Hi, it’s me: your Good With Money Friend. Here to discuss your financial goals.
If an old acquaintance reaches out and asks if I’d like to grab drinks, I know it’s not because they miss my sparkling personality. It’s because they just cracked open their investment statements for the first time in five years and they need to talk to someone who actually understands whut dafuq it says. It’s okay! I don’t take it personally.
The Good With Money Friend is a very valuable part of any friend ecosystem. A squad without one is like a Pokemon team without a dragon type: our rarity and fussy movesets make us only situationally useful, but there’s no getting through the Elite Four without at least one of us.
Obviously Piggy shares my genus and species. We started this blog so that we could save time by sending people a link instead of tapping it all out with our thumbs in a text!
Now, we ain’t professionals. (CFPs are lawful good. We’re chaotic good; we tell you which parts of your taxes you can cheat on. Key distinction!) But if your budget for financial advice is “here, take this six pack,” then BABY, we’re here for you! Talking to a Good With Money Friend can give you the gut-check you need when you can’t afford professional advice, or need insights from someone who knows you better than a paid professional you just met.
This week I Zoomed with two of my closest friends. We talked through their goals and identified a strategy for getting there. With their permission, I’m going to open up that process so you can see how I arrived at my conclusions.
One of our key missions at BGR is to create more Good With Money Friends, especially in historically underserved communities. So open your mind like a flower in the morning and absorb our baseless opinions! One day you, too, will be rich in grateful friends, a more stable immediate community, and/or six packs!
Meet Nick and Helen
Helen and Nick are a married couple in their early thirties.
Helen is a public school teacher. She’s the first to admit that her job is challenging and sometimes draining. Her first year of teaching was traumatically tough; but she’s in a better situation now, and finds her job very rewarding. She’d like to stay in education for the foreseeable future, and has many options to pivot within that field if she chooses (other grades, other districts, administrative roles, working for her union, etc.) without sacrificing the investments in her training and education.
Until recently, Nick had two jobs: shared workspace administrator by day, and union actor in a long-running local show by night. Unfortunately, the coronavirus pandemic hit both industries hard. The office and show closed their doors, and Nick is currently unemployed. He loved his last jobs, but having opposite schedules from his partner was never ideal. So for that and other reasons, he’s open to exploring a career change of some kind.
The personal and the financial
Now, I’m a big believer in factoring emotional shit into financial plans. Just because a plan makes sense mathematically doesn’t mean it feels right for the human person for whom it’s been designed. Say it with me now—personal finance is personal!
These two are among my dearest pals, and in my observation, these two have been Through It™️. Over the past few years they’ve survived near-death health scares, toxic workplaces, union-busting bosses, forced relocations, and grueling opposite schedules. Now add to that layoffs, pandemics, and the systemic racism that directly affects Helen’s students.
Given all the instability they’ve faced together, it’s understandable why they’re dreaming of a more stable life, but feeling pessimistic about their ability to get there. That’s why I’m going to err on the side of making a plan that’s conservative (to help them feel safe even in unlucky times) but focused (so they can quickly reach their most important goals).
About their financial goals
Nick and Helen would love to become homeowners. It’s one of their biggest financial goals. They live in one of the most expensive American cities and currently rent a two-bedroom apartment for $2,000 a month. (I just heard the thud of our Midwestern and Southern readers fainting from shock, but that’s actually a good deal at 35% below the area average.)
They’re not 100% decided on whether they want to have kids or not. Either way, the availability of permanent affordable housing will play a key part in that financial goal.
Emotionally, Helen and Nick have experienced a lot of housing instability. So the idea of owning a home is really exciting to them, but they’re not sure how they would get to a down payment when they have high monthly rent costs and debt repayments. They’ve felt shamed for not investing more toward their retirement, but they feel stretched thin and unfocused trying to make progress on everything at once.
Their biggest liability is Helen’s $45,000 in student loan debt from graduate school. Originally they’d hoped to take advantage of loan forgiveness programs for public school teachers. Sadly, professional public school saboteur and current Education Secretary Betsy DeVos has obstructed this program—possibly to a criminal extent—by rejecting 99% of applicants. California sued DeVos, and at time of writing, the case is working its way through the courts. A proposed fix is in the works, but because the situation is so uncertain, Helen and Nick feel it’s prudent to revise their plan by assuming they won’t ever get these loans forgiven.
On the plus side, all of Helen’s loans were automatically put into forbearance through at least the fall of this year as part of the government’s coronavirus response. They’ll accrue no additional interest during this time.
They have a pretty good cash emergency fund and a very low credit utilization rate.
Digging into their numbers
The purpose of this case study is to figure out how to best optimize their investments to reach their long-term financial goals. So we’re skipping all the basics of their personal budget. They’re adults; I’m sure they do their best to balance prudence with joie de vivre.
- Helen’s take home pay is about $4,400/month.
- Ongoing unemployment insurance for Nick was not considered in this plan, since its total amount and duration is so uncertain.
- Rent for their apartment is $2,000/month.
- Debts are about $750/month.
- Credit card debt is about $600 with a 16% interest rate. Its minimum payment is $35/month.
- Student Loan A is $3,500 with a 6.8% interest rate. Its minimum payment is $108/month.
- Student Loan B is $21,300 with a 6% interest rate. Its minimum payment is $248/month.
- Student Loan C is $21,800 with a 5.3% interest rate. Its minimum payment is $353/month.
- All student loans are in automatic forbearance with no accrued interest for (at least) the next three months due to the coronavirus pandemic.
- The remainder of $1,650 is enough for their other basic combined living expenses, but it feels tight.
- Pension payments are set automatically by Helen’s teacher’s union at 11% of each paycheck.
- An automatic pay raise of $250 per month will start in the fall, also thanks to her teacher’s union. She can expect a similar raise every year, though I’ve only calculated the first year’s raises, mostly just to keep my math simple.
- Cash emergency fund is around $10,000, a larger number than it used to be thanks to Nick’s unemployment insurance payouts.
Helen has two good options to monetize her free time. She could work summer school, which would net her an extra $7,000 per year. She could also invest some time in more schooling, which would automatically bump her up to a new pay tier and increase her pay by about $2,600 per year, effective immediately and permanently. (Unions are the shit, man!)
Because he was laid off from both jobs and he’s open to changing industries entirely, Nick’s options are wide open. And with all the uncertainty of the pandemic, it’s really difficult to gauge what kind of income he could expect, and how quickly. Given that, I’ve built this plan around Helen’s income only.
Yes, that’s conservative—but I see absolutely no reason to introduce additional stress into the already stressful situation of job hunting in a time of record-high unemployment. Any additional income will not change the plan—just the speed at which the plan is achieved.
Got it? Good! Here are my recommendations for reaching their financial goals.
In my armchair opinion, Nick and Helen’s best investment opportunity is pursuing the possibility of owning their own home.
Because they live in a high cost of living area with low housing inventory, quite a lot of their paycheck is tied up in a monthly $2,000 rent payment that does nothing to build wealth or stability. Depending on the property they buy, owning would potentially lower that monthly payment. And even if it didn’t, they would at least be making a similar monthly payment toward eventually owning a home, which is a classic-ass way to build wealth.
Even setting aside the material reality that humans need somewhere to live, the area they’re considering offers a very handsome potential return on investment. And owning a home an is among the most exciting and fulfilling financial goals to them, which counts for a lot!
Their second best investment opportunity is repaying their outstanding debts. Their interest rates and terms aren’t terrible, but combined, they represent a $750 monthly commitment. And that sucks. They could make much faster progress toward all their financial goals by freeing up this $750.
I recommend working on these two financial goals in tandem. If they start by strategically eliminating the three “easiest” debts, they would free up an extra $500 per month. That allows them to save toward a home down payment much more quickly, with flexibility to pivot if something in their life changes in the interim.
As for other investment opportunities, like growing retirement savings, starting a non-retirement investment account, and maximizing dedicated healthcare savings… well, those are never bad financial goals, but it’s not where I would put my money. Helen already contributes 11% of each paycheck to her teaching pension. So I’d focus on eliminating debt and/or becoming a homeowner. That will give them a lot more breathing room for greater retirement investments later.
How do we reach these financial goals?
I think it’s wise to set a savings goal of $20,000 at minimum. I chose this number because it’s a really convenient benchmark on three of their biggest potential goals.
- $20K is a 5% down payment on a $400,000 house, which is generous yet realistic for the area they live in. Yeah, they’ll be stuck paying PMI because they didn’t hit the 20% downpayment threshold… but given the high cost of rent in their area, it’d still come out in the wash.
- This number is also the size of their largest student loan debt.
- It’s also the amount most folks recommend to have saved before starting a family.
- Finally, it’s relatable. If Miz Cracker can get twenty grand, anyone can!
So how can this couple work towards new financial goals, knowing rent and student loans are working together to bust their asses to the tune of almost three grand a month? Well, here’s my step-by-step! I encouraged Nick and Helen to play around, adjusting based on unforeseen changes, and always choosing what feels emotionally right. But this is what I would do, if I were in their shoes.
Start by paying off the credit card, in full, now. You have the cash to pay it off painlessly, and cash in the bank is sitting there slowly losing value. So do it! This will also bump up your credit score—a great thing to do when you plan on buying a house. You now have $35 more every month.
Pay the $3,500 loan at 6.8% (Loan A) off in full, just before the loan forbearance is set to expire. Right now it seems that will be October, though another relief package may push that back.
Normally I’m all “rah-rah get rid of the debt right tf now.” But because it’s not accruing interest, there’s zero benefit to paying it off now as opposed to October. Smarter to hold on to it as a cash emergency fund during this turbulent time. And come October, there’s another $108 back every month.
Combine the $35 and $108 with the extra $250ish you’ll be getting every month in your paycheck from your scheduled autumn pay bump. This is what we finance nerds call a “debt snowball,” the discretionary money you free up by paying off debts ahead of schedule.
Put this extra $400ish into extra principal payments on your $21,800 loan at 5.3% (Loan C). Normally it’s best to tackle debts from highest interest rate to lowest, but since the term on this loan is shorter, your monthly payments on it are much higher—so by a narrow margin, it’s better to eliminate this one next.
Put your heads down and focus on keeping your lifestyle steady. Balance the fun spending you need to stay motivated with keeping your spending as low as you can comfortably make it. Snag interesting, low-cost credits when the opportunity presents itself to slide into that higher pay tier. Pay your credit cards in full, every month, and think of them as an extension of your emergency fund.
You will pay off Loan C in 32 months, or May of 2023. When Loan C is paid off, you should have that $400 back in play, plus the minimum payment on Loan C ($353) for a total of $750ish back in your budget. And if good luck does come your way and you’re making more money, spend the first hundo or two on a really nice romantic dinner—then roll the rest into your snowball.
Now we’ll start to switch things up a bit with these financial goals!
Continue to pay the minimum on your only outstanding loan, Loan B ($21,300 with 6%). Put your $750/mo snowball into a savings account. (Well, there are better vehicles to store it in—but that’s a question for another article. Specifically this article!)
Again, assuming the worst, you should meet your $20,000 savings goal in 26 months, or July of 2025.
As you draw up on your $20,000 goal, start monitoring the housing market. Take a first-time homebuyer class together; start trawling Zillow on the reg; go to open houses you have no real interest in, just to practice evaluating a home; watch every episode of Holmes on Homes, AKA the most legitimately helpful show in the HGTV pantheon.
When the right house presents itself, move forward with buying it. That may take two weeks, and it may take two years. Either way, hold steady and keep adding to your down payment fund. The bigger your down payment, the better the terms of your loan—so there is no reason to rush.
If circumstances change and owning a home isn’t your top priority among your financial goals anymore, you can always use that money to knock out the last outstanding debt, or start a family, or help one of you through an unexpected turn… whatever! If ya got money, ya got options.
Now is also a fine time to reevaluate your budget in general! If there are minor comforts you sacrificed to speed up your savings timeline, this is a pretty good place to discuss reinstating them.
Can they reach their financial goals faster?
All of this math is designed to assume the most conservative (shitty) forecast that still feels within the realm of the realistic. It doesn’t account for “black swan events,” like another serious illness or unprecedentedly catastrophic economic markets.
So in all likelihood, Helen and Nick will hit their financial goals much sooner than 2025! Any money that Nick makes, and any additional money that Helen can bring in is icing on the cake. It can go directly into this plan without alteration to speed it up considerably.
To give a rough idea of scale, here are some potential scenarios and how they would change the timeframe. If…
- they found $100/mo they could comfortably eliminate from their current budget, they would shave 7 months off the timeline for a target homeownership date of December, 2024.
- Helen worked one summer to earn an extra $7K, they would shave 10 months off the timeline for a target homeownership date of September, 2024.
- Nick gets his job back earning $18.50 an hour for 20 hours per week (the same as his old office admin gig), they would shave 42 months off the timeline for a target homeownership date of January, 2022.
- Nick gets a full-time job making $40,000 a year by this autumn, they would shave 49 months off the timeline for a target homeownership date of July, 2021, or one year from now!
What’s the right balance of monetization and leisure for reaching financial goals?
Obviously, the more money they bring in, the faster they’ll reach their financial goals.
… However! It would be penny wise and pound foolish to exhaust and overextend themselves to reach it faster than feels comfortable. This plan aims to maximize the investment of Helen’s education; burnout or sickness would obviously compromise that investment. So that’s something I’ve advised them to consciously avoid.
See, this is one area where you can get better advice from a friend than from a professional. Making extra money always looks great on paper! But knowing them personally, I’m against it. Helen is a very optimistic person, and that optimism can lead her into overcommitting herself to the point where her physical and mental health suffer. And Nick loves this woman more than anything; he would probably be really distressed to see his partner running herself into the ground over money when he himself is unable to work.
Basically I’m scared of their summer becoming these gifs:
Obviously some people don’t have the luxury of choice when it comes to monetizing their free time. Everyone should have that option.
And such sacrifices can be worth it! If you could work one year in a very stressful job and earn a million dollars, you’d do it, right? But if it was for a hundred dollars, you wouldn’t. You’ll have to discover what constitutes “getting out of bed money,” because that number is different for everyone, and it fluctuates all the time.
As I told Nick and Helen in our Zoom call, life is long. A day may come when they’re both making more money than they ever thought possible, but they’re older, in poorer health, with fewer friends and loved ones by their sides. I could imagine them asking themselves, “Why did we intentionally make ourselves miserable during the worst year in human history for so little?”
The best ROI for lost downtime
So that’s my hot take: 2020 seems like a fine summer to relax a bit and enjoy life! In a literal, quantifiable sense, good health and happiness pay excellent dividends.
As you can see from the breakdown above, Helen working during the summer is not substantially different from finding $100 a month worth of unnecessary spending to cut back on. They’ll have to decide for themselves, but for me, it just isn’t worth it. That said, I see two good options they can individually pursue to speed up their timeframe.
The best way to speed this plan up is to bring in a second income through Nick. Even if that income isn’t large, it makes an enormous difference, because even a small paycheck dwarfs all of Helen’s options for additional income. Setting aside some time together to update resumes and fine-tune cover letters would be better quality time as well as a more fruitful investment
The second best way to speed this plan up is for Helen to invest time in more education to reach her next pay tier. Investing in this is attractive because she’s already quite close to that next level. And unlike teaching summer school, the benefits carry over year after year, getting better the longer she chooses to stay in the industry.
That’s it! Hopefully in a few years’ time we’ll hear a happy update on their “five-year” plan. I’m sure we’ll have made great strides under President Steve Medea and his newly appointed Education Secretary, The Handsome Guy Who Pushed the Snobby Guy into the Pool.
Did you guys enjoy this breakdown? Was it helpful? Would you like to see more like it in the future? Let us know in the comments below! And maybe kick some dollars our way so we can buy a very necessary brainstorming six-pack for our next case study.
19 thoughts to “Case Study: Swimming Upstream Against Unemployment, Exhaustion, and $2,750 a Month in Unproductive Spending”
I would look into first time homebuyer programs. They are common in HCOLA.
A great point! Indeed, their city has a lot, and they’ve been watching them closely for years. Unfortunately they have never made the “right” amount of money. There are minimums (they won’t let someone commit 80% of their income to housing), but there are also maximums (they missed out on a great place recently by making ONLY $1K more than the limit). Tough to thread that needle.
This is such a balanced, thoughtful, and personal approach to your friends’ situation. I’d love to see more case studies in the future!
Roger that! It’s something we’ve wanted to try for a while.
I’m just kind of floored that a teacher is making what I would calculate out to be more than 100k a year? I mean, great for her! But take home pay of 4400, AFTER 11% (which is HUGE) has been taken out, health insurance has been taken out, taxes deducted, is a BIG salary. All the teachers I know in NJ/NYC make less than that.
This comment confused tf out of me for a second, but I think I gotchu.
$4,400 is what she takes home per MONTH, not per (biweekly) pay cycle! Her total salary is ~$80K, which makes takehome pay for one year ~$50K.
Yes please! I loved this break down and felt it was somewhat similar to my situation! All of the advice I’ve read up until this point has been very traditional. I have been feeling overwhelmed thinking about having to pay off the rest of my debt, saving 20 percent for a house, save for “maternity leave” and baby, and save 25% of my paycheck to make up for the retirement I couldn’t put much into due to low pay and high debt. Basically I’m still stressed, but this article (and all of the linked articles) make me feel less burdened.
Hooooooweee, you ain’t kidding, that’s a LOT to try to do at once! My ADHD may be showing, but I can only ever seem to focus on one thing at a time. I tried to do everything when I was in my 20s, AKA during the last horrible recession… I scrimped and saved to put a few thousand dollars into a retirement account because I was told it was the right/responsible thing to do. In retrospect, I really wish I’d just used it to knock off one of my student loan debts. I live, I learn.
I love the case study model! So relatable and reassuring. Would love to see more!
“I just heard the thud of our Midwestern and Southern readers fainting from shock” – incredibly accurate. Holy hell. And that house budget… *fans self dramatically*
I’m going waaaaay out on a Southern limb here, but don’t worry – I’ll bring it all back:
I’m in Texas. In 2016 I sold one sweet little house I’d had for 14 years and bought a bigger, more beautiful house. I *immediately* regretted it, regretted the new 20-year mortgage, and wanted OUT. I couldn’t turn back and get my old house again (of course) but in researching the FI/FIRE movement, saw a lot of people were going the RV route to save $$ and revamp their lives.
Fast-forward, I sold the big house Spring 2019, bought (shoulda financed, dammit) an RV and paid to park it safely for several months, saving a TON of money while living there.
Here in Texas we have an RV dealership with 3 locations, started by a woman in the 1970s, that sells only used RVs. They are reselling the one I purchased on consignment now that I bought another house with the money I saved. They’ll also resell those they financed — again, wish I’d financed because COVID put the stank on RV sales and I’d have saved a few thousands there, as well.
If your friends are at all interested in finding a good, safe RV park that is both affordable and local to them, there are fixer-upper RVs out there to be had.
Yeah, it’s a Southern-fix-gone-national, but it worked wonders for me. I’m not seeing what state or city they live in, but saving at least half their rent money would go pretty far in getting their debt paid off and into owning their own home much sooner.
Delete this if it’s completely irrelevant, but I felt the need to put it out there. RV living has become a very viable option for just about anyone wanting to make a big monetary change. It certainly saved my ass…and my money.
They are lucky to have a good with money friend! I wonder, would it make sense for Nick to take on pizza delivery, grocery stocking, etc. temporary gigs until the market for his higher value skills return? I never had to do that, never had a covid kind of crisis in my 9 to 5 years and I’m not sure I would have done that but this is a new world so, maybe?
I could imagine them asking themselves, “Why did we intentionally make ourselves miserable during the worst year in human history for so little?”
— that just might be the best TL;DR ever!
Agreed! My work is swamped, so I feel guilty not putting in more hours, but I have to keep reminding myself that things are already bad. I don’t need to stress myself out a ton to bring in a few extra bucks while caring full time for a preschooler!
You give wonderful advice!
I really loved that raw and on the spot approach, also smacking some carpe-diem-reminder into our senses 😀
Can’t wait to read more in that series.
Talking about penny wise and pound foolish- maybe that would be an interesting topic to tackle someday on your blog as well!
This is one of the few times I’ve disagreed with you! (except for your perfect GIFs, as always)
(1) Helen should do more research on PSLF. While the 99% rejection rate looks bad, it’s a lot of noise as many applicants would never have qualified for forgiveness. Furthermore, under TEPSLF, they will count payments towards PSLF that were the wrong payment plan (graduated extended, etc.). While it’s still bureaucratic, it’s a very worthwhile program if she qualifies as it would free up her funds for retirement, house buying, etc. I recommend (a) Helen use the PSLF calculator (https://www.studentloanplanner.com/public-service-loan-forgiveness-pslf-calculator/) to determine if it’s worth continuing to pursue versus paying off, and (b) checking out the PSLF sub-Reddit (https://www.reddit.com/r/PSLF/), which is a gold mine of information.
Last PSLF note: if she’s on an income-driven plan, the best way to reduce the monthly payments is by putting money into a tIRA or 401k to lower her MAGI, thus furthering retirement savings and also reducing the amount she’ll pay over the life of the loans.
(2) I also recommend they run a Rent vs. Buy calculator (New York Times has a good one: https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html). While $2,000 might sound like a lot, owning a home comes with property taxes, maintenance and repairs, insurance, etc. It might be worth it, but it might not be their best investment opportunity. They may be better served by keeping their below-market rent and opening up Roth IRAs or traditional IRAs to leverage the tax advantages. This would preserve some liquidity and keep their options open while Nick is in an uncertain situation. It sounds as though they’ve had some rough renting experiences and those are not to be taken lightly, but running the numbers is the only way to be sure.
Agree with paying off the credit card and keeping the lifestyle steady. Ramit Sethi has some useful tips on negotiating bills and interest rates (https://www.iwillteachyoutoberich.com/special/lower-your-monthly-bills/).
Thanks for posting the case study, hope this feedback in useful!
Such an amazing post – love the step by step break down and would love more of these with folks (real or hypothetical) in different scenarios!
I also wonder on the rent/buy side (particularly for a place like NY or SF, renting might be the better option on a number of levels), but I think the real danger is the living hell that is FHA MIP. That’s the only part I’m worried about in this writeup (which I *LOVED*, what a great writing style!) – it’s a key consideration. I know it because it’s been AWFUL for me for 7 years and I’m about to get out of it – but this couple won’t.
The FHA MIP cost varies between 0.45% and 1.05%, meaning that the annual FHA MIP payment for a $400,000 house is going to be between $1800 and $4200. That’s $150-$350 a month in just lost money. On top of that, just to get into the FHA MIP, you have to put down a one-time 1.75% payment that’s also just lost money. A $400k house will up the house cost by $7000.
But worst of all is that the new rules (post 2013) mean that the MIP is *never* cancelled. I have finally made it to 78% LTV (thanks to extra principal payments) and have never missed a payment, and I’m still going to lose over $15,000 (on my 250k house) to FHA MIP before it goes away. This couple will never get rid of it, sadly, unless they refinance… which will require a down payment, closing costs, a resetting of their amortization schedule and a possible worse rate.
Maybe the math still works out in favor of the house (and I’d love to be wrong, please correct me!!) but I don’t think you can constitute the FHA MIP portion as getting lost “in the wash”. It’s a living hell, and I have the friendlier pre-2013 version.
Let me know if you agree/disagree!
This is the most profoundly helpful BGR article I’ve read in awhile, actually – it’s one think to hear about the idea of five year plans or w/e (and my perspective is as someone who started earning a salary for the first time one month before the pandemic started and thank g-d got to keep my job after two years post-college of low income gig work) but it’s completely another to be like, “ok, these are really people and real numbers and actually laying out a plan that might not come to fruition until 2025 is Good, Actually.” Totally shifted my perspective.