The Answers to the Quiz

My commentors have all done a great job with the first set of quiz questions. I'm working to come up with some new questions which will be on a different note. It would be fun to make this a regular feature. I really loved seeing each and every comment.

1. This was a trick question of sorts, as we don't often think of paying off debt as an investment. But paying off debt will give you a large, non-taxable return. Paying off credit cards is basic common sense. I believe in paying down a mortgage earlier. However, I would fund an emergency fund of 3-6 months of necessary expenses first and a retirement account, at a minimum, prior to considering paying down a mortgage early.

2. Question 2 was for the accountants amongst us. In the second question I assumed that everything was equal (which we know it rarely is, but we can pretend for a moment) and that either the husband (current salary $75,000) or the wife (current salary $105,000) could take the job with no current or future affects. If the couple simply wants the most money in the present, the wife should take the job because she will not owe social security taxes on the $10,000 additional wages. I've noticed that many people forget about two types of taxes when making a budget:
A. Employment taxes (social security) and B. State/local taxes. Sometimes a reminder is good, especially at the end of the year when an employee's paycheck might increase. In the electronic world of finance, a person might think they got a small raise when in reality they really have just paid up the social security taxes. Check the paystub before banking on a raise.

3. The more I look at the budget presented, the more problems I see. However, the main problem I was driving at was that the income sources were not delineated as "primary" and "secondary," nor did the budget delineate what costs were associated with which sources of income. (Just a note: more than income can go into the decision of which income is primary and which is secondary, although income is often the most major factor).

Some of my readers took the question as a leading one, believing that I would reach the conclusion the wife should stay home. For all I know, the husband's income is the lower income and that he should be the more flexible one and explore his options. The options could range from shifting his work schedule to cut down on day care hours, to trying to telecommute if that is a possibility, to working a night shift if applicable, to leaving his work if that makes financial sense and he is in a field where you can return easily.

Please stay with me. Here is my theory on budgets on the brink (of course, not every possibility can be covered in one post):

When your ship is sinking, which I will loosely define as being in the red because expenses exceed take home income (i.e. they are depleting savings in your youth, or turning to debt financing), you must plug up the hole in the boat and plug it up fast. Usually plugging up a hole comes with a variety of solutions some long term (cost cutting) and some temporary (working different shifts, cutting/adding work hours). There is a time to think long term and a time to think short term. When things are going south budget wise, you just need to get above water quick.

Anyone remember this upside down budget in the Yated: a kollel wife of 12 years and 6 children who does not want her husband to go out to work. Part of her fear is that they will loose all of their government benefits. I remember when I read this, I said to myself, the current solution to their issue might be for the husband to leave kollel and become a homemaker for the time being. They will keep their government benefits and eliminate their daycare expenses. At $20K in debt and approximately $20K in income, they are in deep trouble . What happens to this kollel family if/when the schools are no longer able to accommodate their children despite lack of payment? What happens when the grocery says he can't extend them more credit? I know it isn't socially acceptable to make a change like this, but the ship is sinking and my own opinion is that you jump for safety.

Some other budget issues (thanks commentors!) for the Imamother poster's budget:

A. It isn't all inclusive. She doesn't mention clothing expenses for one. This sticks out in my book. I try to spend as little as possible on consumer items, but we socks, shoes, and underwear seem to wear out in my world.
B. She doesn't indicate how many car payments remain. Perhaps the car is almost paid for, in which case the family might be pulling their heads above water soon.
C. Some expenses seem too high: cell phones of $125 a month (although an employer might require a cell phone and he/she might need a lot of minutes), cleaning help, food + baby necessities. Food alone of $600 seems quite reasonable for a dual income family, but when you add in $250 for baby expenses it seems a bit inflated.
D. As 'ramseyfan' pointed out, they are missing life insurance and retirement savings are low (perhaps they are even passing up company match?).

Take note, beginner budgeters: include every single expense in your budget down to the last penny. My guess is that the small shortfall the mother admits to is actually larger.

Sadly, this budget which is *not* overinflated across the board, underscores a very real problem, i.e. (full) tuition is out of range for many young families that are soon to enter schools and are still growing their families. Just makes you want to cry.