much more stressed with him in my life, but I also laugh more and am more social, healthier, and happier.
While Olivia noted she’s happier with Jacob in her life, she qualified it with quite a bit of negative, including the following:
After I’ve done so much to right my own financial ship, [Jacob’s debt]… is a scary place to be.
I also find it telling that while Olivia discusses some of the longterm financial considerations around a relationship with Jacob, she doesn’t describe a future with him in her longterm goals. Marrying Jacob, or being with Jacob, isn’t explicitly noted in her ten-year goals, although paying off his debt is. I know that Olivia is asking us about how Jacob would impact her finances–this is a personal finance Case Study after all–but she’s not asking it from a place of knowing that Jacob is who she wants to spend her life with.
I appreciate, and commend, Olivia’s circumspection around Jacob’s financial situation and I wish more people were this thoughtful before getting engaged. However, if you want to marry someone–and they are the person for you and you can’t imagine living your life without them at your side–you don’t care about their financial situation.
You should be informed about their finances, you should come up with plans and goals around their finances,you should actively work to get onto the same financial page, but their financial situation–be it good or bad–shouldn’t be a reason to marry, or not marry, someone.
Having a shared financial philosophy and shared life goals are–in my opinion–crucial to the longterm health of a relationship, but they’re not predicated upon both partners being in perfect financial shape at the outset (thank goodness or Mr. FW might not’ve married me… ).
I felt a pang of alarm when I read the following:
My expenses have really gone up over the past year or so. I attribute this to several things: 1) there were some basic house startup costs and I’ll admit not all of these fell into the “need” category, 2) general “dating someone less frugal than me” reasons although it could be much worse, and 3) the stress of dealing with Jacob’s employment situation. In all honesty, #3 is what’s making it hard to tackle #1 and #2. There are days where I put in 10 or 11 hours at the office and then come home and spend the evening reading emails from Jacob’s lawyer and looking over documents. I’m happy to do this and I’m good at it, but it means that I don’t think about what I’m eating for lunch the next day and by the time the weekend rolls around I’m so burnt out I can’t bring myself to spend Sunday meal prepping, which then starts the cycle of spending all over again…
Based solely on this, it appears that Jacob expects Olivia to be responsible for everything: to be the sole income earner for the household, to help him with his work, and to manage household chores such as cooking and meal prep.
They very well may have a more equitable division of labor ironed out, but the imbalance I perceive doesn’t sit well with me. Further, in all honesty, it doesn’t bode well for the potential addition of children and their attendant work and expense. If Olivia is giving up her free time to read Jacob’s legal documents, then in my admittedly uninformed opinion, he should do the meal prepping and pack her lunches for work.
My analysis doesn’t include any data about the emotional or romantic side of their relationship, but from the financial and household labor side of things, it seems a bit grim. I found it telling that Olivia noted the following: “I was single for a very, very long time before meeting Jacob.” I want to note that being single for a long time prior to a relationship does not mean that the relationship you’re in is the right relationship.
Additionally, Olivia included several mentions of having children on her own, which sounds like a concrete plan she’s thought through very carefully:
I’ve decided that I will have a child by myself (eventually) if Jacob and I break up. Being a somewhat single woman with aspirations of having a child (potentially while single), the idea of living in a cooperative where most routine maintenance is taken care of was extremely enticing.
I commend Olivia for identifying that motherhood is a goal for her and it seems she’s put herself in an excellent position to make that happen one day, if she so chooses.
I also want to acknowledge that this is a rough time for Jacob given his unemployment. And sticking with someone during a rough time isn’t easy. If Olivia wants to be with Jacob for the long term, they will figure out the finances. On the other hand, if she doesn’t want to be with him, but feels beholden to him because she’s supporting him financially, then she needs to prioritize her own needs and extract herself from the relationship. As she noted, they are not engaged or married and she is not responsible for him.
I’m concerned about Jacob’s financial impact on Olivia right now since she cited him as one cause of her increased spending. Further, he’s not paying rent, HOA fees, or utilities. Again, these are just my opinions and I am not in full possession of the facts. But since Olivia came to me for advice, I feel I’d be remiss if I didn’t share my concerns with her about her relationship with Jacob.
Let’s turn to her questions on PMI now.
Olivia asked: “To what extent should I prioritize getting to 20% equity in the house given my current situation?”
I’m not as concerned about Olivia’s PMI (Private Mortgage Insurance) as she is. Since her PMI is escrowed through her mortgage and since her mortgage payment is quite low ($837), I have to imagine the PMI isn’t costing her all that much every month. I don’t have a huge hatred of PMI. Sure, it’s additional debt tacked onto a mortgage, but sometimes it’s what you gotta do in order to buy the right house for the right price at the right time. Olivia is correct that it’s ideal not to have PMI, but it’s not the worst financial thing in the world. All that said, if reaching 20% equity and having PMI removed is a top goal for Olivia, she has the capacity to do it and she should go for it.
Wait, What’s PMI Again?
For anyone wondering what PMI is, let’s take a moment to discuss. Olivia did a superb job educating herself on home ownership, so this is the perfect opportunity to share her wisdom with the class.
For a definition, I turn to one of my favorite financial resources, the Consumer Financial Protection Bureau:
Private mortgage insurance, also called PMI, is a type of mortgage insurance you might be required to pay for if you have a conventional loan. Like other kinds of mortgage insurance, PMI protects the lender—not you—if you stop making payments on your loan. PMI is usually required when you have a conventional loan and make a down payment of less than 20 percent of the home’s purchase price.
Ok, does that make sense? PMI is an additional cost a mortgage lender will tack onto your mortgage if you don’t put down 20% of the home’s value at the time of purchase. Here’s some math to illustrate the point: If you want to buy a home that costs $200,000, you would need to pay $40,000 in cash as a downpayment in order to not have PMI added to your mortgage. I want to note that the rules are different for FHA loans.
Now, let’s talk about having PMI removed from your mortgage, again from the CFPB:
The federal Homeowners Protection Act (HPA) provides rights to remove Private Mortgage Insurance (PMI) under certain circumstances. You have the right to request that your servicer cancel PMI when you have reached the date when the principal balance of your mortgage is scheduled to fall to 80 percent of the original value of your home.
This is what Olivia is trying to speed up–the point at which she has 20% equity in her home. Olivia would eventually get to this point if she continued paying her monthly mortgage payment and didn’t pay any extra. However, she wants to pay extra every month in order to get to 20% faster in order to have the cost of PMI removed sooner. After PMI is removed, her monthly mortgage payment will be lower.
Let’s take a look at the numbers on Olivia’s house:
- Appraisal Value: $179,000
- Purchased For: $178,000
- Original Loan Amount: $160,200
- Current Loan Balance: $156,387
- Current Equity: $22,613
20% of the original value of Olivia’s home ($178,000) equals $35,600 in equity. She’s currently at $22,613 in equity, which means she’s $12,987 away from her goal.
Let’s discuss how she might make this happen:
As Olivia noted,
When you add up all my retirement contributions, I’m contributing over $38,000 per year.
Between all of her retirement accounts, Olivia has $127,888 saved, which is phenomenal. I agree with her that she shouldn’t pause all of these contributions; however, I think it would be fine to redirect some of her monthly retirement savings.
- Since the 457 is her most flexible and arguably best plan, I wouldn’t pause those contributions.
- Since her 403b is pre-tax and the contributions are automatically coming out of her paycheck, I wouldn’t pause those contributions.
- If she wants, she could pause her Roth IRA contributions because this account isn’t pre-tax and I assume she’s manually putting money in there every month, which would make it administratively the easiest to start and stop. The 2019 Roth IRA contribution limit for people under 50 is $6K and she said she’s maxing it out, so that = $500 per month.
If she took this $500 per month and added, let’s say, $750 in monthly savings (see my suggestions below), that’d be $1,250 per month she could funnel into her mortgage. At that rate, it would take her just over ten months to reach $35,600 in equity, which is pretty darn quick!
Furthermore, after she pays cash to have the mini-split installed next month, she could put some of her excess cash towards this goal. Between her savings and checking accounts, she has $27,349. Minus the $6,192.20 for the mini-split, Olivia could keep $17,670 in cash as a very healthy emergency fund and put the remaining $3,486.80 towards the PMI-removal goal. That’d knock her timeline down to just over eight months.
All that being said, I’m still not super hot and bothered by her PMI and wouldn’t encourage her to limit all of her retirement contributions in order to have it removed.
Start Saving For a Short-term Goal and Transition to a Long-term Goal
One appealing way to think about paying off PMI is that–after it’s done–she could start putting this monthly savings into index funds or other non-retirement investments. Once you get in the habit of saving at a certain rate, you might as well continue that savings even after your short-term goal is met. This could be a clever way for Olivia to set herself up for a very secure financial future. She would begin saving more with the short-term, easily achievable goal of having PMI removed and then continue that savings rate to fund investments that’ll facilitate her long-term goal of financial independence.
Olivia asked asked: “Since I have to pay for the house to be appraised in order to have PMI removed, I am assuming that I should not count on the mini-split or other changes to impact my LTV [loan-to-value ratio] at all. I should only ask for PMI to be removed once I have hit a solid 20% based on the original loan and appraisal, right?”
This is a tough one. While Olivia is correct that the mini-split will likely add value to her home, it’s impossible to say for certain if this would be reflected in the appraisal. The surest bet is to wait until she hits 20%.
A Review of Olivia’s Expenses
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.
In order to effectively review your expenses, you need to know what you’re spending. Luckily, there are software programs designed to do this for you. I use and recommend Personal Capital, which offers free expense tracking (affiliate link). You can write your expenses down in a notebook, you can create your own spending spreadsheets, you can use an online program–whatever you do, keep track of what you spend every month. 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.
What impressed me most about Olivia’s expenses is that she provided us with yearly averages of her spending in each category. This is a phenomenal way to track expenses because it gives you the most realistic picture of what you spend each month. It’s not realistic to assume that what you spent in, say, November 2019 is what you’ll spend every single month of the year. While some expenses are fixed from month to month (such as rent/mortgage payments), most of us experience fluctuations in tons of other categories, such as: travel, dining out, groceries, healthcare, gifts, entertainment, pets, utilities…. you get the picture.
Where Olivia Could Save More
I don’t have much advice that Olivia hasn’t already identified in her “notes” section for each expense. She knows that reducing dining out and alcohol & bars would save her more each month, but she’s also hitting her savings targets at her current spending rate. If Olivia wants to seriously buckle down and wipe out her PMI ASAP, here are the discretionary areas where she could save:
|Item||Amount||Mrs. FW’s Notes|
|Home & Yard||$400||Olivia noted this category has reduced significantly in recent months, so this’ll be a big chunk of change she can put towards removing PMI.|
|Utilities: Electric||$137||I bet this’ll be lower once the mini-split is installed. Yay!|
|Eating out||$137||It’s totally up to Olivia whether or not she reduces spending in this area. She’s not in a crisis financial situation, so if she wants to continue eating out, she should!|
|Car insurance||$87||This seems high to me, given the age of her car. I recommend shopping this around to see if she can get a lower rate.|
|Alcohol & Bars||$51||It’s totally up to Olivia whether or not she reduces spending in this area. She’s not in a crisis financial situation, so if she wants to continue this expense, she should!|
|Cell Phone||$37||I encourage Olivia to ask her employer to reimburse her cell phone bill. It sounds like she’s using her phone a lot for work, so I think there’s a case to be made here.|
I’m not saying that Olivia needs–or even should–eliminate all of this spending (and obviously the car insurance and electricity aren’t going to go to zero). But, it is an illustration of where some of the PMI money could come from. One thought is for Olivia to do this bare bones budget for a month–or two–to rack up some extra cash to throw at her home equity.
Asset Allocation and Money Management 101
Below are the basic money management steps I advise just about everyone to follow. I’ve made notes of where Olivia is on each step and where she 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).
- Olivia is rocking this with her averaging of a year’s worth of spending in every category.
- 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.
- Olivia is done with this!
- 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).
- Olivia currently spends $2,945/month, which means she should target an emergency fund in the range of $8,835 (three months of spending) to $17,670 (six months worth).
- Between her savings and checking accounts, Olivia has $27,349, which she correctly noted is overkill. I like her plan to invest the remainder after she pays cash for her mini-split installation in mid-January. As noted above, she could also funnel some of this excess into reaching 20% in equity.
- 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.
- Olivia gets a gold star for contributing to not one, not two, but THREE retirement accounts. Her rationale for doing this is sound: she’s maximizing on pre-tax investments and limiting her take-home pay, which in turn reduces her tax burden. Smart.
- 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).
- Since Olivia has such robust retirement savings, and since she’s interested in financial independence, I think it would make sense for her to consider opening a brokerage account and invest in something diversified and aggressive, such as low-fee index funds.
- She should do her own research on what her risk tolerance is for investments, but I’d say it makes sense to have non-retirement investments. Even though her 457 doesn’t penalize early withdrawals, which is awesome, she won’t be able to access the money in her 403bs or Roth IRA until age 59.5 .
- Explore other options for investing in order to achieve diversification. After completing steps 1-5, you should continue investing (and rebalancing) 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.
- Create a credit card strategy. If you’re able to pay your credit card bills in full every month, using credit cards can be an excellent way to boost your credit score and earn rewards, such as cash back or hotel and airline points.
- Olivia is wisely using her Capital One® Venture® Rewards Credit Card to rack up free airline miles for her travels. Very well done! (note: these are affiliate links).
- For more on my credit card strategy, check out The Frugalwoods Guide to a Simple, Yet Rewarding, Credit Card Experience. I also wrote this guide on how to find the best credit card for you.
It appears to me that Olivia has created a life she enjoys. She bought her own home in her ideal location, she lives close to her family, she likes her job (well enough, anyway), and she has robust personal and professional goals outlined, including pursuing her PhD, completing yoga teacher training, having children, and reaching financial independence. In all of her descriptions of her future plans, she mentions Jacob tangentially or as a barrier to achieving her goals.
While I’m all for sharing one’s life with a partner, I firmly believe you’ll be happiest if it’s the right partner. The right partner should build you up, encourage your dreams, provide moral support, be a team player in all aspects of your life together (household chores/childcare/finances/etc), and be someone you can’t imagine living without. I am not telling Olivia to break up with Jacob, but I am encouraging her to examine their relationship through the lens of what she really wants in her life.
I’ll recommend two books to Olivia that I haven’t read, but that have been recommended to me: Attached: The New Science of Adult Attachment and How It Can Help You Find – and Keep – Love and Marry Him: The Case for Settling for Mr. Good Enough. Both are research-based examinations of why people marry who they do, and how to find the right fit in your relationships.
Lastly, I want to address Olivia’s question about Jacob’s debt:
How do you cope with the uncertainly around moving in the direction of sharing your life with someone, but not being there yet? I see his huge scary debt cloud coming towards me, but we’re not at the point where I can do anything about it, and all the while, the debt just keeps growing.
In brief, you don’t. Olivia can’t–and shouldn’t–assume responsibility for Jacob’s debt right now. When and if they get engaged/married, they need to have a frank conversation about whether or not the debt becomes both of theirs. But right now? It’s not Olivia’s problem. While she can–and should–support Jacob emotionally through this job crisis, it’s not her crisis. Olivia did not choose to take out those loans and so Olivia is not responsible for paying them back. At least, not now and not until she and Jacob decide what’ll be best for their longterm financial future and ultimately, their happiness. I’m not a lawyer and so I can’t offer concrete advice here, but if Olivia does plan to marry Jacob, I encourage her to speak with a lawyer regarding her legal rights and responsibilities regarding his debt.
- Determine the importance of removing PMI. If it is goal #1, consider pausing some (but not all) retirement contributions, decreasing monthly spending, and potentially utilizing the excess cash in the savings account (after the mini-split is paid for).
- Consider opening a non-retirement brokerage account to invest in the stock market and diversify holdings to facilitate the goal of eventually reaching financial independence.
- Have a frank–and difficult–reckoning about whether or not you see yourself with Jacob for the longterm. Are you willing to give up on some of your personal and financial goals in order to be with him? Or, would you be happier pursuing the goals you’ve outlined potentially on your own?
Ok Frugalwoods nation, what advice would you give to Olivia? 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.
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