# Reader Case Study: Hair on Fire!

## By Mr. Money Mustache

## Tue, 03 Dec 2013 18:07:40 +0000

Today we bring back the ever-popular reader case study series with an interesting twist.

First of all, our subject is a new reader, with sizable financial baggage from earlier decades, but plenty of potential for improvement. Equally notable is the fact that I have enlisted some outside help for the research and analysis.

During a recent trip, I ran into another blogger named Jacob Wade who, quite amazingly, actually likes budgets. In fact, he feels so strongly about it that he named his financial blog iheartbudgets.net. We got to talking, and he enthused about how much he likes analyzing and solving detailed financial problems for other people.

“Oh boy, do I have a job for you”, I said. “I get emails from people with detailed financial problems every day, and although I still read every one, it pains me not to have time to respond to many of them.”

Could Jacob’s enthusiasm be used to all of our advantage? I sent him a sample case study to test out his chops. I was pleasantly stunned by the results – he did a great job, and offers advice that even I would consider hard-hitting. Let’s dig into our dear reader’s story, then you’ll see the analysis with some joint recommendations by Jacob and myself.

[contents edited for length]

Dear Mr. Money Mustache,

I’m a recent reader of your blog, courtesy of your interview with Jesse at You Need A Budget, which is the budgeting software I’ve been using. I know that you’re all about retiring early, but I’m wondering what advice you’ve got for someone who wonders if they’re ever going to be able to retire at all! Much of what you recommend we can still put into place, I know, and we are in the process, but I am unsure if our advanced age changes any of those tactics and strategies.

I’m not going to bother to tell you all the mistakes we’ve made in 27+ years of marriage and raising five kids. I’m sure you know the drill, since we lived the basic “American Dream.” We are now 53 years old. My question now is “What’s the best we can do at this point?”

This is where we are:

- We have a home with a mortgage/equity loan that’s about $20,000 less than the list value of the house.
- Our credit scores are low, partly due to not having any credit cards for the last ten years to show a history, and partly due to having late payments due to temporary unemployment, among other things.
- We are the “OMG your hair is on fire” commuters; 45 minute commute for me, 55 for husband, we live in the middle of nowhere, and real estate in our area is not selling.
- 4 of 5 of our kids are still in college, two live with us and commute, the (recent) graduate lives with us and has an entry-level job since he can’t find work with his degree. Our commuters travel by bus 30 minutes to the WEST of us to go to school, we travel EAST to go to our jobs. Our employed graduate also travels west to his job, in the same town where the other two go to college. This makes moving a little bit more complicated.
- Retirement: We both qualify for Social Security; however, I have met only the minimum number of quarters since I took 17 years off to home school our five kids, and my estimated benefit at age 67 is $524 a month. I have now been teaching at a charter school since 2006, and contribute to Massachusetts Teachers’ Retirement. I would need to work and contribute to that fund until the spring of 2026 to be fully vested.
- My husband’s estimated Social Security benefit at age 67 is about $2000 a month. He has $20,000 in a 401K with his current employer, and two smaller accounts with former employers, one with a balance of about $4000, and one with roughly $500. I contributed briefly at work to a TIAA-CREF fund, and the balance is about $1000.
- I have a newly minted Master’s Degree, which I was required to get in order to keep my teaching license, leaving me with loans of about 22,000.
- Commuter son and husband have a Nissan Sentra and a Toyota Yaris, both paid for. I am driving our 2005 Dodge Caravan, which is on its last legs at 180K miles with beaucoup mechanical issues.
- We live in Massachusetts, so are among those few who still use oil for heat and hot water; we have electric appliances.
- We own term life insurance policies, and have health insurance through my husband’s employer (a health insurance company).
- We owe back taxes to the IRS and Mass DOR, and have had our paycheck withholdings changed recently to avoid this in the future.
- Not necessarily in the same vein, but relevant – I am a Yankee who would love to penny-pinch, and my husband is a free spender who loves to buy things on sale and as little “rewards” for himself and others, and chafes at the yoke of a budget. He is (grudgingly) on board with me now. We rarely disagree about anything except money. :)

I guess that’s a grim enough picture for now; as you can see, our situation is a giant Charlie Foxtrot*.
I know you get tons of email; perhaps this one will be just different enough to intrigue you – maybe you can Mr. Money Mustache even the old and desperate!

Thanks,
CF in MA

Mr. Money Mustache’s Observations:

This story is a great example of what happens when you live a good, honest life, but just don’t get around to doing the math. Other than the $1200 of oil and gas that goes up in flames each month, the rest of this budget looks fairly moderate for a large household. But there is no way to cheat the numbers. Children cost money to raise, and if you want to raise a large number of them on an average income, something else has to give.

And most people don’t realize that car-commuting (even a 10-minute ride) is spectacularly expensive, so your 45-minute double commute is astonishing. A 2005 vehicle that is “on its last legs?”. I bought my 2005 car four years ago with 57,000 miles and it just cracked 80k this year. It is still brand-new and has many decades of life left! Commuting in a VAN? I use my van when I need to carry home 1200 pounds of steel beams I found on Craigslist for my house rebuilding project – not when I need to transport one lightweight human across a vast distance!

Finally, while supporting adult children and “treating” oneself are nice options to have, from a financial perspective you don’t actually have these options. This is what has caused the long-in-the-making financial emergency. The great news is that you can dig out of this hole much more quickly than you sank in.

So let’s move on to Jacob’s analysis:

Assets:

Home – $235,000
Retirement Fund Savings (401k and MTR) – $45,000
Cars – $7,000

Debts (Balances):

Mortgage – $167,000 at 3.5%
HELOC – $25,000 at 4%
Student Loans – $22,000 at 6.8%
Dell Loan – $2,500 at 16.66%
Personal Loan – $650
Staples CC – $500

Goals:

To retire ever
Budget:

| OLD | NEW | Comments
--- | --- | --- | ---
Total Income | $ 7,200.00 | $ 7,200.00 |
Total Expenses | $ 7,161.00 | $ 3,504.00 |
Projected Ending Balance | $ 39.00 | $ 3,696.00 | <-- Much better!
Donations |  |  |
Other | $ 110.00 | $ 110.00 |
Total Donations | $ 110.00 | $ 110.00 |
Bills |  |  |
Mortgage | $ 1,330.00 | $ 1,000.00 | The goal is to be able to actually stop working at some point, so aggressive measures need to be taken. I suggest selling the house and moving MUCH closer to work (within 5 miles of both if possible). If possible, find something for $1,000 a month (about $130,000 15-year loan) or less.
Electric | $ 200.00 | $ 100.00 | You can lower your electric bill if you implement the changes suggested in this MMM article. You stated that you have started hang drying clothes, now it's time to move on and get all CFL's bulbs and watch the A/C.
Oil Heating | $ 700.00 | $ 200.00 | This bill is KILLING your budget. When you re-locate to a location closer to work, look for a natural gas furnace or another home with low heating costs. Otherwise you will literally waste $86,500 over the next 10 years on this. It's not worth delaying retirement AN ENTIRE YEAR to pay for this inefficient heating method.
Cell Phone Sprint | $ 320.00 | $ - | When moving, you are going to need to drop the cell phone family plan. I didn't see a line for reimbursement for this, and you cannot afford an extra $275 a month to pay for your family's cell phone usage. Move everyone to Republic Wireless and only pay for the adult plans.
Cell Phone Republic Wireless | $ 23.00 | $ 46.00 | Looks like you got started with one line, just double it up here.
Netflix/Hulu/Other | $ 40.00 | $ 40.00 | MMM: Huh? Netflix is $7.99/month. Between library books, learning new skills, and this, you will have plenty of entertainment.
Car Insurance | $ 155.00 | $ 90.00 | Shop this around. We pay $78 for liability on our two used cars, there's no reason you need to pay any more than $90 a month for basic coverage. Since you have a used car, all the extra insurance is not necessary to cover scratches and dings and the like. (MMM Note: mine is $30/month for two cars and two drivers)
Internet | $ 70.00 | $ 70.00 | Also worth shopping around - in your new area the competition might be better.
Land Line | $ 35.00 | $ - | Land line is not needed. (unless there's a business need for this)
Garbage | $ 20.00 | $ 20.00 |
Medical | $ 182.00 | $ 182.00 |
Student Loan 1 | $ 293.00 | $ 293.00 | We'll address this debt below.
Student Loan 2 | $ 130.00 | $ 130.00 | We'll address this debt below.
Life Insurance | $ 91.00 | $ 91.00 |
Personal Loan | $ 90.00 | $ 90.00 | We'll address this debt below.
Dell Loan | $ 160.00 | $ 160.00 | We'll address this debt below.
IRS and State Taxes | $ 700.00 | $ - | You stated in email that this balance is now at $0
Paypal Loan | $ 160.00 | $ - | You stated in email that this balance is now at $0
ADT Security | $ 50.00 | $ - | Not necessary. Here's a direct quote from MMM: "These are a silly invention – the Timeshare Condos of the suburbs. Drop it, live free, and save $(50)"
Homeowner's Insurance | $ 55.00 | $ 55.00 |
Total Bills | $ 4,804.00 | $ 2,567.00 |
Other Expenses |  |  |
Food | $ 900.00 | $ 400.00 | Check out MMM's advice here. You can reduce this bill to $400 a month easily and eat VERY well with a though-out meal plan and some smart shopping.
Gas | $ 575.00 | $ 150.00 | Since we have cut your commute down to only a few miles, your gas bill should be VERY low ($50 a month or less). I padded it a bit to drive out and visit family. MMM Note - and remember that "Gas" should never be used as an approximation of the true cost of commuting. You need to triple this number at least, just to account for the direct car costs. Adding in life costs, the bill is much higher again.
Eating Out | $ 15.00 | $ - | While you're in debt, this is a luxury that cannot be afforded. Take care of the DEBT EMERGENCY first, and then add this back in.
Spending Cash | $ 25.00 | $ - | Same as eating out.
Personal Items | $ 85.00 | $ 85.00 |
Household Items | $ 62.00 | $ 62.00 |
Clothing | $ 60.00 | $ 15.00 | You don't need $60 of new clothing a month. $15 a month should take care of any clothing necessities with thrift shops, consignment stores and garage sales. Also leverage family and friends to organize a clothing swap (read: FREE CLOTHES) if additional garb is required.
Misc | $ 40.00 | $ 40.00 |
Car Maintenance | $ 50.00 | $ 50.00 |
Total Other Expenses | $ 1,812.00 | $ 802.00 |
Savings Buckets |  |  |
Christmas | $ 25.00 | $ 25.00 |
Emergency Fund | $ 410.00 | $ - | This will be addressed below.
Total Savings Buckets | $ 435.00 | $ 25.00 |
Total Expenses | $ 7,161.00 | $ 3,504.00 |

Jacob goes on to write,

Dear CF,
Thank you for exposing your budget to all of us financial voyeurs.

There is a LOT going on here, and a lot to address below. The goal here is to make every hour of work from now until retirement count. So let’s get to it:

Housing: I won’t pull any face punches here. You need to move. Your heating bill and commute are absolutely killing your financial situation, and you will NOT retire anytime soon if you stay there. There is $980 potential savings PER MONTH or more in this transition (including commute and utilities), as well as cutting your commute time down to almost nothing, saving time and stress. This move is to help you take a sharp exit off the highway of Never Retiring Wastefulness and allow you to not work until you die.

In emails, you stated the house needs about $8,000 of updates to rent or sell. Since you have about $2,000 of other monthly savings lined up in this budget, you should be able to have this taken care of within four months, and be moved out in six or seven months. Savings on mortgage is at least $330 per month.

You also stated needing a replacement car soon. Please read this MMM post and PAY CASH for your next used-car purchase.

Food: If you are feeding a flock of adult children, they are going to have to chip in. There is no reason you two people can’t eat VERY well on $400 per month, and with proper planning, that could be $300. So many people cannot save enough to retire but are actually just eating their retirement meal by meal. For reference, the extra $500 a month spent on food would cost you over $86,000 over the next 10 years, and cause you to work an additional year for that inefficiency. Nothing tastes THAT good. Savings of at least $500 a month.

Debt: This debt is to be treated as a radioactive plutonium. You must neutralize it ASAP, and this will be your first priority. Here’s how I suggest you tackle it with your extra $3,700 a month.

Dell Loan – $2,500 at 16.66% (gone in month 1)
Personal Loan – $650 (gone in month 1)
Staples CC – $500 (gone in month 1)
Student Loans – $22,000 at 6.8% (gone in month 7)

With all the expenses saved from the above changes, you can kill this debt COMPLETELY in 7 months. The first 3 debts will be gone in the first month! Now you have another $673 a month to invest.

Investments: Once your consumer debt is gone, you will have about $4,400 a month to invest in index funds to get you to retirement. Investing this at 7% for the next 12 years with your starting balance of $45,000 puts you at about $1,100,000 at age 66.

Your annual expenses with the above budget are about $42,000 per year, and using the rule of 4%, this money would provide you with $44,000 annually. You can retire!

This quick plan comes with a major safety margin:

- the $2,000 per month of Social Security your husband can begin drawing at age 67
- whatever you get from the teacher’s Retirement Fund
- the fact that your new mortgage will be paid off in 15 years, dropping the future budget

Conclusion: Yes, this is a lot of change. No, moving won’t be easy, and figuring out the details of your kids housing and all that is going to be a challenge. But the status quo is what got you here, and changing the flow of money is what will get you out.

Comments: What would YOU do in CF’s position? Can she recover and earn a solid retirement in a timely manner?

MMM Note: Thanks again to my new friend Jacob for all of the help on this one, and you may see a few more case studies around here if we’re lucky.

*I think this is a witty polite way of saying “CF”, which of course means “Clusterfuck”. I thought this was a skilled use of swearwords, and it is one of the reasons I decided to take this case study.