Sara is a doctor and mother living with her best friend, Jodie, in the Pacific Northwest. Sara is a single mother by choice and her son Sam is now seven months old. She loves her work as a doctor and her new role as a mom, but wants to make sure her finances are as healthy as they can be.
What’s a Reader Case Study?
Case Studies address financial and life dilemmas that readers of Frugalwoods send in 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 intend to highlight a diverse range of financial situations, ages, ethnicities, locations, goals, careers, incomes, family compositions and more!
The Case Study series began in 2016 and, to date, there’ve been 76 Case Studies. I’ve featured folks with annual incomes ranging from $17k to $200k+ and net worths ranging from -$300k to $2.9M+.
I’ve featured single, married, partnered, divorced, child-filled and child-free households. I’ve featured gay, straight, queer, bisexual and polyamorous people. I’ve featured women, non-binary folks and men. I’ve featured transgender and cisgender people. I’ve had cat people and dog people. I’ve featured folks from the US, Australia, Canada, England, South Africa, Spain, Finland, Germany 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 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 Sara, today’s Case Study subject, take it from here!
Hi Frugalwoods! I’m Sara, a 44-year-old new mom (!) and doctor. I live in the Pacific Northwest with my awesome 7-month-old baby Sam, my senior cat Sasha, and my best friend Jodie.
I grew up mostly on the East coast, where my parents still live, and went to college and medical school close to home. I moved out to the West Coast for residency, and I met Jodie when I was looking for a roommate. We clicked right away. We saw each other through some very difficult times and I loved living with her in California.
I moved back to my hometown after residency in my early 30s. My first job out of residency was challenging but incredibly rewarding and also–really luckily–paid me very well and qualified for public service student loan forgiveness. My parents were able to pay for college and part of medical school for me, so I was really lucky to be student loan debt-free before I was 35! I was able to buy a condo on my own and lived there for about 5 years before deciding to make a big life change.
The Move West
After several years in my job and some big life changes, I felt pretty burnt out. Work was taking up a huge amount of my time and energy, and I felt like my personal relationships were not getting enough attention. After a vacation to visit Jodie, who had moved back to her hometown in the Pacific NW, I realized it was time for a big change. I loved the mountains plus ocean, the city was great, and I could really see myself building a life in this new area. I decided to take a step back from my super intense career path, landed a part-time job and moved myself and my cat across the country.
It was a little bumpy at first, especially moving away from family, but it has been a really great move overall. It helped me separate my core identity from “doctor” and expand my life in meaningful ways. I bought a house in 2017, have a great community here, and Jodie moved in with me a few months after I moved. She is living with me rent free for now. This has changed a few times over the years of us living together and it’s what works for right now. It won’t be forever, but it’s definitely part of what’s making the budget tighter these days.
In another awesome development, (though not so much for my parents) my sister moved here about a year after I did. She lives less than a mile away with her family and it is super fun to see them regularly.
Deciding to Become A Single Mom By Choice
After dating a bit after my last serious relationship ended, I decided that my biggest life goal was to become a parent, and that dating in that frame of mind was putting a ridiculous amount of pressure on myself and any potential partner. I decided to prioritize having a baby and, after some pretty intense ups and downs over the last 5 years (fertility treatments, foster parenting, an interrupted adoption), I had a baby this summer!
My life is not at all traditional, but it is pretty darn awesome. Baby Sam is an absolute joy, and living with Jodie during this time has made this experience so much more fun. My sister has also been super supportive, especially as I had some pretty serious postpartum complications and needed a lot of extra help.
My family came to visit and we were all very grateful to have had the Covid vaccines, and I was super grateful that baby Sam was born during a relative lull in the pandemic. I was able to take an extended maternity leave, including some unpaid time, because of my savings cushion. I loved being home with Sam and I was really grateful to be able to afford extra help, which made being a solo parent feel a lot less daunting. I also got a new job that allows me a lot more flexibility (more on that below).
Jodie the Amazing Live-In Nanny!
Jodie is going through her own career transition and, after much discussion, we decided she would take some time to work as Sam’s nanny for at least the first year and a half of his life. I’ve been especially grateful for this with the pandemic. Plus, being the sole breadwinner, daycare would be really rough with all the coughs and colds that go along with that coupled with various pandemic closures. Jodie and I did have to address how working for me would impact our relationship, but after 15 years of friendship we were able to keep the lines of communication open and it’s been working incredibly well so far. I think Sam will start going to part-time daycare at around age two.
As I mentioned above, I just started a new job that I’m really happy with. It’s right down the street from my house (like an 8 minute walk), with lovely people, and I’ve been able to arrange a 4 day/week schedule that works really well for me while still bringing in a solid amount of money. I love being a doctor, despite the big challenges of the last few years, and I plan to keep working for a good chunk of time. I would like to go down to 3 days a week at some point but right now, 4 days a week is very doable. I am grateful to have found a practice that reflects how I want to take care of patients while also working with people who respect my desire to spend time with my little one. Additionally, after I’ve been at this job for more than a year, my salary should go up by about $20k, which is awesome! That will really help me feel more stable.
Knowing that my path to becoming a parent was a little more complicated, I saved a lot of cash to make sure I could cover whatever expenses came up. I am so so grateful that my child has arrived, and now that I am out of the haze of the first few months of parenting, I’m looking at life and realizing whoa, ok, now I have the baby – I don’t need to save up for possible unpaid leave or other unexpected expenses! I am ready to start thinking about life in its new configuration as a solo parent, and to think through how I want to set things up financially to help support our little family.
I needed a lot of help over the last year or so with a challenging pregnancy and postpartum period, so I have been paying for services that I don’t usually have like a house cleaner and grocery delivery. These are some obvious things to tweak, but I’m also really enjoying those luxuries as a new parent.
Since I’m now working right down the street, I think staying put in my current house is likely. Also, housing prices have gone crazy here (everywhere?) in the last few years, which is great if I want to leave this area and move somewhere cheaper, but not so great if I want to trade up. I’m currently in a 3-bedroom, which I purchased in 2017, so everyone has a bedroom. Jodie lives downstairs where there’s also a small TV room, laundry room and garage. That leaves me and Sam on the main floor sharing one bathroom and no space for guests or much else – my office is currently out of a hope chest that also serves as a coffee table, and with a crawling baby the house feels very full. Especially with having a lot of friends and family still on the East Coast and in California, one long term consideration is how to make more space to welcome visitors while also making life a little more spacious as Sam grows up.
What feels most pressing right now? What brings you to submit a Case Study?
I was really struck during Frugalwoods’ Uber Frugal Month Challenge by the questions about goals, because for so long, my goal was to have a good financial cushion to enable me to have a baby. And now – baby! He’s here, he’s great, and I’m looking forward to whatever’s next. However, with less clarity around a specific goal, I can definitely feel some lifestyle creep. I want to make sure I’m being thoughtful about our future.
I’m in a really great spot in many ways, so it’s less of a ‘what to do now’ and more of a ‘how do I optimize and set myself up to have a great life going forward’ question. I do want to say this exercise has made me so grateful as I take stock of where things are – I know I’m in an incredibly privileged position to have a lot saved, but I also realize I’ve crept into a place where, despite making a lot of money, I’m spending more than I’m taking home (OMG was not expecting that…. THIS EXERCISE IS SO USEFUL).
I know that some of my big expenses are temporary (but like ‘a couple years’ temporary not ‘a couple weeks’ temporary). For example, I know I’m spending a lot on child care right now and that will change at some point, and I have the cash on hand to spend extra while still maximizing my tax-advantaged savings, but wow do I need to come to terms with the fact that I won’t be able to do that forever if I don’t get things in a net positive direction.
What’s the best part of your current lifestyle/routine?
Things are pretty great right now. This whole being a mom thing is pretty amazing. I love working close to home – I have been able to come home and see Sam at lunch, which is just unbelievable and I’m so grateful. I also love having Jodie take care of Sam – I trust her absolutely and she is basically my platonic life partner and live-in auntie to Sam. I also love that my sister is close by and that I have a great group of friends in town.
I also really love my neighborhood and my home, though it has its challenges as noted above.
What’s the worst part of your current lifestyle/routine?
Being far away from the rest of my family. This has been really tough especially as my parents are in their 70s. Although they are currently doing great, I know they will need help as they get older, which will be much harder to coordinate from across the country.
Another major stressor is that I’m still dealing with some mobility challenges and, as I get back to work and am busier, I’ve had less time for self care. I have had some postpartum anxiety as well as physical complications, so there’s been a lot of balancing self care and baby care and now patient care. Some of my expenses reflect that higher level of need for help right now, and I’m so grateful to have the resources to get it.
Where Sara Wants to be in Ten Years:
- Totally financially independent, with my mortgage paid-off (or with enough saved that it could easily be paid off if I wanted to)
- Working for the fulfillment of my job
- Pretty similar to what I’ve got now, with lots of time with Sam, probably still living with Jodie, and the ability to travel to the east coast for long stretches of time to be with family.
- I also recently became an Irish citizen though my grandmother and have a fantasy of spending some time in Ireland at some point.
- More flexibility but similar work – either direct patient care or some sort of health-related coaching.
- Likely still at this practice since, so far, it feels like a great fit.
|Sara’s net income||$8,650||Sara’s net salary, minus the following deductions: health and dental insurance, 401k and 457b contributions, HSA and Dependent Care Reimbursement Account (DCRA) contributions, LTD, life insurance and taxes.|
|Item||Outstanding Loan Balance||Interest Rate||Loan Period and Terms||Equity||Purchase price and year|
|Mortgage||$487,020||2.5% (refi last year)||30-year fixed-rate mortgage||$297,980||$785K in 2017|
|Item||Amount||Notes||Interest/type of securities held||Name of bank/brokerage||Expense Ratio|
|Retirement account from job 1||$553,423||401K from an old job||2040 target retirement fund||Vanguard|
|Brokerage account||$129,718||Taxable investments with Vanguard||Vanguard Admiral Index fund||Vanguard||0.015%|
|Checking account #2||$70,787||The account I mostly use for everyday expenses||BECU|
|IRA traditional||$63,968||Traditional IRA||2040 target retirement fund||Vanguard|
|Retirement account from job 2 – A||$62,250||403B from an old job||2040 target retirement fund||Fidelity|
|Savings account||$48,128||Emergency fund||Very low interest savings account, circa 0.02%||BECU|
|Retirement account from job 2 – B||$44,423||457b from an old job||2040 target retirement fund||Fidelity|
|Checking account #1||$15,580||I’m slowly getting rid of this account in order to transfer it to a credit union, but I had a bunch of autopay stuff set up that I never got around to transferring, so I left a bunch of money in here to cover those automated payments.||Chase|
|WA state deferred comp count||$10,036||Job #2 additional retirement savings||2040 target retirement fund with Vanguard||Vanguard|
|HSA account||$1,997||New job HSA, $1,000 threshold to hold in account, the rest will be invested||70% Vanguard social index, 20% Vanguard real estate index, 10% emerging markets index||Health Equity|
|Retirement account from job 3- A (current job)||$1,977||401K from current job||2040 target retirement fund||Fidelity|
|Retirement account from job 3 – B (current job I just started)||$1,661||457b from current job||2040 target retirement fund||Fidelity|
|Retirement account from job 2 – C||$1,595||Pension plan from an old job – not vested so probably only have 25% of this once I roll it over||2040 target retirement fund||Fidelity|
|DCRA||$455||new job dependent care account||Health Equity|
Note: I am maxing out both my 401k and 457b ($20,500 / year into each). The 401k has a 3% match. This has been part of my strategy this year to spend down some of my cash savings while getting as many tax advantaged savings as possible. Part of my question today is if this a good strategy.
|Vehicle make, model, year||Valued at||Mileage||Paid off?|
|2016 Honda CRV||$26,000 (this seems crazy high to me but it’s what Kelly Blue Book says)||50,000||Yes|
|Nanny (aka Jodie)||$3,260||Nanny payments including state and federal taxes and admin fee for payroll service. The plan is to continue with Jodie until Sam is at least a year old (and probably more like 18 months), then transition to daycare which should be a lot cheaper.|
|Mortgage||$2,743||Includes escrow for taxes and home insurance|
|Groceries||$650||I have been having groceries delivered while pregnant and now with a baby. I’m not wanting to take him into the store because of Covid.|
|Cleaning service||$560||This is something I started while very pregnant and have continued. It’s on the chopping block already but it’s hard to let it go.|
|Utilities (water, garbage, sewer)||$300||This has been CRAZY HIGH the last couple months and I am not sure why, other than having people at home a lot because now Jodie and the baby are home all day.|
|Gifts||$200||Spread over the year and including holidays|
|Travel||$200||??? Hard to estimate since I haven’t travelled anywhere since before Covid but I am planning some trips back to the East Coast this summer|
|Term life insurance||$188||I got this policy at the beginning of Covid. I’m trying to decide if I want to keep it or switch to my employer offered plan, which I’d need to make sure is portable.|
|Car insurance||$166||Progressive for my car and Jodie’s|
|Baby gear||$100||Varies but it’s about this for diapers, Aquaphor, some occasional baby foods like teething biscuits (though we mostly make our own and I breastfeed), child proofing stuff, occasional ridiculous St Patrick’s day PJs… 90% of baby clothes are hand-me-downs as is most of our baby furniture/gear.|
|Home maintenance||$100||Lawn care once a month ($35), gutter cleaning service once a year, exterminator as needed, chimney cleaning, carpet deep clean (thanks to many cats…)|
|Haircuts||$100||I just started going again after a 2-year hiatus and man I like my hair better when it’s well cut and colored|
|Breast pump rental||$100||I plan to have until July|
|Cat care||$80||Litter, food, vet visits|
|Toiletries||$80||Sundries like face cream, toothpaste, etc|
|Entertainment||$79||This is a clear target for reduction: spotify, HBO, disney plus, WAPO, Kindle unlimited, Amazon prime, and netflix… I am now very embarrassed. Plus some purchased ebooks and movies thrown in, though I’ve gotten much better at using the library!|
|Meds/doctor visits||$75||Averaged out over the year for me and baby|
|Cell phone||$68||Sprint (and yes, I know about MVNOs)|
|Heat||$60||gas heat, average over the year|
|Gas for car||$40||minimal commute!|
|Car tax||$40||paid once per year|
|Therapy||$30||Was covered by my old health plan with minimal co pays, not sure how much it will be on my new health plan|
|House stuff||$25||Paper towels, toilet paper, laundry detergent|
|Physical therapy||$20||Was covered by my old health plan with minimal co pays, not sure how much it will be with my new health plan|
|Monthly subtotal:||$9,691||EEK! This is more than I am taking home!|
Credit Card Strategy
|Card Name||Rewards Type?||Bank/card company|
|Alaska Airlines||Travel||Bank of America|
|Nordstrom card||Nordstrom bucks||Visa|
Sara’s Questions For You:
Is it reasonable to be saving so much into retirement when my expenses are pretty high right now?
- Is this a wake-up call to trim back the many fluffy pieces of my life? (goodbye Spotify – cancelled!).
- I am maxing out both my 401k and 457b ($20,500 / year for each). The 401k has a 3% match. This has been part of my strategy this year to spend down some of my cash savings while getting as many tax advantaged savings as possible. Is this the right strategy?
- Thoughts on having retirement money in an IRA vs. employer-sponsored 401K?
- I have the opportunity to roll over my 401K and 403B from previous jobs and I’m not sure where to put it.
- I like the idea of being able to take it out of an IRA at 59 ½ instead of later for a 401K.
- Are there other financial planning suggestions for a solo parent or does it look like I’ve got things in an ok spot?
- I just found out about DCRA, and as someone who spent several years holding all my retirement accounts in cash because I missed the memo on selecting an investment account, I have a fear that I am missing something about my financial state.
- Since I like my job and I foresee wanting to be working for a while, my goal is not to retire early but to have more flexibility in the long run.
- Should I pay off my mortgage?
- The part of me that’s very anti-debt is tempted to do this, but I have a pretty great interest rate (2.5%) and my monthly payments are not terrible, so I think my money can do more for me elsewhere?
- Should I remodel my garage to make my house more comfortable long term?
- This is what I’m leaning towards, but I am NOT HANDY and so I’m a little nervous about doing a big project like this and would need to make sure I’m really in a positive cash flow place before tackling it.
- How do I make sure I’m saving enough while also keeping a good positive cash flow on a monthly basis, and making sure to optimize what cash I do have on hand without it just sitting in my checking account, which is what I have a tendency to feel most comfortable with?
- I like to know I can handle whatever is likely to arise, but I feel like I’m missing out on some opportunities by holding onto too much cash.
- I also think having so many accounts all over the place has made it really hard to keep track of how much I’m actually saving or spending each month, so I was truly shocked to realize I’m spending more than I’m making.
- Having to write down each of my accounts was ridiculous, and I know I missed one (a small pension from the state after working at a public hospital…). So, consolidation and simplification seem like key next steps!
Liz Frugalwoods’ Recommendations
Sara’s in excellent financial shape, but I’m still glad she came to us today for help! I get the sense that she’s been (understandably!) very focused on having her baby and starting her new job and now that the dust has settled, she wants to turn her attention to her financial life. A great idea!
We all go through phases of life where we’re more (or less) in tune with our finances, which is totally fine. The key is to ensure we check-in periodically to test our assumptions and re-evaluate the things we’ve previously put on autopilot, such as:
- Savings that are automatically deducted from our paychecks
- Subscription services that automatically deduct each month (hello, Amazon Prime!)
- Investment asset allocation decisions
- Automated retirement savings
- Bills we’ve enrolled in auto-pay (insurance, utilities, etc)
- Services, such as house cleaning or childcare, which are likely to change with time and our phase of life
I’m an ENORMOUS fan of automating all of these things–that’s what I do! But the caveat to all of that automation is that you need to review it every once in awhile (once a year? every six months?) to make sure you’re aware of everything you’re signed up for and everything you’re investing in. This is exactly the exercise Sara embarked on to assemble her Case Study and I’m excited to dig in with her today!
Sara’s Question #1: Is it reasonable to be saving so much into retirement when my expenses are pretty high right now?
I think it probably does make sense for Sara to continue her aggressive retirement investment strategy for several reasons:
- At her high income level, the tax savings on her pre-tax contributions to her 401k and 457b are likely pretty substantial. In general, the higher your income, the more important it is for you to take advantage of pre-tax investment opportunities.
- Sara doesn’t want to retire early, so there’s no need to optimize non-traditional retirement vehicles. She’s setting herself up for a very well-funded, very nice, traditional retirement.
- Her biggest expense–childcare–will only decrease with time. Assuming her son attends public school, it is highly likely his care/schooling will never cost as much as it does now. Hence, her “high expenses” are much lower when you take into consideration the transitory nature of the childcare expense.
Reduce Expenses to Break Even
That being said, I agree with Sara that she should get her expenses to align with her income. It would be fine for her to just break even at this point, in light of the fact that she’s putting $41k/year into retirement and already has a substantial emergency fund. Given those two factors, there’s not a real imperative for her to save above and beyond that. Breaking even would put things on a positive trajectory.
Sara’s monthly income: $8,650
Sara’s top expenses (mortgage $2,743 + nanny $3,260) = $6,003
This leaves $2,647 for the remainder of Sara’s expenses. Currently, she’s spending $3,688 (aside from mortgage and nanny), which means she needs to eliminate $1,041 from her monthly spending in order to break even.
Sara: no one can tell you what to reduce/eliminate from your budget expect for you. You know which items are your priorities and which things you could eliminate without too much disruption. The purpose of this exercise is to get you thinking about the things in your budget that are discretionary, but only you can determine their order of importance in your life.
|Item||Amount||Sara’s Notes||Liz’s Notes||Proposed New Amount|
|Groceries||$650||I have been having groceries delivered while pregnant and now with baby. I’m not wanting to take him into the store because of Covid.||This is reasonable, but if it’s an area Sara feels she could reduce, go for it! Is this just for Sara or does it include Jodie as well?||$550|
|Cleaning service||$560||This is something I started while very pregnant and have continued. It’s on the chopping block already but it’s hard to let it go.||This is the obvious thing to axe, but I also understand what a lifesaver it is for working parents. I’m going to eliminate it for the purposes of this exercise.
It’s a good time to ask: which is more valuable to you?
Do you want to reduce a little bit in every category? Or a lot in just a few categories? Lots of options for how to get there!
|Utilities (water, garbage, sewer)||$300||This has been CRAZY HIGH the last couple months and I am not sure why, other than having people at home a lot because now Jodie and the baby are home all day||I’d dig into this if it were me. What’s the breakdown for each utility? Where are you seeing the increase? Seems like A LOT for just water, sewer and garbage, so I’d want to ensure there’s not like a water leak or something going on.||$300|
|Restaurants||$200||This is an easy one to eliminate, if Sara wants to.||$0|
|Gifts||$200||Spread over the year and including holidays||At $2,400 per year, this seems a tad high? But, I’m not sure how many people/family members this includes. Something to take a look at.||$100|
|Travel||$200||??? Hard to estimate since I haven’t travelled anywhere since before Covid but I am planning some trips back to the East Coast this summer||I’ll leave this since Sara noted she already has trips planned for this summer.||$200|
|Term life insurance||$188||I got this policy at the beginning of Covid, trying to decide if I want to keep it or switch to my employer offered plan, which I’d need to make sure is portable||Would be interesting to see what your employer offers and what the cost would be. I agree that, as a single parent, it makes total sense to have term life insurance.||$188|
|Car insurance||$166||Progressive for my car and Jodie’s||Fixed cost.||$166|
|Electricity||$153||Fixed cost, although, have you done an energy audit? Many states offer them for free! They’ll come to your house and offer advice on how you can save $ on utilities. Totally worth it if you haven’t done it yet. This could also help get to the bottom of the high water/sewer bill.
Another great DIY approach is to buy (or borrow, sometimes libraries have them available) an energy use monitor to see if any of your appliances are secret energy hogs (affiliate link).
|Baby gear||$100||Varies but about this for diapers, Aquaphor, some occasional baby foods like teething biscuits tho we mostly make our own and I breastfeed, child proofing stuff, occas ridiculous St Patrick’s day Pjs. 90% of baby clothes are hand me downs as is most of our baby furniture/gear||Sara, are you down with the cheap diapers? I have a post ALL ABOUT the cheapest of the cheap diapers and wipes, which might help save a bit in this category:||$75|
|Home maintenance||$100||lawn care once a month ($35), gutter cleaning service once a year, exterminator as needed, chimney cleaning, carpet deep clean (many cats)||Seems like a necessary fixed expense, so I’ll leave it.||$100|
|Haircuts||$100||I just started going again after a 2 year hiatus and man I like my hair better when it’s well cut and colored||Any chance to go any cheaper on this? If not, no worries! Just something to consider as you weigh reducing other items above.||$100|
|Breast pump rental||$100||plan to have until July||Fixed cost, but only for a few more months, so that’s positive.||$100|
|Cat care||$80||litter, food, vet visits||Fixed cost.||$80|
|Toiletries||$80||Sundries like face cream, tooth paste, etc||Any opportunities for reduction here? Are you already buying generic/store brands?||$60|
|Entertainment||$79||This is a clear target for reduction: spotify, HBO, disney plus, WAPO, Kindle unlimited, Amazon prime, and netflix I am now very embarrassed. Plus some purchased ebooks and movies thrown in, though I’ve gotten much better at using the library!||Don’t be embarrassed! This is why we’re doing this exercise together:)! Ok, what can you eliminate here but still retain what you need? Could you get by with just Amazon Prime since it offers music, TV and free shipping? Prime is $139/year ($11.58 per month), so I’ll put that down for now.||$12|
|Meds/doctor visits||$75||Averaged out over the year for me and baby||Fixed cost.||$75|
|Cell phone||$68||Sprint (and yes I know about MVNOs)||Ok lady, time to get an MVNO! This is probably the least painful, easiest change you can make.
Check out this post and pick an MVNO: How to Save Money on Your Cell Phone Bill with an MVNO: I Pay $12 a Month
|internet connection||$66||Fixed cost.||$66|
|Heat||$60||gas heat, average over the year||Fixed cost.||$60|
|Gas for car||$40||minimal commute!||Fixed cost.||$40|
|Car tax||$40||paid once per year||Fixed cost.||$40|
|Therapy||$30||Was covered by my old health plan with minimal co pays, not sure how much it will be with new health plan||Fixed cost.||$30|
|House stuff||$25||Paper towels, toilet paper, laundry detergent||Fixed cost.||$25|
|Physical therapy||$20||Was covered by my old health plan with minimal co pays, not sure how much it will be with new health plan||Fixed cost.||$20|
|Headspace||$8||Yearly subscription||How important is this? It’s not expensive, but it is one more thing that’s $96/year.||$8|
|Monthly subtotal (without mortgage and nanny)||$3,688||New monthly subtotal (without mortgage and nanny)||$2,563|
These suggestions would put Sara in the comfortable position of being able to:
- Continue maxing out her pre-tax retirement investments
- Pay for high quality childcare
- Cover her expenses and not dip into her savings each month
But as I said, this is a matter of personal choice and Sara will have to make the determination herself of which items she values and wants to keep. I’ll email her this spreadsheet so she can play around with the “proposed new amount” column.
Sara’s Question #2: Thoughts on having retirement money in an IRA vs. employer-sponsored 401K?
Roll it over. Roll it all over.
Sara rightly identified that one of her issues is her, ahem, impressive number of different accounts and indeed, she might go down in Case Study history as “Most Likely to Open Another Account” :). Consolidation and organization will be a great outcome of this exercise!
Sara, you will likely need to spend some time on the phone with Fidelity and Vanguard to roll all of these babies over, but their customer service is typically excellent. Plus, once it’s done? You won’t have to worry about it again!
I also want to make a clarification here: Sara noted she likes the idea of being able to withdraw from an “IRA at age 59 ½ instead of later for a 401K” but that’s not accurate. You can also withdraw from a 401k at age 59 ½ without any penalties. It’s possible Sara is thinking of RMDs (required minimum distributions), which take effect at age 72. But rest assured, it’s age 59.5 for penalty-free withdrawal from both IRAs and 401ks.
Let’s take a closer look at where Sara’s money is:
All together, Sara has $739,332 in retirement investments. According to Fidelity’s (oversimplified, but useful) retirement rule of thumb, you should:
Aim to save at least 1x your salary by 30, 3x by 40, 6x by 50, 8x by 60, and 10x by 67.
Since Sara is 44, let’s go with 4.5x her salary, which would be [$103,800 x 4.5] = $467,100. Given that, Sara’s in excellent shape! Since Sara mentioned she might want to scale back to part-time work in the future, she should be in a great position to do so.
I also noted that all of her retirement accounts are with either Vanguard or Fidelity, which is fantastic as both of those brokerages have a solid reputation for offering low-fee total market index funds. For more on the importance of selecting funds with low fees (aka expense ratios), check out this Case Study.
Sara’s correct that she has an epic amount of money in cash right now: $134,495! A robust emergency fund for Sara–which is three to six months worth of expenses–would be [$9,691 x 3] = $29,073 to [$9,691 x 6] = $58,146. This leaves Sara with $76,349 “extra” in cash.
The downside of having a lot of cash:
- It’s an opportunity cost:
- Cash offers the least opportunity for financial growth.
- Cash just sits there earning low (or no) interest and doesn’t keep up with inflation.
The upside of having a lot of cash:
- It’s a buffer against debt.
- It’s the most stable form of money, except for the fact that it doesn’t keep up with inflation and so it essentially loses value every day.
- But, it’s still the most conservative way to hold assets.
The challenge for Sara right now is that she’s in a state of flux:
- She’s a new parent, which always causes a reshuffling of priorities, spending and saving
- She has a new job and is still acclimating to that schedule and salary
- She’s spending more than her take-home pay every month
This is an interesting situation because Sara’s in excellent financial shape, except for the discrepancy between her spending and take-home pay. There are three ways to bring that into alignment:
- Reduce her pre-tax retirement contributions
- Reduce her spending
- Spend down her cash buffer on her expenses until she gets a raise in a few years
These are all valid options, but the most fiscally smart (and the best for the long term) is option #2: reduce spending.
So, what to do with the extra ca$h?
Typically, the hierarchy of financial options for extra cash are:
- Pay off all high-interest debt: DONE
- Save up a fully-funded emergency fund: DONE
- Max out retirement accounts: DONE
- Open a taxable investment account: DONE
- Potentially open a 529 college savings account: Sara should research this now.
- Potentially open a Donor Advised Fund (DAF): this is the tax-advantaged, most efficient way to donate to charity. I have a DAF and I highly recommend them for folks who want to create a lasting philanthropic legacy (in a tax-advantaged manner!). It’s easy to do, your money is invested so it grows over time, and it’s the simplest way to make and keep track of your donations. I find that DAFs are the most overlooked form of tax-advantaged account, despite being a great deal! More here:
- Add to your taxable investments: this is something Sara could do. Once items 1-6 are complete, folks can continue to invest extra cash in the market in perpetuity.
- Optional: explore other investment options, such as real estate.
All that being said, until Sara’s expenses are at least breaking even with her take-home pay, she’ll need to keep this money in cash so she can continue to cover her expense overages each month.
Jodie’s Role = Superstar
It is so difficult to find high-quality childcare that works with your schedule and that you trust and…. forget about affordable (that does not exist in our country, at least not for infants!). Given that, I think Sara has an incredible deal/arrangement with her BFF Jodie. It’s basically a parent’s dream come true!
I know readers will point out the full freight of Jodie’s compensation package, so I’ll do the math for us here:
|Item||Monthly Amount||Divided by Two|
|Nanny salary||$3,260||$3,260 (N/A)|
|Utilities (water, garbage, sewer)||$300||$150|
|Jodie’s total compensation package:||$5,221|
At $5,221 per month, I still think Sara’s getting a good deal! It’s hard to put a price on having what amounts to a stay-at-home parent who can work around your schedule, who you trust implicitly and who is raising your child with love and care. All that being said, Sara noted this isn’t the forever situation and that she anticipates they’ll send Sam to daycare in another year or so.
My main question here is how Jodie will survive financially after that point? I’m sure she and Sara have discussed this timeline, but I bring it up because Sara wouldn’t be able to afford to pay for daycare AND continue paying Jodie a salary.
Sara’s Question #3: Are there other financial planning suggestions for a solo parent or does it look like I’ve got things in an ok spot?
The tenets I think about for parents–and doubly so for solo parents–are:
- Term Life insurance: Sara’s all set with this
- Healthy retirement savings: you can’t take a loan out for your retirement and you don’t want to saddle your children with the cost of your old age.
- Create a will and estate plan: hire a lawyer to create this for you and update it over the years as circumstances change.
That’s the baseline! It’s most important for parents to have themselves in a solid financial place before they turn their attention to kid-specific investment vehicles. Since Sara’s all set with these AND given her high salary, it may make sense for her to open a 529 college savings account for Sam because it’s tax-advantaged. Sara should research what her state offers in terms of tax breaks and consider if opening a 529 makes sense right now. I assume it probably will, but she’ll need to read up on what her state offers. Here’s more information on how 529s operate: How We Use 529 Plans To Save For College
Sara’s Question #4: Should I pay off my mortgage?
NOPE. Sara locked in a historically low interest rate on her mortgage–2.5%–which should make you just about weep with joy. Sara, you hit the jackpot with that interest rate and there’s no financial or mathematical reason to pay off a mortgage with an interest rate that low. If you did, you’d be locking in a 2.5% rate of return on your money while the stock market (historically and on average) returns 7% annually.
Sara’s Question #5: Should I remodel my garage to make my house more comfortable long term?
In general, you want to cash flow renovations. In other words, you want to have enough cash on hand to pay for the full renovation without the danger of going into debt. Sara could potentially pay for the renovation with the “extra” $76k she has in cash, but, that assumes she’s able to always keep her monthly expenses below her take-home pay. Since Sara is still settling into the finances of her new job, her new role as a parent, and relatively new home ownership, I encourage her to wait. Wait and see what the housing market does in the next few years. Wait and see what the cost of materials and contractors do in the next few years.
In addition to the expense of renovating, due to global supply chain issues, a lot of building materials aren’t even available right now–for any price. If it were me, I’d wait a few years then reassess. Another advantage of waiting a few years is that Sara will no longer have the exorbitant nanny/daycare costs for Sam, which’ll give her much more room to pay for a renovation.
Before embarking on an expensive renovation, I’d want to know the following:
- Does Sara want to stay in this city and this neighborhood for the longterm?
- Would it be cheaper/easier to sell this home and buy a larger one in the same area?
- Will Jodie be living with Sara and Sam for the longterm?
- If Jodie moves out, will the house feel big enough for Sara and Sam?
Sara’s Question #6: How do I make sure I’m saving enough while also keeping a good positive cash flow on a monthly basis, and making sure to optimize what cash I do have on hand without it just sitting in my checking account, which is what I have a tendency to feel most comfortable with?
In many ways, I think this question reflects the fact that Sara is still in a state of transition with her job, home and bebe. And there’s nothing wrong with having extra cash on hand during a transition–in fact, it’s what I recommend!
If and when Sara is able to get her monthly expenses to align with her take-home pay, she can consider deploying her cash as follows:
- Sequester $29,073 to $58,146 as an emergency fund.
- Research opening a 529 for baby Sam.
- Research opening a Donor Advised Fund (DAF).
- Consider the garage remodel AFTER several years and AFTER determining she’s staying in the area for the longterm and AFTER determining that moving to a larger house isn’t a better option than renovating.
- Consider adding more to her taxable investment account.
And yes, Sara I agree, for the love of all things good, please consolidate your accounts :)!:
- Roll over all of the old retirement vehicles
- Combine the cash accounts into one
- Consider moving everything to the same bank/brokerage for ease of transparency. I personally have everything with Fidelity, which enables me to see alllllllll of my accounts on one screen–very, very helpful.
- Continue maxing out the 401k and 457b contributions for the tax advantages.
- Hire a lawyer to create a will and estate plan (if you haven’t already).
- Explore ways to bring your spending into alignment with your post-tax income.
- Once that happens, explore the options for your “extra” cash:
- 529 (tax-advantaged)
- DAF (tax-advantaged)
- Garage remodel
- Adding to taxable investments
- Roll over all old retirement accounts.
- Consolidate all cash into one account.
- Potentially move everything to the same bank/brokerage for ease of tracking all accounts.
- Research 529s in your state.
- Don’t pay off the mortgage because the interest rate is historically low.
- Ensure that Jodie has a financial/career plan for when she is no longer Sam’s nanny.
- Table the garage renovation for now and reconsider in a few years.
Ok Frugalwoods nation, what advice do you have for Sara? We’ll both reply to comments, so please feel free to ask questions!
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