Naked With Cash is an ongoing series at Consumerism Commentary in which readers share their households’ finances with other readers. These participants benefit from the accountability that comes from tracking their finances publicly and the feedback of the four expert Certified Financial Planners (CFPs).
This year, we have four participants who will share their financial reports, exposing the results of their financial choices. Each participant is paired with one of our Certified Financial Planners. The experts will provide insight and guidance that will help our participants take their finances to the next level by the end of 2014. Learn about this year’s participants and experts.
Together, Laura and Leon earn more than $124,000 a year, and Laura recently received a raise. Currently, their main goal is to tackle their student debt. Even though they don’t have children, they think they will start a family soon. As a result, they are trying to sock away as much as they can for retirement, and they are trying to put their finances on the right track so that everything is in order when they decide the time is right to add children to the household. (Read last month’s update.)
After reading Laura and Leon’s comments, you can read commentary from Roger Wohlner, CFP. Roger Wohlner appears courtesy of The Chicago Financial Planner. This month, there is a focus on short-term savings goals.
Laura and Leon’s Net Worth Statement
Laura and Leon’s Income Statement
Comments and analysis from Laura
I was going to open by stating that March was another unusual month, but I’m starting to see a pattern: there is no such thing as a usual month. Some months have extra expenses and some have extra windfalls. I’m simply going to have to get used to it. By the time we establish a predictable long-term pattern, there will be some other major life change that upsets the balance once again.
In any case, this month was differentiated by a weekend trip to attend a friend’s wedding, my first Profit Sharing allocation from my employer, and the loss of one of our long-time family pets.
We carpooled with some friends to the wedding and paid them back by treating them to lunch. We did a little bit of local shopping for unique gifts, gave a cash gift to the happy couple, went out drinking with friends, and spent a tiny amount at the local horseracing track. My estimates show we spent about $530 over the weekend with most of that going toward the hotel. This is way more than I would have guessed, and a sign that I need to be more careful with budgeting and spending on these mini-trips in the future.
The Profit Sharing is distributed annually by my employer and requires three full years of employment to fully vest. This year’s distribution was unusually low, at 2% base salary. As early as a few years ago distributions were as high as 20%, but with increased pressures in the industry I suspect it will be a long time before we see that level of Profit Sharing again. I’m a bit uncertain whether I should even count this amount in our net worth since it will be at least another year before this money fully belongs to me, and given last month’s discussion of my general dissatisfaction with my job, this is far from a sure thing.
The pet we lost was a bird that had been in the family for about 12 years. He had a degenerative nerve condition for years and eventually reached the point where it was kinder to let him go. If you look at our Pets line item on our spending for the past few months, most of that amount was part of the effort to give him a better quality of life. As far as I’m concerned that’s exactly what money is for, and I’m so glad we always had plenty of money on hand to simply write a check for whatever needed to be done. Caring for the little guy was enough of an emotional roller-coaster without adding financial stress to the equation. To anyone out there with pets, I implore you to factor end-of-life costs into your budget or at least your emergency fund. You’ll be so glad you did.
Now let’s move on to our discussion of savings. As a couple, we are still fairly weak at actually spelling out our short-term saving goals. There are two big (non-retirement) items we are carefully saving toward, and about a dozen smaller items where the plan is more or less “keep our expenses low and hope there is enough cash on hand when the time comes.” I’ll start with those two big items.
First and foremost, I really want us pay off that Student Loan. This is a slightly looser definition of savings, but I think it’s applicable here. Our plan at this point is to contribute at least $2,000 each month and, starting in November, increase that amount to $3,000 each month until the full amount is paid off in July 2015. As motivation, I developed a spreadsheet that shows exactly how much principal remains, how much interest accrues, and how a payment affects each amount. When I look at the raw numbers and see how much we owe, I am greatly disheartened. However, when I look at our spreadsheet and see that the daily accrual of interest has gone from over $10 per day to only $6.47 per day (that’s more than $100 savings per month), it actually feels like we are making meaningful progress. Plus, anytime we make an extra payment over the $2,000 amount, I get to move that “final payment date” forward a little bit more. It really is a great feeling.
The second planned item is saving for a down payment on a house. Ideally, I want a 15-year term loan, total monthly payment of no more than 30% of our take-home pay after maxing out our 401(k)s, full 20% down up front, and about $20,000 left in reserve for transition expenses and potential renovations. My estimates show we’ll need about $64,000 to meet this goal. The Net Worth line items for Taxable Investments and Savings Account are exclusively reserved to meet this goal, so when you combine that with our checking accounts, that puts us at about 83% toward meeting the full amount. We are not currently actively contributing toward this goal, but as soon as those loans are paid off, we’ll be hitting it with full force. Hopefully we’ll be there around late 2015.
As for all the other things, here’s a list off the top of my head that we’d like to do within the next few years: replace a car, buy a new mattress, buy a new desktop computer and tablet, fund a few trips a year to visit out-of-state family and friends, update our professional wardrobes, celebrate milestones in our parents’ marriages, host my sister’s bachelorette party… The list goes on. For the most part, I have a rough idea of what these items would cost, but I feel overwhelmed when I actually consider making all of these a specific line item. I really prefer to just pay for these out of our monthly excess as we go. If this “method” is downright foolish, I’m completely open to alternative suggestions.
There is one item that I really feel like we need professional help with. I’m not sure how much we should be saving for the “starting a family and having a parent stay home for at least a little while” fund. Luke brought this up a couple months ago and I admit I’ve been stuck ever since. I would be the stay-at-home parent, so could we just save an amount that equates to perhaps five years of my take-home pay? But what about the various other benefits from my employer? Being out of the workplace, I would forgo a certain amount of life insurance, retirement benefits, and health care subsidies while at the same time spending less on things like commuting and professional attire. How deep do I take all these factors into account and balance being truly prepared with not putting this off until it’s too late?
Feedback from Roger Wohlner, CFP
To address the last issue first: as the father of three I can say that becoming a parent is a huge, life altering experience. It is a wonderful experience that I wouldn’t trade for anything. Your thoughts and analysis on the financial side are to be commended, but at some point you have to accept that there likely will never be a perfect time financially to do this.
That said, you do want to look at your expenses, your husband’s benefits and the like beforehand. And while you are planning to be the stay-at-home parent, perhaps there are some ways you can use your experience and knowledge to work part-time in some sort of consulting role. Or perhaps you could look to start a blog or some sort of online business to offset some of the lost income.
Overall, from the information that you shared, I think you are doing well. You are keeping to (and exceeding, it appears) a schedule for paying off your loans which is better than many folks do. As for the house, I don’t know anything about housing costs where you are, but perhaps buying something a bit lower in price to start out with might help. Certainly your rent currently is quite cheap and home ownership will be a large adjustment. You also need to figure in “stuff” you will need to buy as new homeowners during the first year, such as a lawn mower and perhaps a snow blower. The “Home Depot” visits need to be factored in for year one.
As for the shorter-term items, I suggest creating some sort of spreadsheet with a list of the items to be purchased, anticipated costs, and desired time frame. And, of course, prioritize these items. I think at the very least this will help you visualize the list and dollars needed. From there you can do some planning — and perhaps whittling — of the list if needed.
I applaud your diligence and attention to detail, these traits will serve you well financially throughout your life.
Feedback from Luke Landes
One of the things I’ve noticed over the past few years is that I also never seem to have a “regular” month anymore. Perhaps it’s because I know my finances are in a different place than they were ten years ago, and I actually do have some flexibility in my budget, but every month seems to be different. So I can relate to your situation.
In terms of saving for the upcoming expenses you’re aware of, I don’t think your approach is foolish. In terms of monthly profit — positive cash flow, or excess — you’re doing fine. Unless you see any significant threats to your income over the next few years, you can deal with your expenses by taking the approach you do currently. Now, if the issue is just one of the feeling of being overwhelmed, it might be worthwhile taking a look at why you feel that way when you probably don’t need to.
I’m hoping that Roger, as the experienced financial planner, would offer some solid suggestions on saving money for starting a family and switching to a single income, dealing with all the changes in benefits that go along with that. But I don’t think you need to work under the assumption that you have to replace five years of income and benefits. Your life changes when you have children. No, I don’t have personal experience with this, but starting a family changes your priorities — starting at a biological and chemical level in your brain and manifesting through the way you choose to spend your time and money.
Your priorities will change without a conscious decision to change them, in an effort to care for and protect your family. I think — and I could be wrong — that some of the things you’re concerned about will fall into place naturally. And I’m all for making informed decisions based on what you expect your future to be, in your case, a future with a family, but in the end, how you approach dealing with the choice to have both parents continue to work is a personal one.
For an interesting perspective, you might want to read Farnoosh Torabi’s recent article with the perspective of stay-at-home parenting isn’t worth it, but also take into account some of the better rebuttals to her thesis.