Naked With Cash is the year-long series on Consumerism Commentary where seven readers’ households share their financial progress on a monthly basis. I’ve partnered with financial planners who will offer some guidance along the way. Read this introduction to learn more about the series.
Kathleen is thirty-one years old, single, and living in Portland, Oregon. She loves her job, even if it isn’t very lucrative. With her $33,000 income last year, she’s looking to make more money from “side hustles” this year, such as her blog, Frugal Portland. To learn more about Kathleen, read her bio here. Kathleen is on Team Sara, with Certified Financial Planner Sara Stanich.
Keep reading to see Kathleen’s net worth report, which includes progress over the past year, with detail from the past several months, as of December 2012. Following Kathleen’s own self-analysis, Sara Stanich will offer thoughts from her perspective, and budgeting expert Jacob Wade from iHeartBudgets will also provide insight.
Comments and analysis from Kathleen
Traditional IRA: in January, making the last deposit into 2012′s IRA, then starting in February, depositing $550/month in order to max out my IRA again this year.
Car: 2005 Toyota Corolla. Nothing special, has over 100,000 miles on it. “Worth” $3,000.
Student Loan: paying 4.125% interest on this. This is the next loan I’m going to eliminate, and the only bill that’s not automated. Whenever I think about it, I pay $200. Whenever I get unexpected money (birthdays, holidays) I deposit the check and pay it directly to my student loan. Whenever I save money on something, I take that amount and put it toward my student loan.
This doggedness has gotten me nearly to the $2500 mark, which means it’ll be gone soon. I’ve slightly altered my strategy here because if I’m going to buy a home, then I need cash more than I need a smaller student loan.
Car Loan: I pay 2.75% interest and $203 a month.
There are some differences between 2012 and 2013:
In 2012, I opened a Roth IRA, and left $400 in it for a few months before asking Fidelity to put it in my Traditional instead, so I can keep building that.
In 2012, every month I would ask Craigslist what a car like mine was worth, and I realized that is a fruitless task, so in 2013 I set it to $3,000 and it’ll stay that way all year. It’s very conservative, but in the future, when the loan is paid off, the value of the car is going to be completely off the net worth calculation, since I think it’s stupid that it counts right now (but I’m happy for the bump in net worth, anyway).
In 2012, I did not have a mortgage, but in 2013, I anticipate one. I am also going to track the down payment that my parents are giving me as a loan, since even though they do not expect to be repaid, I fully intend to repay them when I can. When I do have property in my name, I will assume I paid market value for it, and keep the value at the amount I paid for the duration of
2013. Not just for the sake of my net worth calculation, but for sanity’s sake. I’d like to believe that homes don’t lose value as they’re taken off the market.
I’m adding savings to the list in 2013, but it wasn’t a focus in 2012. I am starting fresh in 2013, but because of the above, my net worth takes a hit between December and January.
I pay the credit cards off every month, and I don’t have historical numbers, but I’ll start tracking those in January.
Kathleen is a single thirty-one-year-old living in Portland. She earned $33,000 in 2012 and is looking for opportunities to earn more income on the side.
Feedback from Sara
Kathleen, you are off to a great start. It is clear that you live within your means, and impressive that you are fully funding your IRA. You are really very close to being completely debt free. Keep going, but congrats on your progress so far!
I would like to better understand your plan to buy a condo. Do you have a budget or even a place in mind already? How will mortgage payments (plus taxes, insurance and condo fees) compare to what you pay now for rent?
Is the down payment from your parents a gift or a loan? If it is a loan, I strongly recommend you automate a monthly payment plan to your parents on day one. Some parents make offers to “help out” when they actually can’t afford it, or expect to receive payment “one day” when no arrangements have been made. Be really clear on this now to avoid hard feelings later, especially if you have siblings who may want a similar arrangement.
Finally, it is clear that you are not overspending. But are you under-earning? You mention that you do some “side hustle” work to earn extra money, but I suspect there are opportunities to increase income at your “day” job (or move on).
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Feedback from Jacob
Kathleen, I remember a while back you were talking about saving 50% of your income, which is ridiculously AWESOME! It look like you’re maxing out your IRA, and looking at funding a Roth as well. I definitely commend you for your discipline in living frugally and saving well. Traditionally, I would stay kill the car loan, because there’s no tax write-off and no reason to hang on to that measly loan. But I can sympathize with the want to save for a home, and putting every extra penny toward that goal. I, too, purchased a home while I still had student loans, and though I wish I could have killed them, the timing really was perfect, and I don’t regret it. So I’d say keep saving and planning on your home purchase, but stick to same basic guidelines:
Have an emergency fund in place. You currently have $2,150 put away in your savings account. Now, I’m not sure what size mortgage you are looking at taking on, but I always recommend having at least 3 – 6 months of bare minimum expenses put away in case of job loss or any other major emergency. So, when planning out your home purchase, mock up an emergency budget, and ensure you could survive on that for 3 to 6 months on your savings.
Make sure your mortgage and insurance cost isn’t over 40% of your income. I know people throw all kinds of percentages out there when talking about mortgage cost, but I really think 40% is the max you should take on to be able to still hit your goals. I’m over 50% at the moment, and I am only surviving because of some epic budgeting! But seriously, to continue saving at the pace you are and to be able to hit your goals, I don’t recommend dropping more than 40% on your housing costs.
Don’t “borrow” from family. Your family has already committed to gifting you a down payment, why not accept it? I only ask because it would help you build equity and long-term wealth. Well, that, and the lender probably won’t approve your loan application if they see you borrowing from family. I did the same thing, and was rejected until I just accepted the money as a gift, and stated in an official letter (signed by the gifter and me) that it was a gift. I would talk to a lender about your situation before making any promises to pay it back. Also, the maximum amount you can receive as a gift tax-free is $13,000, so I’d check with your tax accountant as well before the transaction.
Once you have a home, kill the debt. It sounds like you might be able to chip away at it and possibly have it gone by then anyways, but if it’s still hanging, kill it deader than Lance Armstrong’s dignity (yes, deader is now a word). Overall, I’m excited to watch your net worth shoot through the roof. You’ve already got the right mindset and a plan, so you’re going to do very, very well. Thanks again for sharing, Kathleen!
Updated June 22, 2016 and originally published January 23, 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.