Check-In: Expecting Couple Struggling with Debt, But Future Looks Bright

When I first connected with Julia and John, the Queens, NY couple was expecting their first child and grappling with some debt, a lack of savings and income prior to the baby’s arrival. The couple was basically living paycheck to paycheck and in need of some advice to break through that cycle.

We reconnected this month to see how they’ve been doing. Julia is now nearing the end of her third trimester. The baby is due to arrive in two months.

I was hoping that with a baby on the way the couple would have found some ways to chisel away their debt or bulk up savings. Unfortunately, fie months later, they’re more or less still in the same money boat.

But they did act upon a couple of my tips and are benefiting from the goodness of New York and their parents, which has their futures looking brighter.

First, John, who lacks a college degree and was struggling to find full-time work, is going back to school. Not to a college or university, but to a 9-month software boot camp in New York that’s going to give him the skills and network to become a software developer. His potential earnings in the first year in the market could be as much as $75,000 (based on some people I know who’ve gone through similar programs in New York.)

The program will be about $15,000, a fraction of what it would cost to earn a bachelor’s degree. John’s parents have agreed to loan him the money. The couple’s decided to place that $15,000 family loan in savings and, instead, take out a small student loan to pay for John’s school. I agree with that strategy, given that their family is about to increase in size and having some cash on hand will be very important.

Once John completes school and finds work, I’d recommend the couple prioritize the credit card debt by paying at least double the minimums each month. Be most aggressive with the highest interest credit card debt first. Their student loan will likely have a smaller interest rate and can be paid over a 10-year period, making the monthly minimums relatively manageable. Automate those payments as soon as possible and benefit from a 0.25% interest rate reduction when they do.

While they’re taking on more debt, I’m okay with it. Investing in John’s education is one of the best ways this couple can get ahead and better secure their finances in the future – so long as they commit to earning more and paying it down.

Ahead of that program starting, John’s also taken on a side hustle (per my advice). He’s been working a few shifts here and there at Julia’s company, working with special needs patients as a social aide, taking them to community and outdoor events.

Some other good news that’s developed since we last spoke is that New York State has enhanced its Family and Medical Leave Act by implementing Paid Family Leave. In the past, certain employers were only required to provide workers with their jobs back after taking a leave of absence for up to 12 weeks. Now, qualifying private employers must provide paid time off and a continuation of health insurance for 8 weeks in 2018.

This came as a surprise bonus for Julia, who was preparing for zero paid time off from her employer.

It would be my recommendation to use part or all of that extra money to pay down their high-interest credit card debt.

Once Julia returns to work after her maternity leave, her mother-in-law will be the go-to caretaker during the day, another huge help.

They’re fortunate to have free childcare from a trusted, loved one. With that very big expense covered and John’s schooling about to start, I feel confident that the couple’s future is a financially bright one.

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Source: mint.intuit.com

Mint Money Audit: Managing Money When You Make Enough

Anna’s email requesting help with her finances began with a unique confession.

“Farnoosh, my money problem garners little sympathy,” the 32-year-old wrote. “My issue is that I make too much of it.”

Now, THIS is interesting, I thought. I immediately followed up with many questions.

Here’s what I learned through our conversation:

The Denver-based Mint user earns $220,000 per year as an engineer. Anna’s also benefited from years of big bonuses and her net worth, not including her home equity, is close to a million dollars.

After paying taxes and health benefits and maxing out her 401(k), Anna takes home between $8,000 and $10,000 each month. Her expenses mainly consist of a $1,200 mortgage payment, car insurance, gas, food and utilities, amounting to maybe a few thousand dollars per month.

The rest either goes into savings where she stashes about $5,000 to $10,000 for unexpected expenses or into a brokerage account where she has roughly $800,000 invested. A wealth management firm manages that portfolio and charges, she says, an annual 1% fee.

Anna has no consumer debt, besides her mortgage, which amounts to about $338,000. It’s a 30-year fixed rate loan with a 2.85% interest rate. The home has appreciated in recent years with about $100,000 in equity (including Anna’s initial 20% down payment).

So, what is the problem, exactly?

“My big worry is that I don’t have the habits to manage money well,” Anna told me. Her sizeable bank balance has her feeling financially free, although she worries about getting carried away with spending sometimes.

“When I see money in my bank account I rationalize that ‘yea, that vacation is doable. I don’t hold back on the things that may seem frivolous,’” she says. But It seems she wants more financial grounding and to be able to evaluate expenditures and price tags more critically.

Anna’s situation may be unique, but I think relatable in the sense that we all would like to feel more thoughtful with how we spend, save and invest. And while some may do well with earning money, it should not be assumed that they can also manage that money well.

I applaud Anna for wanting to be sure that, even with an impressive net worth, she is actually making wise financial decisions.

Here’s my advice.

Take a Deep Breath

No need to panic when spending on things and experiences that you enjoy. From what I can tell Anna’s prioritizing the serious financial stuff first like contributing the max to her 401(k) and saving all of her annual bonuses in a brokerage account. She has no credit card debt and pays all her bills on time. That’s terrific.

Sometimes we just want to hear that we’re on the right track with our money and I have a very simple way to measure this:

If you manage each paycheck by saving, investing and paying all your bills first, then by all means, you’re entitled to have fun with whatever is left without any fear or regret. Am I right?

If you’ve done the good work of taking care of your future with your money, then don’t hesitate treating yourself and others with the remaining funds today. Splurge away and enjoy your hard-earned money. And remember to enjoy the moment.

Ditch Your Money Managers

I do think Anna could find a better home for her investments.

Paying one percent of her managed assets to this firm may not seem that high of an annual fee. But when you think about Anna’s balance of $800,000, that’s $8,000 this year. What about next year and the decades after that as she contributes more to the account? That fee, compounded over the next 30 years, will amount to – conservatively – over one million dollars. Ouch.

That doesn’t even factor in the expense ratios for each mutual fund that’s in her portfolio.

If all Anna seeks is investment assistance, she may be better suited stationing her money with an automated wealth platform or robo-advisor where her money is largely invested in low-fee index funds or exchange-traded funds (ETF) and the portfolio management fee is typically 0.50% or less.

Of course, breaking up with your financial advisor is not always so simple. It’s especially hard for Anna, as she equated her money managers to “father figures.”

If I were Anna, I would just explain to my advisors over email something like, “I want be more conservative with my money and that includes being extra mindful of the various fees that I’m paying. To that end, I’ve decided to manage my money more independently. I’m sure you can understand. I appreciate your help over the years. Please let me know next steps.”

Planners know the drill and are used to having clients end relationships.  Stay strong. Nobody can really argue with the fact that saving money is a good thing!

Establish Short and Long Term Goals

Anna wants to spend and save with more conviction. I think having some concrete, tangible goals can help.

For example, she shared that she’d like to get married, have a family and own two homes – one near her office downtown and another in the mountains as a getaway.

So, the next step is to understand what these goals cost. What are, say, the going prices on a vacation home in her state? How much might she want to stash in a separate account for the future down payment on this property? Knowing the underlying costs of her goals can better direct how much to spend elsewhere.

Next time she’s planning a vacation, she may be more inclined to price compare or hunt down better deals, as opposed to just judge whether the trip is financially “doable” by the amount of money in her bank account. Now she’ll have the image of that second home and its costs and will make a more informed choice.

Contribute to a Cause

Last but not least, when you feel you make more than enough, like Anna does, this is a great opportunity to be extra charitable. If she’s seeking a way to give her money more meaning and feel purposeful in her financial life, this is a truly wonderful way to go about it. Discover a cause that you’re passionate about and make an impact as a volunteer and donor.

Have a question for Farnoosh? You can submit your questions via Twitter @Farnoosh, Facebook or email at farnoosh@farnoosh.tv (please note “Mint Blog” in the subject line).

Farnoosh Torabi is America’s leading personal finance authority hooked on helping Americans live their richest, happiest lives. From her early days reporting for Money Magazine to now hosting a primetime series on CNBC and writing monthly for O, The Oprah Magazine, she’s become our favorite go-to money expert and friend.

The post Mint Money Audit: Managing Money When You Make Enough appeared first on MintLife Blog.

Source: mint.intuit.com