Spilled Milk

Accidents happen. Sometimes I just wish they would happen to someone else... 

Like the spilled milk in my car - all over the seat and floor - on a nearly 90-degree summer day. The lid must have popped off, and sudden braking sent it flying. Ooops!  I tried to soak it up with paper towel, and then I used soapy water to blot it up. I used a carpet cleaning solution (with an odor neutralizer!) and a wet/dry vacuum to suck it up. 

But my car still smells, like spoiled milk.

And although we're trying to pay debt off as quickly as possible, I'm not going to drive around in a smelly car for the next six months. I could rent a commercial upholstery cleaner and see if that'll take care of it, but sometimes it's worth it to pay a professional. 

I called our local automotive detailing store to get prices. They want $60 to shampoo the interior carpets/seats, or $100 to detail the interior. I had my old car detailed there (right before I sold it!), and I remember thinking that it was the best $100 I'd ever spent - and wondering why I hadn't done it before then. 

I think the $60 will be well worth it. 

Estimating Taxes on Self-Employment Income

I had previously mentioned that we have some self-employment income coming in soon, and that we would either have to pay estimated quarterly income tax on it or we would have to adjust our withholdings from our "day jobs" to cover the additional income tax. 

While I love getting extra money from little side jobs, it really sucks to crunch the numbers and see how little is left over. On a $4500 check, we will end up paying close to 40% in taxes! 

We're in the 25% marginal tax bracket, so there's an instant $1125 to the IRS.  It's self-employment income, which means we have to pay an additional 15.3% (12.4% is to Social Security, and 2.9% is for Medicare). And of course we also have to pay state income tax of 4.35%  - so 44.65% in taxes, right off the top! 

There are a few small deductions (when we go to file our federal tax return, the self-employment tax deduction allows us to subtract 1/2 of the 15.3%) and multipliers used in the forms (you only pay the 15.3% on 92.35% of the net income), so the actual taxes paid ends up being slightly less.  

So out of the $4500 check, we pay: 

- Federal Income Tax:  $1125

- Social Security: $515

- Medicare: $121

- State Income Tax: $196

Subtotal, Taxes: $1957

Minus 1/2 SE deduction @ 25% tax rate: $80 [0.25*(0.5*($515+$121))]

Total, Taxes: $1877

We've sometimes been able to take the home office deduction as well, and that would allow us to save an additional $150 if we can take it this year. Even so, we would end up paying $1727! It's frustrating to see so much of our hard-earned money just disappear! 

Anyways, I used the $1877 to calculate how much extra we should have withheld from our normal paychecks for the rest of the year. I ran through the math a few weeks ago, knowing that it would be effective June-December (so seven months).  $1877 / 7 = $268/mo.  We set up an additional $25/mo to go to the State, and the remainder to go to the Feds. 

Debt Tracking

I've been actively tracking progress on our credit card debt for over two years, since February 2007. At that time, we had $41,755 in personal credit card debt, plus an additional $4738 in business debt (that business has since "failed", and we have assumed that debt).

Two years and three months later, the total credit card debt is down to $33,203. In over two years of this, we've only paid off about $13k! But I guess, to be fair, we've also charged a LOT during that same time frame (as evidenced by several distinct spikes in the chart!).

• The first spike was when we assumed the bad business debt, in January 2008.
• The big spike, in July 2008, was when we spent roughly $7000 for some electronics.
• There are a few smaller spikes, for the purchase of new computers and for a couple of vacations.

During the first seven months of tracking, the total debt didn't really change - despite making monthly minimum payments of nearly $1000/mo! We were paying off only about $200/mo in principal, a rate that would have taken us almost 20 years to pay the credit cards off.

June Grocery Budget

Aside from restaurants, groceries have been the biggest source of unnecessary spending. For just the two of us, our typical weekly grocery bill was $100-125, depending on how many personal care items (shampoo, toothpaste, etc.) we threw in the cart. 

We'd have a good mix of food, from healthy produce to convenience items and everything in between. We tended to buy name brands for many items - soda, cake mix, lunch meat, chips, cereal, cleaning products. We had a few things that we would only buy the premium brand - ice cream, hot dogs. And then we'd buy store-brand for other things - frozen vegetables, flour & sugar, bread. 

I noticed that certain grocery stores (especially the local chains or smaller box stores, like Kroger) tended to be more expensive. If I did a full week's worth of shopping, the bill at the checkout would be $25-50 more. Many of their items, even with a sale price, were more expensive than the everyday price at some of the other (bigger) grocery stores in the area.

I tried several months ago to reduce the weekly grocery budget to $50, and I failed miserably. I could make it for two weeks or so spending only $50 a week on groceries, but then we'd have run out of all the useful food in the house, and I would have to stock up on essentials (noodles, baking stuff, canned foods and sauces), produce, and/or meats - so we'd end up with a $150 or $200 grocery bill, and it would all even out to around $100/wk. 

It took some practice, but I've gotten better about balancing out the grocery bill. I peruse the weekly sales circulars looking for good deals, I buy a newspaper (or two) on Sundays for coupons, and I've cut out many of the convenience foods (prepackaged portions of chips & cookies, baby carrots, etc). I've also had to get creative with some dinner meals.... 

For the month of June we're actually going to come in under the grocery budget. I'm still shooting for an average of $50/week, so $200/mo. As of today, we're at $146.70.  I'll probably go pick up a few things this weekend (maybe $30 worth?), but it'll definitely be less than $200! 

Budget for July: FAIL

I had every intention of posting my full budget for July on here, and then tracking how it compares to what we actually spent. 

The only problem, the July budget is completely screwed up.  It's a 3-paycheck month, so we have extra income. We're also expecting a substantial $4500 check for self-employment, but we don't know if we'll receive it in a few days or a few weeks. Together, this will amount to nearly $5900 in extra income for the upcoming month (that is, above and beyond what we normally take home).

But we're also planning to pay down a huge chunk of credit card debt, just over $6200, in preparation for the looming 150% increase in minimum payments on Chase. And I'd like to maintain a $5000 balance in our emergency fund, which means we need to set aside an extra $3000 by mid-August, to cover fall tuition and the upcoming house repair. 

 And because we decided to use the entire $4500 check now, instead of setting aside some for income taxes,  we had to modify our income tax withholdings at work so that they're taking out extra. If we didn't, we would end up owing nearly $2000 next April, which would kick us into the category where we'd also have to pay interest and penalties for underpayment!  Instead, I estimated what we should pay in estimated quarterlies, and just divided that by the number of months left in the year. The end result will be the same, come tax time, but for the rest of the year our take-home pay will be $275-300/mo less. 

July is going to be an unusual month for budgeting. Lots of extra money coming in, huge extra payments towards debt/savings, and a reduction in normal income. Dollar-wise, I think it all works out. In terms of cash-flow, I have no clue how it will shake out. There's plenty to take care of all the essential bills and minimum payments this month, I'm just not sure when all the extra payments will actually be made. 

So instead of posting an itemized budget, I'm just going to post the targets for the month of the July:

• Reduce credit card balance from $32,747 (as of 6/24) to $25,780
• Pay off completely all but two largest credit cards
• Increase emergency fund to $8000 ($3000 of which will be short-term savings)

Redoing Budgets

In order to come up with enough money to cover the extra $525/mo in increased minimum credit card payments to Chase, we sat down and reviewed our finances. We evaluated monthly expenditures, paring things back where possible. Overall, we didn't find much that we were willing to eliminate, so the majority will come from deferring money that would have gone to the emergency fund or other credit cards and instead paying it to Chase. 

We decided to cancel an insurance policy, which will save us $356/year. The policy was up for renewal anyway, so we are going to just let it lapse. Otherwise, we would have had to pay half of it by the end of next week. 

We also decided to put a 90-day hold on our NetFlix account. It's only $9.53/mo, but every little bit helps. I thought about canceling it altogether, but I love being able to stream movies at home - and it's far cheaper than going out for a date. I'm hoping that 90-days will give us enough time to get a grip on the bills, and then decide whether we want to keep it or cancel it. In the interim, we don't have to pay the monthly fee, and all the movies we've added to the queue won't be deleted! 

The biggest decision was to pay off several credit cards with smaller balances (and higher interest rates, ranging from 13-20%). In total, we have decided to pay off three credit cards with a combined total of $6204. The money to do this is going to come from a few different sources: 

• $4500, from some self employment work ($2000 of this was supposed to go to the IRS in September for estimated quarterly income taxes, but we have instead modified our withholdings for the rest of the year, so that take-home pay will be around $300/mo less than normal)
• $1150 in reimbursement checks (from a medical flex spending account, the overage on the mortgage escrow account, and for some items we purchased for someone else) that should be coming any day
• $150, for selling some older electronic items that we no longer need
• $400, from the emergency fund

Once these are paid off (by the end of July), we'll be left with only two credit cards - both with a large outstanding balance but with low fixed interest rates. Paying these smaller cards off won't have much impact on monthly payments (roughly $150/mo, which will be going right back to Chase now), but I'm hoping it'll give us extra momentum to keep going with the debt payoff.  

Bad news from Chase

Waiting in today's mail was an "Important Change in Terms" notice from Chase Bank, addressed to my husband. The contents: 

We're sending you this notice to advise you of some changes to your credit card account. These changes will take place automatically and will be effective with your August 2009 statement.

Your minimum payment due will increase from 2% to 5% of the ending balance on your monthly statement but will not be less than $30 unless your total balance is below $30. The principal factors we considered in increasing the minimum payment due include the current APRs and revolving balances associated with your account. 

There was nothing on there about being able to "opt out", and the Chase customer service representatives are saying that affected cardholders do not have the option to reject the change in terms. Either pay it off now, close the card and have the 5% minimum payment, or keep the card open and have a 5% minimum payment. 

We have several accounts with Chase, and the particular credit card affected by this change currently has a balance of $17,543 at 5.3% APR. The current minimum monthly payment on this card alone is $358 - the new monthly payment will be $877, an increase of $525 each month! 

Thanks to the emergency fund, and some serious budgeting over the past year, we should be able to absorb the increased payment and stay current on everything as well. Unfortunately, it means that some of our other credit cards, with much higher APRs, will be paid off at a significantly slower rate. We also may need to re-evaluate some planned expenditures (including school) to decide what makes the most sense. 

Financial Goals for 2009

I like to project out estimated expenses & income, and figure out where we'll be at various points in the future. I usually just do the rough calculations on a sheet of scratch paper, or on the back of a napkin, and don't often keep 'em or track how that compares to reality. 

The last time that I set written financial goals was in October 2008, and that's when I established the following list of "goals" that I hoped to achieve by the end of 2009: 

1. Contribute $200/month to emergency fund 
2. Achieve balance of $5000 in emergency fund by end of 2009 (current balance = $1900) 
3. Eliminate credit card debt by end of 2009 (current balance = $12590)
4. Pay off Perkins student loan (current balance = $1626)
5. Pay down Stafford student loan to <$25k (current balance = $25502)

Right now it's hard to say whether I'll be able to accomplish all of them. I still think it's possible, but it's going to be a bit tougher than I'd originally anticipated. We had a critical home repair in January that cost $1700, and was paid for using the emergency fund. My decision to go back to school (made after I wrote those goals) will also set us back by about $2500 this year (for tuition, textbooks & fees). 

Because of the economic climate, I've been contributing far more than $200/mo into the emergency fund, so that the current balance is already over $5000. I've also already taken care of #5 (just barely!). 

I'll definitely be able to pay off the credit card debt referenced in #3, but I'll possibly have to make a decision whether to wipe out the emergency fund to do so. Hopefully I'll be able to earn some extra money working overtime, and my company will give a holiday bonus at the end of the year. 

Salary Freeze

My husband's employer just sent out a company-wide email announcing
that they would be enacting a pay freeze, effective immediately.

He usually gets a 3-4% raise every year (which covers cost-of-living
increase and a small merit raise), which would have amounted to about
$100/month after taxes. We had expected that the raise would be
smaller than usual, perhaps only 2%, but we hadn't expected the freeze.

In the past we both typically find out what our raises are around
Thanksgiving, and we see the increased checks after the first of the
year.

Although we don't usually re-do our budget until the end of December,
we had already incorporated the anticipated increase into plans for
next year. We know that we'll have some major out-of-pocket expenses
for an elective medical procedure (LASIK vision correction), so now we
will need to re-evaluate whether to delay that surgery or make other
changes to our budget to compensate.

I wonder what my company will do about raises this year...

Bought an iPhone 3GS

It was a bit of hemming & hawing, but we did end up buying a 32GB iPhone 3GS. I thought we should only get a 16GB, to save the extra $100, but by Saturday evening the local Apple store had sold out of everything else... so that made the decision on which model to get pretty easy. The total came to $316 with tax. 

The 3GS is going to replace our original iPhone (which runs on Edge network), so we'll be able to resell that for around $100. We also have another older smartphone which should sell for around $50. 

So total cost, $166. The monthly bill will also increase by $10/mo, since the data plan that went with the original iPhone was only $20/mo, but 3G & 3GS iPhone data plans are now running $30/mo. 

Escrow Analysis

We just received our annual Escrow Analysis from the mortgage company, where they re-calculate how much we need to set aside in escrow for property taxes & insurance for the upcoming year. The total amount estimated came to $3643.31, for a required monthly escrow payment of $303.61, a reduction of almost $60/mo.

There is some regulation that only allows them to keep a "cushion" of 2 months worth of escrow (so when everything is paid, they would still have an extra $607.22 - which could be used in case property taxes or homeowners insurance premiums increase). The cushion in our account exceeds that amount, so they also notified us that we'll be getting a refund check for $145 next month. 

Because our property values have declined so much over the past year and a half, our taxable value has actually been dropping. We received our assessed value statement from the City, and they estimated that, as of January, our property had gone down by nearly $14,000 from the same time last year.... and it has continued to decline since then. 

The plus side is that this means our property taxes have gone down too. For the upcoming year, our property taxes will be almost $250 less than what we paid this past year. This decrease in taxes was not reflected in the latest escrow analysis, so I expect that we'll get a refund of $250 next summer. 

Upcoming Expenses

The next six weeks are going to have a few major expenses. I've known about some for awhile, and I've tried to budget for them, but I suspect there will be a few indulgent purchases too.

The boring stuff: 

There's an insurance bill sitting on the kitchen table, waiting to be paid, for almost $200. I think we have another two weeks before it's technically due, but I really ought to write a check and send it out. 

And we have a home repair that needs to be taken care of. It's been an issue for the past year, and I've pushed it off about as long as I can. I had a few estimates done last fall, and it was going to run about $1000. I'm not sure if it'll still be that much, if we'll be able to get a discounted rate because of the economy, or if it'll cost more because it's the "peak" season. I'm going to call around after the 4th of July to get updated estimates, and then we'll hopefully get it taken care of later next month. 

And now for the fun stuff: 

The latest Apple iPhone 3GS comes out tomorrow, and I'm pretty sure that we're going to upgrade and get one. It'll be a couple hundred dollars up front ($199 + tax + AT&T activation fee), plus our monthly cell phone bill will go up. And of course there will be the requisite accessory purchases - a new cell phone case, a clear screen protector, some spiffy applications from the iTunes store. 

I'm taking a mini-vacation next month with some friends, and it'll be at least $100. I haven't decided whether to drive or take public transit, and I'm sure we'll try to keep it cheap for dining and entertainment, but the absolute bare-bones cost would be $100. 

Household Bills - June 09

This month's household bills have all arrived, here are the numbers:

Mortgage #1: $1321.16
Mortgage #2: $ 229.50
Electricity: $ 56.67
Gas: $ 53.79
Cable: $ 105.18
Cell Phone: $ 127.08

TOTAL: $1893.38

Sloppy Spending

I sat down with the intent of totaling up everything that we've spent money on this month.

The mortgage, car and student loan payments are fixed amounts and are easy to budget for. Utilities fluctuate a lot by season, but it's also fairly easy to predict. Groceries and gas are even more variable, but I've always just taken the viewpoint that whatever it is, it is. If I go to Walmart and the grocery bill is *gulp* $250, oh well. And if I only spend $30 on groceries for another week, excellent. It sort of balances out in the long-term anyways.

Same with automotive gas - it doesn't matter whether it's $1.50/gal or $4.25/gal, I still need to drive to work everyday. I don't have the option of public transit (there isn't any), and I can't bike or walk that far. So last summer, when gas prices were at an all-time high, we were spending close to $500/mo on gas. We tried to cut back on groceries, and we stopped leisure drives, but mostly we reallocated the money that was supposed to go to credit cards, and used it to cover the increased cost of fuel.

I looked through the joint checking online account log, finding very few charges. We also have separate (individual) checking accounts, so I looked through my account transactions. Then I looked through my husband's checking account. Found more charges, but definitely not everything - I could only find $47.90 worth of grocery bills since June 1st, and I know I've spent more than that. Likewise with gas.

We also each have a few rewards credit cards, and we tend to use them (and then pay it off) for month-to-month expenses, just to capture the extra rewards points back. I looked through the statements for each of our accounts, and found more charges.

So far the totals are at a bit over $200 in automotive gas, $75 in groceries, and almost $100 in lunches out... since June 1st! The first two don't worry me (gas was about what I thought it would be, groceries were slightly less than I expected), but I hadn't realized how much we've wasted on eating lunch at restaurants while at work.

Save Up or Pay Down?

I listen to Dave Ramsey and Suze Orman, but I don't necessarily agree with everything they say.

Dave Ramsey recommends creating a $1000 baby emergency fund, and then paying off debts smallest to largest (based on amount owed). Suze Orman recommends paying off debts in the order of highest interest rate, regardless of principal balance. She used to say to focus on paying down debts aggressively, then to save up an emergency fund after the debts are paid off - but she has changed her advice and now recommends only paying the minimum on credit cards and saving the rest for emergencies (until you have 8 months worth of living expenses saved up).

Intellectually, I have a really hard time with Dave Ramsey's advice. If I have one credit card with a 20% interest rate, and another with a fixed 6% interest rate, I'm going to pay a lot more in interest by paying off the 6% card first. I know that he says you'll pay it off quickly enough that it won't matter, but the reality is that it does add up - especially if the balance owed is very high, to the point that it would take a year or two (or more!) to pay it in full. I get his point, that it's a psychological feel-good thing, but I can't bring myself to follow his advice. The other problem is that $1000 for an emergency fund doesn't get very far - we've had a few major home repairs that have cost far more than that, and were things that were truly urgent and necessary (heat & plumbing).

But I don't like Suze's advice either. Eight months of living expenses is a LOT of money, even for someone sitting in a very secure financial situation. With absolutely no consumer debt, and a paid-off mortgage, that would still take at least a few months to save up that much money. And for someone who owes a lot of money, it would take a couple of years (or more!) to save that much up, meanwhile you'd be paying a ton in interest.

I'll admit that the credit crunch and recession has made me a little gun-shy, and I did shift my focus from aggressive debt payoff to a blend of debt payoff & saving. I had been paying off about $1000/mo on one of the credit cards, and practically nothing into an emergency fund, but when the credit companies started slashing credit limits and chasing balances, I decided to put $500/mo towards the card and another $500/mo in a savings account.

I've got $5000 saved in my emergency fund, enough to make me feel comfortable. I just don't know whether I should continue my 50/50 strategy, or if I should hold the emergency fund at $5000 and refocus on paying down the credit card debts.

Any advice?

Budget Categories

I'm still deciding whether to post my full monthly budget, but here are the categories:

Living Expenses
Mortgage
Electric
Gas
Cable/Internet
Phone
Groceries
Sewer*
Homeowners Association Fees*

Auto Expenses
Car loan #1
Car loan #2
Gas
Maintenance & Repairs
Auto Insurance*

Miscellaneous
Home Repairs & Maintenance
Medical Copays & Expenses
Vet Expenses
Entertainment
Dining Out
Clothing
Tuition & Textbooks
Gifts & Charitable Giving
Discretionary Spending

Debt Repayment
Capital One
Chase #1
Chase #2
Discover
Bank of America
Direct Student Loan #1
Direct Student Loan #2
Perkins Student Loan #1*
Perkins Student Loan #2*

3-paycheck month

Like many others, I get paid on a biweekly basis - every other Friday. My paycheck tends to vary quite a bit, based on how many hours I work, so I estimate what I'll make and then set the upcoming month's budget accordingly.

Since there are 52 weeks in a year (so 26 pay periods), but only 12 months (with the typical month having only 2 pay periods), twice a year I get a third paycheck. This year, the third check happens to be in July, so that'll be a nice chunk of extra money.

I'd really love to take that extra money and go on a vacation, or use it to help pay down credit card debt, but I've got a $2000 college tuition bill that will be due in August... the extra check won't cover the tuition, but it will make a substantial dent.

Initially I'd looked into getting student loans to pay for tuition, but the interest rate on federal Direct graduate student loans sucks. It's at 6.8%, and is fixed at that for a few more years (it used to be that student loan interest rates would reset every July 1st, but the feds changed that a few years ago). Since the interest rates on my credit card balances are generally lower than that (averaging around 6%, thanks to many low-APR balance transfer offers over the past few years), it doesn't make sense to take out student loans just so that the credit cards can be paid off a few months sooner (when in the end, I'd end up paying slightly more in accumulated interest, plus origination fees for the loan).

Debt Status, as of 6/10/09

As of today, here's where we stand:

$33,200.    - credit card balance (APRs ranging from 5.7 - 19.99%)

$51,940.     - student loans (APRs ranging from 3.125 - 5%)

$11,425.      - auto loan (APR at 5.94%)

$ 7,340.      - auto loan (APR at 2.99%)

$165,760.   - mortgage 

-----------

$269,665.   - TOTAL debt

How It Began

It all started so innocently. A $2200 student loan for my first year of college. A $3300 student loan the following year. Then a $5500 student loan, and another, and another. 

But that's not where the trouble began. Sure, I graduated with nearly $30,000 in student loans, but the payments were quite manageable: less than $200/month. 

The real problem began with a boy. A certain boy, who later became my husband. He came with some baggage, a nearly $3000 personal loan. And then he bought me a sparkly diamond ring, on a jewelry store charge. And then there was the wedding. And the honeymoon. And expensive toys, hobbies, and vacations... all paid for with student loans, and credit cards. Our meager income couldn't sustain the lifestyles that we'd both grown up in, and we figured that we would graduate making more than enough to pay for it all. 

And I suppose we would have, if we'd stop spending. But we needed a brand-new $25,000 vehicle. And a moderately-priced "starter" home in a nice suburb. A few more toys, a couple more vacations. Another new vehicle. And another. 

And that's how we got where we are today.