Reader Case Study: Community College Teachers Dream Of Real Estate and Rural Living (oh and they’re having another baby soon!)
Ann and Leo are both tenured community college English teachers in Seattle, WA. They have a three-year-old daughter, a baby due in March, and an adorable Corgi keeping them busy. While Ann and Leo appreciate the life they’ve created, they feel they’re at a turning point and want our help determining what’s possible, and prudent, given their financial situation.
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 Ann, this month’s Case Study subject, take it from here!
Hello, Frugalwoods readers! I’m Ann, I’m 38, and my husband Leo is 37. We have a three-year-old daughter, a baby due in March 2020, and a Corgi. We live in Seattle, WA where we both work as tenured community college English teachers. Leo and I met in graduate school (I have an MFA in creative nonfiction and Leo has an MFA in poetry).
We moved to Seattle together in 2010 and got married in 2012. I love to garden and Leo loves to write (poetry and a soccer blog with a sole proprietorship that was really gaining readership momentum before it fell by the wayside after our first child was born). We love spending time with our daughter and are excited/nervous about adding another kiddo to the mix in March.
Leo and I find ourselves in kind of a stuck place right now, where we have a lot of good things in our lives that we’re grateful for, but we also can’t shake the feeling that we’re not living a life that reflects our values and true selves. Basically, we’re sure this is not the life we want to be living ten years from now, but are still figuring out what we do want, and feel kind of paralyzed about what to do next. I feel like our finances are a place where that stuck-ness really shows up. I could use some outside perspective (from you!) on where we are, what’s possible, and how to get there.
Ann & Leo’s Life
Our jobs are pretty flexible on a daily schedule basis–we certainly don’t have traditional 9 to 5 schedules, and the academic schedule is pretty awesome in terms of time off for holidays, school breaks, etc. We love our neighborhood–we know lots of our neighbors, some friends are close, restaurants are nearby, there’s an amazing hardware store, a video store (really! We have a family ritual of renting movies on Friday nights that’s a highlight of the week), and an incredible park all in easy walking distance. Plus, our daughter’s daycare is just three blocks away.
We spend a lot more time together as a family compared to most other people we know. I have a garden I have been slowly creating, and would do more with it if I had more time. The whole family loves to spend time out there in the non-rainy seasons. Watching our daughter hunt for–and devour–fruit all over our yard in the summer is seriously one of the best things ever. We appreciate and make use of the literary, cultural and culinary resources of Seattle. I have amazing work colleagues, and feel that the work I do is meaningful and aligns with my values. I grew up in Seattle and my parents, an aunt and two uncles, and a cousin and her family all live in town.
Despite all this goodness, Leo and I feel like we’re in a rut. Where does this “stuck” feeling come from? As best as I can nail it down, it stems from:
1) Our House.
We were very, very lucky to be able to buy our house in 2013, before housing costs in Seattle got really out of control. We bought the proverbial “worst house on the block,” which had been a rental for 15 years, and it had A LOT of long overdue maintenance, plus mold issues that made Leo sick.
All of our extra income from the time we bought the house (in 2013) to when we had our daughter (in 2016) went to necessary (non-cosmetic) house repairs/maintenance, such as: replacing the roof and adding proper ventilation, replacing the furnace, replacing the hot water heater, replacing a missing section of foundation (the former owners had removed it to make a closet!), completely gutting the janky and mold-ridden basement apartment, adding French drains to make the basement watertight, and damp-proofing and insulating the basement.
The house is at a stable point now, but we’d really like to make it work better/more for us by doing some big projects, such as: finish the basement to add more bedrooms and another bathroom, renovate the kitchen, re-side the house, etc. Plus maybe add an Airbnb unit (more on that below)? Right now, we live in the 850 square feet of the upstairs, with two bedrooms and one bathroom. The basement is dry, insulated, and plumbed for a future bathroom, but doesn’t have, you know, walls or anything fancy like that. It’s currently unclear where the money would come from to do these big projects, without some sort of a major financial move (see my questions).
2) Leo’s job.
Leo and I do the same job, but at different schools, and his job entails a lame commute, toxic colleagues, and most importantly: he doesn’t feel fulfilled by teaching. Leo is an incredible people person–he can talk to and make friends with anyone–but the constant flow of students (people he invests in, gets to know, and then never sees again) in and out of his life is wearing on him. He knows he needs a change, sooner rather than later (like, within a couple of years). Before our first kiddo was born, he took a break from teaching to try out being an electrician as an apprentice. This ultimately didn’t work out – we couldn’t imagine the hours and low pay (during training) working for our family – but he learned a lot and generally enjoys working on stuff like that. He also worked hard on his soccer blog pre-kids, loved that, and it was gaining a solid readership. He’d ultimately like to re-start that and look into the possibility of selling it.
3) My job.
I, too, think about whether I want to stay in teaching for the long haul. I find myself being kind of… bored after doing this for almost ten years. My job is intense in a people-interaction kind of way, which is hard for me as an introvert, and the essay grading really wears me down. It’s feeling repetitive to teach the same courses over and over again. Though I believe in the mission of community colleges, and I like my school a lot, I can see myself becoming very, very burned out in ten more years. I really don’t know what else I would do, though.
In crunching numbers for this Case Study, I was happy to see that we’ve got a good gap between our spending and our income, which is a brand new thing for us! When we first moved to Seattle, we were both adjuncts and were making around $70,000 – $80,000 combined. Then I got a full-time job, while Leo was still an adjunct. During this time we bought our house, and then were doing major work on it, and borrowed $20,000 from relatives to help with renovation costs. We paid off that loan in January 2019. When our daughter was born, Leo got a full-time job, so we’ve only had two full-time incomes for three years.
Since starting daycare payments when our daughter was a year old, we’ve been barely breaking even–or going into the red–every year, even though we work extra classes during the summer. We just got an 8.2% raise this academic year, and have an additional 3% raise coming in January, but that was the first raise of any type that Washington state community college teachers received in 12 years, and getting that took a years-long lobbying effort, a walk-out, and a major media campaign that I am proud to have participated in. Given that, we’re not counting on getting other raises like, ever again – not even COLAs.
Our jobs are super secure and come with some amazing benefits, but our salaries are pretty much set for life. In general, it feels like we’re treading water financially, sometimes getting a bit underwater, and that’s with just one kid in daycare… Theoretically we’re making enough money, but it seems like something always comes up. I’d love to have more breathing room financially, so that we could choose to not work in the summer, travel more, improve the house, or have the flexibility to not always work full-time. That would make an enormous difference in our outlook.
5) We’re not sure we want to stay in Seattle.
Although I grew up here, I also spent some time living in small rural towns and loved a lot about those experiences. Leo grew up in a small town in Alaska, not far from Anchorage, and could definitely live somewhere a lot smaller. Leo was never wild about moving to Seattle, and the city has changed a lot since I grew up here and not necessarily in a good way. Though we have a good community here in some ways, it’s also odd to be earning about half to a third of what most of our peer group makes.
We both feel the pressure of living in a high cost of living area on not-huge salaries. Most of our colleagues have a partner who works in the tech or biotech fields to “subsidize” their community college salary. Leo and I have a general feeling that in Seattle, everyone is stressed and busy and doing their own thing and not joining together to support one another. We’d love to live somewhere with less emphasis on what people do and more emphasis on community.
Real Estate Considerations/Dreams
For years, Leo and I have bandied about the idea of having a “real estate empire” (’empire’ being tongue in cheek). For a while, we thought we might create an AirBnB unit in our basement. We’ve also talked about building a Detached Accessory Dwelling Unit (DADU) on our property, which we would rent out either short term or long term. Both of us think it sounds exciting and fun to do this – we can imagine a scenario where I’m the behind-the-scenes/organization/bookings person, and Leo is the “front of house” person, interacting with guests and doing the maintenance. This would really play to our strengths – we certainly have a lot of experience with maintenance after everything we’ve done to our house – and it’s something we’re both interested in, though to be fair, we don’t have any actual landlording experience. We haven’t pulled the trigger on any of these ideas due to a lack of capital to get started and also… life!
Our house is zoned to allow a DADU, but we’re not sure how big of a structure/where it could go. The rules are somewhat complicated, involving percents of property covered by buildings, setback requirements, etc., so we’d likely have to consult with an architect/builder.
While we’re lacking in capital, we do have a wild amount of home equity, and I think it’s burning a hole in our pocket. We won the property value lottery when we bought the house that we did in the neighborhood we did at the time we did. Young families are moving here like crazy, the public schools are good, and light rail (within a 15-minute walk) will open in the next 18 months. We bought our house for $375,000 (in 2013) and could probably sell it tomorrow (with no additional renovations) for $700,000. Fully renovated homes in our neighborhood, approximately the size of ours, sell for $850,000+. The market here is bonkers.
Future Property Inheritances
Additionally, we are set to inherit two properties in the future: one on our own and one with family. The first (which we will inherit on our own) is a one-bedroom cottage in the heart of the most desirable neighborhood in Seattle, close to downtown, a block from light rail, and right off the main commercial area. We’re inheriting it under an agreement to not sell it, since it would almost certainly be sold to a developer who would tear it down and build a condo or apartment building. It’s the kind of property that’s totally unique in the area, a bit of Old Seattle, and my relative who owns it regularly gets offers of $1 million for the land. However, the house is special, and it’s really important to our relative–and to us–that it not become just another apartment building. We imagine renting this cottage out, probably as a short-term vacation rental given the desirable location.
The second property is a small (two-bedroom), funky family vacation cabin on the waterfront about an hour and a half from Seattle. The current understanding is that we’ll inherit a quarter of the property along with two cousins and my sibling (at present, my father and two of his siblings are the owners). It’s a little unclear how this will actually pan out. My sibling and one of the cousins don’t (and likely won’t) live in the area, but my other cousin does. I have a lot of emotional attachment to this cabin and would really like to keep it in the family… I think. Financially, I know that my parents and aunts and uncles put about $7,500 a year into owning and maintaining the property, which I think is worth around $300,000.
There are also somewhat constant, low-level familial conflicts about who puts more time and energy into the maintenance of the cabin, how decisions get made, etc. Looking to the future, I can see it would be simpler if fewer people were involved, and there’s a possibility that some of “the next generation” would want to sell and others wouldn’t… we haven’t yet had a real family conversation about the future of this property, which is kind of stressful. In a dream world, I would like to buy out the other co-owners of the cabin (my sibling and two cousins), and then run it as a vacation rental during the times we’re not using it. This could also possibly work if we were co-owners, say having bought out some of my cousins/sibling, but not others?
This past summer, we went to visit one cousin (who would co-inherit the family cabin with me) who lives a few hours from Seattle on rural acreage. It was a magical visit at a moment in time when we were really open to questioning things and thinking about what we like and don’t like about our life right now. Our daughter was so excited and comfortable running around outside and exploring, which was magical to see for a kid who has been raised in a residential urban environment. It sparked a “what are we doing? what are we waiting for?” moment for both of us, and we were able to imagine a life that seems a lot more desirable than what we’re currently living.
Ann & Leo’s Potential Rural-Living Dream
A dream that emerged from that weekend trip goes something like this:
- We move to a rural spot–maybe Western Washington–within striking distance of a major metropolitan area.
- We build a DADU on our current house’s property, which we can use as a crash pad when we want to visit Seattle/need to go there for maintenance, etc.
- We rent out our current house, rent out the inherited Seattle cottage, and rent the family vacation cottage.
- We earn enough money from those rentals–and maybe other jobs—to support a simple, fulfilling life on our rural property.
- Leo can imagine doing something physical, such as being a self-employed electrician, to balance out his writing interests. I can imagine doing a lot more serious gardening and some writing as well.
In other words, we’re interested in something very similar to the Frugalwoods’ life! Leo and I can both imagine loving this kind of life, but have no idea how to go about enacting it.
Where Ann & Leo Want To Be In Ten Years:
This is a hard one! I’d say the clearest sense of where we’d like to be in 10 years is outlined in the “Rural-Living Dream” section above.
- Finances: on track for retirement, have an honest-to-goodness emergency fund, and have the flexibility to not both work full-time.
- Lifestyle: not have to work in the summer (if we’re still teaching), be able to travel more–it’s a dream to live abroad for a while –and live a slower pace of life, whether that’s in Seattle or elsewhere.
- Career: Leo doesn’t want to be teaching and wants to continue writing. I want to not HAVE to be teaching. If I am still teaching, I don’t want to have to work in the summer. Or, maybe I’d like to do something totally different. I’m not interested in trying to become an administrator or anything else in the academic world.
Ann & Leo’s Finances
|Ann’s net salary||$4,851||These are our new salary numbers, reflecting a raise that started this academic year. We’ll get another 3% raise in January (see notes above in narrative).
Both salaries are minus health and dental insurance, retirement contributions (mandatory 7.5% contribution from us, matched by employer), life insurance, short term disability insurance, union dues, and taxes.
These totals are an average of a 12 month period when both of us picked up one class in the summer (the maximum we can work is two). We prefer to only teach online in the summer, to prevent burnout, but it’s not always possible to get two online classes, especially for Ann. Ideally, we wouldn’t need to work in the summer at all.
|Leo’s net salary||$4,600|
Note: the below monthly totals are averages from June 2018 – June 2019
|Mortgage||$2,025||Includes home insurance and property taxes.|
|Daycare||$1,350||Reasonable for Seattle…|
|Groceries||$684||It’s important to us to buy almost all organic, mostly whole foods, etc.|
|Medical/wellness||$637||Leo has a well-managed chronic condition that he takes supplements for. They are expensive, but keep him healthy!
This also includes A LOT of therapy — honestly, becoming parents has been an unfolding process of dealing with stuff from our families of origin both as individuals and a couple. We’re doing well, though, and this feels like an important investment in everyone’s emotional well-being. This should be going down in the future. I think $500 is a more realistic number going forward?
|Travel||$510||We have cut way back on this recently, but we have a lot of family all over the place, we’re used to traveling frequently, and though we used credit card miles for almost all flights (right now we have the Discover It Miles card), this really added up. There tends to be a lot of eating out, etc. while traveling.|
|Student Loan Payments||$323||For both Ann and Leo|
|Eating Out||$237||This category is the canary in the coal mine for us. When things are going well, it’s less, when they are not, this can get way out of control, to $500 to $600 in a month. I’d prefer this to be more like $100 for a special dinner once a month, but instead it tends to be mostly “oh, crap, I guess takeout?”|
|Taxes||$216||See questions — the changes to the tax code really surprised us! Gah.|
|Christmas||$173||See notes below under “Gifts” line item.|
|Bulk Shopping||$160||This is quarterly Costco trips, plus occasional bulk meat purchases from a farm. This and the grocery bill includes most household stuff like toilet paper, batteries, etc.|
|Water, Sewer, Garbage||$140||Apparently Seattle has some of the highest water rates in the country??|
|Home Maintenance||$138||Air filters, things that need fixing, etc.|
|Gifts||$119||So much family, so many birthdays, weddings, baby showers, etc. This feels like a lot to me, but Leo really enjoys gift giving and it’s a big deal in his family… It’s an “ongoing conversation” between us.|
|Household Goods||$111||Miscellaneous house stuff that doesn’t get bought at a grocery store or Costco.|
|Car Maintenance||$106||Includes taxes and registration, and whatever maintenance needs crop up.|
|Kiddo||$103||Diapers, wipes, clothes, car seats, etc., etc.|
|Gas for cars||$92|
|Home improvements||$70||Occasional purchases of small to medium sized wants not needs, but things that make our life better. Blackout curtains for bedrooms is a recent example.|
|Babysitters||$60||Occasional date nights not covered by grandparents.|
|Clothing/Haircuts||$50||For Ann and Leo|
|Phone||$47||Two cell phones through Republic Wireless, plus a VOIP landline that costs about $5.50 a month|
|Natural Gas||$45||Furnace is natural gas|
|Internet||$40||Promotional rate — whenever it goes up, we call and get it reinstated.|
|Ann Expendable||$25||Misc. personal spending — also when we get monetary birthday gifts, etc., that balance goes here.|
|Leo Expendable||$25||See note above.|
|Garden||$25||Ann’s major hobby — includes vegetable and fruit production for the family!|
|Dog||$18||Dog food, vet when necessary|
|Website hosting||$16||For Leo’s website, not currently being worked on, but maybe again in the future?|
|Subscriptions||$14||A couple of magazines that we really enjoy — house stuff for Ann, sports for Leo.|
|House||$700,000||This is what I estimate our house is worth (in its current state, with no additional renovations). We bought it for $375K in 2013. Fully renovated homes in our neighborhood, approximately the size of ours, sell for $850,000+.|
|Ann’s Retirement Account||$90,000||Vanguard Total Stock Market Index Fund|
|Leo’s Retirement Account||$80,000||Vanguard Total Stock Market Index Fund|
|Checking Account||$8,200||We keep enough in here to cover living expenses.|
|Ann’s Roth IRA||$8,000||I inherited money from a grandparent years ago — this is where I stuck it. We used the original capital for home repairs a few years ago. This is in FSTVX at Fidelity.|
|Savings Account||$3,800||This is where we collect money for the summer, when we make less money, and also theoretically our emergency fund.|
|Leo’s IRA||$2,000||Retirement account he started in his 20s through TIAA CREF|
|Item||Outstanding loan balance||Interest Rate||Loan Period and Terms|
|Mortgage||$290,000||3.38%||30-year fixed-rate mortgage; purchased in 2013 for $375K|
|Item||Outstanding Loan Balance||Interest Rate||Loan Period/Payoff Terms|
|Loan from family member for Leo’s surgery||$15,000||0% interest, flexible repayment||For a very necessary hip surgery for Leo, which was unfortunately not covered by (our normally extremely excellent) insurance. This just happened this fall, and we’ll need to make a plan for repayment.|
|Leo’s Student Loans||$11,000||5.60%||For both student loans: we refinanced through Sofi in 2015 to reduce the interest from 6.8% to 4%. The original balances when we refinanced were something like $14,000 and $15,000, respectively.
We went with a variable interest rate, thinking we’d be able to pay them off in a couple of years, but that didn’t happen. The original 4% rate has been creeping up, up, up. It feels like we make no progress on these and they drive me crazy!!
I looked into refinancing again and I think we could refinance at a fixed 5.7% over 20 years and reduce our monthly payment to $150. Or should we use part of a house refinance to pay these off?
Anticipated payoff date is June 2025.
|Ann’s Student Loans||$10,000||5.60%||See notes above.|
|Discover credit card||$9,341||0% interest until June 2020||We used this to cover some of our living expenses this summer when Ann wasn’t able to work two classes.
We plan to have this paid off by the time it starts accruing interest in June.
|Vehicle make, model, year||Valued at||Mileage||Paid off?|
|Nissan Versa 2014||$6,000||100,000||Yes, bought with cash|
|Honda CR-V 2001||$1,500||150,000||Yes, bought with cash|
|Total estimated value:||$7,500|
Ann’s Questions For You:
1) Our number one question boils down to: how can we leverage our current situation to start moving towards a life we really want to be leading?
2) Can we afford two full-time daycare bills? Or should we explore other childcare options, such as an Au Pair?
I confess that we figured we would cross that bridge when we get there… not great. We imagine starting the new kiddo in daycare in Fall 2020, so that would be two daycare bills from then until Fall 2022 (when our oldest starts kindergarten). That means that in Fall 2020, our daycare bill would go from $1,350 to $2,700 a month (it’s not the same price for infants and toddlers, but siblings receive a $200 discount, which will make their monthly cost the same). Gulp. We have friends who have an Au Pair, and that’s more like $800 a month, but we would also need to provide housing and food plus an upfront agency cost. Neither of us love the idea of having someone living in the house with us and, without renovations, it would be impossible to house an Au Pair since we don’t have a bedroom for them.
3) How can and/or should we use our home equity to get ourselves on firmer financial footing?
Should we do a cash-out refinance to get a big chunk of money and use it to build a separate Airbnb/Au Pair unit on the property, lessening daycare costs in the immediate future while creating the potential for rental income later?
Or should we potentially create an Airbnb unit/Au Pair quarters in the basement, which would be less desirable long term but more affordable in the short term? I got some ballpark numbers from a loan officer, asking her to cap our total housing payment at $2,500 (including insurance, taxes, etc.). The answer was that we could get about $115K, with an interest rate of 3.75%, on a new 30-year mortgage. Construction costs in Seattle are HIGH – for creating a DADU, the ballpark figure is $300/square foot.
4) How would you plan for/think about the two properties we’re set to inherit? Are we crazy for thinking we could turn those into serious part-time or even full-time income (and be able to leave teaching)?
5) Are we doing okay with respect to saving for retirement? Doing some basic compound interest math using the Fidelity rule of thumb you have mentioned on the blog before, it seems we’ll be okay even though we’re a little behind right now, but what do you think?
6) The recent changes to the tax code really hosed us – we went from breaking about even to owing $2,600 last year! Is there anything we can do to lessen this?
Mrs. Frugalwoods’ Recommendations
Congratulations to Ann and Leo on their upcoming baby! And congratulations on putting themselves in the position to have options. They’re doing an excellent service to themselves by pausing to analyze their finances and their longterm goals.
Ann is so insightful about how their spending does–and does not–reflect their values and I commend her for taking the time and energy to do this thorough soul search and financial research. These two things often work in parallel: how you spend your money equals the type of life you’re able to lead. And the type of life you want to lead is informed by how you manage your money.
In many ways, the future is wide open for Ann and Leo due largely to the prudent purchase of their current home. Since they have so many options, which we’ll get to in a moment, I want to start off with their top line financial priorities (as I see them). By first identifying what they need to do, we can then address what they might want to do.
Financial Goal #1: Pay off the credit card by June 2020
I’m not a fan of carrying a balance on a credit card; however, since this card has a 0% interest rate, I’m not hot and bothered. What I am worried about is their promise to pay it off before the interest rate begins in June 2020. I want to make sure Ann and Leo have an ironclad plan for making this happen because I have to imagine the interest rate won’t be pretty (most credit cards have interest rates in the high teens–eek!). Plus they’re having a baby in March, which has a way of derailing the best of intentions. Given that, I want to keep this repayment top of mind for them.
- Current balance: $9,341
- Months to pay off (including January): six
- Amount to pay each month: $1,556. 83 (we’ll get to how in a moment)
Financial Goal #2: Build a real emergency fund
Ann and Leo sort of have an emergency fund–which is better than no emergency fund!–between their checking and savings accounts. However, Ann noted that the checking account is depleted each month to pay their expenses, and they only have $3,800 in their savings account. An emergency fund is a required part of a responsible, stable financial life because it serves as the buffer between you being fine and you being in deep debt.
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. This is why it’s so important to track your expenses–I use and recommend the free expense tracker from Personal Capital (affiliate link).
- Ann and Leo currently spend $7,853/month, which means they should target an emergency fund in the range of $23,559 (three months of spending) to $47,118 (six months worth).
- They have $3,800 in this fund at present, so they should target saving at least another $19,759.
- I will note that since emergency funds are calibrated on monthly expenses, if Ann and Leo reduce their monthly expenses, they’ll need a smaller emergency fund.
There are quite a few options for how Ann and Leo can achieve these two goals, but I want them to be crystal clear that these are priorities one and two. Not renovations. Not moving. Not quitting jobs. These two things need to be done first so that they don’t find themselves spiraling deeper into debt.
How To Achieve These Goals: Reduce Expenses
The good news is that, with focus and determination, Ann and Leo have the capacity to knock these two goals out in a relatively short time frame. The bad news is that they will need to severely trim their spending in order to do so. But the good news is that this is Frugalwoods, where frugality is fun! Right, guys? Aren’t we having fun??!!! Ok good.
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.
What impressed me about Ann and Leo’s expenses is that they provided annual spending averages 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, December 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.
Since Ann and Leo have two clearly defined goals (at least, according to moi), they might consider making the below cuts to their spending until these goals are met. Once they achieve these goals, they could incorporate some of this spending back into their lifestyle… although they’ll want to consider Goals #3-5 (listed below) first.
|Item||Current Amount||Mrs. FW’s Notes||Proposed New Amount||Amount Saved|
|Mortgage||$2,025||Fixed expense; no change||$2,025||$0|
|Daycare||$1,350||Fixed expense; no change||$1,350||$0|
|Groceries||$684||This is not bad at all! With some concerted effort, I wonder if they could decrease this a tad? Alternately, it may be that this amount remains while the eating out category goes down.||$684||$0|
|Medical/wellness||$637||Ann noted that $500 seems like a more realistic number going forward.||$500||$137|
|Travel||$510||I recommend putting this on hold while they work towards goal #1 and goal #2||$0||$510|
|Student Loan Payments||$323||Fixed expense; no change||$323||$0|
|Eating Out||$237||I recommend putting this on hold while they work towards goal #1 and goal #2||$0||$237|
|Taxes||$216||Fixed expense; no change||$216||$0|
|Christmas||$173||I recommend putting this on hold while they work towards goal #1 and goal #2||$0||$173|
|Bulk Shopping: grocery and household goods||$160||My question is about the monthly total spent on groceries, bulk shopping, and household goods. Between those three categories, Ann and Leo are spending $955 per month, which seems like a lot.
I wonder if there are efficiencies to realize? I encourage them to comb through receipts to determine what’s being bought in each of these categories and what “wants” might be creeping in with the “needs”
|Water, Sewer, Garbage||$140||This does seem like a lot. I wonder if they’ve looked into water-saving options, such as low-flow faucets/shower heads and more efficient toilets? I’ll leave as is for now, but I recommend they explore water conservation options.||$140||$0|
|Home Maintenance||$138||I recommend putting any non-essential items here on hold while they work towards goal #1 and goal #2||$65||$73|
|Car Insurance||$133||This seems high for two older, high-mileage cars. I suggest they shop this around and see if there’s anything cheaper.||$133||$0|
|Gifts||$119||I recommend putting this on hold while they work towards goal #1 and goal #2||$0||$119|
|Household Goods||$111||My question is about the monthly total spent on groceries, bulk shopping, and household goods. Between those three categories, Ann and Leo are spending $955 per month, which seems like a lot.
I wonder if there are efficiencies to realize? I encourage them to comb through receipts to determine what’s being bought in each of these categories and what “wants” might be creeping in with the “needs”
|Car Maintenance||$106||Fixed expense; no change||$106||$0|
|Kiddo||$103||This seems high since this is in addition to all groceries and household goods. I encourage Ann and Leo to look into generics, hand-me-downs, etc.
Here’s a post on the topic: How I Saved Tons Of Money During My Baby’s First Year
|Gas for cars||$92||Fixed expense; no change||$92||$0|
|Electricity||$87||Fixed expense; no change||$87||$0|
|Home improvements||$70||I recommend putting this on hold while they work towards goal #1 and goal #2||$0||$70|
|Fun||$65||I recommend putting this on hold while they work towards goal #1 and goal #2||$0||$65|
|Babysitters||$60||I recommend putting this on hold while they work towards goal #1 and goal #2||$0||$60|
|Clothing/Haircuts||$50||I recommend putting this on hold while they work towards goal #1 and goal #2||$0||$50|
|Two cell phones through Republic Wireless, plus a VOIP landline that costs about $5.50 a month||$47||I’m thrilled that Ann and Leo are using an MVNO, but this still seems a tad high. I pay around $29 for two cell phones through Ting. Might be worth shopping around to see if they could settle into a cheaper monthly plan. However, this isn’t a super duper high priority since they’re already doing the right thing by using an MVNO.
Wondering what an MVNO is? Check this out: My Frugal Cell Phone Service Trick: How I Pay $10.65 A Month
|Natural Gas||$45||Fixed expense; no change||$45||$0|
|Ann Expendable||$25||I recommend putting this on hold while they work towards goal #1 and goal #2||$0||$25|
|Leo Expendable||$25||I recommend putting this on hold while they work towards goal #1 and goal #2||$0||$25|
|Garden||$25||Fixed expense; no change||$25||$0|
|Dog||$18||Fixed expense; no change||$18||$0|
|Website hosting||$16||Fixed expense; no change||$16||$0|
|Subscriptions||$14||I recommend putting this on hold while they work towards goal #1 and goal #2||$0||$14|
|Netflix||$9||I recommend putting this on hold while they work towards goal #1 and goal #2||$0||$9|
|Monthly subtotal:||$7,853||Proposed new monthly subtotal:||$6,090||$1,763|
|Annual total:||$94,236||Proposed new annual total:||$73,080||21,156|
If Ann and Leo brought their spending down to $6,090 per month, they’d have $3,361 every month to put towards paying off their credit card and building an emergency fund ($9,451 income – $6,090 expenses).
At that rate, they could easily pay off their credit card before the interest rate appears in June:
- Current credit card balance: $9,341
- Months to pay off (including January): six
- Amount to pay each month: $1,556. 83
After making their credit card payment, they’d have $1,804.17 leftover each month to put into their emergency fund. Plus, if they decided to continue all of the above cuts and keep their monthly expenses at $6,090, they could target saving up a smaller emergency fund ($18,270 to $36,540).
After the credit card is paid off in June, they’ll be able to funnel the full $3,361 every month into their emergency fund. At that rate, they’d have a fully funded emergency fund of $18,270 in place by August 2020 (math below):
$1,804.17 x 6 months = $10,825 (by June 2020) + existing $3,800 in savings = $14,625 + July 2020 amount of $3,361 = $17,986
Based on the above recommended savings, they could wipe out goals #1 and #2 in a mere eight months!
Financial Goal #3: Daycare For Two
It’s really good news–and ideal timing–that Ann and Leo could have their credit card paid off and their emergency fund built by August 2020 because their second child is slated to start daycare in September 2020. At that point, their monthly daycare bill will double to $2,700.
In order to afford this second daycare fee, Ann and Leo will have to reduce their spending, so it’ll be perfect that they’ve already done so!
If they follow the above recommended cuts to their spending, they’ll be able to easily afford the $2,700/month daycare bill and will, in fact, have $2,011 leftover every month ($3,361 in monthly savings – $1,350 for the second child’s daycare) to plow into…
Financial Goal #4: Student Loans!
I know Ann is bothered by their student loans, but the upside is that the interest rate (5.6%) isn’t terrible and the total amount they owe ($21,000) isn’t astronomical. They’re a hassle, but they can be paid down–especially if Ann and Leo are able to stick with lowered expenses. Let’s project when these could be paid off:
January 2020 to August 2020: continue paying the $323 monthly minimum (while completing goals #1-3). In September 2020, their combined loan total will be $18,416 = ($21,000 – [323 x 8]) 2,584
September 2020: add the $2,011 in monthly savings to the $323 monthly minimum payment for a total of $2,334 per month going towards their student loans
At that rate, it would take them under 8 months (until May 2021) to pay both loans off in full! Not bad! ($2,334 x 8 months = $18,672)
Note: I initially made a ton of errors in calculating this for reasons unknown. Thanks to helpful Frugalwoods readers, I’ve updated all the numbers! Thanks you guys!
Financial Goal #5: Loan from family member
Ann and Leo borrowed $15K at 0% interest from a family member and they will need to pay it back. I encourage them to sit down with this family member to discuss repayment expectations and timeline.
If this family member is flexible and willing to defer payments on this loan, Ann and Leo should wait to pay it off until their interest-bearing debts (credit card and student loans) are paid off. This is the mathematically smartest solution, but might not be the family-relationship smartest solution. They’ll need to talk with this relative and figure out what’s reasonable.
If they can wait until May 2021 to begin repayment, they could then put their full $2,334 in monthly savings towards the $15,000 balance (it’ll be the full $2,334 because they’ll no longer have a student loan payment!!!!).
In this scenario, they’d have the $15K paid back in full by December 2021:
$2,334 x 6.5 months = $15,171
December 2021: Ann and Leo are debt-free!!!
According to all of the above calculations (which are imperfect since they don’t account for inflation or increases to their salaries or inevitable emergency expenses), Ann and Leo can have their full debt load of $45,341 paid off in less than two and a half years from today! That’s pretty darn quick! This would necessitate a permanent reduction in their monthly spending, but it’s a very doable, very quick debt repayment rate.
Once they’re finished paying off this debt, and once their older daughter starts kindergarten in September 2022, they’ll have $3,684 ($2,334 former debt payment + $1,350 former daycare payment) leftover every month to put towards investments or renovations or a move to the country.
But What About Their Rural-Living Dream?
None of the above takes Ann and Leo’s rural-living dream into account, but I wanted to get all of those details out of the way first, so that they have a clear picture of what they can–and need to–do in order to right their financial ship. The enormous wild card in all of this is the value of their current home and their home equity. I think Ann and Leo have done a great job penciling out different possibilities here, and they clearly bought an incredible investment property, so I’m going to turn the tables and ask them a few questions:
Question #1: How handy are they?
Ann mentioned all of the renovations they’ve done to their home but it wasn’t clear to me if they did that work themselves or hired someone to do it. If Ann and Leo are serious about living rurally and becoming landlords, being handy will make the process a lot easier and a ton less expensive.
For both landlording and living rurally, Mr. FW and I have learned that handiness–and a willingness/ability to teach yourself how to do stuff–is imperative. It might actually be the first requirement, unless you have endless funds to pay for endless repairs, maintenance, rural labor… the list goes on. Mr. FW and I have a property manager for our rental, which is certainly something Ann and Leo should explore, but it will, of course, eat into their profits.
Since Leo studied to become an electrician, I assume he’s handy and has an aptitude for teaching himself handy skills. Handiness matters because if they do a cash-out refinance of their home, they won’t need to get a construction loan and won’t need to hire a contractor. With a construction loan, they’d be limited on how much they’d be permitted to do themselves and they’d (most likely) be required by their lender to hire a contractor.
Question #2: What’s their anticipated rate of return?
How much could they rent their current home out for? How much could they rent a DADU for? A basement apartment? I encourage Ann and Leo to start building spreadsheets that account for all the expenses and rental prices for each of the rental scenarios they’ve discussed. Look at rental prices on Craigslist, have a realtor do a free appraisal of the home, have a property manager do a free rental appraisal.
Regarding the Au Pair question, this can only be answered when we know what the DADU/basement apartment would rent out for. It seems possible they’d be able to charge enough in rent to negate the savings of an Au Pair over daycare. But again, we can’t know that until we know the expected rental rates (minus costs).
Ann’s question of whether or not they should refinance their home should really be answered by what rate of return they can expect from renting out a basement apartment/DADU (with all expenses accounted for, including: an ongoing maintenance reserve, vacancy, repairs, etc).
Another note: if they do move to a rural location and rent out their home, I don’t think it’ll make financial sense to keep the DADU as a pied-à-terre for themselves. It would most likely be a lot more advantageous to rent out the DADU and pay for a hotel when they visit Seattle and/or hire a property manager.
Question #3: What’s their risk tolerance?
At present, Ann and Leo have a pretty low risk level. They both have stable, tenured jobs and–with a bit of cutting to their expenses–they can afford daycare for both kids and pay down their debts in a reasonable time frame. However, if they want to explore a different lifestyle, they’ll be looking at a higher risk level.
This isn’t a bad thing, it’s just something for them to be aware of. They’d be going from stable (boring, perhaps), routine paychecks to the potentially volatile, variable (exciting, perhaps) income of rental properties, which also, by the way, does not include health insurance or retirement benefits.
The way I see it, the highest risk, highest potential reward would be for Leo to quit his job (since he makes less money and is more interested in quitting) and continue paying for daycare while he renovates the basement and builds the DADU as quickly (and cheaply) as possible. If they took this approach, they’d need to cut their spending to the bone and be quite quick about the renovations in order to not slip underwater.
Question #4: How much would they pay in healthcare?
If one of them quits their job, how much would it cost for them to be covered by the working spouse’s healthcare? If they both quit their jobs, how much should they expect to pay through the affordable care act for their family of four?
Question #5: Are they paying for daycare in the summer?
It sounds like they’re currently paying for summertime daycare, but if they’re not working, then could they cease the daycare and re-start the kids in the fall? This would give them some financial breathing room this summer to work on the renovations.
That being said, I have two little kids and I know it’s not possible to work on a renovation project with children underfoot. So, one parent would either need to watch the kids or work and pay for daycare while the other parent did the renovation work.
Question #6: What’s the price point of the rural properties they’re interested in?
Ann and Leo should start researching rural properties in the area they’re interested in to get a sense for what their budget will need to be. There are a lot of unknowns here and the best direction I can give is to start creating financial models that pin down as many variables as possible.
Question #7: Can they spend more time living/visiting rurally?
Rural life is A LOT different from city life and I encourage Ann and Leo to spend more time in their desired rural location before making the leap.
The only advice I have here is that an inheritance doesn’t mean anything until you actually inherit it. If it comes your way, great, but you can’t build plans around it until it happens. It’s not wise (or possible, really) for Ann to make plans about these properties until they are hers. It sounds like the Seattle cottage could potentially provide a great rental income, but again, it’s an unknown until it’s hers. The vacation cabin sounds like kind of a hassle, but again, it’s an unknown until it’s hers.
If it were me, I’d focus on all of their tangible financial goals and then deal with the inherited properties when (and if) they’re inherited.
Get a High Interest Savings Account
I’m not sure what interest rate Ann and Leo’s savings account has, but, they should make sure they’re in a high-interest savings account. Using a savings account with a high interest rate is one of the easiest ways to make your money work for you. For more info, here’s my page on high-interest savings accounts.
Credit Card Usage
I’m usually a fan of credit card usage–for the rewards points and also the boost it can give your credit score–but, I’m concerned about Ann and Leo’s tendency to carry a balance on their card. I encourage them to consider if they feel they can pay their card off in full every month. If they can’t, I recommend they stop using credit cards. More on how to use credit cards responsibly: The Frugalwoods Guide to a Simple, Yet Rewarding, Credit Card Experience.
Not much to say here because Ann and Leo are doing just fine with their retirement savings. They’re both saving a total of 15% of their salaries (7.5% with a 7.5% match) towards retirement, which is awesome. The thing to keep an eye on will be if one (or both) of them quits their job(s). At that point, they’ll want to research alternative, non-employer sponsored retirement vehicles, such as IRAs, Roth IRAs, SEP IRAs, and more.
- Research the rates of return for renting out their current home, a basement apartment, and a DADU.
- Calculate the cost of renovations/building and determine how much of the work they could DIY versus hire out.
- Consider their risk tolerance and handiness level and whether or not they’d be comfortable with one of them quitting their job in order to perform the renovations/building.
- Research home prices, lifestyle, schools, availability of services, hospitals, grocery stores, etc in the rural area they want to live in. Visit and spend as much time there as is feasible.
- Enact the plan I outlined for paying off the credit card by June 2020 and saving up an emergency fund.
- Then, based on what they decide regarding the house, pay off the student loans and the family member loan.
- Reduce their expenses in order to afford any–and all–of this, including a second daycare bill (unless it becomes feasible for Leo to stay home with the kids while managing a DADU/basement apartment rental that he has built).
Ok Frugalwoods nation, what advice would you give to Ann? 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.
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