Budget Friday: Submission 13

Budget Friday: Submission 13

Hey everyone! Welcome back to another episode of Budget Friday. This is seriously my favorite part about personal finance, the chance to help others get on a budget, get out of debt and reach their financial goals. I love showing the power of a well-thought out budget plan, and the long term results they can have.

Today’s budget is an anonymous submission. We’ll call her Jessie.

Background: Jessie reached out to me for some help setting up a clear and concise budget for her family. Her and her husband are in their mid-thirties, and they have a young daughter and infant son at home. I said I’d be happy to help, and asked for her info to get started. Check it out below:

Assets:

  1. Rental home + 14 acres – $50,000
  2. Emergency Fund – $500
  3. Roth IRA – $22,000
  4. Fire Dept. Retirement Fund – $5,000
  5. 23 acres our home is on – paid for, free and clear (family land)
  6. 1,000 square foot home – paid for, free and clear (family home)
  7. Several trucks and trailers for my husband’s side job of hauling, etc. – paid for, free and clear
  8. Stud horse worth several thousand – paid for free and clear – earns us several hundred dollars per breeding when it is successful
  9. Small herd of feeder calves – $5,000

Debts (Balances):

  1. Roof Repair Loan – $19,000
  2. 5th Wheel Travel Trailer – $25,000 at 6.5%
  3. Rental Home Mortgage – $50,000 at 5%

Priorities:

  1. Finish improving our two places to a clean and functional level
  2. Take a few short vacations every year with our children (camping, beach, three day weekends, that type thing)
  3. Have the reserves to handle the unexpected expenses that come with owning land, animals, and used vehicles
  4. Give to those around us in need

Goals:

  1. Pay off our three major debts before our second and last child starts school in 2019
  2. Pour a concrete floor for my husband’s shop in the next six months, as he’s a welder and can make extra income with this one improvement ($2,500)
  3. Finish improving our two places to a clean and functional level
  4. Sell Travel Trailer

Here is her budget:

 

OLD NEW Comments
Total Income  $ 6,000.00  $   6,000.00 Well done!
Total Expenses  $ 3,758.00  $   3,907.00
Projected Ending Balance  $ 2,242.00  $   2,161.00
Income
Income 1  $ 2,600.00  $   2,600.00
Income 2  $ 2,800.00  $   2,800.00
Rental Income  $     600.00  $       600.00
Total Income  $ 6,000.00  $   6,000.00
Donations
Church
Other  $       100.00 I added in some giving to start working toward your Priority #4. You can increase as you feel comfortable.
Total Donations  $              –    $       100.00
Bills
Rental Mortgage  $     506.00  $       506.00
Electric  $     175.00  $       100.00 As always, I recommend working on the electric bill. This such as hang drying clothing, tempering use of A/C units but shutting up the house during hot days, and opening up windows an such at night.
Natural Gas  $     100.00  $       100.00
Cell Phone  $     123.00  $         40.00 You indicated you will be switching to Republic Wireless, and that one of your phone lines is already $10/month. If the second line is the $25 plan, with taxes, should land you around $40.
Phone / Internet  $       63.00  $         45.00 You indicated this is required as you don’t have cell phone reception where you live. Though, with Republic Wireless, all you need is internet so….should be able to cut this down to internet only soon.
Car Insurance  $     150.00  $       100.00 You mentioned a lot of vehicles, but you can probably only drive two at a time. No reason to insure the whole lot of them. I recommend calling Farmers or Geico, getting liability on them along with fire/theft/towing. Should save you some money.
Childcare  $     265.00  $       265.00 This is VERY inexpensive, nice work!
Lawn Services  $     100.00  $                –   You mentioned having 22 acres. If this is the cost of a farm hand or something, then ok. But if this is just for personal lawn care, I will challenge this and say that you should be planning on doing this yourself. You bought the land and house to enjoy, and part of that is yard work. You are doing VERY WELL, and this can help get you ahead quicker.
House Cleaning  $       73.00  $                –   ^ see note above. I recommend saving your $73 and letting the house get a little messy every now and then.
Travel Trailer Insurance  $       60.00  $         60.00 Hoping these will go away. See explanation below
Travel Trailer Loan  $     303.00  $       303.00 Hoping these will go away. See explanation below
Roof Repair Loan $      300.00 $        300.00
Total Bills  $ 2,218.00  $   1,819.00
Necessities
Food  $     400.00  $       400.00 This is pretty good for a family of 4. Though you mentioned half of this is eating out. So I recommend keeping the budget at $400, but choosing other options rather than eating out.
Gas  $     800.00  $       800.00
Date  $         80.00 You are married, so go on dates. This is non-negotiable. No plan will ever work without some R&R time 🙂
Supplies (kids, etc.)  $     140.00  $       140.00
Horse Feed  $     200.00  $       200.00
Total Necessities  $ 1,540.00  $   1,620.00
Savings Buckets
Christmas/Holiday  $         50.00 I didn’t see gift savings in here, so I’m building it in. I recommend automating $50 per month to a savings account to ensure it’s always there.
Other Gifts  $         50.00 ^ see above
Vacation  $       200.00 This is to work toward priority #2. This should be good for some fun weekend trips to enjoy. If you’re up to it, you can even supplement this with some free travel.
Total Other  $              –    $       300.00
Total Expenses  $ 3,758.00  $   3,839.00

Well that was fun. Now let’s lay out the game plan!

Initial Thoughts

Some details that aren’t in here, but that are very important. You are contributing to the match on your 401k. SWEET! Your husband also has a government pension. BOOM! And a “drop plan” with a guaranteed $500,000 after 30 total years of service. WOOP! You are also fully covered with health insurance through work. That’s GREAT!

You have also paid off your mortgage in your mid-thirties. That is pretty incredible. You’re off to a great start, so let’s build a roadmap to a great finish.

Debt Snowball

As many know, I’m a fan of the debt snowball. But sometimes this method doesn’t make sense, so I’m going to approach these debts based on what they are.

  1. 5th Wheel Travel Trailer – $25,000 at 6.5%

I know that you’re worried about owing money on this travel trailer if you sell it, but let’s break down the bottom line here. Say you sell it for $20,000 and you owe $5,000 left on it. Bummer. BUT, if you keep it, it will continue to drop in value, AND you will continue to pay interest on it. DOUBLE LOSS! It could easily drop in value MORE than $5,000, not to mention the interest paid. So I recommend killing it now and taking the loss before it gets much worse! Put it up for sale TOMORROW, and cut this ball and chain off. AND, don’t forget an additional $60 per month savings of NOT having to insure it anymore either. YAY! TRIPLE WIN!

  1. Roof Repair Loan – $19,000

This loan needs to GO! But luckily, you have $2161 per month to throw at this thing! Which means this nuisance will be gone in approximately 9 MONTHS! BOOM! Add an additional $363 a month once you sell the trailer, and this thing will be gone in a flash!

  1. Rental Home Mortgage – $50,000 at 5%

Your rental home is an asset, and the interest rate isn’t too bad. I would say you can tackle this quickly if you want, but if you’d rather max out your investing accounts, I wouldn’t fault you for it. For funsies, let’s see how long it would take with the additional cash from paying off the other debts. Your original snowball of $2161 + $363 from the trailer + $300 = $2824 per month! With that, you could KILL THIS LOAN in only 18 months!! Incredible!

Goals

With the debt out of the way, it’s time to tackle those awesome goals!

  1. Pay off our three major debts before our second and last child starts school in 2019

This is ABSOLUTELY POSSIBLE based on the above timeline. In fact, you could be done within 2.5 years. WOOP WOOP!

  1. Pour a concrete floor for my husband’s shop in the next six months for $2,500

You can save this cash in just over a month, so GIT R’ DONE! 🙂

  1. Finish improving our two places to a clean and functional level

Without a monetary value attached, I can’t put a timeline on this. But I recommend coming up with a list of what needs to be done, and WHEN it needs to be done by. Then you can save toward these. And once you have the rental paid off, you’ll have an additional $3,300+ per month to save. So I’d say you’re good to go!

Final Thoughts

You’ve in an amazing place. You could have TWO PAID FOR HOUSES before you are 40, have a guaranteed $500k for retirement, have already put away money in retirement accounts, and have a great income. Financially, your family is set IF you can stick to the budget above. And since you’ve already come this far, I have no doubt in my mind you can do this.

I would even recommend looking at options for early retirement if that appeals to you. With the debt out of the way, you will be saving probably over HALF your income, which puts you in a place to be able to retire in just over 10 years! Add that to your paid for rental, and you could be done by 45 if you play these cards right!

Thanks again for reaching out, and HAPPY BUDGETING!

Note: There is a Republic Wireless affiliate link in this post. I recommend them for those who are paying WAY too much on their cell phone plan. If you use the link, I am compensated for those who choose to sign up and save hundreds. As always, thank you for your support!

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Comments

  1. Sounds like this family is doing great. I’m always amazed at how much travel trailers cost. If they do use it for camping, you can buy a used pop up pretty cheap if that’s something they will use and enjoy. If you are lucky enough to have a pension eligible job, it’s tough to walk away. I doubt Jim would quit working, even if we paid off our house, until he is can take his pension. He is more than halfway there, so it would be tough to give up a guaranteed income for life.
    Kim recently posted..Field Trip FridayMy Profile

  2. Good luck on your goals, I know you will have a positive result! We were planning to pay all our debts to maybe by next year and we will keep an eye on our emergency fund.
    Kate @ Money Propeller recently posted..Friday Jet Fuel #12My Profile

  3. Is the interest rate on the roof loan more or less than the trailer loan? That would decide which gets paid off first, wouldn’t it? And is the 5% on the rental property a commercial loan? I’ve seen mortgage rates of 3.5% recently. You also didn’t mention the rental income from the property: I would be interested to know what the yield on that investment is.
    Myles Money recently posted..Credit VirginsMy Profile

    • Didn’t get all the interest rate details….but I always say pay off depreciating asset debt first! 🙂

      And the rental income is listed under the “Income” portion of the budget, it is $600

  4. One of their priorities is to have reserves sufficient to handle unexpected expenses, a.k.a. an emergency fund (EF). Their current EF is $500, which isn’t cutting it. I think a good idea would be to increase that to the equivalent of at least one month of expenses ($4K) before getting aggressive with the debt pay-off. Otherwise, they will keep going into debt to handle emergencies. Once their debt is paid off, they should increase their EF to the equivalent of at least three to six months of expenses ($12-24K).

  5. I enjoyed reading your analysis of this budget.

    The only comment I have is, the mortgage loan on the rental property is coming in at only 5% interest. That’ a pretty good rate in my book. While they only clear $94 per month that will go up substantially as the economy picks up steam over the next few years. They should be able to raise rents and increase profits.

    If it were up to me, I would not pay off the loan.

  6. Good luck with all of your plans. It looks like you are more than organized and you can get them accomplished!

  7. Looks like you’re doing really well! With a few trims in spending, and paying down your debts, you’ll be in awesome shape. The paid-for land and house are fantastic assets!
    Mrs. Frugalwoods recently posted..Put Your Life on Frugal AutopilotMy Profile

  8. You got this to the T… great job! Good luck in October =)
    Ciel Belle recently posted..September 2014 Month-End RecapMy Profile

  9. Sweet. Looks like they are actually in pretty good shape. The debts don’t look so bad when you consider their assets.
    Holly@ClubThrifty recently posted..Cash Money: $9,438 in September Income…and a Business Card GiveawayMy Profile

  10. Wow! They are doing great. Looks like they didn’t need too much help balancing their budget. 🙂
    Kayla @ Red Debted Stepchild recently posted..You Might be a Workaholic If…My Profile

  11. Pretty good on keeping the overall costs down. You can always cut, but you have also accomplished quite a bit so it shows you are able to do both so I wouldn’t be too overall worried about it. Always good to save more, no one complains about having extra money only not having enough.
    Lance @ Healthy Wealthy Income recently posted..Best Online Finance Articles This Week Oct 4 2014My Profile

  12. Great break down over there. I also think its a good thing selling the trailer as the first priority. I wish you all the best in your finances 🙂
    Amos @ Modest Money recently posted..The Hawaiian Airlines® World Elite MasterCard® ReviewMy Profile

  13. Those are some really fun assets!
    Did I miss part of this story? I didn’t see anything about wanting to sell the trailer, or a situation in which the payments on the trailer were or would be a problem. In fact, it says they want to camp more, which is presumably in the trailer.
    Taxation wise, I do not know enough about the area to comment on whether or not paying off the rental mortgage rapidly will make sense versus investing those funds elsewhere. It also doesn’t cover enough on the roof loan details.
    My suggestions:
    Pour the concrete pad, with cash flow, as you’ve said that it will increase income. That’s key.
    Dump all of the additional earnings, plus the spare cash into paying off the roof loan.
    Figure out if you can rent out your trailer, even to family or friends, and earmark that cash for paying down the roof, too. You might be able to rent it out while it is parked on your property, using Airbnb.
    Also figure out how much owning the trailer costs you. Depreciation + interest + insurance, etc, divided by how much you use it. Once you have that number, decide if you can go on family vacations that will make you happy for a lower cost. If you can, strongly consider selling it.
    Anne @ Money Propeller recently posted..Jet Setter Interview – Alicia of Financial DiffractionMy Profile

    • Great analysis Anne. Sorry I didn’t mention it, but yes, she expressed wanting to sell the trailer. I will update the post to include that detail. 🙂

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