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Friday, August 22, 2008

A Few Quiz Questions:
Old Fashioned Finance

I thought I'd have a little fun and put up a little quiz. I'd give this quiz if I was running a personal finance and budgeting course. But, I tried to pitch the idea to a girls school and a small seminar didn't seem to be of interest for them.

1. Name an investment that is guaranteed to return a non-taxable 5 3/4 -6 3/4 % with zero risk? What about an investment that is guaranteed to return a non-taxable 10-20% guaranteed with no risk?

2. A husband and a wife are both offered additional projects at work that will entail the same amount of additional hours by their respective employers. The husband already makes $75,000 in salary. The wife already makes $105,000 in salary. Only one spouse can on the extra hours because they want someone home when the kids are home. The additional work will pay $15,000 in additional salary per year. The family needs the money to cover their expenses. Who should take the job?

3. Below is a household budget I saw outlined at imamother from a mother. The family is dual income, 2 children, and they are hanging on by a shoestring. What detail is missing from this budget (and/or elsewhere) that would be needed should they want to tackle their budget issue:

Our earned approximate of $115K is $9583.33/month (because of self-employment, that can of course fluctuate plus or minus). After taxes, insurance, and 2% into 401(k), our take home is roughly $6100/month.

We do not live in NY and do not live extravagantly. We do own and run 2 cars, but living in a city with very little/effectively no public transportation, it's a necessity. Expenses break out as:

1400 - housing - mortgage, insurance, taxes
450 - utilities - power, water, home phone
1100 - car - payments for 1 car, gas, tolls, insurance, routine maintenance, aaa
600 - groceries (with very little entertaining on shabbos)
1500 - day care for 2 children
250 - baby necessities - formula, food, diapers, etc.
300 - student loan repayment
200 - unexpected repairs for house or cars (obviously an average, but $2400/yr may even be low)
125 - two cell phone subscriptions
140 - cleaning lady once every other week
100 - average medical expenses - includes maintenance meds, co-pays, otc meds, etc.

For a grand total of expenses at $6165/month. This says nothing of things that naturally come up in the scheme of life and are sometimes unavoidable - gift giving, unexpected medical expenses, etc. We have not had a vacation in over 3 years because we cannot afford it - not even a long weekend. We haven't eaten out in almost 2 years unless family is taking us out though the food figure does include for a bit of shabbos take out for weeks when I just can't get it together - maybe once every two months.

30 comments:

Hi said...

The first one I got right away (I won't spoil it for anyone else) but not sure about the next two.

SuMMy said...

This is a great idea. I got 1 and probably 2. I have some thoughts on #3- though you may have some others.

tesyaa said...

I have a guess as to what you're thinking for #3, though it's not a monthly expense

If you don't tell us the answers before Shabbos, we may be thinking about it on Shabbos and that wouldn't be good!

SephardiLady said...

Maybe everyone will wait to spell out their answers after Shabbat.
I'm glad the idea is receiving a positive response. I will have to start looking for more questions. I made these up myself and have no doubt I can come up with more.

tesyaa-I definitely want to hear your guess. It may be different than mine, but that only makes things more interesting. For number 3, there could definitely be more than one answer.

I expect #2 to be possibly the most difficult.

JLan said...

When does etiquette dictate that it's acceptable to start posting answers? I think I have one for #2, in particular, but don't want to jump the gun here.

SephardiLady said...

Now would be fine. It will keep the interest in the question sup. I will post some answers by Wednesday.

RamseyFan said...

Baby necessities seem high---per month, we spend $45 on formula (Walmart brand) and about $50 on diapers (also Walmart). Food is neglibile because it's what we eat ground up.

I'd like to know the actual car payment---maybe they can do better by selling the car and buying a clunker.

$1500/month daycare---I am wondering how the 2 salaries break out---is one parent earning $30k? If so, they may just be breaking even with the daycare.

$125 for cell phones---why not get a pay-per-minute phone just for emergencies?

$140 cleaning lady? Seems quite expensive..... can't you clean on Sundays? Every other week can't keep the place clean anyways, so just do it yourself.

Also, the family is grossly undersaving. 2% for retirement is not enough for retirement, to say nothing for college education, emergency fund, and wealth building.

ramseyfan said...

#1 - money market mutual funds do this well when the fed isn't messing with interest rates, but it is taxable. Munis are this good---so what are you driving at?

#2 - Wife should take it because she won't be paying Social Security tax on income above $102k. That's an extra 7% or $1000 she will take hime.

Dave said...

1. Pay off your mortgage. Pay off your credit cards/unsecured debt.

2. As was stated above, if the wife takes the extra work, they don't pay additional Social Security Taxes. Assuming that they do in fact need both incomes to survive, there is no downside to this. However, assuming that they could downsize their lifestyle to live only on the wife's current income, they arguably want to get the husband's income to that point as well, giving them the ability to survive the loss of either job without disaster.

3. They have no savings. They need to find a way to put money away for emergencies.

Shoshana said...

The budget from imamother does not include LIFE INSURANCE!

ramseyfan said...

shoshana--
can't believe I missed that. Also no disability insurance mentioned---you are far more likely to become disabled than to die.

JLan said...

My take on #2- Although there's a tax savings if the wife takes the extra, I'd say that the husband should take it, since that if (G-d forbid) something happens to the wife or her job the family will be in a more manageable position.

#1- Not sure on either of these, but whole life insurance could potentially be in the lower range, and I'm pretty sure it wouldn't be taxable (of course, you can't withdraw it).

On #3- in addition to sme of the notes other people have made, $125 seems slightly high for two cell phone subscriptions- is there a reason they're not on a family plan? And if they are, they need to cut out the data package or drop down to a lower amount.

Ezzie said...

$125 for two cells is not high, if you count taxes and fees. It's actually pretty average, if not low, and a family plan isn't allowed for whatever reason. (We can't get one without my losing my number, for example.)

Dave said...

If they each have a cell phone, why do they have a land line at all?

rachel in israel said...

for #3 SL asked for the thing that's missing to be able to tackle their whole finances. I think it is the break up of the salary. It may be that if one earns about ~70 and the other one about ~30 the second parent should stay home with the kids. That salary after tax is basically going straight to day care.

tesyaa said...

For #3 - missing is the 6 month emergency fund.

Many times commenters on this blog talk about giving up the second job (usually the wife's) to stay home with the kids, because after childcare costs there's not much left. I think this approach is really shortsighted, unless the family will *never* need the second salary or it's just too difficult to manage with both parents working. What makes you think she can go back to work in several years at anything like her current salary? Time off from the job market often equals no empoyability in 5-10 years, unfortunately. Plus, she'll lose 5-10 years of experience that will raise her future salary, even if she's not on an ambitious career track.

ProfK said...

If the couple in #2 is married and filing separately then it really makes no discernible difference which one takes the extra job since their combined incomes even with the extra money will not change their tax bracket nor come near doing so. If they file jointly they need to be careful. The extra income puts them only a few thousand dollars below the next tax bracket, and even a small raise in salary for either one of them would send them from the 28% bracket to the 33% bracket, almost wiping out any gain in money earned.

mother in israel said...

Nu?

Dave said...

Tax Brackets don't work that way.

If you go from the 28% to the 33% bracket, only the income above the threshold is taxed at 33%, it doesn't suddenly tax all of your income at 33%.

SephardiLady said...

MiL-My answers go up on Tuesday or Wednesday. I believe #3 will turn into an analysis.

SephardiLady said...

tesyaa-Sometimes there are other options from taking a different work schedule that makes the need for child care less (probably not none). Sometimes a lesser paying job ultimately pays more, although the skill level might be less.

There is no way this family is including all of their expenses and the schedule shows a negative cash flow (I can presume either credit cards are at play, or a better case scenario past savings are being dipped into). When you are sinking, there is little choice but to make a change.

Dave said...

Also, this is a budget for pre-school children -- it doesn't even touch on the "third rail" of Orthodox finances, tuition.

tesyaa said...

dave - not sure but I think this family's daycare costs are not much less than tuition in many communities

sl - ideally we could all work in fields where we could work as many or as few hours as we liked and get paid what our work is worth. Most jobs don't offer this type of flexibility. Speech therapists and OTs are sometimes an exception, although many of those jobs are on a fixed, school schedule. Also, there are benefits to consider, which often aren't available with a part time job.

I have been a working full time mother and I was a stay at home mother for many years, so I have seen both sides of this. I'm not sure what the answer is, but I see the pitfalls on both sides.

mother in israel said...

Tesyaa, I know someone who said that young working mothers should get as much help as they need even if they take home no income. They should see working as a way of staying in their field and getting experience, or to get out of the house not as a way to earn money. I agree that couples need to look at future income as well when making decisions about working. However, as we all know, babies are not always about the bottom line.

Mike S said...

1) Yes, you can pay off the mortgage earlier. And the credit cards, which you shouldn't have borrowed against in the first place. However, whether that is your best move depends on a number of factors, including how long you will be there, what your liquidity needs might be and tax situation. If paying down the mortgage will have you taking out a home equity loan in a couple years, you might be better off with a CD, depending on the rates you can get for the CD and what the home equity will be. Also, if you get a match from your employer, you will almost certainly be better off maxing out the 401K than paying the mortgage. If you are in a 41% combined state+federal tax bracket and your employer matches you get $2.00 into your 401K for 59 cents in after tax income. You won't beat that paying down the mortgage.

As far as 2 goes, one would have to have more details about the couple's full tax situation to know for sure whether their is a tax difference. But the wife won't be paying Social security, as she has already maxed out, so with no other info, that's what you would do. But lot's of things could change that, as we are talking 6.2% of 15,000. If the husband can increase the employer's contribution to a 401K by some fraction of that, for example that might outweigh the FICA. Also, given that we are talking about $900 that decision may be driven by matters other than taxes; like who likes cooking dinner better.

Gave A Get said...

#2 is not that simple if Obama wins....

Ariella said...

I find the cell phone charges high. I have AT&T for $30 a month. Even with the fees and taxs, it comes out to between $37 and $38 each month. So even 2 separate (not family) plans would come in at under $80 a month, and I believe there are family options for far less. (My husband makes do without a cell and sometimes takes mine if I want to be able to reach him when he would not be around his desk phone.) I don't use the phone for texts, pictures, or any of the other bells and whistles that are available at extra charges. I use the phone to make and receive calls only, not as a cool gadget.

They should definitely shop around for insurance and see what deals are available from various companies for buying both the home and car policy from them. Some companies offer particular discounts for certain categories, like Liberty Mutual offers one for CUNY grads. Also it really pays to take the defensive driving course -- as in savings that could top $300 a year for 3 years.

Good quality childcare is very expensive, so I really do sympathize. The answer is not necessarily the seemingly obvious one of one spouse staying home because down the road, their earnings may increase far more by staying the course than by dropping out for a few years. Also there may be other perks from the job like insurance and pension plans that would be lost. Not to mention the fact that some people need the stimulation of the work enviornment, and so long as they are not actually losing money by working, it would be worth it to them to keep the job.

SuMMy said...

I tried to think like SephardiLady when I answer these:
1) a) prepay mortgage (though there may be an argument against this if you can get more elsewhere)
b)fund your 401k. especially if there is company matching- the percentage actually goes much higher...
2) My original suggestion would have been to have the husband take the extra time because it's more worth it per hour- then the wife still has her time open to pursue something potentially more lucrative. but I think ramseyfan's (and others) analysis is correct- the wife has the social security tax advantage. Of course all these factors would go into the calculation.
3) There are many ems to nitpick as you guys have found. of course it's missing a SL staple: insurance and savings. The other item you'll mention is that the woman should consider working from home: savings may include day care, 1 car, 1 cell, cleaning lady, and perhaps grocery savings from home time clipping coupons.

Now I pose this scary question:
what percentage of american households make over 100k/year? No cheating.

I think you'll be surprised (and scared) by the number especially when you consider that this family cant make due with 115k...

Anonymous said...

For #3 I agree with many of the posters -- the cell phone seems high (we have 2 cell phones on a family plan - with My Faves so we EACH get 5 people to call unlimited - $70). I think the cleaning lady is making a lot of money. And they did not mention credit cards NOR clothing! I'm sure they get some clothing.....

It's hard to say for one person not to work, but I think one should look long and hard at themselves to see if they can manage it. We have one car --- which we hardly ever use. My husband drives a moped to work - 90 miles/gallon. We do walk a lot to stores to get a few things during the week to save gas.

Mike S. said...

One other thing. General guidelines help you understand how to think about these things, but you always have to analyze your particular situation. Take 2). I assume SL meant to alert people to the maxing out of FICA taxes. Fine and good. But the hours might be different in a way that changed the cost of childcare, or the benefits packages might differ in a way that exceeds the $930 difference in FICA. Or one parent may cook less leading to more takeout. So you have to analyze your own situation.