Reader Case Study: Breaking the Cycle of Financial Instability
Kayla and her partner Lauren live in Charlotte, NC with their two dogs and one cat. They both work in banking–at the same bank, in fact–and are feeling settled in the home they bought in 2019. Very soon, they plan to have children, which has them reflecting on their financial priorities. While they still have some debt, they’ve done a fantastic job of paying it down over the years. Now, they’re ready to get serious about their financial health and they’ve asked for our help. Kayla and Lauren both grew up in households they describe as financially unstable and they’re committed to breaking that cycle for their own children. Let’s work together as the Frugalwoods community to help this young couple chart the best possible future for their family!
What’s a Reader Case Study?
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 the last case study. Case Studies are updated by participants (at the end of the post) several months after the Case is featured. Visit this page for links to all updated Case Studies.
The Goal Of Reader Case Studies
Reader Case Studies are intended to highlight a diverse range of financial situations, ages, ethnicities, geography, goals, careers, incomes, family composition and more!
The Case Study series began in 2016 and, to date, there’ve been 58 Case Studies. I’ve featured folks with annual incomes ranging from $17,160 to $200k+ and net worths ranging from -$317,596 to $2.9M+.
I’ve featured single, married, partnered, divorced, child-filled and child-free households. I’ve featured gay, straight and trans people. I’ve featured men, women and non-binary folks. I’ve had cat people and dog people. I’ve featured folks from the US, Australia, Canada, England, South Africa, and France.
I’ve featured people with PhDs and people with high school diplomas. I’ve featured people in their early 20’s and people in their late 60’s. I’ve featured folks who live on farms and folks who live in New York City.
The goal is diversity and only YOU can help me achieve that by emailing me your story! If you haven’t seen your circumstances reflected in a Case Study, I encourage you to apply to be a Case Study participant by emailing email@example.com.
Reader Case Study Guidelines
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 condemn. There’s no room for rudeness here–the goal is to create a supportive environment where we all acknowledge that we’re human, we’re flawed, but we choose to be here together, workshopping our money and our lives with positive, proactive suggestions and ideas.
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. I am not a financial advisor and I am not your financial advisor.
With that I’ll let Kayla, today’s Case Study subject, take it from here!
Kayla & Lauren’s Story
Hi! I’m Kayla, 26, and my partner (we’re married, so she’s technically my wife but I’m not crazy about the word “wife” and prefer “partner”) Lauren is 30. We have two dogs and a cat and live in Charlotte, NC. We work at the same bank – Kayla in Corporate Treasury and Lauren in Supply Chain Risk. We got married while living in DC in 2017 and have been together since meeting in college in 2012.
Pre-COVID, the biggest thing we liked to spend our money on was travel. We both have a huge passion for traveling and have been to 15+ countries together. When traveling and in general, we really like luxurious experiences. We love to go on spa dates, to the ballet, to see concerts of artists we love, go to plays, nice restaurants, museums, etc.
Since COVID, we’ve been less focused on these types of experiences and more focused on individual hobbies. Lauren likes woodworking and home projects, which there’ve been plenty of since working from home and quarantining began. Kayla likes to read, bake, and garden. Some shared passions we have are the outdoors and history. North Carolina is naturally such a beautiful state with a lot of history. We love exploring and are really thankful to live in a location that has an urban feel but also a big beautiful lake for the summer time and a short driving distance to the mountains.
I feel like we’re at a transition point in our lives. We both had pretty unstable childhoods that included both financial instability and physical instability (as in, we both moved at least once per year due to the instability of our family units, relationships, etc.). While we can both fully acknowledge the ingrained privilege we’ve had in our lives, we also inherited some of the unstable habits of our parents.
After Kayla graduated from college in 2015, we spent the next 4 years spending beyond our means. We purchased our first home in late 2015, which turned out to be a money pit with a lot of deferred maintenance that was missed during the inspections. We moved from Charlotte, NC to DC and then back again, which was quite expensive. We spent way more money on our wedding and honeymoon than we had to. We took frequent vacations and put them on credit cards without having the money to pay them off right away, traded in cars like the money didn’t actually matter, etc.
The list goes on and we have spent the past two years paying off all of that credit card debt and working through the emotional issues that led us to the same cycle of overspending and physical instability as our parents. We’re very proud of the progress we’ve made in our spending habits. Paying off our credit card debt and finding physical security through the purchase of our current home was a huge accomplishment. Our next financial goals seem daunting and we feel like we need some guidance and perspective.
The best part of our current lifestyle is the comfort we have. Lauren and I have been together since I was 18 and I literally feel like we have grown up together (because we have). I think we are really lucky that the work-from-home COVID situation has been fairly easy for us.
We like being around each other but at the same time are totally cool if one person needs alone time and then we barely talk to each other for 2 days while we each do our own thing. We are at a point where there are no plans to move. We can pay all our bills without concern, purchase the food we want at the grocery store, buy whatever books we feel like buying, etc. with no thought of oh how are we going to pay this off or where is this money coming from. It’s just nice to be comfortable and stable for what feels like the first time in both of our lives.
The worst part of our current lifestyle is our fear of the future. The added layer of uncertainty surrounding COVID has definitely not helped. We both have always wanted a family and are ready to start that process. There are a lot of financial goals tied to this next chapter and they seem overwhelming and uncontrollable when looked at through a lens of fear and uncertainty.
Where Kayla and Lauren Want to be in Ten Years:
- No debt aside from our mortgage.
- Able to finance our pregnancy process in cash with no additional debt accrued.
- Adequate savings for our children’s primary and college educations.
- The ability to pay for family vacations and travel in cash.
- Be on track to both retire somewhere between age 50-55.
- Not worry about money at all.
- Not have parental arguments about finances be something our kids ever experience.
- We want to be long done with the pregnancy process and have our children as part of our family unit.
- We have a family cabin in the NC mountains and would like our kids to spend a ton of time outdoors, swimming at the lake, exploring around the cabin in the mountains (we are very lucky to have ownership in this property with no expenses currently).
- On the flip side we also love living in an urban space and want to take advantage of the public transport available to us in addition to the art, culture, and food scene of our town.
- We want to be able to travel both domestically and internationally to historic and/or beautiful places.
- Kayla: I’m very happy with the career path I’m on. I work in a very corporate setting, which I feel is kind of looked down upon from others in my generation, but it works for me. My job fits both my personality and my strengths. I love the mental challenge my job provides and it’s a good outlet for me to push myself. I like the stability and predictability of the type of work that I do and in terms of being able to provide for my family. I also feel like I am on a path that can provide opportunities for career growth and higher income in the future.
- Lauren: Am I in love with my job? No. Am I content? Yes. While I don’t feel that my current career path is my passion, I do appreciate what it provides: a great manager, low pressure, and a hybrid schedule once we go back to the office. I’ve spent many years trying to figure out what I want to be when I grow up and the best I can come up with is that I don’t know. I like the company I work for and they encourage internal movement, so if I ever want to move to another role I know I have internal support. Otherwise, I am content to stay in my current field and progress upwards. My ultimate goal is to be financially independent so I can choose how and what I spend my time working on. I would like to get to a place where I don’t have to work for a living and instead can work without concern for how much income I make i.e. with a non-profit, as an EMT, with my woodworking.
Kayla and Lauren’s Finances
|Kayla’s Net Monthly Income||$4,659||Minus Kayla’s 401k contribution (6% pre tax), supplemental life insurance and critical illness coverage, and state and federal taxes|
|Lauren’s Net Monthly Income||$3,501||Minus health/dental insurance for both of us, Lauren’s 401k contribution (6% pre tax), HSA contribution ($200 per month), and state and federal taxes|
|Kayla’s Bonus||$333||Paid annually – target is 7% of salary (81,600) but could be more or less depending on performance. Subtracted 30% for taxes.|
|Lauren’s Bonus||$193||Paid annually – target is 5% of salary (66,300) but could be more or less depending on performance. Subtracted 30% for taxes.|
|Item||Outstanding loan balance||Interest Rate||Loan Period and Terms||Equity||Purchase price and year|
|Mortgage on primary residence||$269,157||2.88%||30 year mortgage||$4,843||$276k; purchased in 2019|
|Item||Outstanding loan balance||Interest Rate||Loan Period/Payoff Terms/Your monthly required payment|
|Lauren’s Student Loans||$57,127||Currently set at 0% and not able to find what the interest rate was pre-Covid||Normally pay $442 per month + $100 employer contribution – currently only paying $100 employer contribution|
|Kayla’s Student Loans||$32,546||Currently set at 0% and not able to find what the interest rate was pre-Covid||Normally pay $158 per month + $100 employer contribution – currently only paying $100 employer contribution|
|Lauren’s Car Loan||$17,859||5.53%||Pay $553 per month (minimum payment) – 2 years and 8 months left on the loan term|
|Kayla’s Car Loan||$14,202||4.50%||Pay $446 per month (minimum payment) – 2 years and 6 months left on the loan term|
|Medical Bill||$3,460||0%||Pay $65 per month (minimum payment) – program through our hospital to make small monthly payment with no interest for unexpected surgery|
|Item||Amount||Notes||Interest/type of securities held||Name of bank/brokerage|
|Lauren’s 401k||$28,377||This is Lauren’s employer sponsored 401k (current employer). We both contribute enough to qualify for our employer’s full match.||Tier 1 Vanguard Target Retirement 2055||Vanguard|
|Kayla’s 401k||$17,005||This is Kayla’s employer sponsored 401k (current employer). We both contribute enough to qualify for our employer’s full match.||Tier 1 Vanguard Target Retirement 2060||Vanguard|
|Lauren’s Company Stock||$10,584||Some of Lauren’s stock was purchased through the employee stock purchase plan but most was gifted by the company||Stock + accrued dividends||Solium|
|Kayla’s Company Stock||$8,674||All of Kayla’s stock was gifted by the company||Stock + accrued dividends||Solium|
|Savings Account||$4,937||This is our savings for unexpected events, things for the house, basically anything/everything right now especially sperm purchase savings||Cash – 0.50%||Ally Bank|
|Kayla’s IRA||$3,437||This is a 401k from an old job of Kayla’s that rolled into an Traditional IRA||0.50%||Ally Bank|
|HSA Account||$1,500||This is our HSA account – Lauren contributes $200 per month and our employer occassionally contributes as an extra perk. We pay for all medical expenses out of this account which have been a lot over the past few years. We also never track what we spend out of this account but there are recurring charges such as therapy for Kayla which changes based on when we hit our deductible.||Currently cash (usually we have it set to automatically move anything over $1,500 to investments managed by the brokerage but we currently only have $1,500 in the account)||Health Equity|
|Vehicle make, model, year||Valued at||Mileage||Paid off?|
|2017 Buick Enclave||$17,780||67,561||No, the amount I owe is listed under “Debts”|
|2014 JC Tritoon Pontoon Boat||$14,000||Less than 50 hours||Yes. We split the cost at the time of purchase with Kayla’s mom who covers the insurance and yearly storage fee as well. So we own half the value of $14k, not the whole amount.|
|2016 Hyundai Sonata Hybrid||$10,000||49,000||No, the amount I owe is listed under “Debts”|
Note about this section: we don’t track our monthly spending at all (aside from making sure our bills are paid). Doing this spreadsheet was pretty eye opening because for the most part, we have like no idea where our money goes each month. Once we paid off all our credit card debt, we went to a system of only budgeting for bills and putting everything else on the credit card and then paying it off at the end of each month. It is very easy to buy a whole bunch of stuff using that method and have way less to transfer into savings at the end of the month.
We’ve now switched to using Dave Ramsey’s Allocated Spending Plan worksheets and are hoping that those help us reign in our discretionary spending and stop just swiping our credit card because we know we have excess cash to pay it off. Long story short: this is why we don’t have breakdowns for clothing, vacations/travel, holidays, entertainment, home goods, etc. because we genuinely just have no idea what we’ve historically spent on these things.
|Mortgage||$1,562||Taxes and Insurance are escrowed|
|Lauren’s Car Payment||$553||Noted in liabilities section|
|Groceries and household supplies||$547||We don’t track this on a monthly basis, which I think is part of our issue with wondering where our money goes. We purchase household supplies and hygiene items on these trips also but don’t track them. This was the average I was able to calculate by going through our credit card statements.|
|Kayla’s Car Payment||$446||Noted in liabilities section|
|Lauren’s Student Loans||$442||(not paying on these currently but employer is contributing $100 per month still)|
|Car Insurance||$174||Through Geico – pay monthly|
|Takeout/Restaurants||$159||Again – we don’t track monthly and that is part of our issue. This was our average from 2020.|
|Kayla’s Student Loans||$158||(not paying on these currently but employer is contributing $100 per month still)|
|Security system monitoring||$80||CPI Security – very necessary for us as we had some scary incidents in our area last spring|
|Dog Medicine||$75||Purchased monthly (both of our dogs take a daily medication)|
|Dog Boarding||$73||We spent $879 on this in 2020. We typically board our dogs a few times a year if we go to visit family or on vacation. Calculated monthly by total divided by 12.|
|Vet Bills||$70||We took our dogs to the vet once in 2020 (typically take them once a year for check ups, vaccines, etc.) It costs a lot when this happens and one of our dogs was sick when we went last time so the bill was $845. We paid it in full at the time but divided by 12 for the monthly amount.|
|Internet||$70||Through Spectrum – unfortunately our only provider in our area|
|Dog Food||$70||Purchase 1 bag of food per month|
|Medical Bills Payment||$65||Noted in liabilities section|
|Gas for cars||$64||Again, we don’t track this monthly but this was our 2020 average per month.|
|Electricity Bill||$61||On equal billing payment plan where you pay one price based on historical usage and are billed or refunded at end of year|
|Gas Bill||$51||Varies between $20-150 per month depending on time of year. Used average from 2020 to calculate|
|Water Bill||$44||Varies between $40 – $65 per month. Most months it is around $45. Used average from 2020 to calculate|
|Car Registration Fees/Inspections||$41||Pay annually in full for both cars but divided by 12 to get the monthly amount.|
|Netflix||$20||Pay for family plan for us + siblings monthly|
|Cat Food||$20||Purchase 1 bad of food every 2 months (so around $20 monthly)|
|Dog Membership||$18||We pay a monthly fee to be part of our dog’s boarding and training facility|
|Amazon Prime||$13||(Membership paid once per year but broke cost down monthly)|
|Disney Plus||$7||Pay for family plan for us + siblings monthly|
|Costco Membership||$5||Monthly amount divided by 12|
Credit Card Strategy
|Card Name||Rewards Type?||Bank/card company|
|Citi AAdvantage||American Airlines Miles||Citi Bank|
|Bank of America Travel Rewards||Points used to make payments towards travel related purchases||BOA|
|Capital One Platinum||None||Capital One (affiliate link)|
Kayla and Lauren’s Questions for You:
How do we prioritize our financial goals and where our money goes each month?
- Our priorities are: paying off our cars and student loans, saving for the pregnancy process, saving for our children’s education, and investing for retirement.
- We have a big issue with excess discretionary spending. We’re no longer spending above our means, but we have lofty goals each month to transfer X number of $ into savings at the end of the month. But by the time the end of the month rolls around, we’ve spent money on so many random things/experiences/etc. that our savings transfer is a fraction of what we wanted it to be.
- How much should we be saving for retirement (monthly or annually) if we both want to retire somewhere between age 50-55?
- When should we start saving for our children’s education and how much should we save?
- It’s a big priority for us to gift a college education to our children if they choose that path.
- How do we save for other things (vacations, holidays, unexpected expenses, unexpected job losses, etc.)?
- Kayla has the larger salary. For tax purposes should we switch over insurance, HSA, etc. withdrawals from her paycheck to have a smaller take home pay or should they stay with Lauren?
- After looking at our financial situation – are there any other recommendations you have that would help us reach our goals?
Mrs. Frugalwoods’ Recommendations
Congrats to Kayla and Lauren for the hard work they’ve put in to pay off their credit card debt! I am really impressed with their drive to break this cycle of financial instability. I commend them both for recognizing that their childhood money experiences have a profound bearing on how they manage money as adults. A lot of folks don’t realize how deeply your childhood money experiences impact your lifelong relationship to money. Acknowledging this will help Kayla and Lauren create a money culture for their family. It will help them chart a path that’s different from how they were raised and recognizes the triggers and traumas of their unstable financial upbringings.
While I can offer advice about the numerical side of things, we all know that our relationship to money goes much deeper than that. Kayla and Lauren might want to consider speaking with a therapist about the deeper issues surrounding their emotional responses to money and finances. Until they’re able to truly understand what prompts them to churn through cycles of spending and debt, they’ll likely keep falling victim to them. I encourage Kayla and Lauren to consider spending some time with a couples’ therapist to dig into these issues. It will likely be time and money very well spent!
Ok, let’s dig into Kayla’s questions.
Question #1: How do we prioritize our financial goals and where our money goes each month?
To answer this, I’m going to back up a few steps and encourage Kayla and Lauren to start tracking their expenses rigorously. Kayla noted they’re not doing this and that’s obvious from their expense report. If they were truly spending only $4,888 per month, they’d have $3,798 leftover every month, which isn’t the case (that’s their net income of $8,686 – $4,888).
Priority #1 for Kayla and Lauren is to track where every dollar is going. Without that crucial data point, we can’t really move forward because we don’t know how much money is leftover every month.
There are tons of different ways to track your spending, here are a few ideas for them to try:
- Sign-up for the free expense tracking service from Personal Capital. This is what I use and recommend because it does the work for you.
- Commit to writing down every expenditure at the time of purchase. Then, create their own spreadsheet every month of what they’ve spent.
- Comb through their credit card statements to determine what’s being purchased every month. Combine this with a list of everything purchased with cash, direct deposit and check.
- Move to the cash envelope system and set a budget at the beginning of the month for each category. Create envelopes of cash (yes, actual envelopes) with the category and monthly budget written on the front. When the money’s gone from each envelope, that’s it for the month–you can’t buy any more. For example: you write “Groceries (food only), May 2021, $400” and you put $400 in that envelope. When you’ve spent the $400, you can’t buy any more groceries until June.
Bottom Line: there are a million different ways to track your spending and there’s no one right way. The “right way” is whatever Kayla and Lauren can commit to for the long haul. They need to find a system that works for both of them.
Once Kayla and Lauren know what they’re spending every month, they can start setting savings goals (more on that in a moment).
Question #2: How much should we be saving for retirement (monthly or annually) if we both want to retire somewhere between age 50-55?
I want to take a moment to give a HUGE congratulations to Kayla and Lauren for contributing enough to their 401ks every month to qualify for their employer’s match. Very, very well done!!
At this point, they’re so many years away from retirement that it’s not possible to give them a precise answer. However, we can apply a few simple rules of thumb to help them track their progress.
- Lauren’s total retirement: $28,377
- Kayla’s total retirement: $20,442
- Combined: $48,819
To give them some context, we’ll use Fidelity (somewhat oversimplified) retirement rule of thumb:
Aim to save at least 1x your salary by 30, 3x by 40, 6x by 50, 8x by 60, and 10x by 67
Since Kayla is 26 and Lauren is 30, we’ll go with 1x their combined salaries, which would be $104,232. While they’re pretty short of this metric, I’m not super worried because they’re doing the right thing by contributing to their 401ks. It would be great if they could increase the percentage they contribute every year. One easy way to do this is to increase their contribution by one percentage point every year. So if they’re contributing 6% this year, bump it up to 7% next year, 8% the following year and so on.
However, I can’t really advise them on how much more to contribute each month because we don’t know how much they’re spending every month. It all goes back to tracking your spending so that you know how much money you have to work with (net income – total monthly expenses = money leftover to put into savings and investments).
Question #3: When should we start saving for our children’s education and how much should we save?
I totally understand their desire to pay for their future children’s higher education, however, this should be their lowest priority at this point. Not forever, but right now, it’s the least important of their financial goals because:
- Kayla and Lauren need to first get out of debt.
Their debt is literally dragging them down. They are losing money to interest every month that they carry this debt.
Let’s take a look at their car loans first:
- Kayla’s car: $14,202 owed at a 4.5% interest rate
- Lauren’s car: $17,869 owed at a 5.53% interest rate
You want to prioritize paying off debt according to interest rate. The higher the interest rate, the worse the debt. So, if it were me, I would throw everything I have at paying off Lauren’s car ASAP since 5.53% is a pretty steep interest rate.
At their income level, if they really, really buckled down and trimmed every single unnecessary expense, they could pay off Lauren’s car in LESS THAN FOUR MONTHS!!!! Here’s how:
|Item||Amount||Kayla & Lauren’s Notes||Mrs. FW’s Notes||New Amount Suggestion|
|Mortgage||$1,562||Taxes and Insurance are escrowed||Fixed||$1,562|
|Lauren’s Car Payment||$553||Noted in liabilities section||Fixed||$553|
|Groceries and household supplies||$547||We don’t track this on a monthly basis, which I think is part of our issue with wondering where our money goes. We purchase household supplies and hygiene items on these trips also but don’t track them. This was the average I was able to calculate by going through our credit card statements.||Reduce by $200||$347|
|Kayla’s Car Payment||$446||Noted in liabilities section||Fixed||$446|
|Lauren’s Student Loans||$442||(not paying on these currently but employer is contributing $100 per month still)||Deferred at present||$0|
|Car Insurance||$174||Through Geico – pay monthly||Fixed||$174|
|Takeout/Restaurants||$159||Again – we don’t track monthly and that is part of our issue. This was our average from 2020.||Eliminate||$0|
|Kayla’s Student Loans||$158||(not paying on these currently but employer is contributing $100 per month still)||Deferred at present||$0|
|Security system monitoring||$80||CPI Security – very necessary for us as we had some scary incidents in our area last spring||Fixed||$80|
|Dog Medicine||$75||Purchased monthly (both of our dogs take a daily medication)||Fixed||$75|
|Dog Boarding||$73||We spent $879 on this in 2020. We typically board our dogs a few times a year if we go to visit family or on vacation. Calculated monthly by total divided by 12.||Eliminate||$0|
|Vet Bills||$70||We took our dogs to the vet once in 2020 (typically take them once a year for check ups, vaccines, etc.) It costs a lot when this happens and one of our dogs was sick when we went last time so the bill was $845. We paid it in full at the time but divided by 12 for the monthly amount.||Fixed||$70|
|Internet||$70||Through Spectrum – unfortunately our only provider in our area||Fixed||$70|
|Dog Food||$70||Purchase 1 bag of food per month||Fixed||$70|
|Medical Bills Payment||$65||Noted in liabilities section||Fixed||$65|
|Gas for cars||$64||Again, we don’t track this monthly but this was our 2020 average per month.||Reduce by $25||$39|
|Electricity Bill||$61||On equal billing payment plan where you pay one price based on historical usage and are billed or refunded at end of year||Fixed||$61|
|Gas Bill||$51||Varies between $20-150 per month depending on time of year. Used average from 2020 to calculate||Fixed||$51|
|Water Bill||$44||Varies between $40 – $65 per month. Most months it is around $45. Used average from 2020 to calculate||Fixed||$44|
|Car Registration Fees/Inspections||$41||Pay annually in full for both cars but divided by 12 to get the monthly amount.||Fixed||$41|
|Netflix||$20||Pay for family plan for us + siblings monthly||Eliminate||$0|
|Cat Food||$20||Purchase 1 bad of food every 2 months (so around $20 monthly)||Fixed||$20|
|Dog Membership||$18||We pay a monthly fee to be part of our dog’s boarding and training facility||Eliminate||$0|
|Amazon Prime||$13||(Membership paid once per year but broke cost down monthly)||Eliminate||$0|
|Disney Plus||$7||Pay for family plan for us + siblings monthly||Eliminate||$0|
|Costco Membership||$5||Monthly amount divided by 12||Eliminate||$0|
|Current Monthly Subtotal:||$4,888||Suggested New Monthly Subtotal:||$3,768|
|Current Annual Total:||$58,656||Suggested New Annual Total:||$45,216|
I took their expenses spreadsheet and eliminated everything not required for their survival and reduced every other category I could.
The challenge is that this isn’t their actual monthly spending. Kayla and Lauren didn’t include any of the following on their expense spreadsheet:
- Personal care (haircuts, etc)
- Home improvement supplies
- Hobby-related expenses
- Household supplies
The good news is that everything on that list is discretionary. If they eliminate all the stuff I listed–and every expense they didn’t list–they could wipe out their debt really quickly.
With their monthly net income of $8,686, if they stripped their spending down to the bare minimum of $3,768, they’d have a whopping $4,918 leftover every month to funnel into debt repayment.
At that rate, they could pay off Lauren’s car in LESS THAN FOUR MONTHS!!!!!!!
Lauren’s car loan $17,869/$4,918 = 3.63 months
Holy cow that’s fast!!! Then, if they were up for continuing this super duper frugal experiment, they could pay off Kayla’s car in UNDER THREE MONTHS!!!!!!
Once they eliminate Lauren’s monthly car payment of $553, we can do the math of $3,768 – $553 = $3,215 to get their new monthly spending. Once again, we’ll take their net monthly income of $8,686 – their new proposed monthly spending of $3,215, which leaves them with $5,471 leftover every month.
- Kayla owes $14,202 on her car, so we’ll do $14,202/$5,471 = 2.59 months to paid off!!!!!
Bottom Line: If Kayla and Lauren decide to eliminate all discretionary expenses for the next seven months, they’d have both of their cars completely paid off!!!! That’s a good thing for several reasons:
- They’d no longer be losing money to interest on those car loans every month.
- They’d no longer be paying $999 in two car loans every month (Lauren’s at $553 + Kayla’s at $446). That’s a TON of money freed up every single month! In fact, it’s $11,988 PER YEAR! That’s real money, folks.
Now that the cars are paid off, let’s turn to their…
Federal student loans are currently deferred due to the pandemic. Given that, Kayla and Lauren are wisely not making payments on their loans right now. Here’s what I’d do if it were me:
- Continue to not make payments while the loans are in forbearance and the interest rate is 0% for federal student loans.
- Wait to see if the administration moves forward with waiving student loan debt of up to $10k (higher amounts of forgiveness are being discussed as well, so it’s very much a wait-and-see moment for student loans)
- I very rarely advise people to not pay off debt, but given the forbearance program as well as the looming potential for loan forgiveness I think it’s wise not to pay down federal student loans right now (provided you’re certain you qualify for the federal student loan forbearance program. Read more about pandemic-specific financial programs in my series Uber Frugal Week: How to Manage Your Money in the Time Of Pandemic and Recession).
- Once the COVID forbearance program ends on September 30, 2021, resume paying the monthly minimum required payment. However, keep an eye on this date as it continues to be pushed back.
If it appears that student loan forgiveness isn’t going to happen anytime soon, Kayla and Lauren might want to consider accelerating their pay-off of these loans. Unfortunately, without knowing the interest rate on these loans, it’s tough for me to give concrete advice. With debt, it’s the interest rate that matters.
- Lauren has $57,127 in loans and Kayla has $32,546, for a total of $89,673
I would prioritize paying these off according to interest rate–in other words, pay off the loan with the highest interest rate first. If they continue with the uber frugal spending I outlined above, they could pay off both loans in 15.15 months.
- Once again, we’ll take their monthly net income of $8,686 – their new proposed monthly spending of $2,769, which leaves them with $5,917 leftover every month.
To recap, here’s how we got them to a monthly spend rate of $2,769:
- We took their current spending of $4,888 – the eliminations I suggested in the spreadsheet above = $3,768. Then, with both cars paid off, we subtracted their $999 monthly car payments to reach $2,769.
Then we take their total student loan debt of $89,673 / $5,917 per month = 15.15 months
That means they could have BOTH of their student loans obliterated in ONE YEAR AND THREE MONTHS!!!!!
Debt Freedom in LESS THAN TWO YEARS
Based on the calculations I’ve done, Kayla and Lauren could be completely debt-free (other than their mortgage) in 22 months, which is UNDER two years! That’s an incredibly fast timeline!!!! To recap, it would take approximately 4 months to pay off Lauren’s car, 3 months to pay off Kayla’s car and 15.15 months to pay off BOTH of their student loans.
I realize that they still have a medical bill of $3,460, but assuming their hospital keeps this loan at a 0% interest rate, there’s no reason to pay it off ahead of time. Just keep paying on it every month until it’s gone. Kayla and Lauren should confirm that the 0% interest rate is fixed and not subject to adjustment.
The Trade Off
The trade off with this super sonic speed to debt freedom is their discretionary spending. What I’ve outlined is a pretty bare bones frugal lifestyle. However, Kayla and Lauren should feel free to tweak this spending as it suits them. Maybe they want to spend even less in one category in order to add a treat or luxury. Maybe they’d like to extend the debt-freedom timeline another few months in order to spend more every month. The bottom line is that Kayla and Lauren have a lot of options here and, given their salaries, they have the ability to be free from their debt in short order.
Question #4: How do we save for other things (vacations, holidays, unexpected expenses, unexpected job losses, etc.)?
Now that we’ve addressed their retirement investments and debt repayment strategy, let’s talk more about their savings.
What Kayla and Lauren really need is an emergency fund. An emergency fund is easily accessible cash held in a savings or checking account that prevents you from slipping into debt in the event of an emergency.
If you lose your job or your car breaks down or a tree falls on your roof, you have the ability to dip into your emergency fund as opposed to racking up credit card debt. An emergency fund is calibrated on your monthly spending, which is why its so crucial to track what you spend every month. The general rule of thumb is that an emergency fund equals three to six month’s worth of your expenses.
At Kayla and Lauren’s current spending rate of $4,888, they’d want to target an emergency fund of $14,664 (three month’s worth) to $29,328 (six month’s worth). Of course, if they choose to spend less every month, they can target a smaller emergency fund.
If they choose to stick with the super frugal spending rate of $2,769 per month, they could save $8,307 (three months worth) to $16,614 (six months worth). Since they already have $4,937 in savings, it would take them just TWO months of saving $5,917 per month to reach a fully funded emergency fund of $16,771. Nice!!!!
Question #5: Kayla has the larger salary. For tax purposes should we switch over insurance, HSA, etc. withdrawals from her paycheck to have a smaller take home pay or should they stay with Lauren?
Assuming they are “married filing jointly,” it doesn’t matter because the IRS considers your income to be combined total household income.
Question #6: After looking at our financial situation – are there any other recommendations you have that would help us reach our goals?
Let’s do a summary of what I recommend for Kayla and Lauren:
- Start rigorously tracking their monthly spending. Sign-up for Personal Capital, use your own spreadsheet, write it in a notebook–whatever system will work best for them, Kayla and Lauren need to get a handle on what they’re spending every month (affiliate link).
- Continue contributing enough to their 401ks in order to qualify for their employer’s match. Consider increasing their contribution amount by 1% (or more) per year in order to catch up to where they need to be at their age.
- Consider stripping their monthly spending down to $3,768 as I outlined in the spreadsheet above. To guide them on this process, I strongly encourage them to take my free Uber Frugal Month Challenge together.
- Take their newfound monthly savings (per #3) and throw it at their debt in order of interest rate:
- Pay off their highest interest rate debt first, which is Lauren’s car loan of $17,869 at a 5.53% interest rate. This’ll be paid off in UNDER FOUR MONTHS!
- Pay off Kayla’s car loan next, which is $14,202 at a 4.5% interest rate. They’ll pay this off in LESS THAN THREE MONTHS!
- Monitor the federal student loan forbearance/forgiveness program, which is set to expire on 9/30/21. If student loan forgiveness isn’t happening by that point, consider wiping out their student loans, starting with the highest interest rate loan:
- Based on my calculations above, they could have BOTH of their student loans completely paid off in just over 15 months!
- If they decide to follow steps 3 – 5, Kayla and Lauren could be debt-free (other than their mortgage) in under two years, which is remarkably quick!!!!!
- The next major priority is building up a fully funded emergency fund. Emergency funds are calculated based on your monthly spending, so Kayla and Lauren will need to track their spending and decide what level of frugality they’re comfortable with. The glorious thing is that, without their car payments, they’ll have a cool $999 extra every single month!!!
- Determine their monthly spending and save an emergency fund of three to six months worth of expenses.
- As outlined above, if they stick with the uber frugal scheme, they could have this baby fully funded in TWO quick months.
- Now it’s time to save for their other priorities!! Based on the above, Kayla and Lauren could spend exactly two years paying off all of their debt and building their emergency fund. There’s a hierarchy of financial wellness that Kayla and Lauren should strive for BEFORE turning their attention to other priorities. They’ll be ready to focus on their other priorities AFTER they’ve:
- Paid off their debt
- Built up an emergency fund
- Continued to contribute to their 401ks, increasing their contribution levels annually
Kayla and Lauren’s Other Priorities: Pregnancy and Their Children’s Education
I’m addressing these two priorities last because financial management is very much a “put your own oxygen mask on first” situation. You need to get your own financial house in order BEFORE you start planning and saving for your children’s future.
Kids can take out loans for higher education, parents cannot take out loans for retirement. Kids will be vastly happier if their parents are financially stable and don’t need to move in with them later in life because they can’t pay their own bills. To be clear: living together by choice is a totally different conversation, I’m talking about NEEDING to move in with your adult children because you can’t pay your bills.
After Kayla and Lauren take care of their car loans, student loans, emergency fund, and 401ks, they can–and should–turn their attention to their future children.
We have a big issue with excess discretionary spending. We’re no longer spending above our means, but we have lofty goals each month to transfer X number of $ into savings at the end of the month. But by the time the end of the month rolls around, we’ve spent money on so many random things/experiences/etc. that our savings transfer is a fraction of what we wanted it to be.
My suggestion: instead of waiting until the end of the month to save money, set up direct deposits from their paychecks into savings accounts. This way, the money will never actually be theirs to spend. Much like how their 401k contributions automatically come out of their paychecks, this would eliminate the issue of Kayla and Lauren having a big pot of money to spend. They’d have to commit to not touching these savings accounts, but it would be a way to automate their savings and put their long-term goals first.
They might want to open different savings accounts for different goals and name the accounts accordingly. For example, they could open an account for each of their stated goals:
- Pregnancy Process
- Children’s Education
Then, they could specify that $x of every paycheck go into theses accounts. Thus, instead of being paid the big lump sum of $8,686 every month, they’d be paid, let’s say, $4,000 with the difference going directly into these savings accounts. They’d obviously have access to these accounts, but it would be a way to “trick” themselves into saving. Then, if they wanted to spend this money on a meal out at a restaurant, they’d have to face the fact that they were taking $100 away from their goal of “Pregnancy Process” in order to go to a restaurant.
It’s still their money, but by segregating it, Kayla and Lauren would be confronted with their long-term goals every time they wanted to spend money on short-term treats.
This would force them to do the mental exercise of “Do I want to buy these shoes or do I want to save for our kids’ education?” This is the technique I used when we were saving for our financial independence/homestead goal. I would actually ask myself, “Do I want to buy these boots or do I want to get to my homestead faster?” Sometimes I bought the boots, but more often, I’d be reminded of my overarching goal and I’d put the boots back on the shelf.
I also recommend that Kayla and Lauren take my free, 31-day Uber Frugal Month Challenge. The Challenge is designed to help you prioritize your spending, understand your triggers to overspend and come to a place of peace with frugality. If they’re up for it, I think doing the Challenge together would lend a lot of insight into the issues Kayla and Lauren face every month with their spending.
A final note: since the kids needs to be born before they go to school, if it were me, I would focus solely on the Pregnancy Process goal at this time. Once the kiddos are born, and assuming Kayla and Lauren are still on track with being debt-free and have fully funded emergency and retirement accounts, they can consider opening 529 college savings accounts for their kids.
The point of all of this isn’t deprivation, it’s about having control over your money. The goal isn’t to save every last penny and make yourself miserable, the goal is to spend your money mindfully and on your highest and best priorities.
Ok Frugalwoods nation, what advice would you give to Kayla and Lauren? Kayla 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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