Need help figuring out how to reduce expenses and pay debt

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JasonA
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Need help figuring out how to reduce expenses and pay debt

Post by JasonA »

My wife and I have an $80K in a line of credit.

We own our home with $50K that we put in as downpayment and probably about $125K in appreciated value (we bought it 4 years ago pre-construction for $300K and it’s probably worth $425K now). I guess we also have the additional capital put into the home by way of our monthly mortgage payments but I imagine most of the payments go toward interest.

So the $50K investment in the home plus the $125K appreciated value = $175K in assets and minus the $80K line of credit makes us about $100K in the positive.

Our problem is that we are running at a loss of about $1K to $2K each month and this loss comes out of the line of credit which is going to continue going up.

My wife and I bring in about $6K or 7K net each month in income.

Our expenditures are around 7K or 8K a month.

So we run at a loss of about $1K to $2K a month.

The breakdown of our $7K or $8K expenditures is as follows: The main expense is our home which costs around $2K a month (based on $1,300 for the mortgage, $400 for condo fees, $600 for property tax). Our case lease is $450 a month. Insurance is $500 a month (life insurance, LTD insurance, car insurance, home insurance). Interest on our line of credit is $300 a month. Entertainment expenses are about $800 a month including dinners, buying electronics and stuff, buying clothing, going to concerts. Groceries are $600 a month. Haircuts are $100 a month. My public transit pass is $175. Internet and TV is $175 a month. Cell phones total $120 a month. We put $150 into an RRSP each month.

My question is what should we do? Cut down certain expenses? Move to a lower cost place as our place is of course the biggest expense?

How could we even reduce our expenses by moving to a cheaper place? We go over $1K to $2K a month and our home expenses including mortgage etc. right now is $2K a month.

And what about this theory – is it a good idea to keep living with the $1K to $2K loss and taking it out of the line of credit rather than move to a cheaper place because the benefit of having a more expensive place for which more money goes into it via mortgage payments and for which we make money off a higher appreciated value makes up for the $1K to $2K loss?
mlipps
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Re: Need help figuring out how to reduce expenses and pay de

Post by mlipps »

-Get cheaper cars (do you need more than one if you have public transportation?)
-Cut down on entertainment, my fiancé and I spend $200/month and we're not in debt. If I were in debt, especially from lifestyle spending, that number would be 0.
-I'm not sure about the COL difference between US and Canada, but I'd venture you could cut groceries by $200/month and maybe insurance too.
-Cut cable completely and get cheaper Internet and cell phones
Cash
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Re: Need help figuring out how to reduce expenses and pay de

Post by Cash »

JasonA wrote:
The breakdown of our $7K or $8K expenditures is as follows: The main expense is our home which costs around $2K a month (based on $1,300 for the mortgage, $400 for condo fees, $600 for property tax). Our case lease is $450 a month. Insurance is $500 a month (life insurance, LTD insurance, car insurance, home insurance). Interest on our line of credit is $300 a month. Entertainment expenses are about $800 a month including dinners, buying electronics and stuff, buying clothing, going to concerts. Groceries are $600 a month. Haircuts are $100 a month. My public transit pass is $175. Internet and TV is $175 a month. Cell phones total $120 a month. We put $150 into an RRSP each month.
I'm counting $5670. Are you leaving out something? Seems like the biggest area to cut back on is $800/month in entertainment and $600/month in groceries. You would also gain $300/month by paying off the line of credit (which seems to have been a bad idea for you to begin with). If you want to keep the home, then reduce your other expenses. If you want to keep your other expenses, then find cheaper housing. You can't have it all unless you increase your income.
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momar
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Re: Need help figuring out how to reduce expenses and pay de

Post by momar »

This is going to be rude, but how can you be wondering how to cut expenses? You clearly have a ton of room to cut in entertainment, television/internet, groceries, car lease, haircuts, and insurance.

Your house is your biggest expense, but it is far from out of line with your income and is actually somewhat modest if you are really bringing in 7k net per month.

edit to add: this is actually good news. Many people need to cut but don't have easy things to cut. You do, it should be easy and straightforward.
"Index funds have a place in your portfolio, but you'll never beat the index with them." - Words of wisdom from a Fidelity rep
FillorKill
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Re: Need help figuring out how to reduce expenses and pay de

Post by FillorKill »

And what about this theory – is it a good idea to keep living with the $1K to $2K loss and taking it out of the line of credit rather than move to a cheaper place because the benefit of having a more expensive place for which more money goes into it via mortgage payments and for which we make money off a higher appreciated value makes up for the $1K to $2K loss?
Let me tell you about my friend in Hollywood who stopped going to work because 'my house is doing more than enough'... He enlightened me to the workings of the world as he now knew it in 2005. We had a very different conversation in 2008. He wasn't so excited about residential housing values anymore.

Kill this theory dead.

Living above your means is not a good strategy. Hopefully you will find a lifestyle that works for you and it within your means.

If I were in your boat I would do a bottom-up analysis of all spending and nothing would be held sacred. If my household take home was 6K per month I would not have expenses greater than 4K. But that's me. I think your overall lifestyle is the issue and you can make smaller improvements but you will have to make major changes to go from that deficit to any kind of surplus. This comes down to your priorities and willingness to make the tough changes. Good luck.
crowd79
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Re: Need help figuring out how to reduce expenses and pay de

Post by crowd79 »

You're paying nearly $300 per month for TV, internet and cell phones. Get rid of the cable/satellite and get an antenna to pick up local channels and stream Hulu/Netflix. Also, do you need an expensive phone contract? I use Tracfone pre-paid double minutes for life and barely spend $20 per month.
nimo956
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Re: Need help figuring out how to reduce expenses and pay de

Post by nimo956 »

You are going about this completely backwards. You need to save first and figure out spending afterwards. How much you want to save for retirement each month? Let's say you want to put away $2k per month. So $6k income - $2k = $4k left to cover other expenses. You spend $2.3k on your house. That leaves $1.7k for other expenses. 500 for insurance and 300 for line of credit puts you at $900.

You need to cut $1520 out of the following:

450 - car
600 - groceries
800 - entertainment
100 - haircuts
175 - public transit
175 - tv/internet
120 - cell phones

I don't think that's that hard. Just off the top of my head: sell the car and buy something cheaper with cash, cut groceries to 300, cut entertainment to 200, get cheaper tv, internet and cell phones and you're done!
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crowd79
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Re: Need help figuring out how to reduce expenses and pay de

Post by crowd79 »

nimo956 wrote:cut groceries to 300
Okay, $150 per person? That is a bit extreme, unless they want to eat Ramen noodles and cheap 99 cent Banquet TV dinners every day of the week and stop eating healthy. I spend $250 per month just on myself and that includes 6% cashback with my AmEx Preferred CC.
ddj
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Re: Need help figuring out how to reduce expenses and pay de

Post by ddj »

JasonA, thanks for posting. I agree with the above posts: you have room to make the necessary cuts.
BBL wrote: If I were in your boat I would do a bottom-up analysis of all spending and nothing would be held sacred.
JasonA wrote:
And what about this theory – is it a good idea to keep living with the $1K to $2K loss [because the increasing value of our home] makes up for the $1K to $2K loss?
No. I get the impression that you already knew that.
MathWizard
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Re: Need help figuring out how to reduce expenses and pay de

Post by MathWizard »

Saving $150/month for retirment does not seem enough. I suspect that you will nned to save much more, hence you will
need to cut more than $2K/month. I'd suggest a figure closer to $3K depending upon your age.

You will have health care now and in retirement, since RRSP implies you are Canadian, so you won't need to cover that in retirement.
That is helpful for you, because I am estimating $8K for health car in retirement for the two of us.

I don't know if Canada has the equivalent of Social Security, that may affect what you need to save each month.
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nydad
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Re: Need help figuring out how to reduce expenses and pay de

Post by nydad »

If I were you, I would completely ignore the "value" or "equity" of your house at this point in time - it is not real money, and certainly any theoretical gain in market value does not serve to offset losses in the short term because you are living there and aren't selling it tomorrow.

Many people who invested in real estate from 2005-2008 were burned badly by this notion that real estate values will always go up - they don't.
(see this for example: Image

If one day, you sell your house, it may have gained value - in inflation adjusted terms - or it may not have. For now, you can consider it part of your net worth, but don't think of it as income or as offsetting expenses.

In any case, every dollar you pay in principal is a dollar you don't have to pay to the bank when you sell, so paying down a mortgage is definitely a good idea.

I'm a bit confused- do you have both a mortgage and a line of credit? What percentage interest are you paying on these?

The only way to avoid debt and not erode your wealth is to spend less than you earn. I'm sure you could trim your expenses. $100/month for haircuts?
Mill
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Re: Need help figuring out how to reduce expenses and pay de

Post by Mill »

$800 a month on entertainment? Face it, poor people cant afford $800 a month in entertainment. Make your own entertainment until this gets under control. $100 a month on haircuts? Come on. To the OP, I realize youre a first time poster, but there are tons of ways to reduce that budget. I havent paid a barber in 5 years...in fact I gave myself a cheap haircut this weekend with a pair of 20 dollar clippers purchased years ago. Truth is, i messed it up. Big chunk of hair buzzed out of the side of my head. But these are the sacrifices that need to be made, especially if youre running a deficit. Its not going to be pretty, but for Christs sake, make it functional!
harikaried
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Re: Need help figuring out how to reduce expenses and pay de

Post by harikaried »

nydad wrote:$100/month for haircuts?
Okay, I wasn't sure if I was the only one somewhat shocked by that number. I know I stretch out the time between haircuts, so I'm pretty sure I'm on the low end of monthly haircut expenses. I pay $15 with tip every 3 months, and my wife pays maybe $30 once a year. So that's on average $7.5/mo.

One plus is that you can buy a hair cut kit for $25, so if you and your wife don't have too complex of hair styles, you can save $1200 a year with a small initial investment + some learning.
Zytos
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Re: Need help figuring out how to reduce expenses and pay de

Post by Zytos »

harikaried wrote:
nydad wrote:$100/month for haircuts?
Okay, I wasn't sure if I was the only one somewhat shocked by that number. I know I stretch out the time between haircuts, so I'm pretty sure I'm on the low end of monthly haircut expenses. I pay $15 with tip every 3 months, and my wife pays maybe $30 once a year. So that's on average $7.5/mo.

One plus is that you can buy a hair cut kit for $25, so if you and your wife don't have too complex of hair styles, you can save $1200 a year with a small initial investment + some learning.
Agreed that $100/mo is ridiculous, but I think your numbers are a little off too. One haircut per year for $30 isn't practical for most women. I agree that every man should be able to get by with a $15 haircut, but again, one per 3 months seems infrequent.

Not sure why I felt the need to post this.
ginyah
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Re: Need help figuring out how to reduce expenses and pay de

Post by ginyah »

IMO you should sell the house. You obviously cannot afford the house and continue the lifestyle you want. It is always a choice. Live big today or save to live well tomorrow. But continuing to accrue debt is a not a way to live. Use any profit from the house to clear debt and start saving more for retirement. Who knows what the housing market will bring tomorrow and the profit you forecast today could easily evaporate. Decide if you really want to be home owners with all that responsibility and expense or if you want the flexibility of renting. Good luck!
Calm Man
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Re: Need help figuring out how to reduce expenses and pay de

Post by Calm Man »

OP uses the term " a loss of 1-2K per month". Does he mean he spends 1-2K more than he takes in? That's how I read it. If so, this is easy. The expenses are so easy to pare.
donall
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Re: Need help figuring out how to reduce expenses and pay de

Post by donall »

Try to renegotiate (or remove in areas such as cable) as much as possible:
- higher salary
- lower insurance, cable, phone
- lower mortgage rate
- etc.

Spend less, if you cannot determine where to spend less, then take 25% off all discretionary areas (entertainment, etc.).

$2000/mo. doesn't sound unreasonable for a condo and may be comparable to rent.

After taking these actions, you need to put together a saving plan.

Good luck
mollymillions
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Re: Need help figuring out how to reduce expenses and pay de

Post by mollymillions »

Housing - $2300
Car - $450
Insurance - $500
LOC - $300
Groceries - $600
Haircuts - $100
TV/ISP - $175
RRSP - $150
Cell - $120
Trans - $175
Entertainment - $800
Total: $5670

The total you give is less than the $6000 minimum net that you state that you are bringing in. Do you have a higher minimum payment on your LOC or are you only paying the interest? You also didn't mention utilities, is that in addition to what you've listed or is it included in the HOA fee or something?

There is obviously a lot of wiggle room in your budget. The house is a little high (especially with that LOC) but you can keep it if you like. There are a number of things that you can cut in order to keep the house, in varying degrees of intensity.

The car lease is rough, you should probably get rid of the car and buy something cheaper to get rid of that payment.

You might be able to lower your cell phone costs, but that's a trivial amount of your budget. Cable bill can be cut out or at least significantly reduced.

100$/mo haircuts are pretty steep. You can cut back there, but again, it's not much in itself. I do think this line-item is a sign of a somewhat opulent lifestyle that you need to cut back if you'd like to keep your house and be financially successful down the road.

$600/mo on groceries is high, especially if all of your eating out is allocated to your entertainment. You can probably cut this in half.

Aaaaand the big one: $800/mo in entertainment. If you are really running a deficit, this is ludicrous. You will have to cut back here significantly if you want to keep your house and/or stay out of bankruptcy a few years down the road.

I would suggest that you start doing a monthly budget (without a deficit) and work towards sticking to it. Cutting your lifestyle will be difficult for you, but your current situation is unsustainable (as I'm sure you've realized). You might want to take a look at http://www.bogleheads.org/wiki/Boglehea ... art-up_kit and start planning your next steps.

JasonA wrote: And what about this theory – is it a good idea to keep living with the $1K to $2K loss and taking it out of the line of credit rather than move to a cheaper place because the benefit of having a more expensive place for which more money goes into it via mortgage payments and for which we make money off a higher appreciated value makes up for the $1K to $2K loss?
Bad idea. A vivid illustration would be the housing crash of 2007.
Grt2bOutdoors
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Re: Need help figuring out how to reduce expenses and pay de

Post by Grt2bOutdoors »

3 expenses loom large - Entertainment $800, really? Are you buying front row tickets to your favorite concert group each month? Car loan - $450 a month? What are you driving - bimmer, benz or rover the dog? Groceries - $600 a month? - are you buying processed foods only, living in Whole Paycheck or are you including fine dining in that line amount? There's only two of you, you are living far far above your means. Thank you for supporting the local economy.
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ddunca1944
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Re: Need help figuring out how to reduce expenses and pay de

Post by ddunca1944 »

My wife and I bring in about $6K or 7K net each month in income.

Our expenditures are around 7K or 8K a month.

So we run at a loss of about $1K to $2K a month.
There are a lot (too many) "about"s.... You need to know (down to the dollar) exactly how much is coming in and how much is going out and for what.
If you are using a line of credit to maintain your lifestyle, it's pretty obvious that you are living beyond your means.

The good news is that you do have a good income. The bad news is that you are spending more than you can afford. I agree with mollymillions. Figure out exactly how much you have coming in (do not count borrowing money from a line of credit as income - it is not "income"). Then, figure out where it is going. You have a lot of room to trim expenses. The $800/mo for entertainment is the most obvious. How much of that is eating out? You should be able to cut that back to $200/mo with little deprivation.
And there is no need to spend $100/mo for haircuts. Is that for the both of you? Either find a less expensive barber or go less often.
$600/mo on food. We budget that amount but rarely spend that much. Do more cooking from scratch. Do more planning. Do more meals based on what is on hand in the pantry, the freezer and refrigerator. Make more meals from leftovers.

Finally, about your home. Down the road, you may make money on it. You may break even. You may even lose money. But right now, it is shelter. Look at it that way. It is not a piggybank to borrow money from. It is a roof over your head.
Working2notWork
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Re: Need help figuring out how to reduce expenses and pay de

Post by Working2notWork »

OP, what did you end up doing? Was anyone able to help you?
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abuss368
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Re: Need help figuring out how to reduce expenses and pay de

Post by abuss368 »

OP is MIA with only one post?

I am surprised that Bogleheads even need to provide input here honestly. The answer is right in the body of your original post. $800 entertainment, $100 haircuts, $400+ condo fees? Where do you even start? You could cut a lot.
John C. Bogle: “Simplicity is the master key to financial success."
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