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Reader’s Budget Profile: Mr. and Mrs. D

by retirebyforty on August 14, 2013 · 54 comments

in cash flow

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Our reader, Mr. D needed a little help with their household budget. They just had a baby and decided that Mrs. D should stay home with the Baby D. As you can imagine, their household income took a hit and their monthly cash flow turned negative.

I went over their budget and made some suggestions below. I’m sure they would welcome your input as well. If you’d like a little help with your budget, please send me an email and we can put together an article like this.

Mr. and Mrs. D

Mr. and Mrs. D live in the Midwest in a home that they purchased in December 2011.  They are both 28 years old.  Mr. D works full-time for a financial firm. He is an MBA student and will be registering to begin the CFA program shortly (all employer-paid).  Mrs. D used to work full-time until Baby D was born in February 2013.  Mrs. D now works part-time for a family business, from home, while caring for Baby D.

Before Baby D, income was higher, but expenses were also higher; the displayed budget is the product of multiple trimmings.  A cost-benefit analysis was done when Baby D was on the way and it was determined that Mrs. D would only bring in about $2,400.00/annual after-tax, once childcare costs were included.  This led Mr. and Mrs. D to decide that Mrs. D should stay home, which is what both wanted anyway.

Goal – Mr. and Mrs. D wish to improve their monthly cash flow so more money can be put toward building up passive income.

Budget Summary

reader's budget profile

Budget Details

Housing and living expense

  • Housing Payment – This breaks down to $9,855.96/annual principal and interest (4.25% 30-year fixed), $3,320.00/annual taxes and $920.06/annual homeowner’s insurance.  The difference is building up the escrow account.
  • Housing Upkeep – This is primarily savings for big items such as a new roof or replacing a water heater.  Month-to-month, this budget is uncommonly used, let alone maxed.
  • Electric/Gas and Water/Sewage Utilities –We might end up going over budget.
  • Internet Service – Used to have cable TV, now down to just internet only.
  • Groceries and Consumables – This category covers almost anything that Mr. and Mrs. D buy from month-to-month – food, small household furnishings, cleaning supplies, light bulbs, toiletries, small household electronics, etc., etc.  Mrs. D has recently begun to start couponing seriously, so there may be room to decrease this budget further.
  • Baby D’s Expenses – Covers anything purchased for the baby, from diapers to clothes to a food processor purchased so Mrs. D can make baby food herself.  While Baby D is only 5 ½ months old, there is often money left over in this budget at month-end.

Transportation

  • Gas (Car) – Mr. D is trying to work from home more, so hopefully this expense might go down.  Also, having Baby D gives Mr. and Mrs. D a reason to push family members to visit them, rather than having to drive all over the state to visit.
  • Car Insurance – Well-insured, not just the minimum coverage.

Entertainment and discretionary spending

  • Eating Out and Entertainment – This includes streaming Netflix plan.
  • Family Vacation Budget – One side of Mr. D’s family goes on an annual vacation, which Mr. and Mrs. D go on every year.  Vacations have been becoming more local to accommodate a family member’s mobility/health issues.
  • Christmas Gift Budget – This budget has been trimmed back from what it was previously.
  • Other Gifts and Celebrations Budget – This budget has been trimmed back from what it was previously.

Healthcare

  • High Deductible Health Plan – Based on anticipated birth of Baby D, this health plan was determined to be most beneficial.  Mr. and Mrs. D will probably choose this plan going forward as well.
  • Dental Insurance – Basic Dental plan offered by employer.
  • Flex Spending Account – Funded to purchase new frames every other year and new lenses in the alternate years.
  • Health Savings Account – Mr. and Mrs. D opened this HSA in 2013; after medical expenses associated with delivery, not much will be left in account at the end of the year.  Mr. and Mrs. D wish to contribute as much as possible into this account until it has ~$10,000, to cover 2 years’ maximum out-of-pocket expenses.

Insurance and security

  • Mr. D Term Life Insurance ($1MM coverage) – 20 year term
  • Mrs. D Term Life Insurance ($1MM coverage) – 20 year term
  • Mrs. D Variable Universal Life Insurance – This was originally purchased as an investment policy.  Mr. D was the sales representative on the policy (used to work in sales before career change) and believes (probably more than most on financial blogs) that there is a value to using a VUL for tax deferred growth.
  • Umbrella Liability Policy – $1MM in coverage
  • Security System – Security company chosen after thorough competitor analysis.  Non-discretionary expense.
  • Mr. D Disability Insurance – Combined with employer-provided policy, should provide close to 90%-100% income replacement for long-term disability.  His employer provides short-term disability coverage.
  • Mrs. D Disability Insurance – Long-term coverage only, no short-term.
  • Baby D’s Whole Life Insurance – Purchased from a mutual company with a strong history of paying dividends.

Debt

  • Mrs. D’s Consolidated Student Loans – One is a private loan and one is a federal loan.  The private loan has an interest rate of 8.4% and the federal loan has an interest rate of 6.125%.  Mr. and Mrs. D plan to, in the coming months, switch payment plans so that the federal student loan payment will go down temporarily and then pay the difference toward the private loan.  Reworking the payments in this manner will pay off all of the loans 2-3 years sooner than originally scheduled.
  • Furniture Payment – Purchased couches when home was purchased.  Zero percent financing until January 2014; balance will be paid off at that time.  While the amount shown in the budget is assuming equal amortized payments, only the minimum payment is actually being made, so there will be a lump sum payoff.
  • Dishwasher Payment – Zero percent financing until July 2014; balance will be paid off at that time.  While the amount shown in the budget is assuming equal amortized payments, only the minimum payment is actually being made, so there will be a lump sum payoff.

Saving

  • Emergency Account Savings – Not as high as we’d like this to be.  Account has enough to pay for ~6 months of expenses.

Mr. and Mrs. D do not have anything budgeted toward “miscellaneous” expenses.  While they agree that this should be done, as they are in deficit spending currently, it didn’t make sense for them to add it to the budget.  Examples are dry cleaning, oil changes/vehicle maintenance, vehicle repairs, etc.

*NOTE ON “MAD MONEY”* – It is often said that without some money being budgeted as “mad money”, the success rate of sticking to a budget is very low.  Mr. and Mrs. D use their “mad money” budgets individually on whatever they see fit, such as hobbies, eating out with friends, buying each other Christmas/birthday gifts, etc.  This money is for anything that either Mr. or Mrs. D want to spend money on that isn’t really a “joint” expense – this includes clothes and similar items.  Mr. D also puts as much money as he can into his employer’s stock purchase plan; his XIRR on the plan has been ~60% annualized since joining the plan in July 2009 and he hopes to maximize his contribution this year.  Mr. D also makes very modest donations to his church with this money and pays a parking lot fee for work (public transportation not an option).

 **SPECIAL NOTE** Mr. D has a 2nd job. He is also employed by the family business, but there are strings attached to his employment – Mr. D’s salary from the 2nd job can only be used for retirement savings and assorted other benefits (such as Vision Insurance and a Variable Universal Life policy on Mr. D) for Mr. D.  Because of this arrangement, Mr. D has been able to contribute the maximum amount to a Roth 401(k) and the maximum amount to his Roth IRA.  The salary can also be used to offset the increase in tax liability that this extra income generates, but the salary cannot be used for any other kind of expenses or other investments.  Because no changes can be made to this income, the total income from this employment is not included at all above.  This note is to help demonstrate that savings for retirement are actually occurring, in addition to Mr. D’s cash balance pension from his primary employer.

Final thoughts

Mr. and Mrs. D have excellent credit; they put all eligible expenses on credit cards to gain rewards and pay the balance off each month.  They recently applied for another credit card through their bank (to avoid monthly maintenance fees on their bank accounts) and were informed that their credit score was 791 (believed to be an average/composite of both scores).

Mr. D very much wants to use their credit to purchase a residential rental property, believing that a combination of leverage and tax benefits would greatly assist them toward financial independence.  However, Mrs. D disagrees, pointing out the fact that neither of them have any skills in basic home repairs/maintenance and, with work, increasing studying demands made on Mr. D from the MBA and CFA programs, and Baby D, Mr. D doesn’t have the time to manage the property himself.  Mr. D agrees, but feels that a property management service provides an easy solution (average costs 10% of gross rent receipts).  Mrs. D doesn’t feel the possible return is worth the risk, especially with the expense of a property management service.  Mr. D is considering taking his father as a partner in investing in a rental property, as his father has experience in being a landlord and would potentially have the liquid assets for a down payment and covering incidental expenses.  They would still utilize a property management service if this occurred, as his father does not live locally.

Mr. D would be much more knowledgeable/comfortable maintaining a dividend portfolio, but loses the ability to leverage up as much as a rental would allow, plus there’s no depreciation benefit and the cost of borrowing is much higher when a physical asset isn’t involved.

RB40’s response

Thanks Mr. D for sharing your household budget with us. My first impression is that the D’s household expense is pretty reasonable. Mr. D’s income will increase in the future (MBA) and they just need to keep the boat afloat until things improve. However, running on negative cash flow is a huge problem right now. They had a big change due to Baby D, but they have to concentrate on getting back to positive cash flow as soon as they can.

Currently, they are running in the red at about $6,000 annually. Let’s see what we can do with the budget.

First of all, I would pay off those short term debts so it will simplify the budgeting process. They will free up $2,300 annually. That’s just me, though.

Second I would trim the discretionary spending even more. This might seems harsh, but you have to spend less than you earn. There is no way around it.

discretionary budget too big

The Gifts budget seems a bit excessive to me. Can they do something more affordable for a few years until Mr. D gets his big raise? Perhaps they can have fun locally and create memorable moments with Baby D instead of spending money on gifts. Also, Mr. D probably needs to sacrifice a little and reduce his Mad Money budget. How about 5% of his salary instead of 10%?

Let’s cut both Gifts budget in half. That will free up about $1,300. Mr. D’s Mad Money reduction could also save another $2,000.

We are still a little short though. Let’s see where else we can cut. How about Mrs. D’s long term disability insurance? She is not making much money now and a long term disability policy doesn’t seem worth it. From what I understand, the policy would pay about 50% of her current salary. That’s about $5,000 per year. That’s really not much in the grand scheme of things. It might be wise to remove this for now and then pick it up later once she makes more money.

We are really close now so I think it’s ok to take the rest from the emergency saving.

$2,300 – short term debt pay off

$1,300 – Gift budget reduction

$2,000 – Mr. D’s Mad Money reduction

$371 – Mrs. D’s long term disability policy cancellation

$29 – Reduce emergency saving

$6,000

It was tough to cut $6,000 from the D’s budget because their expense is already reasonable. The good thing is this is only temporary. In a few years, Mr. D will make more money and they’ll have some relief. For now, they just have to bite the bullet and spend less money.

Their insurance budget also seems a bit excessive to me, but that’s their choice.

Put real estate investment on hold

I think I’m getting more conservative in my old age. I would put the real estate investment on hold for now. The D household is already stretched pretty thin. A big repair or two on the rental home could easily drain their emergency fund.

From what I understand, it would be difficult to get a mortgage loan with their current cash flow. Even with the great credit, most banks probably wouldn’t let them take out an additional mortgage. Mr. D could have a casual conversation with his bank and see if they would consider another mortgage for him. I would put the additional investment on the back burner until they are in a stronger financial position.

Follow up with Mr. D

Mrs. D’s disability insurance

The way it works is that it actually provides coverage at a higher amount than what she makes now.  She got the policy when she was making more.  My initial assumption was that, once she left her job, that she would be required to reduce the policy coverage to her new income level.  However, when I contacted the insurance company, I was informed that that is not the case, but rather that she can continue have the policy at its current coverage level ($1,150 benefit monthly).  So if she were ever to become disabled, she would actually bring home more money than what she currently makes ($13,800 nontaxable disability benefit versus the $12,000 annual salary she earns).  If she were to become disabled, we’d need to pay for childcare, so that is why I personally like having the disability coverage at the current level.

Gift Budget

As for our gift budget, below is our Christmas budget as an example.  We recognize that some of the dollar amounts seem high, but we keep falling into the trap of trying to keep up with other family members.  Especially on Mr. D’s side(s) of the family, gift-giving tends to be very generous; we could double most of our gift budgets and be in the norm for our family.  Other Gifts and Celebrations are basically identical to this budget, except showing birthdays, Father’s Day, Mother’s Day and a few anniversaries.  Little Baby D didn’t make the cut this year; we figure that’s what grandparents are for.

Christmas gift budget

 

 

 

 

 

RB40’s Parting Words

Wow, Christmas is tough when you have a big extended family. We usually spend less than $100 total because we only buy gifts for a few people.

IMO, they should let the families know that they just had a baby this year and they are still trying to work out their budget. Perhaps for a few years they can make some DIY Christmas gifts instead of spending a lot of money. This will just be temporary until their financial situation improves so I don’t think the family would really mind.

What do you think the D household should do? Whatever they do, they should do it fast and get the cash flow back to positive ASAP. Good luck!

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{ 54 comments… read them below or add one }

Jane Savers @ Solving The Money Puzzle August 14, 2013 at 4:18 am

The private student loan has a high rate of interest. Would there be any penalty to taking out a personal loan at the current lower interest rates and move the loan there?

Or roll the private loan in to the mortgage or take on a second mortgage? 8.4% is too high a rate to be paying in this time of low interest rates.

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Mr. D August 14, 2013 at 6:41 am

We are currently looking into a HELOC, which would get us about $9,000 at prime + 0.5% or so. We also are considering using some 0% credit card offers that we have recieved, so its certainly something we’re looking to tackle. A couple negatives to knocking out the student loans with something else is that student loans tend to have fairly lenient terms for suspending payments in times of need and are deductible regardless of whether or not Mrs. D and I itemize (we might not in future years). However, student loans are not dischargable in the event of bankrupcy (albeit extremely unlikely) and the interest rates are painfully high, given current rates, so I think we will be trying to get them paid off with other debt here soon.

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C. the Romanian August 14, 2013 at 4:41 am

It’s pretty tough to cut on some expenses that seem to be already trimmed. I too think that the gifts budget is too big. This should be reduced and maybe they should try to offer one gift for more people (something the mother and father can use together and so on). The mad money should also be cut in half for the time being, in my opinion and maybe reducing or completely pausing the emergency fund saving for now could be a good idea. Finally, it might be a good idea to check for a new insurance for the car – other companies might have better rates – even though this would only save a fraction of what is needed, it’s still some money saved.

I think that in this particular case, Mrs D might try to give it a shot at making some extra money – selling homemade stuff, blogging, freelancing or something similar. All the best and good luck!

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Mr. D August 14, 2013 at 6:48 am

We might try the joint gift idea. While it might not work for all of our parents, since both sets have divorced and only one parent has remarried, it might work to do something like that for my father and stepmother, or Mrs. D’s nieces. I’ll see if Mrs. D is open to working some more, but with her just starting to coupon heavily and seeing how much time/work that is taking, I’m not sure if there’s time. Thanks for the input!

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Amanda L Grossman August 14, 2013 at 5:12 am

I agree with your gift assessment–that is a lot of money to spend on Christmas. I understand there is pressure to spend, but they can just be honest with everyone and no one would love them less. In our family, gifts are usually $20 or so each, and if we want to give someone a larger gift (like our parents), then all the siblings will go in together so not any one person is left with a large bill. The gift is spending time together.

Great job for them to not spend lots of Christmas money on their baby; it’s hard for me to understand parents who give a ton of gifts to very little children. Most of the time they enjoy the wrapping paper and boxes more, and they are right, other family members are sure to spoil them!

Also, could they refinance their mortgage for a lower interest rate, thus reducing their monthly payments? 4.25% seems high for this economy, and they have good credit.

Thanks for sharing your finances! I hope the best for your family moving forward.

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Mr. D August 14, 2013 at 6:50 am

For refinancing, unfortunately it would seem that our window has passed. The house is assessed by the county as being worth $190,000 while we owe $162,000, so we don’t quailty for the best rates until we’ve gotten to 20% equity. While rates were lower a few months ago, they’ve jumped since June, so unfortunately I doubt refinancing the balance of our mortgage will be an option unless rates come back down. Thank you for the warm wishes!

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Mel August 14, 2013 at 5:28 am

I agree on the comments regarding reducing the gift budgets and the mad money.

Can the utility bills be reduced? Has a programmable thermostat been installed? Are all unnecessary appliances unplugged or power strips installed? We live in the Midwest and our bills run $300 less annually for Gas /Electric for a 1500 sq ft ranch.

On the mortgage, 4.25% is a little high by today’s standards. If a refi is possible, they could reduce their payment.

Are they being resourceful in everyway possible for deals / coupons? Sign up for all restaurant mailing lists, use restaurants.com, use bargains to bounty for coupon matching, use fatwallet or evreward for online shopping kickback discounts. Buy Christmas presents all year long at clearance prices. Use credit cards for hotel / airfare reward points. Line dry your clothes.

Are you over insured? We usually laugh when we tell folks that we have 1 Million in insurance. It’s only because it’s super cheap through my work. Otherwise, we have a standard 400K term policy.

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Mr. D August 14, 2013 at 8:18 am

Thank you for the suggestions! As for tackling your questions:

We do use a programmable thermostat. During the summer, we generally try to use fans and opened windows until it gets into the mid-80sF, then we switch to the AC and set it at 78F. In the winter we keep the furnace set to 68F. We did the whole programming thing while no one was at home during the day, but with Mrs. D home all day, we’re more limited to when we can shut things off. I feel that maybe we’re missing out on some savings, so I may have Mrs. D have the utility company come over for a free energy audit and see where we can save.

Unfortunately, we’re about 85% LTV on the home, so refinancing is not really a worthwhile option. Plus, it seems that rates have gone back up over 4% again, so probably not worth it.

We’ve been using rewards credit cards for ALL spending for a few years now, but we’re starting to rely on coupons and discounts more and more. Hopefully this will bear some fruit and we can use this to help with our gift shopping.

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Mom @ Three is Plenty August 14, 2013 at 5:54 am

I agree with your suggestion to reduce gift-giving. Just because the rest of the family spends lavishly, doesn’t mean Mr and Mrs D need to do so as well. If they get flak about it – they can use the baby excuse.

If they haven’t already checked about insurance rates for their cars – presumably since Mrs D isn’t driving as much any more – they might be able to lower that cost some.

A final thought is to reducing “mad money” from both at least temporarily. You’re in a negative cash flow, now is not the time to be spending more.

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Mr. D August 14, 2013 at 6:55 am

Mrs. D has been pushing me to lower our gift budgets for a few months now, but I’ve found it very difficult to accept; the consensus from others on the outside looking in though is probably what will push me to cut these budgets even more than we have. Thank you!

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cj August 14, 2013 at 6:13 am

RB40! What a thorough breakdown! Well done! And thanks to the Ds for giving us all that info. Way too much insurance, healthcare and entertainment. Why are groceries 400/mth? 300 seems more than enough. Why are utilities 150/mth? 100 might be a good goal. Why is housing 1200/mth. 1000 or less would be good here. Clearly cuts and downsizing can happen in these areas for starters.

Have a willy nilly Wednesday!

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Mr. D August 14, 2013 at 7:13 am

You point out one thing I’m curious about. Everyone talks about their “grocery” budget and you indicate that $400/month is too high for a family of three. What constitutes “groceries”? In our household, the “Groceries and Consumables” budget covers everything in our house that is purchased that is a tangible item and not a service, with the exception of baby supplies, which is on its own budget. So that’s including everything from food, toiletries, anything kitchen-related, batteries, towels, etc., etc. Does everyone else count these types of items under their grocery budget too, and we’re just that excessive in our spending, or is there another budget category that everyone is counting those types of things under?

As for utilities, I think there’s room to try to improve our energy consumption, but we generally try to keep our thermostat set on 78F in the summer and 68F in the winter, if for nothing else than the baby. Still, I think we’ve only seen our energy bill under $100 once or twice. If it helps, our house is two stories plus basement and 2000 square feet.

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cj August 14, 2013 at 7:31 am

Thanks for such a nice reply! Groceries under that definition is much more plausible. We live in Houston and out thermo is set on 82 all day except for sleeping hours. It is understood everyone on these sites is trying their best. We have costs to cut too which is why I read these blogs. So glad you and the missus are tweaking like we are and hope you have a marvy day!!!

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Chris August 14, 2013 at 6:18 am

I agree with the previous comments about cutting back on gift giving. Working in insurance (I’m an actuary for a large insurance mutual), I naturally look at the insurance first and see a lot of areas for improvement. For starters, close the variable life insurance policy and Baby D’s whole life policy. Despite what Mr. D believes, life insurance policies are not sound investments. Period. Also, the purpose of life insurance is to replace income should that person die. So it doesn’t make sense for Baby D to have a whole life policy. Despite what the Gerber commercials says, you’re much better off putting those premiums in a savings account or a custodial investment account.

Second, they could probably scale back the death benefits of their term policies. $1 million each is pretty excessive considering Mrs. D doesn’t work full-time and Mr. D probably doesn’t pull in $100k/year before taxes. They could lower those death benefits to $600k for him, $200k for her, and probably cut their premiums by more than half. Just these small changes would save over $1,000/year, and they would not feel any adverse effects.

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Mr. D August 14, 2013 at 8:25 am

While you and I may have differing views on the value of life insurance and its suitability as an investment, let me ask you this – do you believe there is any worthwhile value to establishing a permanent life insurance policy while an individual is young and healthy to protect against the possibility that they become uninsurable later in life and are unable to get needed term insurance? While coverage amounts will vary on opinions, I have felt that there was a value to insuring that Baby D would always be able to increase her coverage without providing evidence of insurability later was worthwhile.

While neither here nor there, Baby D’s policy is with Penn Mutual; I ran IRR calcaultions on 20+ whole life and univiersal life policies (guaranteed assumptions) and liked Penn Mutual’s the best.

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No Waste August 14, 2013 at 6:48 am

I think cashing out some of the equity in the home in order to reduce the rate on those student loans might make sense, if you’re not moving soon.

Kill those small debts before even thinking about becoming a landlord!

Also, GOOD LUCK on Part II of the CFA exam! I’ve gathered its a doozy…

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Mr. D August 14, 2013 at 7:25 am

A little confusion from above, but I’m actually studying for Part I of the CFA exam. I’m a little nervous about having enough time to sufficiently study, but I’ve got a few days left before I have to make a definite decision. Thank you!

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No Waste August 15, 2013 at 7:19 am

Oh I know you were just getting started…I just know that Part II is a bear!

But go for it!

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Insourcelife August 14, 2013 at 6:50 am

Like others already mentioned, if I was looking at ANY negative cash flow, ALL the discretionary budget items would be cut immediately. Gifts?? You can’t afford them! I would NEVER borrow money to give gifts, which is essentially what you would be doing if this budget is not modified. Same with the entertainment budget. And yes, way too much insurance indeed. First things I would cut is the life/disability insurance for the Mrs and the life insurance for the baby. The car insurance premium seems way high especially for Midwest. Hard to make suggestions since no model/year is given, but if you don’t want to lower some of the coverage at least shop around – see this post for some tips: http://insourcelife.com/how-to-save-on-auto-insurance/

It’s really not a bad budget overall and it’s great that you realize that you’re about to get into trouble and looking for suggestions. Besides further cuts to the budget you may want to work on increasing the income side as well. Can Mrs babysit another child to bring some money? My wife is working part time while our one year old is in daycare, but if we have another baby she is probably going to stay home and our plan was to supplement our income by her babysitting one or two other kids. Maybe you could do something similar? If not, I would be looking at other money making opportunities to get your budget back on track.

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Mr. D August 14, 2013 at 7:35 am

Thank you for the suggestions. I respectfully disagree on the insurance assessment on the life/disability side. Playing Devil’s Advocate, in my mind, you pay for insurance to protect oneself against potentially catastrophic losses. For example, few would argue that you should have no homeowner’s insurance, because if one loses their home and belongings, that would potentially wipe out many/most families. By dropping life/disability insurance off of Mrs. D, what that basically is implying is that Mrs. D is worthless. That if she dies, there wouldn’t be a loss of income or an increase in living expenses (which there would be, on both ends). Same story if she became disabled; she’d (potentially) lose her income and our expenses would go up. While the amount of coverage and price of coverage can be argued back and forth, I have difficulty believing that no coverage is better than some coverage. Again, thank you for your suggestions. While Mrs. D and I like our property and casualty insuance agents, we’ll probably take your suggestion and shop it around and see if we can squeeze some more savings.

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Insourcelife August 14, 2013 at 8:13 am

Sorry, I did not mean to imply that Mrs. D is worthless. I was looking at your current budget to see what I would personally cut if I was staring at the prospect of going into the red. The coverage for the Mrs would be one of the options albeit lower on the list after the gifts, vacations and entertainment. I would want to protect the breadwinner first while taking a calculated risk on the Mrs. Her chances for needing disability/life insurance are probably lower than yours because she will be spending more time at home, driving less etc.

We might never agree on this because it looks like your risk tolerance profile is very different than mine based on the numbers in your budget: loaded car insurance, life insurance on all including the baby, disability insurance, umbrella policy, security system for the house. It’s fine to spend money on what’s important to YOU but I would balance it with what you can presently afford scaling up or down depending on your budget. You should certainly shop around to see how much you can save if you want to keep the same coverage – I can almost guarantee that there is room for substantial savings there given the amount of insurance you carry.

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Mr. D August 14, 2013 at 8:31 am

No worries, I knew what you were getting at and I VERY much appreciate the feeback. Mrs. D also expresses frustration that we seem to spend so much on insurances/services that only pay off when something bad happens to us, and she certainly doesn’t consider herself worthless. ;)

However, when she sits down in front of the property and casualty agent for a review, she comes away feeling like we’re approparitely insured, rather than over-insured. Me sliding on snow and hitting a curb, doing a couple thousand dollars of damage to my car this past winter also probably helps her feel that way.

Again, thank you for the feedback. Insurance has been one of the things targeted in the comments enough that I don’t see how Mrs. D and I can NOT look into trying to decrease costs on it while trying to get cash flow positive.

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MonicaOnMoney August 14, 2013 at 6:52 am

I would see if Mrs. D can find an at home source of income like online surveys to starting a blog. Extra money would be very helpful and a part time at home position like babysitting would also help.

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Mr. D August 14, 2013 at 7:51 am

Mrs. D is very much “looking foward” to Mr. D getting home tonight to discuss this suggestion with her. ;)

I’ve also contemplated getting another (part-time) job or doing something like selling plasma (did that in college), but I just feel like I’m being stretched too thin now as it is and am not sure I could manage anything further. Hopefully as Baby D gets a bit older, Mrs. D will feel like she has some more capacity to increase her earnings.

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LAPhil August 14, 2013 at 6:53 am

Reexamine the whole life insurance for the baby. These policies are expensive (fees) and it seems a waste of money (it’s likely that a huge chunk of that $400 is going to the insurance broker). To invest for the child, put that same amount toward a low cost index fund when the money frees up.

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Mr. D August 14, 2013 at 8:37 am

I think the biggest gain that I see coming from the whole life policy on Baby D is protecting future insurability. The guaranteed assumption on the whole life policy is an IRR of about 2% or so, if I recall correctly. While I could probably get an average of 8%-10% by investing in a Vanguard stock market index fund, might it be worth losing 6%-8% return on $400/year to guarantee that Baby D can get up to $600K-$800K of coverage should she become uninsurable (granted, the premium would scale up proportionally)?

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Mr. Utopia @ Personal Finance Utopia August 14, 2013 at 9:08 am

Wow, the Christmas and gifts expenses popped out like crazy when reading over the line items! I know that’s already been addressed in the advice given out, but I still can’t help on commenting about it. Extended family or not, I can’t imagine ever spending that amount of money for gifts. I understand the holidays, birthdays, etc. are special times to celebrate but the money this family was spending is definitely excessive. There are so many options to save money there…bake cookies/treats, make ornaments, etc. It’s the “thought that counts”!

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Mr. D August 14, 2013 at 11:31 am

We’ll probably start moving more toward homemade gifts and food and such items, as well as being much more aggresive in making sure we’re pursuing all possible discounts to try to force the gift budgets down. Thanks for the input!

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UrbanSaltLake August 14, 2013 at 9:34 am

Just a thought…to help curve grocery cost, our family has been contributing to Bountiful Baskets each week for several years now. $15 per basket +$1.50 fee. It’s cheaper and we have enough fruits and vegetables for the week. Sometimes we get so much that we have to skip a week. This way, we only need to buy meat at the market which can be cheap if there’s a sale. We also have a vegetable garden that produce very well every year. I’m not sure where you live, but if this co-op is available in your area, check it out.
http://www.bountifulbaskets.org
http://urbansaltlake.tumblr.com

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Mr. D August 15, 2013 at 7:33 am

Thank you for the suggestion! I don’t eat many fruits and vegetables (though I know I should work on improving that), but I’ll have my wife look into this.

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Done by Forty August 14, 2013 at 10:23 am

That’s a solid, thorough analysis. I probably would cut gifts out entirely with some frank discussions with family. I also agree with lowering their insurance levels (and might also cut the life insurance on the part time employed spouse entirely).

Side hustle income from home would provide a boost, but obviously with a new baby this option may not be advisable or have much opportunity for growth.

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Mr. D August 14, 2013 at 11:34 am

I don’t think I could stomach cutting gifts entirely. Regardless of whatever expectations we set with our family for ourselves, there will still be lots of gifts being exchanged at the different family gatherings we go to (we once had to attend 7 Christmases during the holiday season). That said, we’ll certainly be looking into what cuts can be made on the gift side and evaluating our insurances. Thank you!

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so August 14, 2013 at 10:35 am

Move into a duplex if you can. You’ll get maximum leverage as an owner-occupant, experience being a landlord, and a nice offset against the current mortgage.

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Mr. D August 14, 2013 at 11:36 am

Mrs. D was very opposed to this idea when we bought our home about a year and a half ago. It didn’t meet the expectation of what she wanted the home she raises her children to be. Even if that expectation has changed, we’ve only been in the home for 19 months or so, so selling and relocating isn’t too feasible at this point, but we will certainly keep this in mind for the future. Thanks!

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SavvyFinancialLatina August 14, 2013 at 11:10 am

I would look at life insurance policies, decreasing gift budget, and looking at other side hustles for your wife. For gifts, you can shop year round and buy the gifts cheaper. Or you can make coupons like I will clean your house, wash the dishes, etc.

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Mr. D August 14, 2013 at 11:43 am

Each of the items that you listed appear to be making up the short list of immediate financial changes to make. Hopefully we’ll be able to get some of these changes made and get cash flow positive. Thank you!

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Wilson August 14, 2013 at 11:52 am

How about cutting out the dental insurance? You’re probably coming out behind in that every year. Unless someone’s imminently getting braces or some other type work this generally is a losing proposition. Even paying out of pocket for two cleanings a year for both of you would come in under $500. If you’re each currently only going one time a year the savings are even greater. And the child won’t be needing to go for a few years.

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Mr. D August 14, 2013 at 1:40 pm

I’ve never though about that. I guess I was certainly glad I had it last year, as Mrs. D had something like 7 cavities that needed work (she hadn’t seen the dentist in probably 10 years or so prior to that). Wouldn’t I be putting us in quite a bit of upside risk if something happened, like a car accident knocking out/damaging teeth? I didn’t think medical would cover anything like that.

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Wilson August 14, 2013 at 2:33 pm

I don’t think there’s a tremendous risk worth insuring against. A car accident should be covered by the other party’s insurance, provided they’re at fault, but do you really want to wager on regular car accidents that you caused which knock out your family’s teeth as a basis for keeping the insurance? Some twice or thrice daily maintenance and a yearly visit should take care of everything, and just in case something does later happen you’ll have more than enough savings added up over the years from having cancelled the policy to cover it.

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Pretired Nick August 14, 2013 at 9:35 pm

Great advice as always, Joe! The disability insurance jumped out to me as well. I get that there’s a lot of fear-based marketing going on with that kind of thing, but, really, what are the odds that something catastrophic will happen? Probably better than a lottery ticket but worse than Vegas.
But mostly I agree: their budget is in generally pretty good shape, which shows you how incomes in America haven’t kept up with the cost of living. People are generally feeling fairly broke and they can’t quite figure out why.
I also agree that considering rental property right now is completely nuts. They are running far too tightly each month. When something breaks, and it will, they’ll have to use credit to maintain their cashflow and the house of cards will crash down.

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Mr. D August 15, 2013 at 7:38 am

Thank you for the feedback. The stats I read indicate that 1 in 5 people will become disabled long enough to receive benefits from a long-term disability policy, though granted, most statistics come from companies selling disability insurance. A quick search on http://www.disabilitystatistics.org seem to show that, in 2011, over 12% of the population was disabled. My wife has ended up becoming disabled (short-term) twice now (albeit once due to childbirth), so perhaps that is why I’m a little more cautious than most.

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Bryce @ Save and Conquer August 14, 2013 at 9:38 pm

My extended family used to buy Christmas gifts for all 3 of my siblings and wives, both parents, and nieces, and nephews. My wife said, “This is too expensive and difficult.” She had a talk with my mom, and they decided that there should be no gift giving between adults in the extended family. I love her. That sure cut back on gift expenses as well as trying to outdo each other on giving the best gift. It’s the same with her extended family. Perhaps you can convince a family matriarch or two that gifts to grownups should stop or be cut back, especially because you cannot afford it now. I saw you reply on the baby insurance. I would still ax it. Also, do you have enough assets to warrant umbrella insurance? I know it’s not super expensive, but you are living in the red.

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Mr. D August 15, 2013 at 7:42 am

That’s a good point. It’s hard for me to accept the change though; this is the way that it has always been for me, and for me to push for these changes based purely on me not making enough money to responsibly continue with the status quo makes it a bitter pill to swallow. Still, as everyone has pointed out, our current cash flow situation can’t continue.

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Mike August 15, 2013 at 10:05 am

I guess I have a few questions about their budget (but keep in mind these are just questions and I might not have all the facts about the situation, even after reading the well detailed blog post).

First, is the $1440 per gas yearly (and what kind of car is it)? If so, is Mr. D within a comfortable biking range of his work (this might drop some of that cost down as well as maintenance costs that are often associated with driving)? Being able to find time to get some exercise might help them lower health insurance costs. Also this might allow them to get rid of one of the cars if they happen to be a two-car household.

Second, on the utilities and mortgage payment. Would it be possible for them to downsize into a smaller house and then turn their current house into a rental property? That might allow them to save a little on their utilities as well if it is manageable. If it is not possible, what ways can they reduce their current usage of the utilities so that they might be able to free up some of that $1800 that they are spending on electric/gas?

These are just questions that might catch me when moving to a new place or becoming a lot more independent. Keep in mind, it’s just for my information if they can find ways to trim some of the expenses that they might have currently.

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Mr. D August 15, 2013 at 10:32 am

I drive a 2007 Honda Civic Hybrid and Mrs. D drives a 2003 Honda CR-V. I actually never learned how to ride a bike; even if I was able to learn (I’ve read that moderate/severe hearing loss can impact the ease of riding a bike), it’s 9-10 miles one-way. So, for that and a few other reasons, I don’t consider biking to be an option for me. I’ve started making arrangements at work to try to increase the amount of time I work from home and actually have gotten to where, most weeks, I’m working from home 2 days a week, so that should help quite a bit. That said, I still would want Mrs. D to have access to a car in case of emergency, being home all day with Baby D.

With the exception of Mrs. D’s hosptial bills from delivering Baby D, our health expenditures are actually very low. Every 4-6 years I will need new hearing aids, which cost upwards of $5000 for a pair, which is why we’re trying to build a cushion in the HSA.

I expect fuel costs to go down, as Mrs. D isn’t driving to work anymore. However, on average we are expected to travel somewhere between 120-300 miles round trip for quite a number of family gatherings; probably averaging 1.5 trips a month or so. We try to take the hybrid when we can, but sometimes you just can’t fit everything that needs to go in it.

As for downsizing, we just purchased the home in December 2011, so we’re pretty well locked in for now. That said, we love the house so we’d be much more in favor of finding ways to curb utility consumption and, if a rental property is in our (not immediate, judging from public opinion) future, we’ll probably buy it and stay in our home.

Thanks for the suggestions!

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Mike August 15, 2013 at 10:37 am

That’s why I asked. Sometimes it’s good to present ideas, even if they are not entirely feasible to do so. The information that you provided me helps to open my eyes to the fact that you are looking at the situation, but maybe through a different perspective than where I would come from.

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Dave August 15, 2013 at 4:19 pm

Good article and thanks for sharing Mr. D. Another idea that can be tough convince the wife(some women can be so impractical at times, some men too…) is if you have a family member or good friend who wants to save some money and rent a room from you. We live in Northern California where rent is through the roof, so when we bought a 4 bedroom house, we rented out 2 of the rooms to my sister and her husband and split the utilities evenly(we didn’t want cable TV but they did so they offered to pay for 100% of that, so free tv!) It was a win/win as they saved a lot of money, they were paying ~$1200-1300 for a 1 bedroom apartment plus utilities before that. Now they are in the process of buying their own house. Thanks to that rent money, we saved up a lot of money then last year bought a townhouse to rent out. Although we didn’t have our first baby until they were there a few years, they tolerated his crying even during the night. Not sure if this idea is practical for you or not, but just thought I’d throw it out there. My wife was originally against the idea, and now admits it was a good idea and helped a lot.

Also another idea is if you live near your father/step-mom or parent-in-laws, if they are retired, maybe they’d be willing to watch the baby a few days a week. My mom started off watching our baby 2 days a week and started liking it so now she watches him 4 days a week. I “work from home” the 5th day, so my wife went from part-time back to full time.

I’d also agree with everyone on the gift giving/christmas, while it might seem embarrassing to severely cut back, I think everyone will understand, especially with the new baby.

Then we also do some crazy stuff to get some extra money this year, Chase had a deal this year, setup a checking account, with direct deposit, get $200, setup a savings account with 10K, get $150(Citibank had the same deal too). Then we did a few credit cards that offered $100 after spending $500 within 3 months. So we did all those accounts separately, for this year, a total of $3300. There is work to be done though, open the accounts, change direct deposits, close accounts, read all the fine print, etc, some of that money is taxable, some is not, plus opening new credit cards causes credit checks which affect your credit score.

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Mr. D August 16, 2013 at 1:54 pm

Thank you for all of the suggestions!

My wife really likes her space, so I don’t see a roomie in the near future. That said, we will certainly keep that in mind and can always see about doing something on a short-term basis if an opportunity presents itself.

That’s a good point about the grandparents. I have one set of grandparents in particular that have a day off in the middle of the week every week; I bet they’d probably be willing to come down on that day more frequently if invited.

The sign-up bonuses is really appealing to me. Especially since some of those cards are 0% interest; depening how crazy I want to get, I could pay off a big chunk of the student loans on them, use the sign-up bonuses toward them as well, keep the money earning interest until the end of the promo period. My wife is a little nervous about making so many major changes so quickly, but we’ll see if it can be done in an orderly fashion. We’ll be applying for the HELOC within the next few days and forsee no immediate need to get our credit score checked for anything major, so we might be able to afford the short-term hits it will take by loading up on cards with sign-up bonuses.

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retirebyforty August 16, 2013 at 2:05 pm

We had a renter off and on when we didn’t have a kid. It helped a bit. Now that we have a kid, I wouldn’t want to rent a room out. We’re already very tight anyway.
It would be great if the grandparents can take care of the kid for a few hours on a consistent basis. It will give Mrs. D the time to get some side hustle going.

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Mr. D August 23, 2013 at 8:01 am

First off, I wanted to thank Joe for taking the time to help my wife and me with our cash flow/budget analysis. I keep very detailed records of our month-to-month spending and review our budget quarterly for adjustments, and therefore had a LOT of information to bury him with.

Also, I wanted to thank everyone who gave us suggestions. This was exactly what I was hoping for, basically a brainstorming session of all sorts of ideas that might help. Some we knew wouldn’t be something we were willing to do, some were things that aren’t practical for us to do, but because we had an open slate, there were also a number of ideas that we never would have thought of that we now can look into.

My wife and I are tackling a number of options and hope to have a number of them implemented by the time the end of September rolls around and I draft up a budget for the end of the year. Hopefully my wife and I will see a budget surplus for the first time in a while!

Thank you again for all of your help!

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Mary August 26, 2013 at 8:58 am

We had the same problem re gifts–6 siblings on my side and 5 on my husbands. Plus, all those kids, in-laws, parents, etc.. It was out of control and, to tell the truth, everyone was a bit tired on “finding the perfect gift”. Our solution was to pull names out of a hat for the children only. If you had two kids, you pulled two names. The $ limit was $25. For the adults, we had a white elephant gift exchange. So much fun! If you wanted to participate, you brought a gift valued at no more than $20. You draw numbers for the number of particpants. #1 selects a gift, opens it. #2 does same or if he/she wants, they can steal #1’s gift. It gets more interesting as more people are selecting gifts. A gift can be stolen 2 times but when stolen the 3rd time, that person gets to keep it.
Not only do all the kids get a gift, but the adults that participate have a great time getting their gift as well.

I also think the suggestion of your wife babysitting one other child is a good one.

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retirebyforty August 27, 2013 at 8:29 am

That’s a great suggestion for gift exchange. It’s a lot of fun without costing a lot of money. I would love to do that if we have a bigger family.

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mary w August 27, 2013 at 3:04 pm

Please don’t buy a rental home in your current situation. I say this as a loooong time landlord. When we were younger we managed properties ourselves and did much of the maintenance. It’s a drag especially if you aren’t good at DIY. Re-read all the ups and downs that Joe has had with their rental. If you use property management that 10% only covers renting the place, collecting rents and coordinating maintenance. You still have to pay the maintenance and repair costs yourself.

Take whatever money you might have for a down payment on a rental and pay off/down those 8% student loans.

As others have said I would re-think your gift budget and various insurance policies until you have a balanced household budget.

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Mark December 8, 2013 at 9:05 am

I also come from a larger family. We switched to a “Secret Santa” a few years ago. We put the names all of the adults into a hat and draw names, then spend $50 to $100 on a single gift, instead of 8 gifts for my 4 siblings and their spouses.
We used to do the same for the children, so the cousins bought for each other, but as they aged, the children transitioned to the adult hat. Of course, my parents elected to continue to buy gifts for everyone. The best part is we have an evening where we all get together to exchange gifts, separate from all of our other Christmas activities. It’s always a fun evening, and looked forward to by us all.

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