Blunt Money

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This is part of a series of interviews with people who are either working to improve their financial situation or who have already reached their goals. This week’s interview is with Jessica J, who is working on paying off credit card debt so that they can begin saving for a house.

Could you tell us something about yourself?
I have my BSBA from the University of Denver, and am currently working on my masters in business. I’m 24, and married with no children — just a chocolate lab.

In what way have you turned your financial life around? (Or what are you working on changing?)
We are keeping detailed records of what we spend our money on, and making sure that we don’t spend anything extra, cutting coupons, etc.

Can you give a little bit of background on your story? What were things like for you pre-change?
We have $50K in student loans combined. As I understand things it’s “good” debt, but debt none the less! The main problem that we have is credit card debt due to me being unable to work for 6 months due to an injury.

How much progress have you made?
We have paid off about $15k in the last year and plan to have another $20K paid off by May 2009. I know that we would be making more progress if we were not contributing to our IRA, but we feel it is important.

How do you feel about your financial situation right now? (Or how did you feel after reaching your goal?)
After each payment I feel better and better. If I were not working I would be scared relying on just my husband’s income.

What was the catalyst that caused you to take action?
Seeing that we were only making the minimum payments on our credit cards, and knowing that we would never get out of debt that way

Did you have any setbacks? If so, how did you deal with them?
We haven’t yet, but we have only been doing this for a few months. We are planning on buying a house in June of ‘09 if we are out of debt.

What has been the hardest part of the process?
It hasn’t been too hard yet, its been exciting to see our balance decrease!

The easiest?
Finding new and different ways to cut costs, or to do things that don’t cost money.

How long has it taken?
It has taken about 3 months so far, but will take another 10.

What will be your next step?
We are living just off of my husband’s income, and using all of mine to put towards our debt.

What’s the best financial advice you’ve received?
There has been so much that I couldn’t pick!

What inspiration could you give to someone in a similar situation?
Just that its not something that is going to happen over night. It’s going to be slow but worth it!

Would you like to share your story? If you would like to be interviewed via email for a future article, please email me at c o m m e n t s @bluntmoney.com (without the spaces) to let me know you’re interested.

I’ve known for a while now that I’m behind on retirement contributions, but I finally really admitted it to myself in cold, hard numbers. Or I tried to, at least. It’s pretty hard to find a “number” that you’re supposed to have by a certain age so that you can tell if you’re on track for retirement or not. But, I think it’s safe to say that I’m behind. Waaay behind. I’m 40, and I don’t even have $40,000 set aside yet for retirement.

I did start contributing young (at age 19 or 20) but I followed up that good move with a laundry list of dumb things. I withdrew money from a 401k and spent it. I didn’t insist that my then-husband contribute to retirement also, so when we divorced the small amount that I hadn’t already done dumb things with was cut in half. I didn’t contribute at all for years after that. Instead, I spent down my regular savings while I was unemployed. Meanwhile, my little bit of retirement money was invested in kind of a bad fund that I kept dumping money into when I did resume contributions. And we all know what the market has been like lately.

One good move minus several stupid moves plus down markets equals not much money set aside for retirement.

So what am I doing to improve the situation?

I decided that I wasn’t going to let panic or avoidance get in the way. All the retirement rules of thumb that I found online suggested that I needed a whole heck of a lot of money to retire. Seeing all those zeros was scary, but then I got a grip.

Everyone’s situation is individual. Estimators can only give you estimates. (Dinkytown has a nice retirement calculator if you’re looking for one.) Sure, I do want a retirement where we can travel the world on a whim and be philanthropists. And I want us to retire early. So that’s what I’m really aiming for. But first we have to take care of necessities, so…

I set a minimum target number for myself: I want to have $300,000 set aside for retirement as soon as possible. I got that number by figuring up my minimum annual expenses and then dividing the total by 4%, which would be my conservative estimated annual return. Since I could live on $12,000 per year (or less) if I had to, $12,000 x .04 gives me $300,000. This would mean that I could spend $12,000 per year without touching the principal balance of $300,000. Unfortunately, this scenario still pretty much leaves me counting on the government for health insurance (or on Social Security to pay for health insurance.) Since I don’t trust the government or the prospect of Social Security, that’s bad, but I have to start somewhere. So $300,000 it is as an initial goal.

Reducing expenses and expenditures. I’ve been working on reducing my fixed expenses as much as possible and just spending less in general. Throw a paid-for home into the mix, and my required annual expenses will drop even further. I figure the fewer expenses I have, the less money I’ll require. Health insurance and other medical-related expenses are the biggest potential wrench that I can see.

Increasing income and becoming informed. I’ve been working on increasing my income while decreasing my spending. If I make more money but spend even less, I’ll have more to contribute to retirement and the house payoff. My husband has been doing the same. I’ve also been learning about investing so that I can hopefully avoid making the kinds of (uninformed) mistakes that I made in the past.

Increasing contributions. Finally, I’ve increased my retirement contributions dramatically. They are now at 30% of gross, but need to be even higher. I’ll continue to increase that percentage gradually, a few percent at a time until I’ve reached the maximum allowed at this time for my situation. ($15,500 in a 401k + $5,000 in an IRA.) I’ll also need to save outside of traditional retirement vehicles for retirement.

Of course my husband looked at his retirement situation as well, and what’s needed. He is in better shape than me as far as that goes, but he’s also a little older than me so he has been increasing his contributions as well. Together I think we can get it done.

The most important part of this experience was actually LOOKING at the situation and making changes NOW without panicking. (Now is always the best time to make a change.) It’s too easy to avoid thinking about things otherwise. And too dangerous, since the distant future will be here before we know it.

Adam commented on this Get Rich Slowly post, saying:

“Can’t make it to the end of the month” is just a euphemism for people who decided to have children, buy a car, mortgage a house, take out student loans and more without putting much thought into income levels and expenditures.

Since I have rather vivid memories of stressing about making it to the end of the month, every month, back when my ex-husband & I got married in 1989, reading that comment offended me. After all, we didn’t have children, a house, or student loans, and we put a LOT of thought into income levels and expenditures. (That’s what happens when your checking account constantly hovers around zero and you’re debating hard in the grocery store between toilet paper and peanut butter — peanut butter that you don’t even like.) We did have two cars & associated payments though.

I decided to dig through old paperwork to see if I could reconstruct 1989 financially to see if what I remembered matched reality. Since we got paid weekly, I broke all income and expenses down into weekly amounts to make it easier to figure. Bills that only occurred monthly were multiplied by 12 and then divided by 52 to get the weekly amounts.

Here’s what I found:

GROSS COMBINED INCOME - APPROX. $433.62 TOTAL PER WEEK
We were both employed and grossed $22,548.38 total for the year. We did not receive health insurance from our jobs. (Me because I worked one hour short of being considered full-time, and him because he worked for a small business that did not offer it.) Note that this was when minimum wage was $3.35 per hour, so we actually had pretty good jobs. We also both went to school full time.

EXPENSES - $432.04 TOTAL PER WEEK
1 bedroom apt in a bad neighborhood (water & trash included) - $84.23 wk
Electricity - $25.38 wk
Car payment #1 - $36.32 wk
Car payment #2 - $43.38 wk
Car insurance* - $41.54 wk
Car registrations - $5.38 wk
Gasoline* - $18.46 wk
Parking* - $4.56 wk
Groceries - $10 wk (yes, really $10 a week)
Laundry* - $1 wk
Haircuts* - $1.15 wk
Telephone* - $4.15 wk
Student health insurance - $19.38 wk
Pets* - $1.50 wk
Spending money (for lunches, snacks, and splurges) - $10 wk
Books at university - $11.54 wk
Charity - $2.02 wk
Medical (copays & medication) - $2.64 wk
Gifts* (birthdays and Christmas for 13 people) - $5.00 wk
Credit card payments - $23.08 wk
Federal taxes - $38.15 wk
State taxes - $5.46 wk
401k contributions - $4.92 wk
Social security taxes withheld - $32.80 wk

*Amounts with asterisks are estimated to the best of my memory since I could not find records for them.

What did this mean?
In theory we should have had an extra $1.58 per week, as long as we didn’t need to buy anything unexpected such as supplies required (but not reimbursed) by work or frivolous things like, you know, shoes, underwear or eyeglasses. We didn’t really buy ANY other clothing, relying instead on what we happened to get as gifts. We also did not go to any sort of entertainment that wasn’t free or paid for by relatives or work. At all. Still, even the tiniest unplanned expense became a major problem.

Analyzing this further, our issues were three-fold. One, we were spending way too much money on cars & transportation-related items, so it appears that Adam was right in that regard. 35% of our gross income each week went to maintain, pay for, and use our cars. That’s just way too high. We could have managed with just one paid-for car instead and been somewhat better off, IF we had had the $500-$800 to pay for a beater upfront. Which we did not. We had zero savings, and would have been in trouble if that beater broke down. I confess though that it never occurred to me at the time that our cars were too expensive, so I didn’t even go down this line of thought then. If I had, I probably would have changed things somehow.

Two, we were already in trouble with credit cards, although that $23.08 a week was significantly over the minimum payment. My ex-husband brought about $700 in debt to the marriage, and I brought about $100, so we were trying to pay them off as quickly as we could. We weren’t successful at that.

Three, although our apartment was inexpensive, the associated electric bill was huge due to poor construction. At the time though I didn’t realize that the bill was out of line. I’d never had utilities before, so thought that amount was normal for many years. (I now pay significantly less than that monthly, almost 20 years later, for a house that is more than 4 times the size.) This is a sad social issue that seems to be completely overlooked. The people who can least afford to pay high utility bills often have little choice but to live in a poorly constructed apartment or house because that’s all they can afford. But because the buildings are poorly constructed, they have thin walls, little insulation, slapped on windows & doors that leak like a sieve, and ancient and inefficient (or sometimes non-existent or dangerous) AC units & heaters. For this you get to live in an unsafe, crime and blight-ridden neighborhood without basic things like real grocery stores. You get told that you ‘deserve it’ and should just ‘get a real job’, ‘plan better’ or ‘quit buying crap that you don’t need’. Clearly this is a sore point with me.

Oh, and our budget with the extra $1.58 a week? We actually kept to it. We made it work. It completely sucked, but we made it work. (We didn’t get into trouble with budgeting until later.) It’s sad to realize now though how much better off we might have been if we hadn’t bought those cars. But you can’t see the future. I bought mine when I was living at home. Since it was pretty much my only expense, I could easily afford it. But when things changed, I didn’t realize that maybe the cars should be changed too. Unfortunately I think most of us learn by experience, instead of by really understanding the far-reaching implications of our immediate decisions before we make them. But at least we learn!