As the Debt Movement surges along and we look to help give you ways to pay off debt, I gave WSL readers the opportunity to have me review (and analyze) their personal budget and goals. My hope with this is twofold: (1) help the particular individual/family and (2) help YOU find areas you can improve by seeing other peoples’ budgets along with the suggestions I give them.
The first reader that responded to the offer emailed me this:
|Within the past year, my husband and I both graduated from college, got married, as well as moved to a new city for new jobs. (I discovered they’re both 25 years old). I have been at my job for a month, but the company recently announced that they are moving headquarters to Texas. I will be looking for a new position in the coming year, but am unsure how to budget with such a large unknown – especially since my husband and I are working hard to pay off student loans. We started with $55,000, but paid off the one with the highest interest rate, so now we have $40,000 in loans left to tackle. 🙂
I have a background in accounting, but have never really budgeted prior to getting married a few months ago. My husband and I have goals of paying off student loans, saving for a down payment on a house and saving up for an international trip. (We went on a short honeymoon, with the understanding that we would go to Europe or South America in the coming 1-2 years.) I’m not sure what to do with our budget now that our income will be changing sometime this year, and I never had a good idea about how much should be budgeted in each category.
My initial thought was that these newlyweds are KILLING IT and it’s very encouraging that they’re willing to ask for an opinion – even though they’re doing pretty well on their own! I love the fact that they already had things broken down into this amount of detail. It speaks volumes that they have no consumer debt and have a decent amount already saved for emergencies. Furthermore, the fact that they have a goal of traveling and are saving towards that end shows they’re organized, disciplined, and are willing to sacrifice to meet those goals. Finally, it’s great they each have a “fun money” category as that’s mandatory for married couples. Awhile back I wrote how I got into a little bit of trouble because we didn’t have a blow/fun money category in our budget.
Overall, they don’t have many things that are missing and just need to work on setting goals and clearly work on attacking a few particular things at a time.
1. Build up the Emergency Fund
Based on our conversation I believe they’ll find employment, prior to the wife’s company moving, without an issue. However, it’s always nice (and wise) to have the added protection of an emergency fund in case things don’t turn out as planned.
With that in mind, I’d have a goal of saving a total of 6-months worth of living expenses and build up your emergency fund to a total of $22,000. I reached this number by using the $4,012 monthly expense total in the proposed budget and subtracted the $400/month retirement savings. That gives them a total of $3612 that needs to come in each month. $3612 x 6 = $21,672 (so I rounded up).
With $7,000 already in the emergency fund and having 2,730/month in disposable income to save, they should be able to add the extra $15,000 within 6 months (that’s assuming they don’t bring in any extra income and don’t have “extra” paycheck months).
The reason I suggest doing this and delaying paying extra on debt is for two reasons: (1) there is a storm brewing…they’re not sure if it will be a hurricane or just a little thunderstorm, and (2) if they secure employment shortly before (or after) the wife leaves her job, then they’ll have a LARGE stash of cash that they can pay down towards debt.
I’ve learned this lesson the hard way: once you pay the money on debt, you can’t get it back. It’s nice to have the cash cushion because you never know what life will throw your way.
2. Finish off The Vacation Fund
Understanding that this will be 6 months in the future, that means they’ve already saved $1,500 towards their vacation fund (as they’re saving $250/month towards that goal). With that in mind, develop a target goal within the next few months on how much the vacation fund needs to be. I realize the trip will be expensive, but be diligent, plan ahead, and get a good estimate on costs.
Once they’ve determined exactly how much they need for the trip, I’d then take all of the disposable income each month ($2700 in addition to the $250 already being saved) and add it to the vacation fund. At month 7 of this plan, they’ll have $4,450 saved and at the end of month 8 they will have $7,400. I’m not sure how much it’ll cost, but $7.5k should be close to enough.
3. Rock That Debt
With the emergency fund sitting at $22,000 thousand dollars (in 6 months) and the vacation fund completed, they’ve now freed up all of that money they were saving and will have a disposable income of $2,950/month.
Pay off The Debts Completely – now that we’re 8-9 months down the road, the employment situation will be close to being hashed out. If they were able to secure employment and have no lapse in income, then that means they can use a portion of their emergency fund to pay down debts. I’d suggest leaving 3 months worth of expenses in the emergency fund, but they can also take it all the way down to $7,000 (the amount they told me they like to always have in their e-fun). Which they choose doesn’t matter too much and comes down to preference.
By leaving 3 months of living expenses in the emergency fund, that frees up $11,000 that could instantly be paid towards debt (assuming they have transitioned to the new job). That would leave around $26,000 remaining of student loan debt. Currently have $40k, minus $11k from the lump sum pay-down, and $500 worth of minimum payments for 8 months (as we’re 8 months down the road).
With a disposable income of $2950/month (and $500 worth of minimum payments), that means they can be debt free in 8 months!! That would be a total of 16 months into this plan!
4. 6-Month Emergency Fund
With the debt eliminated, emergency fund sitting at 3 months worth of expenses, and a European vacation in the rear view mirror, that will give them a total of $3,450/month in disposable income. Now that they’ve gotten $500/month off of your budget (by eliminating the debt), they only NEED $3,112/month to cover your bills, living expenses, and targeted savings. That means their 6-month emergency fund would need to have $19,000 sitting in it.
With $11,000 sitting in the fund that leaves them $8k left to save. By chucking all of their disposable income ($3450) towards that goal, that means they’ll be able to build their emergency fund to a full 6 months worth of expenses within 2.5 months! A total of 18-19 months into this plan.
5. House Down Payment Fund
Saving a down payment for a house is all that’s left of their goals and will be their primary focus at this point in their journey. With $3,450/month that can go towards that end, they’ll be able to save $13,800 in 4 months (which is right at their 2-year goal).
Considering all that they’ve done to accomplish their goals at this point, I’d encourage them to wait to buy a house until you have 20% down. If the $14k (only a $70,000 house) is enough to meet that goal, then go for it! If not, I’d encourage them to wait another 6 months and continue to build up their down payment fund. At that time they’d have about $35,000 which would be good for a 20% down payment on a $175,000 house! Total of 28 months into the plan.
6. Retirement Savings, Rental Properties, and Other Concerns
Now that all of their goals are accomplished, they’ll simply have to create new ones and focus on taking care of their new responsibilities at age 28. They’ll likely need to start saving for new cars, maybe additions to the family, and most certainly should allocate a significant amount of money towards Roth IRAs, 401(k), and investing in rental properties.
Readers: what did I miss? Do you think I should have told them to pay off debt first and then go on vacation? I don’t think there is a right or wrong, but feel free to give your opinions so this couple can get some extra guidance!
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