Whats Wrong With My Budget?

[Obiwan]

Hello all,

I'm hoping i can get some help with my budget. I try to make a budget, but i seem to end up with little saved at the end of the month. Please help me with suggestions on what i can do differently and where i can make changes.

here goes...

Monthly Income (after tax):
Me: $4,000 ($72k annually)
spouse: $7,600 ($138k annually)
TOTAL: $11,600

Expenses:
Mortgage - $2,227 ($375k @2.5%. We bought in 07' and are severely underwater)
Car 1 - $448 ($19k owed)
Car 2 - $283 ($12k owed)
Car insurance - $195
cell phones - $105 (2 lines with unlimited mins and data plans. no home phone)
electric - $200 (estimate high in the summer and drops to about $80 in winter)
natural gas - $200 (estimate, in winter, the bill is above $200 but in summer its like $30)
water - $85
cable/internet -$110
trash pickup - $31
credit card - $300 (owe $9k at about 3.75% floating.)
macys cc - $100 (owe $1,200 rate is about 22%)
sps student ln -$880 (owes about $150k)
my student lns -$866 (about $125k from law school)
daycare - $720 (2 kids in daycare. a 3-yr old and a 9-month old)
tithe/giving - $580
IRS - $500 (we owe $14k to the IRS because spouse was a 1099 last 2 years and we werent putting aside taxes)
Food/household -$600 (2 adults and 2 kids. includes formula etc)
Fuel - $560 (2 cars)
drycleaning - $80
dog food - $100 (average)
HOA dues for rental property - $189

Total - $9,359
Net Income - $2,241

We have made alot of mistakes in the past that we're now trying to dig ourselves out of. On the up side, within the last year and a half, we've managed to payoff about $22k in credit card debt. We also had two rental properties that we kept feeding even when they were not rented (which was half the time for some reason). We've recently sold one, and the other one is currently for sale.

I know this was extremely long winded, but i'm just looking for some friendly advice on how else to improve our financial situation, or are we so far gone that the issue is hopeless? i would hate to file bk, and it probably wouldnt help much since a large amount of our debt is student loans, which are not bankruptable.

thanks.

[disneysteve]

Originally Posted by Obiwan

I try to make a budget, but i seem to end up with little saved at the end of the month

Why? Where does it go? What are you spending money on that isn't included in this list?

What saving are you doing now? Do either or both of you contribute to employer-sponsored retirement plans?

There is a ton of room for improvement here but I don't have time right now to pick through it. I would like to hear the above questions answered though as that will guide the advice.

[Obiwan]

Right now i have $2k a month going directly into an online savings account, so that's been working out. We don't have much in the way of an EF right now because we've been sending money to payoff our credit cards from smallest to largest (part of the $22k we've paid down so far). I do realize that there is alot of waste, and i have now realized that the biggest culprit is my eating out. I typically will buy a coffee and some kind of breakfast thing on my way to work, and then usually go to lunch with co-workers and could spend up to $10. this happens every day.

I don't contribute to a retirement plan right now. I stopped contributing in order to start trying to pay down these CCs. my employer matches at 6%, but i'm not taking advantage currently.

[riverwed070707]

Biggest areas I can see for you to improve (though there are lots) is 1) sell one of the cars -- no one should have that high of a car payment (let alone 2!!) when you have so much debt. Sell the one with the best loan-to-value ratio and get something cheap you can buy outright.

2) Cut the non-essentials -- you don't list categories for things like dining out, fun money, kids activities, etc so I'm guessing your overlooking this spending and that's why you don't have as much left as it appears you should. You need to start tracking where every penny goes and stick to your budget. There are lots of other smaller areas you could scale back, but I'd start with these two.

If you truly have $2,200 left over each month, you should be able to make progress on this debt quickly. Formualte a snowball plan (try whatsthecost.org) for paying off your debts starting with the highest interest rate first. I'd leave student loans out of the equasion for now since interest is tax deductible.

[riverwed070707]

Originally Posted by Obiwan

Right now i have $2k a month going directly into an online savings account, so that's been working out. We don't have much in the way of an EF right now because we've been sending money to payoff our credit cards from smallest to largest (part of the $22k we've paid down so far). I do realize that there is alot of waste, and i have now realized that the biggest culprit is my eating out. I typically will buy a coffee and some kind of breakfast thing on my way to work, and then usually go to lunch with co-workers and could spend up to $10. this happens every day.

I don't contribute to a retirement plan right now. I stopped contributing in order to start trying to pay down these CCs. my employer matches at 6%, but i'm not taking advantage currently.

How old are you and your spouse? Retirement comes before a lot of things you have listed -- get rid of cable, drop the data plans, quit eating out. Not contributing that 6% is like giving away free money. If you can't get by on your current income now, how do you expect to get by on social security at retirement?? This needs to be a priority -- maybe not up to the full recommended 15-20% right now but you and your spouse need to be contributing something.

[riverwed070707]

Also, why do you spend nearly $600/month in gas? How long is your commute?

[disneysteve]

Originally Posted by Obiwan

Right now i have $2k a month going directly into an online savings account, so that's been working out. We don't have much in the way of an EF

How much is in the savings account? Why are you adding 2K/month to it when you have so much debt?

I'm not clear on where that 2K is coming from. If it is part of the $11,600 monthly take home, you are saving just over 17% of income which is quite good however I think you need to save less and pay off debt more right now.

First priority should be getting rid of the IRS debt. I would pay just the minimums on every debt except the IRS. Throw every spare penny at that. If you have more than 1-2K in the savings account, I'd take out the rest and send that to the IRS. If you are able to save 2K/month, the IRS can be cleared in no more than 7 months.

More to follow...

[DaveInPgh]

I have never owed the IRS so I don't know how any of that works. What stands out the most to me is the 22% Macy's credit card debt.

[artwest]

Congratulations on your income. Even without cutting your expenses more, you are in pretty good shape.

You have $2,241 income left over at the end of the month. I am going to adjust that down to $2,000 just to make this easier. Now here is what I would do if I were in your shoes.

First be sure that there is some small emergency fund. $2,000-$3,000 to start with would be okay.

I would have the $1,200 credit card paid off next month. Then I'd take the $100 that was being paid on that along with the $2,000 extra each month and add that to the IRS payment. That's 2,600 per month applied to the IRS. In about 5 months you should have that paid off. So in 6-7 months the $1,200 debt is gone and the IRS is gone. There is now $2,600 per month to add to the $9,000 credit card. That should be paid off in about 3 months. Take the $300 per month that was paid on that and add it to the $2,600. You now have $2,900 to add to the $283 car payment for car #2. That should be paid off in about 3-4 months.

So about 1 year from now both credit cards would be paid off, the IRS would be paid off and car #2 would be paid off. I would take the $283 car payment and increase the tithe/giving. Use the $2,900 to add to car #1. That should be paid off in about 5-6 months. Once that is paid, I would add $348 more to the tithe/giving. Add $100 to the $2,900 for a total of $3,000 to add to the $125,000 student loan.

Basically, by my calculations you should be debt free except the house and student loans in about a year and a half.

Of course if you want to sell one of the cars as someone has suggested and/or cut more from your budget, you can get out of debt more quickly.

[Obiwan]

[quote=disneysteve;303545]How much is in the savings account? Why are you adding 2K/month to it when you have so much debt?

I'm not clear on where that 2K is coming from. If it is part of the $11,600 monthly take home, you are saving just over 17% of income which is quite good however I think you need to save less and pay off debt more right now.

sorry for the confusion on this... The $2k that goes into the savings account is basically the $2,241 net income after expenses. I just have it direct deposited into that separate account. I haven't been keeping any money in the account because i've been clearing it out every month and a half to pay down our CCs (we just paid one off last month). The only thing left in there right now is our $1k starter EF.

To answer other questions posted:
1. I'm 34, spouse 32.
2. I recently put up a post about selling my car, and after getting some good advice on that, i've decided to sell. Unfortunately, that car (BMW) is the cheaper of the two cars, the one where we owe $12k and have a monthly payment of $283. We chose to sell this one because it is the one that has a reputation of being less reliable and high maintenance.
3. Our fuel cost is high because we have two cars that aren't very fuel efficient. Hopefully, this will improve after the sale of the car.

I think that's all i remember for now. Thanks everyone for the advice. I really appreciate it, and i'm very open to all suggestions/criticism. I know i've dug myself into a big hole and i'm now desperate to get out, just seems like i have a Murphy magnet on me right now. something always seems to come up...

[photo]

You've probably figured out that you've really overspent your incomes, with an expensive house, cars, and just an extravagant way of living. The great news is that you have a pretty good income, so it should be easier than most people.

One of the biggest adjustments is with your priorities and overall financial attitude. As professionals, you and your wife obviously need to dress well (which doesn't necessarily translate into haute fashion) and drive decent cars, but if you are honest with yourselves, you've gone way beyond that.

The little stuff does add up, like cable and feeding a grizzly dog, expensive phone plan (we have 5 cellphones and pay less a month than you do), extra dry cleaning bills (iron the shirts yourselves), and such.

What you can do immediately is cut out all non-essentials. Eat breakfast at home. Raise or lower the temperature in the house to cut down on electricity and heat. No new clothes. No cable. You really have to diet.

You have the potential to become a multi-millionaire in not that many years but only if you look at money much differently.

[jpg7n16]

FWIW - I got a different monthly total than you did.

Your listed expenses only add up to $8759/month, leaving $2841/month unaccounted for and available for debt elimination. Did you miss a $600 expenses when you posted your budget?

Notable expenses:
Debt payments (required): $3377 {38.55% of all expenses, 29.11% of monthly income}

When you consider that you are actively paying an additional $2500/month (or so) towards debt, that means that over 1/2 your money is going to pay on your debts.

When you look at just how much you are paying towards your debts, you guys are doing a great job at digging yourselves out of the hole you're in.


But --- Pay off that Macy's card as soon as you can!!!! 22% is ridiculous!



I'd personally like to see you guys start building investments as soon as all your remaining debts are at 5% or lower. At that point, you may be able to outearn the interest charges.

[photo]

With your food/household bill of $600, do you include eating out? If you spend $10 at lunch and, let's say, $5.00 for breakfast ($15 per day X 5 days a week X 4 weeks), that's $300 per month, which is half of your $600. Does your spouse ever eat out?

With $600 a month on food for 4 people, that's an average of $150 per person. It costs almost as much to feed your dog!

Some other expenses which may not be covered under your budget:

-- clothing
-- hair salon
-- season tickets to sporting or theatrical events
-- gifts
-- travel for holidays or to see grandparents
-- car maintenance and repairs
-- home repairs
-- health insurance premiums
-- medical expenses


Something that might benefit you greatly is to write down every single cent you spend. Even those who are careful with money are usually surprised at the results.

[BMEPhDinCO]

First, let me say you've gotten some good advice already.

One thing no one mentioned that might help kick start both of you:

You currently owe $705,200! That's nearly 3/4 of a million dollars.

So let's work on making that net worth positive instead of negative...

Mortgage: High, but as underwater, nothing you can do but keep paying...do you have any extra room for a nanny? Perhaps that could help with daycare....?

Car 1 - what is it? Try and sell or trade for a better gas car - no reason to drive a fancy car just because you make money, a honda, kia, hyundai, etc are good cars! You can price them both on kbb.com, nsda.com, and edmunds.com and then go about selling - hopefully you can get at least $3k for them, that'll buy you a used old Honda that'll still last.

Car 2 - get rid of it as quickly as possible...trade in or sell and then get a used Honda or similar for cheaper - in a few years you can get a better car once you have more cash. A BMW should be worth at least $4-5k more than you owe, we hope! Get another used Honda.

(Note: if you really can't get by on a cheap car for 1-2 years, get a 3 year lease and make sure the cost comes out to less than $250 per car then be saving to get a better used car in cash by the end of the lease.)

Car insurance will go down with cheaper cars...remember to shop around every year if you have a clean record.

Cell phones aren't bad...I'd go to cheap, no data phones only if everything else fails, in your professions you probably need email access though.

Electric is a bit high, make sure you are turning off ALL lights if you aren't in the room and only leaving on one if you are (ie, no need to do a flooding of the room with lamps, overhead, etc). Also make sure your kids aren't turning things on and leaving the room.

Natural gas is also a bit high, but of course that's season dependent - just try to keep the temperature neutral and not too high/low. If you get cold, put on sweaters, socks, blankets, hats, etc - to an extent of course.

Water is also high - I bet you are doing baths for the kids? Make sure they are together and not too much in the tub and not excessive long for you and spouse either.

Drop down to internet only - no cable needed and you can't afford it right now. Add the extra to CCs.

With your budget, pay off the Macy's card in September - and then put it away.

With the other CC, pay the $2,000 + Macy's + cable and you should be done with that by the end of Jan. 2012.

I realize that giving is important to you - but realize that you can tithe time instead of money, consider volunteering to help the church/community instead of giving so much, you bill hours for work, calculate how much your time is worth and deduct from amount of money given.

Fuel is high - will reduce with better cars, otherwise look into public transport even once or twice a week.

Dry cleaning is also high, you can rewear jackets and pants and also look into "at-home" kits - they work great to freshen and then only once a month get them cleaned professionally.

Dog food is a bit much - order online or consider switching to different brands.

Build the HOA cost of rental into the amount you charge for rent.

Once you have both CC paid off by the end of Jan, 2012 you should have at least $2,500 to put towards the IRS + any bonus you may get at the end of the year. Thus you should be able to pay it off by the end of June at the latest and ideally by the end of May.

By following this plan, you should get an extra $1,600 or so starting with your July 2012 paychecks. Put that into your 401k ($1,000) and your new car fund ($600). Also check on consolidating the student loans and if your house breaks even, consider selling and moving into a smaller house. Hopefully the rentals sell for more than they are worth - if so, pay down the loans or the mortgage with that.

You really do have a lot of income and with hard work and dedication you should be able to get rid of most of this in the next 5 years.

Good luck!

[bennyhoff]

I could reiterate the points already mentioned, but let me instead mention a few things I haven't seen.

One is that it looks you both have a ton of debt from school. (OK, I've seen worse, but still...) What you've done is trade a lot of debt for school and future high salaries. There's nothing wrong with that, but once you start down that route, there is no sure & fast way out of the debt except for living super frugal for a few years. People here have given you some good pointers towards that, but given everything you've obligated yourself to already, you had best be ready to accept you're going to be in debt for some time. Assuming no more bad financial decisions you'll be golden 5-10 years from now, but just be ready to accept it for now as this process will take time.

Second, is the tithe really necessary? I know its politically incorrect to point this out, but is whomever you worship going to be upset with you if you prioritize getting out of debt for a few years? Honestly, can't you talk to your <fill in the blank here> and tell him/her what you are going through. See what they say. If it's X% of your salary or you go to hell, just what does that say about them?

Oh and let me second (or third or whatever), why do you have cable???? Aren't the kids entertainment enough?