In Naked With Cash, seven anonymous Consumerism Commentary readers publicly track and analyze their finances on a monthly basis. For almost a decade, I tracked my own finances on Consumerism Commentary; now I’m sharing the benefits of public accountability with the participants. I’ve partnered with financial planners who will offer some guidance along the way. Read this introduction to learn more about the series.
Calvin is in his early 40s, earning an annual salary of $120,000 plus bonus as an IT project manager in New Jersey. He recently finalized a divorce and has a teenage child. Read his bio here. Calvin is on Team Sara, with Certified Financial Planner Sara Stanich.
The net worth report below and following commentary refer to the last full month, November 2013. Last month’s report analyzed Calvin’s progress during the month of October. November’s theme is debt. Calvin’s thoughts are followed by Sara’s feedback and advice.
Calvin’s analysis and comments
Strictly by the numbers this has been a great month for me. I was helped by a nice increase in the stock market which lifted my LTI and company stock options by a large amount. I was also helped out by November being a three-paycheck month for me. The trend has definitely been positive for me in increasing my net worth and regardless of the stock market fluctuations I feel like some of the hard work that I have been doing to reduce my expenses has been paying off.
Speaking of reducing expenses, this month I began the process of switching cell phone plans for my daughter and me from AT&T to Republic Wireless. I have had the Republic Moto X phone for over a week and have been extremely impressed by its reliability and coverage in my area. When I fully switch over, which should be by the end of the year, my savings will be more than $100 a month on cell service.
Overall in the past year I have been able to reduce my monthly expenses by close to $1,000 which has had a tremendous impact in my day to day quality of life, my anxiety was reduced tremendously by getting myself on more stable financial footing.
This month’s numbers make it look like my credit card debt went up this month. What happened was that I paid for several things on my American Express that I have the money in the bank to pay for. The bill is coming due in a couple weeks.
Debt is a great topic for me since it has dominated my life for so long. Prior to my divorce debt was not really something that I ever thought about. My attitude towards money for a long time was that it was always there when I needed it so I never really worried about it. As my wife and I were getting further and further into debt our incomes continued to go up and up so it never felt like it was a real problem. It had this “someday I’ll have to deal with it” quality to it.
Then when my divorce came at the same time as the real estate melt down, it became suddenly obvious to me why debt was such a bad idea. While I am sorry that it took such an extreme event to wake me up to better financial discipline, I am grateful that I at least still have time to change my ways.
I did have a specific question for Sara regarding my outstanding consumer debt: I have an option to withdraw money from my 401(k). It does carry the 10% IRS penalty and I will have to pay income taxes on the withdrawal. I realize that I could withdraw $40,000, set aside $8,000 for taxes and penalties and use the $32,000 proceeds to knock out all of my credit card debt, which would free up over $1,000 a month in income. My plan would then be to increase my 401(k) contribution to 6% to get the entire company match. I would also be able to use my annual bonus to create an instant emergency fund of one month’s salary. I would then begin contributing to the emergency fund regularly.
I would also still have a nice tax refund for 2013 which I am anticipating to be able to use to pay off my car or put towards one of my outstanding 401(k) loans. When I started thinking about this I realized that in a couple months I could be in a fairly normal, more stable financial situation. I think that the 10% penalty will be offset in the savings from not paying interest on my debts. But I would like to have your professional opinion on the matter.
Thinking about paying off my debts has lead me to begin pondering some of the questions posed by Luke this month. Specifically, I have been asking myself what would I do differently if I were debt free. How would my life change? Honestly I don’t have a very good answer. I would hope that my life would not change at all and that the extra breathing room in my income will be earmarked for savings once my budget is balanced. I hope my lifestyle would not inflate as a result of that breathing room.
This is new territory for me and not something with which I have had any previous success. Prior to my awakening I was the kind of person who would take a home equity loan to pay off the credit cards only to see the credit cards gradually regain their balance. I know that I am in a much different place in my life now, but this would be where the rubber meets the road. Like I have said previously, it’s easy not to spend when you don’t have any money. Now I would need to not spend while accumulating money.
In terms of whether carrying any sort of debt is OK or not, I don’t really have an opinion right now. I assume that for some people having a mortgage is an acceptable type of debt to carry, but I currently have no desire to own anything as large as a house anywhere in the near future. I also have changed my thinking about cars. I think buying reliable used cars is going to be my preference moving forward. I went though so much financial stress and anxiety, and I feel that monthly payments on anything is just a curse to be avoided at all costs.
What would I do differently if I were debt free? One thing that I have been thinking about is starting to date again. I have had one fairly long relationship after my marriage ended, but when that ended I decided to focus on my daughter and my finances. Dating sometimes is just an unnecessary added expense that I chose to save on. Now I think that I might like to allow myself a certain amount of budget room monthly for dating. At first I would like to keep it small (maybe $100) so that I would naturally be limited in my pursuits.
Other than dating, the only additional thing I would like to have money for is going on vacation. I haven’t been on a proper vacation in several years and I would like to save money, make plans and take my daughter somewhere nice, like California or Europe. I am a very frugal traveler, but I would like to be able to afford a nice vacation every other year or so.
Feedback from Sara Stanich, CFP
You’ve really changed the trajectory of your financial life this year, Calvin. At this time last year, you were getting a little bit deeper in debt every month. Of course that can cause anxiety!
Now you are climbing out of that hole. It may take two or more years to pay off those credit cards. I think you will feel a weight has been lifted when you do. My advice is to just keep plugging away.
While a withdrawal from your 401(k) to pay off debt may be tempting, I do not recommend it. You mentioned the 10% tax penalty on withdrawals. But that is not the only downside. Withdrawals of pre-tax contributions would also be taxable income for the year. You would also lose the benefit of tax-deferred growth of the investments in the account. And frankly, I’d like to see you adding to your retirement savings (even just a little bit), not subtracting.
This communication is intended only for the person or entity to which it is addressed. Any taking of any action in reliance upon, this information by persons or entities other than the intended recipient is not recommended. Any information provided is for informational purposes only and does not constitute a recommendation. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Be sure to contact a qualified professional regarding your particular situation before making any investment or withdrawal decision. Raymond James and Sara Stanich, CFP, are not affiliated with and do not endorse, authorize or sponsor any third party websites, their respective sponsors, or user comments found on this or other sites.
Feedback from Luke Landes
I’m surprised to see the return of the 2011 tax liability on your balance sheet. It wasn’t addressed in your comments — is there a story there? But regardless, your net worth took a pretty big leap this month. It sounds like between cutting your expenses, an “extra” paycheck, and some good stock market returns, you made out really well. I’m hoping the stock market trends don’t reverse — although that could open better opportunities for long-term investing as your continue to earn income.
Affording a vacation every other year sounds like something that is within the realm of possibility. But I’d think long and hard about the decision when you have so much debt. It’s important for quality of living to add enjoyable activities, especially those with family, so I understand the need to do something like this. The fact of the matter is you have more than $30,000 in credit card debt, outstanding loans to your 401(k) — these will cause trouble if you ever lose your job — a medical bill liability that keeps growing, and a divorce settlement. You have almost $100,000 in debt.
A $2,000 vacation isn’t going to make much difference in the long run, but you only have a little over $8,000 in accessible assets. What happens if you find out you have to pay back your 401(k) loan immediately, as would be the case if you lose your job? I’m not going to say don’t go on vacation, but you have a dangerous level of debt to deal with.
Updated June 22, 2016 and originally published December 28, 2013. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.