For my American friends, don’t be sad about our government’s inability to get along & have the maturity & wherewithal to agree on anything. I have a new series for you!
I’ve been thinking a lot about self-reliance, living within our means, being practical/frugal & smart about money. You know, most of the things the government can’t seem to figure out right now. These are themes that don’t seem to go away–they’re ever present, particularly when the weight of debt is on your shoulders.
So, for the next while (maybe permanently) I’ll be devoting Tuesdays to everything money related: saving, how to be more frugal, getting out of debt, & so on. I welcome any of your questions or suggestions for future posts.
Today, I’ll be sharing a question from a reader, Amanda.
Email #1 she writes:
My husband and I currently have no extra pennies to pinch. I work full time and make about $34,000 a year.
My husband is in school full-time and works part-time for a landscaping company making $10/hr for about 10-15 hrs a week. Three years ago he received a diagnosis of stage 3 brain cancer. He is doing GREAT currently (yay!) but he has an MRI ($$$) every 4 months.
I guess my question is: is there hope for us?
We have about $100 in savings and $4,000 in credit card debt. I want to build a savings account so if the worst happened (Kyle’s tumor coming back…) then we could float. But with our low income we have nothing to save after paying bills at the end of the month.
I appreciate you taking the time to read this. Thank you so much for the inspiring and motivation topics you cover on your blog. I wish you and your family all the best!
I wrote her back & declared: “YES THERE IS HOPE FOR YOU.” & then asked for more details about their spending & budget.
I live in a university town in Oregon, population about 55,000 people. It is about 1.5 hours away from Portland, Oregon.
My salary is pretty pitiful but I am a young, recent college graduate so I’m grateful that I had a job coming right out of college!
Here are the basics on our home/life expenses:
Cable: 80 (negotiable)
Car Payments: none- we own two pre-2000 Subarus outright (I think we’re in a place to sell one car and just have a shared vehicle between us!)
Credit cards: 300
Do we eat out? Not really. An occasional McDonalds run for Kyle but I’m a vegetarian so we mostly eat at home.
Date nights? Not really. Lately it’s been catching up on episodes of Breaking Bad.
Take home (after taxes): Amanda – 2,300
Kyle – 400
Total: $ 2,700
Okay, so that’s my life story! Thanks so much for your advice and input!
I think Amanda’s situation is not unlike so many–fresh out of school, not much money, some debt, no savings.
The bright spots:
1) Amanda has a job! So does her husband. They might not pay as much as they’d like, but it’s something, & in this uncertain economic climate, that is a thing to celebrate.
2) They seem to have relatively frugal habits–eating at home, don’t go out much–which is helpful when needing to ratchet down expenses.
3) They don’t have any car debt!
4) From what info she gave me, I’m going to assume they don’t have other debts other than credit cards, which is awesome, especially for a recent grad.
1) Income is low & Kyle is only working part-time.
2) $4,000 in credit card debt, & the interest is accruing all the time.
3) Rent is kind of high–42% of their take home pay.
4) Only $100 in savings.
Let’s address the struggles & figure out what can be done about it.
1) They need to figure out a way to increase their income.
The obvious is for Kyle or Amanda to find any (I mean anything, including minimum wage stuff) type of extra work. At this point, an $8.95 an hour is not bad. Oregon’s minimum wage–$8.95/hr–is only second to Washington state ($9.10) in being the highest minimum wage. (If you’re a minimum wage earner, don’t move to Wyoming where the minimum is only $5.15/hr!).
Since he works for a landscaping company, I’d recommend saving up $200-$300 to start his own freelance business mowing lawns. He could earn more (potentially a lot more) working for himself. Not only that, but a few clients a week would really help add hundreds of dollars a month to their income. Amanda may be able to add a weekend or part-time work (a little creativity is needed here, but delivering pizzas, though not necessarily a savory thought, does make some extra cash at night & on weekends).
Another option for Amanda is donating plasma. I’m not giving this advice to old folks, pregnant women, or terminally ill people–this option is for the young & healthy (which by all accounts, is Amanda). Joseph donated plasma all throughout undergrad & sometimes in law school. It helped fund our date nights, birthdays, & Christmases. Joseph donated twice a week, & at that time made about $200 extra dollars a month. It’s not for everyone, but it’s something to consider–you can do it when you want/can, it’s a service people need, & you instantly get paid (& it’s all tax free!).
2) Sell the extra car, sell the extra car!
I recommend craigslist, or some other free listing service. We’ve sold everything from our car to our house (yes, our house!) on craigslist & everything in between. I’m a big advocate of craigslist (for buying & selling). Used cars, particularly below the $3,000 range, are in high demand (we sold our $1200 car for $1350 within 24 hrs of listing because there were so many people who wanted it).
The money from selling the car could go towards funding an emergency fund (at least $1,000) + Kyle’s medical fund (to pay for the quarterly MRI’s), paying Kyle’s start-up costs for a lawn mowing service, & then the remainder going towards debt. A no-brainer, in my opinion. I admit only having one car is sometimes an inconvenience, but as long as a couple can work out getting each other to & from work & school, it’s definitely do-able. Plus there’s the extra savings of not having to pay car insurance for that extra car.
3) Let’s get real about rent.
A general rule is to spend 25-30% of your take home pay on housing which includes rent or mortgage + insurance, utilities, hoa fees.
As a side note, we spend 28% of our income on housing which is higher than I’d like, but we decided on this house because of it’s location (closer to Joseph’s work, so we save money on gas, not to mention time), the fact it has a community pool & is in walking distance of our kid’s school. It’s also a very safe neighborhood, & all of these factors are important since we have young children. Since Amanda & Kyle don’t have kids, they are able to be more flexible with where they are willing to live.
Amanda is spending 42% of their take home pay on rent.
Now, they could remain in their place & earn more income, but at this point, the easier (& in my opinion, obvious) way to save money is to move to a much cheaper place, even if it’s in a less desirable part of town. It will only be temporary–until they can pay off their debt & get a substantial savings in place. Also, I understand every part of the country has different rent rates. Texas, for example, has one of the cheapest housing costs in the nation, while California, New York, & many metro areas can have unbelievably high housing rates. I did a quick look-up for 1 bedroom apartments in Corvallis & was happy to find that there were plenty of options in the $550-$700 range.
Since Kyle is a student, they should find a place close to campus so he can walk/bike thereby saving some money on gas. If they could find a place that was in the $600 range, they’d be nearly $700 ahead each month!
Bottom line: They should move to a cheaper place as soon as their lease/rental agreement runs out & save anywhere from $500-$700 a month just by downgrading their housing.
4) Cut the expenses.
Amanda estimates they spend $300 dollars a month on groceries. While this is not an exorbitant amount, for a family of 2, they could easily spend less. I recommend reducing their budget to $200 a month (this is about $1 a meal for each one of them, plus a little extra for things like toilet paper & misc. kitchen items). Savings: $100.
Also, cable is absolutely non-essential. Cut the cable & watch shows on a free hulu account. If this includes internet, I’d cut that too & use internet at work/school. Also, if you have an iphone, I’d sell it/get out of your contract, & reduce to basic text/call phone with absolute lowest plan as soon as possible. An iphone, despite popular belief, is not a necessity (unless required for work). Savings: $80.
So let’s review:
Current Income: $2700
Current Expenses: $2285
Left over: $415
Move to a $600, 1 bedroom apartment, they will make $585 extra a month (!)
Increase their income by at least $250 net (after taxes & expenses like extra gas) a month
Reduce groceries, cut cable & save $180
+ their leftover income ($415)
Then they will have a total of $1045 extra income a month.
Plan of action:
1) Sell the extra car. Use money to fund Kyle’s lawn mowing service, create an emergency fund (they need $900 more), & pay towards the $4,000 credit card debt. If they can sell for $2,000, they have $800 for Kyle’s MRI’s & lawn mowing, $900 for emergency fund, & $300 to go towards debt.
2) Debt is now reduced to $3700.
3) If they do the above 3 things (move, increase income, & reduce groceries), they will have $1045 extra a month. Let’s say $100 of it goes to misc. stuff, so they have $945 a month to go towards debt. In a little less than 4 months from making these changes, they will have their debt paid off. Let’s say they don’t/can’t increase their income, they are still able to save about $800 a month by reducing expenses & moving to a cheaper place.
4) If they continue with this budget & lifestyle, & saving around $900-$1000 a month, they will have about $12,000 in savings in about 12 months.
5) After a year or so (realistically about 15-18 months, depending on how well they stick with their budget), they can be debt-free & have a full funded 6 month emergency fund.
6) Once they reach this point, I’d recommend adjusting budget a bit (increasing grocery budget, adding some vacation money) so they don’t live quite the spartan lifestyle. I’d recommend continuing the stricter budget, so that $700 or so a month was going towards savings for at least another year to cover potential medical expenses. I think a good goal for them to shoot for is to have somewhere around $20,000 in the bank. Once they reach that point, they can slightly adjust their budget to accommodate a higher-cost lifestyle.
While it’s easy to lay out a plan like this, I know from personal experience, the best laid plans are always broken. Meaning: life happens. But, despite the unexpected expenses & twists & turns of life, there is so much within our realm of control. If things get off track, you adjust & get back on. It may add some time to your initial goals, but staying focused on the end goal, being consistent with tracking your budget (& staying within it) are crucial for arriving at your final destination, which is DEBT-FREE!
Amanda & Kyle, there IS hope for you. You’re young, you have jobs, & your credit card debt is rather easy to tackle. You can do it.
Do you have any advice, input, or words of encouragement for Amanda? Please share.