Income change budget adjustments

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Topic Author
atDev
Posts: 69
Joined: Thu Apr 08, 2010 8:05 pm

Income change budget adjustments

Post by atDev »

My wife is quitting her job to stay home with our child which will reduce our income substantially. I am considering ways to reduce our mortgage payment to help keep our budget. We are obviously reviewing other areas (eating out, luxuries, etc) to reduce expenses. Any ideas are welcome and appreciated!

Info
  • 31 years old
  • One child, daycare was about 50% of her 32k/year salary
  • Healthcare/life insurance/401k was provided via her job
  • I am self-employed as a single member S corp so individual/family insurance will be needed now
  • Due to health reasons, life insurance is very hard to get at a reasonable price (reason for large emergency fund)
Numbers
  • 3% 15 year fixed rate mortgage balance of 261k (property value of 412k) with around $2600 month payment.
  • I hope to make about 45k/year but this varies (I used to make a lot more but business has declined)
  • 58k in automobile equity
  • 170k cash
  • 112k in general investing account
  • 113k in traditional ira
  • 116k in roth iras
  • 5k in wifes 401k
  • 11k in 529 plan
Questions
  • Should I even consider paying down/refinancing the mortgage due to my current low interest rate in order to achieve a smaller payment?
  • Are there any safe options ideas for the emergency fund cash to help produce income to help balance the new budget?
Ben | Young Investor and Learning
Rob Bertram
Posts: 824
Joined: Mon May 05, 2014 12:15 pm

Re: Income change budget adjustments

Post by Rob Bertram »

Considering things like health insurance, your wife was getting more than the $32k/year salary. Is her quitting her job a done deal? Can you quit your job and stay home with your child instead? Can you work part time?

If you pay a lump sum on the loan, you might be able to have the bank adjust your monthly payments. There's no need to refinance as 3% is about as good as it gets right now. Though, I would (personally) keep the cash liquid if you were concerned about income stability.

You can put your EF into CDs or short-term bonds, but a high-interest bank account is about as good if you can find one at 1%.
Topic Author
atDev
Posts: 69
Joined: Thu Apr 08, 2010 8:05 pm

Re: Income change budget adjustments

Post by atDev »

Considering things like health insurance, your wife was getting more than the $32k/year salary. Is her quitting her job a done deal? Can you quit your job and stay home with your child instead? Can you work part time?
Yes her quitting is a done deal. Unfortunately I can't really "quit" as I own the business. I work from home and operate as a single member S corp for tax purposes. The only option would be to try to sell the business and look for a higher paying job with health insurance which is also an option.

Thank you for the reply!
Ben | Young Investor and Learning
Rupert
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Joined: Fri Aug 17, 2012 12:01 pm

Re: Income change budget adjustments

Post by Rupert »

What does "58k in automobile equity" mean? Do you still owe anything on your automobiles? Is there a good reason you own so many and/or such expensive automobiles, i.e., is it necessary for your business? If not, and given that neither you nor your wife commute, I'd recommend exchanging some of that "automobile equity" for cash.
bungalow10
Posts: 2271
Joined: Sat Apr 09, 2011 6:28 am
Location: Chicago North Shore

Re: Income change budget adjustments

Post by bungalow10 »

Depending on your income and your state, her income may have had a very high marginal tax rate. When my DH quit, the math we did figured that his income was being taxed at 25% (fed) +6% (state) + 6%(SS) = 37%. Add in the cost of his transportation and the convience incidentals that a household with two working parents often rely on, and we saw little impact to our monthly take-home after subtracting out daycare for our three munchkins. That's not to say the impact is zero, but it wasn't as bad as I had thought it would be.

Do you budget? Like, really budget? If you don't already, I suggest you start. We use YNAB. It helps so much. I was never a budgeter before, but when baby boglehead #3 came along I had to start because there just wasn't as much wiggle room as we'd enjoyed in the past.

edit: oops, I just saw your income is 45k. Yes, you are going to have a problem as your house payment is going to eat up over 30k/year. This is going to involve some big ideas or big changes if you want this to work. With a 45k income you might qualify for a subsidy under the ACA.
An elephant for a dime is only a good deal if you need an elephant and have a dime.
Topic Author
atDev
Posts: 69
Joined: Thu Apr 08, 2010 8:05 pm

Re: Income change budget adjustments

Post by atDev »

What does "58k in automobile equity" mean? Do you still owe anything on your automobiles? Is there a good reason you own so many and/or such expensive automobiles, i.e., is it necessary for your business? If not, and given that neither you nor your wife commute, I'd recommend exchanging some of that "automobile equity" for cash.
2 cars, equally priced, all paid off. They are SUVs and bought both used. We did have an older car, but the repairs it was beginning to require would cost us more than upgrading. I agree we could sell one for extra cash and am not against it, but wouldn't this only be a short term fix? The questions with the larger mortgage payment still remains and the monthly budget is still a concern.
Ben | Young Investor and Learning
Topic Author
atDev
Posts: 69
Joined: Thu Apr 08, 2010 8:05 pm

Re: Income change budget adjustments

Post by atDev »

bungalow10 wrote:Depending on your income and your state, her income may have had a very high marginal tax rate. When my DH quit, the math we did figured that his income was being taxed at 25% (fed) +6% (state) + 6%(SS) = 37%. Add in the cost of his transportation and the convience incidentals that a household with two working parents often rely on, and we saw little impact to our monthly take-home after subtracting out daycare for our three munchkins. That's not to say the impact is zero, but it wasn't as bad as I had thought it would be.

Do you budget? Like, really budget? If you don't already, I suggest you start. We use YNAB. It helps so much. I was never a budgeter before, but when baby boglehead #3 came along I had to start because there just wasn't as much wiggle room as we'd enjoyed in the past.

edit: oops, I just saw your income is 45k. Yes, you are going to have a problem as your house payment is going to eat up over 30k/year. This is going to involve some big ideas or big changes if you want this to work. With a 45k income you might qualify for a subsidy under the ACA.
We are starting to "really" budget at this point due to her quitting her job. We planned on trying Mint, but will check YNAB as well. Thank you for the feedback. I agree there are a lot of factors including the tax brackets, etc that will come into play.
Ben | Young Investor and Learning
bungalow10
Posts: 2271
Joined: Sat Apr 09, 2011 6:28 am
Location: Chicago North Shore

Re: Income change budget adjustments

Post by bungalow10 »

atDev wrote:
We are starting to "really" budget at this point due to her quitting her job. We planned on trying Mint, but will check YNAB as well. Thank you for the feedback. I agree there are a lot of factors including the tax brackets, etc that will come into play.
Good luck!!!! Keep us posted.
An elephant for a dime is only a good deal if you need an elephant and have a dime.
Mike Scott
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Joined: Fri Jul 19, 2013 2:45 pm

Re: Income change budget adjustments

Post by Mike Scott »

That is a lot of house and car to maintain on a 45K income (even if you cashed out enough accounts to pay off the house). It's not a happy thought but Is it time to sell/downsize the house to fit the reality of the current budget? It seems to me that you are making a major lifestyle change that is going to require something more drastic than a bit of budget tweaking.
mlipps
Posts: 1027
Joined: Thu Jun 21, 2012 9:35 am

Re: Income change budget adjustments

Post by mlipps »

You can't afford that house on your salary. There's no way around that fact. You also do not need two SUV's for one or even two kids, let alone ones that cost $30k. These are facts. I would check out the post "Smart Cars for Smart People" on Mr Money Mustache, as well as his blog in general. No, it will not permanently fix the situation to sell the cars, but it will put food on the table. At that income level, you should qualify for a large subsidy under ACA. You might also look into the Savers Credit to help with continuing to save for retirement. But in the long run, you will need to make one of two changes: increase income or decrease expenses, there is no other way for your family to make it.
Rob Bertram
Posts: 824
Joined: Mon May 05, 2014 12:15 pm

Re: Income change budget adjustments

Post by Rob Bertram »

Does your wife plan to go back to work after your child is in school? If this is a temporary situation, you might have to burn some of your $170k cash while you are operating on a single income. Your mortgage and property taxes will probably eat up most of your $45k/year. You still need to eat and keep the lights on.

If this will be a permanent situation, you should consider downsizing the house and maybe sell one of the vehicles. You may have to consider cutting back some things in your budget like stopping cable/satellite, smaller vacations, and switching your cell phone provider to an NVO like Republic Wireless, Ting, or PagePlus.
Topic Author
atDev
Posts: 69
Joined: Thu Apr 08, 2010 8:05 pm

Re: Income change budget adjustments

Post by atDev »

Just to note, the reason for the more expensive house/cars was due to my previous business income of around 150k/year for several years as well as being able to do a large down payment on the house. Unfortunately that income has fluctuated and is now significantly lower. We also did not really get to make the decision of her quitting on her own. It was somewhat forced, but she has always wanted to focus on raising our child as well.

Thank you all for the comments and it is obvious now that it boils down on cutting something out or improving the business income or seeking other employment and selling the business. I had hoped a refinance might get us back into budget or putting some of the cash to work, but based on the comments and doing some more math it appears that idea won't work. Thanks!
Ben | Young Investor and Learning
Topic Author
atDev
Posts: 69
Joined: Thu Apr 08, 2010 8:05 pm

Re: Income change budget adjustments

Post by atDev »

Does your wife plan to go back to work after your child is in school? If this is a temporary situation, you might have to burn some of your $170k cash while you are operating on a single income. Your mortgage and property taxes will probably eat up most of your $45k/year. You still need to eat and keep the lights on.
That is a possibility. She is also considering doing some self-employment work part-time which could help. We've also been offered a loan from a family member (early inheritance) to use while I try to get my business back on track, but I know the family loan situation is a slippery slope as well.
Ben | Young Investor and Learning
mlipps
Posts: 1027
Joined: Thu Jun 21, 2012 9:35 am

Re: Income change budget adjustments

Post by mlipps »

atDev wrote:Just to note, the reason for the more expensive house/cars was due to my previous business income of around 150k/year for several years as well as being able to do a large down payment on the house. Unfortunately that income has fluctuated and is now significantly lower. We also did not really get to make the decision of her quitting on her own. It was somewhat forced, but she has always wanted to focus on raising our child as well.

Thank you all for the comments and it is obvious now that it boils down on cutting something out or improving the business income or seeking other employment and selling the business. I had hoped a refinance might get us back into budget or putting some of the cash to work, but based on the comments and doing some more math it appears that idea won't work. Thanks!
I was a bit short in my earlier post because I was posting from my phone & was a bit alarmed at how gentle everyone else was being about, what seems to me, an alarming situation. However, in all fairness, I should also say that your family has shown a great deal of financial acumen to date & deserves to be commended for that; thank goodness that you did save up a large downpayment on your home because now you can sell it if you need to. And clearly, based on your savings, you have not been squandering your money. I hope that this good financial judgement continues; if it does you will be just fine in the long run.
flyingaway
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Joined: Fri Jan 17, 2014 10:19 am

Re: Income change budget adjustments

Post by flyingaway »

If it were me, I would pay down the mortgage using the emergency fund (170K) and the investment account balance(112K), and use Roth IRA (116K) as the new emergency fund. Then your $45K income should be comfortable for your living expenses (and for rebuilding your traditional emergency fund).

I know most people here would not recommend doing that (paying down mortgage).
bungalow10
Posts: 2271
Joined: Sat Apr 09, 2011 6:28 am
Location: Chicago North Shore

Re: Income change budget adjustments

Post by bungalow10 »

flyingaway wrote:If it were me, I would pay down the mortgage using the emergency fund (170K) and the investment account balance(112K), and use Roth IRA (116K) as the new emergency fund. Then your $45K income should be comfortable for your living expenses (and for rebuilding your traditional emergency fund).

I know most people here would not recommend doing that (paying down mortgage).

A hybrid approach would be to start using that $170k cash to make the mortgage payment (no other living expenses), while trying to rebuild the business. Set a cut-off, like when the balance hits $85k or 18 months from now, where OP decides to take further action (which could be to pay off house, have wife go back to work, or sell house, etc) if he's not at a point where his income covers the mortgage expense.
An elephant for a dime is only a good deal if you need an elephant and have a dime.
Topic Author
atDev
Posts: 69
Joined: Thu Apr 08, 2010 8:05 pm

Re: Income change budget adjustments

Post by atDev »

mlipps wrote: I was a bit short in my earlier post because I was posting from my phone & was a bit alarmed at how gentle everyone else was being about, what seems to me, an alarming situation. However, in all fairness, I should also say that your family has shown a great deal of financial acumen to date & deserves to be commended for that; thank goodness that you did save up a large downpayment on your home because now you can sell it if you need to. And clearly, based on your savings, you have not been squandering your money. I hope that this good financial judgement continues; if it does you will be just fine in the long run.
I realize the seriousness of the situation and appreciated your "to the point" response. If I wasn't serious about preparing and rectifying the situation I would not have posted here to try to gain some outside perspective, so be as harsh as gentle as you need to :) Thank you also for the comments on our past financial awareness, we worked hard to get to this point and hope to continue it once we can get past this current situation.
Ben | Young Investor and Learning
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