Att: Financial Geniuses - what would YOU do?

**buildmybudget** · 01-22-2011, 07:22 AM

Sounds like you've answered your own question to me becauseclearly you are spending more than you are earning. What about needless expenses such as expensive cell phone plans, cable tv, eating out, excessive entertainment, poor grocery shopping habits or bad habits such as smoking/drinking, extravagant shopping trips, or daily trips to Starbucks? Without much detail on your business or your budget it's pretty tough to see where you can make an immediate impact. And I don't think you need a magician, you just need to buckle down and look at your budget--both business and personal--and figure out a way out of this. This forum has tons of savings tips all througout it, you just need to find the ones that will work for you.

**disneysteve** · 01-22-2011, 07:34 AM

Originally posted by glr View Post

BESIDES reducing expenses or raising income

What else is there? Every possible solution to this problem must involve at least one of those two things.

Could you refinance any of the debt? That wouldn't actually solve your problem but it could delay having to definitively deal with it. If you could reduce your monthly payments by lowering interest rates or extending repayment periods, that could bring the monthly expenses more in line with income.

Ultimately, though, you need to lessen your expenses and/or raise your income.

**Snodog** · 01-22-2011, 07:40 AM

First let me say I'm sorry to hear about your loss due to fraud.

Second, I am far from a financial genius and remember this advice is worth what you paid for it.

Heres what I would do if I woke up in your situation.

It appears you have too much of your wealth tied up in your house.

If I could not reasonably expect to at least double my income in the next 6 months I would look at downsizing your house. IMO a house should not be worth more than 3-4x your income except if you have a boatload of money saved up. (which you do not)

If I could reasonably expect to double my income in the near future I would get a home equity loan or just add the extra expenses to your credit card depending on the interest rates.

**disneysteve** · 01-22-2011, 07:49 AM

Originally posted by Snodog View Post

IMO a house should not be worth more than 3-4x your income

This isn't quite right. The rule of thumb is not to buy a house costing more than 3X income.
That rule does not comment on the current value of the house.
Those can be two very different things.

OP owes 546,000 on the house and earns 300,000. That isn't unreasonable at all. Just because the house is worth 2 million doesn't mean he paid 2 million. I have no idea what the housing market is like in South Africa. If they've seen a housing boom/bubble like we did a few years ago, it could be very possible that he paid a lot less and has seen the value balloon upward.

Much more important than the current value of the home is what the monthly payment is. Without knowing that, we can't really say if the house is too much for his income to support.

**Snodog** · 01-22-2011, 09:48 AM

Originally posted by disneysteve View Post

This isn't quite right. The rule of thumb is not to buy a house costing more than 3X income.
That rule does not comment on the current value of the house.
Those can be two very different things.

OP owes 546,000 on the house and earns 300,000. That isn't unreasonable at all. Just because the house is worth 2 million doesn't mean he paid 2 million. I have no idea what the housing market is like in South Africa. If they've seen a housing boom/bubble like we did a few years ago, it could be very possible that he paid a lot less and has seen the value balloon upward.

Much more important than the current value of the home is what the monthly payment is. Without knowing that, we can't really say if the house is too much for his income to support.

Its guess its my own rule of thumb.

As I said I am far from an expert but IMO the problem I have is that he has almost his entire net-worth tied up in a low appreciating asset. To some that may not matter but I personally would not want to do that. If he had a few years salary in investable assets then I might agree with you.

**jpg7n16** · 01-22-2011, 10:20 AM

Well I don't know about being a genius... but I do know that you can't take 5 minus 10 and get a positive number.

So when you say your income is 25k and your expenses are 28k, and you say you want to change that without raising income or lowering expenses - you're asking us to make 5-10 not equal negative 5.

Since you're losing 3k/month, somehow you need to secure 18k to make it through the 6 months.

And I'm not very familiar with the real estate market in South Africa

but one solution would be to sell the 2 mil home, pay off all $700k of debt, and purchase a 900k-1mil home outright.

Then you'd have no payments (which would lower your expenses), no debt, and anywhere between 300-400k available for liquidity/expansion in your business. Or to invest in order to raise income, retirement savings, etc. And you should likely keep about 100-150k of that out for an emergency fund.

Besides that, you'd be looking at selling 3k/month of other assets (furniture, cars, jewelry) or borrowing 18k against the equity in your home (which I don't know if you'd be approved for or not).

**snafu** · 01-22-2011, 11:05 AM

Sorry you've been victimized by fraud and understand it can take 2-3 months to get expenses down and income up. Do you have items to sell for immediate cash. Can you get a 2nd PT job that brings in cash?

I don't know the specific interest rates for your loan & mortgage or RSA rates but have the impression are similar to N America with mortgages 2.5% to 4.5% depending on credit worthiness & time frame. Is there any possibility of working with your creditor to reduce the payment on the ZAR 150K loan, extending the time-line or increasing the interest rate by .01% If it's a private lender and you've been paying on time for a lengthy period... perhaps they could be persuaded to give you a 2 month payment 'holiday' which will be made-up before the end of 2011 + penalty.

What terms and conditions could you negotiate for a home equity loan from your mortgage holder? You may notice we're always asking that people create an emergency fund to cover basic expenses for several months to protect themselves and their families because unanticipated problems bite.

**glr** · 01-22-2011, 10:05 PM

Thanks, so far

Hi Thanks to you all for your well considered answers.

Yes, reducing expenses is a key, but to be honest that's something we've tackled quite aggressively. There's no extravagance going on. Just life. Insurances, school, food are our major expenses plus then the mortgage (around 5000 pm.)

Yes, increasing earnings is a key. And plans are underway to get that sorted. Doubling it? Probably not going to happen though.

Selling the house. This is a logical option. Part of the aggravation right now is that we built the house 3 years ago, put all out cash into it - and more - but it's like a never ending black hole. There's always something else to fix, etc. And then the fridge packs up, the cars pack up, etc.

Selling the house however, would be a pity. In years to come it'll be worth very much more (the area is on the brink of major upliftment and if we sell now, we stand to just break even.) But thinking of having the house paid off, some cash in the bank, etc is very attractive. So selling and buying smaller has to be an option.

Extend the loan period. That sounds like it could be a short term plan. As long as we can get expenses further down and income up in the interim. I will look into this on Monday, chat to the bank to explore options.

Kids are in private school (the area where we live has limited options), may have to look at home schooling. When we tell people what we pay monthly, there's a dead silence.

Your comments have been very valuable! Making me think this through.

Thank you.

**disneysteve** · 01-23-2011, 07:00 AM

Originally posted by glr View Post

the mortgage (around 5000 pm.)

So OP earns 25,000/month and has a house payment of 5,000/month or 20%. That is well within the 28% limit that we all talk about. So it doesn't appear that the mortgage payment is the problem here. Where is the other 23,000/month in spending going? That is an awful lot of money.

Yes, selling the house could help things out, but it really isn't the problem here. Only 20% of your income goes to the house. You need to get a handle on the other 80%.

**snafu** · 01-23-2011, 07:22 AM

Since school fees as so high, would it be more cost effective to hire a qualified [credentialled] instructor for an hourly rate? We have excess teachers here and I know teachers are being laid of in the USA but I don't know the employment situation for educators in your community. Degree teachers here are working as wait staff for minimum wage and would be delighted to work as tutors for both experience and slightly more money.

Setting up and eventually delivering the home school program is very time consuming and draining for most parents. The children need to do well on qualifying examinations no matter who teaches. This would free you up to work on enhancing business and income.

**Money Gal** · 01-23-2011, 07:32 AM

Something more than bare bones life is using up 23,000 per month. If you post a more detailed budget you would get some alternatives on what could be done to immediately reduce monthly expenses. I suspect that you have things in your budget that you consider mandatory, but others might not see it that way & can offer suggestions.

Holding on to the house because its "on the brink of becoming valuable" is probably your path to the brink of bankruptcy.

**snshijuptr** · 01-23-2011, 10:23 AM

If people around you scoff at your private school payments, you possibly need to move your children to a new private school. I know private schools near me can cost the same as a university education if you are willing. Is financial aid an option? I know our private schools understand that even relatively wealthy people can have a hard time making incredibly steep tuition levels.

**glr** · 01-23-2011, 10:52 PM

Hi - thank you for your ongoing advice and support.

And it's true, the house on its own is not the problem. The problems are:

1) We sank too much cash - all of it and more - into the house a single non liquid asset.
2) We are earning less than our basic monthly expenses.

Here is a budget we have (ie where all the $ goes):

Mortgage - 5200
Life Insurance - 2000 (both my wife and I) (I'm covered for 2 000 000, and for 700 000 dread disease, disability, etc; my wife is covered for 500 000)
Medical Insurance - 2000 (hospital cover only, ie kicks in once hospitalized)
Household/Car Insurance - 800 (both cars are >10 yrs old and fully paid)
Phones/Internet - 1100 (3x mobiles, 1 fixed line - all pretty expensive in SA)
School - 3500 (including a 40% subsidy for oldest child, 8yo; 2 kids, 5yo and 8yo)
Household (Food, clothing, etc) - 5000 (I can think of nothing extravagant. We eat out maybe 2x pm at a cheap place, spending perhaps 200 each time)
Gas (cars) - 1200
Utilities (electricity, water, municipal rates) - 1900 (nothing extravagant, but we could save a little, switching off lights, being more careful.)
Animals (3 dogs, 3 cats, 1 horse) - 1000 (really cheap considering)
Staff - garden, household help (2x per week)1760; property is 5000 sqm (53800 sq feet)

GRAND TOTAL - 25460 pm

This is a figure that excludes dentists, doctor (medical aid is for hospital stay overs and above only), car repairs, home diy/maintenance, vacations, savings for retirement (nothing is budgeted for these.)

Areas for further saving:

Get rid of the horse - -500 (there's a history here so really don't want to)
Cut down on the help - -900
Save on electricity and water - 200
Save on phones - 200
No private school for kids - by next year we'll be paying 7000 pm for both, with a possible discount of 40% for one child (a special subsidy offered by the school we applied for). Home schooling? Could save up to 5000 pm!! or around 2500 as things stand now. Looking in to it.

Would love to stay in our house. We live in a very special place, very uncommon. And we have a tenant who pays 1500 toward the mortgage, so that makes it even more crazy to blame it on the house. However, we have no liquidity as a result. Unless we apply for additional funds via our home loan. Is more debt the answer?

**disneysteve** · 01-24-2011, 06:38 AM

It is a rather difficult for us to give advice because most of us are in the US and some of your numbers seem extreme by our standards but might not be in South Africa. For example, your life insurance, phones, food, gas and utilities all sound really high to me.

I would certainly consider reducing the number of pets in the house and I would absolutely do without paid staff. That is a total luxury that you simply can't afford. Clothing budget for the adults should probably go to zero. You likely have all the clothes you need. The kids need a clothing budget since they keep outgrowing stuff but perhaps you can switch to doing more hand-me-downs from the older kid to younger kid and more lower cost items and secondhand items. Lots of ways to cut the food budget. If you spend 400/month eating out, that needs to get cut until you are no longer running at a deficit. I love to eat out but if I couldn't afford it, I wouldn't do it. I suspect that there are a lot of things you are spending money on that you consider necessary that really aren't.

Att: Financial Geniuses - what would YOU do?