Budget Critique & Advice

[tink]

Hi! I’m a long-time-lurker and first-time-poster. I am seeking advice and critique over our existing budget and recommendations about how to best move forward. In the coming months we will have a variety of debts paid off thus freeing more money each month. I need help in determining how to best allocate the extra money.

Dh is 36 and I am 29. We have one young child.

DH’s net (after 14% 401K contribution and medical insurance deductions): $2982.00
My net pay (not eligible for 401K): $3747.88
Combined: $6729.88

Mortgage:
$2175 per month for housing expenses (insurance, mortgage, taxes) balance on mortgage $233,697.00 @ 4.25%
Mortgage per month is $1188.99 for Principle & Interest, and $807.52 in escrow

The escrow is for:
$175.01 per month for PMI
$82.34 for insurance
$550.17 taxes

$178.49 per month is addition toward principle

Monthly Payments:
$100 Cable/Internet
$400 all utilities
$200 life insurance policies on DH & I, $1 million each
$200 per month ‘saved’ for Christmas/Vacation fund
$600 per month for groceries/dining/miscellaneous spending

Vehicles:
$550/month will be paid off 11/2013
$625/month will be paid off 5/14

Consumer Debt (All of these are on financing with zero interest. Either the payment is being made in equal amounts to pay it off in full before the promotion expires or we are saving the difference each month in a separate account which will pay off the balance before the promo expires):

$100/month (Paid off 9/13)
$125/ month (Paid off 1/13)
$225/month (Paid off 11/2012)

Savings:
$400 per month into my ROTH (Balance $10,333.54)
$400 per month into Emergency Fund (Current Balance $14K)
$300 per month into mutual funds (Current Balance $4360.05)
$100 per month into 529 (my mom also contributes $100 per month into this fund) (Current balance $4623.16)
DH’s 401K balance is 91K


Goals:
Build EF
Eliminate PMI ($537.49 per month is going to principal. Likely need balance to be under $200K before PMI can be eliminated)
Maximize dh’s ROTH
Save for home addition. We would very much like to put an addition on our home around 8 years from now. We anticipate it will cost approximately 100K.
Pay off home before DH is 55

Questions:
Are we saving enough? Is that savings being directed toward the best avenues?

I feel torn with several different goals & desires as we come close to having more money free each month (from having the above mentioned debts paid off in the coming years).
Which is best to tackle first, after the EF is fully established?
Is saving for home addition in 8 years a realistic goal?
Are there other ‘goals’ we should be aiming for that I haven’t listed?

Any thoughts & advice would be greatly appreciated!

[riverwed070707]

Hi! I’m a long-time-lurker and first-time-poster. I am seeking advice and critique over our existing budget and recommendations about how to best move forward. In the coming months we will have a variety of debts paid off thus freeing more money each month. I need help in determining how to best allocate the extra money.

Dh is 36 and I am 29. We have one young child.

DH’s net (after 14% 401K contribution and medical insurance deductions): $2982.00
My net pay (not eligible for 401K): $3747.88
Combined: $6729.88

Mortgage:
$2175 per month for housing expenses (insurance, mortgage, taxes) balance on mortgage $233,697.00 @ 4.25%
Mortgage per month is $1188.99 for Principle & Interest, and $807.52 in escrow

The escrow is for:
$175.01 per month for PMI
$82.34 for insurance
$550.17 taxes

$178.49 per month is addition toward principle

Monthly Payments:
$100 Cable/Internet
$400 all utilities This seems extremely high -- what all does it include? Any way to scale back here?
$200 life insurance policies on DH & I, $1 million each This seems high to me too. Is it term? Have you shopped around? I'm just a smidge younger than you and my $500k policy is only $175/year...
$200 per month ‘saved’ for Christmas/Vacation fund
$600 per month for groceries/dining/miscellaneous spending

Vehicles:
$550/month will be paid off 11/2013 Do these amounts include extra principle or is this just your regular payments? What are the balances?
$625/month will be paid off 5/14

Consumer Debt (All of these are on financing with zero interest. Either the payment is being made in equal amounts to pay it off in full before the promotion expires or we are saving the difference each month in a separate account which will pay off the balance before the promo expires): Given you have 0% on all of these, I'd really focus on the cars first -- freeing up $1100 PER MONTH will make paying these off a breeze.

$100/month (Paid off 9/13)
$125/ month (Paid off 1/13)
$225/month (Paid off 11/2012)

Savings:
$400 per month into my ROTH (Balance $10,333.54)
$400 per month into Emergency Fund (Current Balance $14K) Debts need to be a priority over this. If your jobs are secure, I'd use $10k from here toward your highest interest car payment and knock out a chunk to get your snowball rolling. Once your cars and those 0% cards are paid, then make this a priority.
$300 per month into mutual funds (Current Balance $4360.05) Again, I'd stop contributing to this until your debts are paid. You aren't earning more interest than you're paying out.
$100 per month into 529 (my mom also contributes $100 per month into this fund) (Current balance $4623.16) I know some people feel strongly about paying for college in full but the bottom line is you have to sort your own finances before you can start contributing to someone elses. Think of how much more you could contribute here when you aren't paying $1,625/month to consumer debt! You'll be able to save so much faster if you focus your energy first on paying those off.
DH’s 401K balance is 91K


Goals:
Build EF
Eliminate PMI ($537.49 per month is going to principal. Likely need balance to be under $200K before PMI can be eliminated)
Maximize dh’s ROTH
Save for home addition. We would very much like to put an addition on our home around 8 years from now. We anticipate it will cost approximately 100K.
Pay off home before DH is 55

Questions:
Are we saving enough? Is that savings being directed toward the best avenues?

I feel torn with several different goals & desires as we come close to having more money free each month (from having the above mentioned debts paid off in the coming years).
Which is best to tackle first, after the EF is fully established?
Is saving for home addition in 8 years a realistic goal?
Are there other ‘goals’ we should be aiming for that I haven’t listed?

Any thoughts & advice would be greatly appreciated!

I think you'rd doing OK with your savings, but if it were me, I'd be paying off some of that debt/working to get rid of the PMI before I put so much effort into saving. Does it bother you that you pay as much for your cars each month as you do P&I on your *home*? Your car payments are outrageous. If it were me, i'd sell and get something cheaper. If that's not an option, start throwing some of your savings at those to get them paid off quicker.

How long ago did you buy your house? Kinda crazy that you pay as much in PMI as you do toward principal. I would also make that a priority over savings... that's $2k/year down the drain that you shouldn't be paying.

You have a good income, but I think you could make it work better for you than you currently are.

[riverwed070707]

Also, I feel like there are some things not accounted for here. Your listed expenses total $200 less than your take home but you don't have line items for entertainment, cell phones, gas/maintenance for cars, daycare (you both work -- does little one go to daycare?). That seems like a lot missing for $200 to cover.

[tink]

I think you'rd doing OK with your savings, but if it were me, I'd be paying off some of that debt/working to get rid of the PMI before I put so much effort into saving. Does it bother you that you pay as much for your cars each month as you do P&I on your *home*? Your car payments are outrageous. If it were me, i'd sell and get something cheaper. If that's not an option, start throwing some of your savings at those to get them paid off quicker.

How long ago did you buy your house? Kinda crazy that you pay more in PMI in a year than you do in taxes. I would also make that a priority over savings... that's $2k/year down the drain that you shouldn't be paying.

We bought our home 1 year ago. Our taxes are considerably more per year than our PMI. Taxes are $550/month and PMI is $175.

Our actual car payments are much less, but we want to pay them off asap so we are paying substancially more each month toward them. Do you think we should pay even more on them each month? The APR on those loans is 3.2%. Would it be better to reduce the amount on car payments and put that toward the mortgage? I was looking forward to being car payment free in the next 24 months (both cars will be fully paid off), but am I better delaying that?

Also, I feel like there are some things not accounted for here. Your listed expenses total $200 less than your take home but you don't have line items for entertainment, cell phones, gas/maintenance for cars, daycare (you both work -- does little one go to daycare?). That seems like a lot missing for $200 to cover.

The $200/month isn't budgeted very well. It usually ends up going into random things and that's definately something we should track better and get a handle on so we can make that money work best for us each month.

I work from home, occasionally use a sitter (an example of something that $200 would go toward), but our little one does not go to daycare. I work for a family owned company (hence not being eligible for a 401K) and our gas, cell phones, and insurance are paid for by the company.

Thank you for your reply & thoughts!

[tink]

Sorry- I just noticed your replies in red.

The life insurance premiums are term (30 year) and they are high. I have a very complicated medical history that makes my premium outrageous.

Utilities include gas, electric & water. It usually falls below $400 but in the very cold months, it can easily get to that. I budget for $400 as the highest amount.

Car Payment #1 has a balance of $12,588.88 at 3.2 % APR and Car Payment #2 has a balance of $7,865.15 at the same APR.

So, you would suggest I take 10K out of my emergency fund (that makes me nervous, shouldn't it??) and stop savings until car payments & consumer debt is paid off. Am I understanding that correctly? Thanks

[riverwed070707]

We bought our home 1 year ago. Our taxes are considerably more per year than our PMI. Taxes are $550/month and PMI is $175.

Our actual car payments are much less, but we want to pay them off asap so we are paying substancially more each month toward them. Do you think we should pay even more on them each month? The APR on those loans is 3.2%. Would it be better to reduce the amount on car payments and put that toward the mortgage? I was looking forward to being car payment free in the next 24 months (both cars will be fully paid off), but am I better delaying that?




The $200/month isn't budgeted very well. It usually ends up going into random things and that's definately something we should track better and get a handle on so we can make that money work best for us each month.

I work from home, occasionally use a sitter (an example of something that $200 would go toward), but our little one does not go to daycare. I work for a family owned company (hence not being eligible for a 401K) and our gas, cell phones, and insurance are paid for by the company.

Thank you for your reply & thoughts!

I edited my initial response about the PMI and taxes... My brain was going two directions at once. Good to know your car payments include extra -- whether to pay more on them depends on what your balances are. Definteily wouldn't delay paying them, if anything, I'd be diverting more toward them and delaying savings.

It seems to me like you've evenly distributed your extra payments toward debt in order to make progress on all of them. Read up on the snowball method of debt payment (make sure you include "for debt" in your google search or your results will be x-rated ). I think you need to make a list of your debts and for each one include total owed, minimum payment and interest rate. Then decide what extra amount you can afford to put toward debt each month and use a calculator like What's The Cost? - Become debt free at WhatsTheCost.com to figure out where to best alocate your extra money and pay off your debt most effectively. You're going to make a lot more progress putting all your extra toward one debt at a time and then rolling those dollar over to the next debt than you are paying an extra $100 here and $150 toward another.

[riverwed070707]

Sorry- I just noticed your replies in red.

The life insurance premiums are term (30 year) and they are high. I have a very complicated medical history that makes my premium outrageous.

Utilities include gas, electric & water. It usually falls below $400 but in the very cold months, it can easily get to that. I budget for $400 as the highest amount.

Car Payment #1 has a balance of $12,588.88 at 3.2 % APR and Car Payment #2 has a balance of $7,865.15 at the same APR.

So, you would suggest I take 10K out of my emergency fund (that makes me nervous, shouldn't it??) and stop savings until car payments & consumer debt is paid off. Am I understanding that correctly? Thanks

Exactly. If you're not comfortable with a full $10k, do what you can but even paying off car 2 and starting fresh with car 1 would be a huge jump start. Just by rolling over what you're currently paying in car payments plus the efund contribution, mutual funds and 529 you'd be able to knock out car #1 in 7 months... That's HUGE! The only savings I wouldn't stop contributing to is retirement.

I don't know what your card balances are, but I suspect if you kept the ball rolling you could have those knocked out within a year or shortly after. Then you get to start fresh with your savings plan, you can resume your savings contributions and start saving to pay down your PMI, for your house addition, etc.

[Goldy]

Hi! I’m a long-time-lurker and first-time-poster. I am seeking advice and critique over our existing budget and recommendations about how to best move forward. In the coming months we will have a variety of debts paid off thus freeing more money each month. I need help in determining how to best allocate the extra money.

Dh is 36 and I am 29. We have one young child.

DH’s net (after 14% 401K contribution and medical insurance deductions): $2982.00
My net pay (not eligible for 401K): $3747.88
Combined: $6729.88

Mortgage:
$2175 per month for housing expenses (insurance, mortgage, taxes) balance on mortgage $233,697.00 @ 4.25%
Mortgage per month is $1188.99 for Principle & Interest, and $807.52 in escrow

The escrow is for:
$175.01 per month for PMI
$82.34 for insurance
$550.17 taxes

$178.49 per month is addition toward principle

Monthly Payments:
$100 Cable/Internet
$400 all utilities
$200 life insurance policies on DH & I, $1 million each
$200 per month ‘saved’ for Christmas/Vacation fund
$600 per month for groceries/dining/miscellaneous spending

Vehicles:
$550/month will be paid off 11/2013
$625/month will be paid off 5/14

Consumer Debt (All of these are on financing with zero interest. Either the payment is being made in equal amounts to pay it off in full before the promotion expires or we are saving the difference each month in a separate account which will pay off the balance before the promo expires):

$100/month (Paid off 9/13)
$125/ month (Paid off 1/13)
$225/month (Paid off 11/2012)

Savings:
$400 per month into my ROTH (Balance $10,333.54)
$400 per month into Emergency Fund (Current Balance $14K)
$300 per month into mutual funds (Current Balance $4360.05)
$100 per month into 529 (my mom also contributes $100 per month into this fund) (Current balance $4623.16)
DH’s 401K balance is 91K


Goals:
Build EF
Eliminate PMI ($537.49 per month is going to principal. Likely need balance to be under $200K before PMI can be eliminated)
Maximize dh’s ROTH
Save for home addition. We would very much like to put an addition on our home around 8 years from now. We anticipate it will cost approximately 100K.
Pay off home before DH is 55

Questions:
Are we saving enough? Is that savings being directed toward the best avenues?

I feel torn with several different goals & desires as we come close to having more money free each month (from having the above mentioned debts paid off in the coming years).
Which is best to tackle first, after the EF is fully established?
Is saving for home addition in 8 years a realistic goal?
Are there other ‘goals’ we should be aiming for that I haven’t listed?

Any thoughts & advice would be greatly appreciated!

This is a great budget that is both elegant and well thought out. Once the first of the year rolls around you will be able to start your debt snowball and then you will be in really good shape.

I do have a few pointers/ideas to slightly tweak your current outline.

I love the fact that you are keeping the extra payments on the 0% CC in order to have them paid off by the time the rates increase. In my mind that is the perfect way to deal with CC debt. However, you have enough in your EF that you might be able to use 4k of it to pay off a debt that would then free up that monthly payment to be allocated somewhere else. You didn't post balances so I dont know if you could pay off a debt with 4k but its something to think about.

Car Payments, why dont you put the extra payments that are currently going to the car toward the home loan? Not only is the home loan higher interest but its also $175 of PMI insurance. Has your home gained any value since you purchased it? Refi might be an option if you would be able to get your loan to under 80% of the home value so you would not only get a better rate but you would lose the PMI fees. again, not sure of balances so take it for what it is.

Another idea would be to reduce your 401k contributions and fund a roth for your DH with the excess. That would increase your annual tax but then your roth would be funded.

It looks like you are on a very good road to recovery. By 2014 you should be in outstanding shape with lots of extra money to allocate where you wish.

[mgkimsal]

Everyone's risk tolerance is different, but here's my own take:

Take out enough from EF to pay off the lower car payment and the consumer debt entirely. If I'm doing my math right it seems you'd have enough or could do it within a month. Take money going to retirement account for that month as well, and pay all that off. That will free up ... $1000/month (I think?). That gives you a lot of breathing room to then reallocate back to emergency fund rebuilding and reprioritize what's left.

You're brining home $6700, and if you eliminate the consumer debt and cars, you're left with somewhere around $4800/month (I was rounding, give or take a bit). That's $2/month flexible in your budget. Taking an extra $300 from 'mutual funds' you'd have $2300/month to tackle something bigger - faster paying down on the mortgage to get a refi or eliminate PMI, rebuild EF in 5 months, etc. With $4800/month, 3 months of savings would be ~$15k. If your comfort level demands it, you may want to go higher, but it wouldn't take you very long to do that. You could then stop funding the EF and go back to mutual funds funding, but still have >$2k month to throw at the house, or retirement, or college fund, or whatever you're most comfortable with.

It feels like you've got little breathing room in the budget, and the cars/consumer debt are taking up all the remaining space. Knocking those out quickly gives you lots of options.

Are your taxes really $6k year? $550/month feels high to me, but... every area is different certainly. My annual taxes were $2100, and are going to be reduced a bit this year because property values have declined in the area (yay?). If I paid monthly, it would now be something like $160/month, so seeing $550/month is a shocker. Is there ever any left over after the taxes are paid? Can you manage the taxes yourself instead?

However, paying $2k extra per month may get your balance down quickly - you may be able to hit that 80% mark in a year, and get PMI removed. That would certainly be nice too.

Lots of options as to where to put money - take some of those options out (car/cards) so that the fewer options you have are all higher value choices.

Good luck!