Budget Assessment 1

There have been a number of things that have occurred recently that have brought a budget re-assessment to the top of our financial to-do list. The biggies were deciding to enroll the boys in pre-school as early as possible, paying off our medical debt (again) only to have a medical emergency put us right back in debt (again), practically wiping out the e-fund to support S’ business, and the realization that we have been overspending on certain budgetary items for months which had been masked by the complicated system we created for ourselves with the credit card.

I’ve written more about each of these factors in other posts as they were occurring but as they say, hindsight is 20/20. Regarding the boys’ preschool and S’ business, I have no second thoughts that we made the right decision although how to pay for them is still up in the air. As for the medical debt and the credit card, they reveal a major flaw in our debt repayment plan and current budget: we just don’t have enough budgeted to cover our medical expenses and our household/ grocery expenses. Our mission to pay off our debt but having a limited income to do so was forcing us to cut budget items that, now obvious, couldn’t take any more cutting. What we ended up doing was “robbing Peter to pay Paul”.

Here’s the budget that we were trying to adhere to (and failing) by amount, percentage of after tax income, and category:

$1,215  30%      Rent & Utilities: gas, electric, sewer, water

   $580  15%      Insurance: Health, life, disability

   $270    7%     Cars: insurance and fuel

   $135    3%     Tech: phones, internet, Netflix

   $650  16%      Household: Groceries, diapers, toiletries, pets, etc

   $180    5%     Extraneous/ Fun: haircuts, clothing, dining out, projects

     $60    2%     Medical/ Savings

   $910  23%      Debt: minimum payments

$4,000              Total after tax income

The only income we can count on is my bi-monthly pay check so that is what our monthly budget was based on. Extra income from my etsy sites, selling stuff off, tax returns, etc. go towards saving for one-time items that we need, like new tires. Once there’s enough set aside for the item, we make the purchase. We did a fairly good job of estimating what one-time items we might need and what extra income we can expect so far this year except that our extra income is frequently needed to cover the overages in our budget and we added a biggie with the pre-school decision.

I’m pretty much maxed out on bringing more income to the table. S is currently not bringing any income as he continues to focus on building his business up. Given the pitfalls we’ve faced trying to get his business up and running, we expect that his business will not be a significant contributor to the budget this year as most income will be put back into the business. Hopefully, next year we will start to see some profit. Options here include S holding on the business so he can find evening and weekend work to bring in some income or finding full time work which means the boys would have to go into daycare. Currently, we plan on sticking with the original plan of S focusing primarily on our sons (especially in light of the delays one of the boys is experiencing) and part-time on his business.

This is turning into a lengthy post so I’m going to end here. I’ll follow-up later with an assessment of each of our budget categories and how we might make adjustments to get our spending and budget aligned.

Credit card use

Throughout this process of paying off the debt there’s one cardinal sin we’ve always broken: we still use a credit card for regular monthly purchases which we pay in full every month. There are several justifications for our breaking the no credit rule and I’m sure most people will disagree with our decision. The method has been working for us for years, until recently. Before I get into our current plight, let me at least explain our justifications for continuing to use the credit card:

1.   It’s easier to pay one lump sum for a bunch of the little bills we pay each month. Our internet, phones, Netflix, medical debt, and utilities are all set up to auto-pay on the credit card. Since all these bills pretty much the same from month to month, it’s easiest for me to budget one larger payment and only have to remember to set up one payment each month.

2.   We get cash back rewards. It’s not much (2%) but right now, with such a slim income, any little extra helps.

3.   We also put the big items we’ve saved up for on the card to get the extra cash back.

4.   It gives us a wee bit of security in addition to our emergency fund. We pay the cc bill on the day it is released so there are several weeks of padding before the actual due date in case something comes up where we need to put that money elsewhere while we hustle up the cash to cover the unexpected instead of hitting our e-fund.

So now our current situation:

Earlier this year, we decided that we should try out paying for other things besides those listed above with the card to maximize the cash back. So we started putting everyday expenditures on the card like groceries, gas, diapers, etc. The idea was that we would take our cash for those budgeted items and put it in a reserve account so we could cover the expenses when the credit card bill was due. This worked reasonably well at first but it was complicated for me to keep track of everything since these other budget items where often variable and purchases are frequent and throughout the week. I was spending way too much time trying to figure out what expenses had occurred since the last time I transferred cash.  Also, psychologically, I did not like the feeling I got looking at a steadily increasing cc balance each month, even though the cash was there waiting to pay it off.

After a few months, I also realized that we were spending a little bit more on the credit card than we were setting aside and had been “dipping into” the next month’s cash reserves. The date that we were paying the card was also slowly creeping towards the due date. Basically, our little experiment failed. We are ok at paying set amounts and for large, saved for items on the cc but the smaller day to day stuff leaves too much room for error and overspending. So we’ll be transitioning back to our old method which will take a couple months since we overspent for several months.

Besides the basic lesson that making our finances more complicated like this DOES NOT help in the long run, there are also a couple other issues at play here that I’ll need to examine.

-    Were we going over budget each month because the cc was tempting us back to our old ways and giving us false security to overspend? Yes, I think we were guilty of this for at least a little bit of the overspending.

-    Were we going over budget each month because we don’t have enough budgeted to cover our expenses? I think this is a major factor, we’ve been so focused on “paying off the debt” that we are putting ourselves in a situation where we can’t cover the regular expenses.

-    Should we have dipped into the e-fund for some of the things that went on the cc? Yes, we definitely had a few totally unexpected things come up that should have been e-funded. We need to get comfortable with the idea that the e-fund is there to help us when we need it not some sacred account that’s untouchable.

Moral of the story, it’s time to get back to basics, assess the budget and simplify the finances. 

Early Pre-School

I’ve been meaning to write this post for quite a while but better late than never I guess. We enrolled the boys to start in pre-school this fall. Since Kentucky doesn’t have open public pre-school and since, even if the State did, most don’t start until 3 years old, we’ve had to enroll them in a private pre-school that offers a 2 year old program. We struggled with the decision given that we really can’t afford to send them to school so it will definitely mean cutting back on our debt pay-off. However…

I’m not sure I’ve ever written about the boys’ development delays since they haven’t had a financial impact on us in the past. Both boys have a speech delay and one also appears to have some other possibly sensory delays that we are still working to uncover. For the past six months we’ve been working with a speech therapist through the State First Steps program which helps cover the cost after our insurance for weekly therapy. DS B is making pretty good progress in getting caught up but DS L is still lagging behind hence us deciding they need as much additional help as possible. The bottom line is that we feel that we should supplement the therapy sessions to help them overcome the developmental delays as quickly as they can and catch up to their peers before kindergarten.

Given that the cost for pre-school has to come out of our already strained budget we had to go with the most economical route possible which narrowed down the field to a handful of options. Of those options, a cooperative preschool really rose to the top for us. To keep tuition costs down, parents are required to assist in the classroom a set number of days in each semester. This really appealed to us as a way to get a great quality education but also to experience first-hand a pre-school type curriculum and schedule which, in turn, helps us to improve their learning environment at home. The school is also pretty convenient to our house which will allow me to take them to school on my way to work on the days S is not working in the classroom. Another added bonus is that, on the days S is not working the classroom, he will be able to have more time to focus on his business.

Quick update

A lot has been happening lately in our lives that impacts our finances but I haven’t had a lot of time to write about it. Figured a quick bullet point synopsis would be better than nothing at all:

• We decided to use the emergency fund to put towards S’s kiln rebuild. He will have to work on it in phases as we didn’t have enough to purchase all the supplies outright but ultimately we can’t justify taking out a large business loan at this point.

• My parents offered to give us a loan for the credit card balance we were about to refinance. They offered the $4,200 needed at a 4.5% interest rate for a term of 24 months. Gets them a better return than some other short term, stable investment opportunities they were exploring and it gives us a better interest rate than we would have been able to get elsewhere.

• My parents also received some inheritance money from my grandmother’s estate and, graciously, decided to pass on a portion of it to me and my sisters. We were able to pay off the remaining medical debt we owe and minimize the impact that S’ kiln rebuild had on our emergency fund.

• Paying off the medical debt felt great and was even more important due to the fact that our DS L was admitted to the hospital over the holiday weekend with a high fever and seizure. He was cleared and the doctors believe it was a “typical” fever seizure so there shouldn’t be any long-term repercussions to his health. Given that we had already met his deductible for the year with his surgery, I’m hopeful the bills will be minimal and not have a long-term impact on our financial health.

So you want to be an artist…

When we moved from Massachusetts to Kentucky a year ago the plan was for S to stay home with our sons and rebuild his pottery business. In the past year we’ve both learned a ton about the difficulties stay at home parents face, especially those that are also trying to build a business. To say we were naïve when we went into this would be an understatement. Incredibly, S has been able to rebuild his studio, launch his website, and begin producing work for sale… all while providing wonderful care for our sons and without the benefit of significant start-up capital.

Building up to and shortly after his launch at the end of last year, we were feeling really optimistic. He literally sold out of his inventory during the holidays and quickly put that income back into supplies to continue building the business. Then the long, colder than normal winter set in and we were quickly confronted by the fact that our rental property and it’s uninsulated garage where he set up his studio, wouldn’t allow him to make work not to mention the fact that it doesn’t have the electrical service required to run his electric kilns he usually uses for the first firing of his work. He struggled all winter to try and insulate and build a wood burning heater and set up a small studio inside the house but progress really stalled out for a few months.

Once the weather started turning, he started producing work again and was finally able to do gas kiln firings. Upon opening the gas kiln he discovered that the firing had not gone well and most of the work was unsellable. He did some repair work on the kiln, tweaked his glaze recipes, produced more work and did another gas kiln firing. Again, almost a total loss. Yesterday, he was trying to figure out what the problem could be and began to disassemble his kiln to do a complete examination and assessment. I was watching from the kitchen. When he pulled the last ring of the modular kiln up, the entire floor of the kiln gave away. The whole bottom of the kiln had degraded to the point of crumbling away and now sits as a pile of rubble in his kiln shed. So now we have two electric kilns that are unusable at our rental and a completely dead gas kiln.

We spent most of yesterday morning feeling pretty awful about the situation. All of the hard work he has done over the last year to overcome all the ridiculous obstacles trying to build a business with no capital and two toddlers on hand has come to a screeching halt. At this point we have to make a decision about proceeding, options range from scrapping the whole business idea to using the emergency savings to build a cheap make-do new kiln or, on the really big financial impact side, taking out a business loan to get him the equipment and studio space that would really support art as a business.

How do we proceed? At this point we have very little (financially speaking) invested, do we put the idea on the shelf for a few years so S can seek other income opportunities while we continue to focus on debt? Do we dip into emergency savings and continue to trickle money into the business as a bare minimum approach? Do we go “all-in” and move to another location that would better support a pottery studio, or rent studio space, or buy a place and build a permanent kiln and studio? It’s so hard to decide what to do, we want desperately to be out of debt but we also want to raise our sons at home and both have careers doing what we love to do. 

Doing the shuffle

Over the course of our debt pay-off journey we've shuffled debt around numerous times to take advantage of lower interest rates, to lower our monthly payments, and to consolidate debts. The last shuffle we did consolidated a high interest credit card with a defaulted loan at an 8.39% interest rate through Lending Club. Before that, we had done a balance transfer on another credit card debt to secure a 0% interest rate until June 2015. Now, with the promotional 0% rate coming to an end it’s time to come up with a plan to pay off the remaining $4,200.

Our options include:

1.   Doing another balance transfer on the credit card (we have two that we have just transferred debt back and forth between) which would secure a 0% rate for another year but cost us a transfer fee and potentially set us up for another transfer in the future if we can’t get it paid off in a year.

2.   Leaving it where it is and continuing to pay it off as quickly as possible. The interest rate would be high somewhere between 8.99% and 15.99%.

3.   Taking out another Lending Club loan. We could probably get a lower interest rate around 6% for a three year loan which would make payments affordable and easy enough. This would also cost us a fee.

4.   Consolidating it with the larger Lending Club loan for a lower rate for a three year loan. This would be a more aggressive pay-off for all consumer debt and would also cost us a fee.

My next step is to explore cost and feasibility of each option this weekend. 

End of 1st Q 2015 Report

Starting point (Oct 2011):

Student Loan 1 (My fed loan): $38,339

Student Loan 2 (S' state loan): $21,719

Student Loan 3 (S' fed loan): $5,454

Car Loan: $11,684

Credit Card 1: $10,577

Credit Card 2: $3,635

Credit Card 3: $0

Misc. small debts (S' small debts in collections): $5,443

Medical expenses: $3,672

Parents: $600

Total: $101,123

And here's where we are today:

Student Loan 1: $34,501

Student Loan 2: $18,860

Student Loan 3: $0

Car Loan: $0

Credit Card 1: $0

Credit Card 2: $0

Credit Card 3: $4,344

Misc. small debts: $4,349

Medical expenses: $1,544

Parents: $0

Consolidation Loan: $8,610

Total: $72,208

Paid off to date: $28,915 paid off + $1,426 in savings

So far 2015 is heading in a much better direction than last year. We are making slow but steady progress on the debt pay-off and have maintained the $1000 emergency fund plus we still have $400 in savings towards DS L’s surgery bills.

We still have some unknown bills for DS L’s surgery that we are waiting for and we still have an outstanding tax return coming to us. Once all the surgery bills are paid/ tax return is received, we’ve decided the balance will go towards the medical debt. I’ve been going back and forth on paying interest bearing credit card debt or paying no-interest medical debt. In the end, knocking out the medical debt ASAP won. The medical is a small enough number that we can get rid of it this year for a boost in our debt reduction mission. We’ll be able to snowball our payment towards the credit card and, on the really lean months, ease some of the burden on our budget.

I’ve also realized looking at this quarter’s numbers that we are nearing the 1/3 debt pay-off mark! If we stick with our projected payments through the next two quarters, we will be able to reach that goal by October which is the 4-year anniversary of the beginning of the debt reduction journey!