Got Orthonomics in your Email Box?

Sunday, May 17, 2009

CNN Money Should Get My Number on File

Hat Tip: Numerous readers who alerted me to the Money Magazine Article on Faith and the Expense. Please feel free to self-identify.

Money Magazine is featuring three families in a article about religion and money: a Muslim couple, a Christian family with three children, and an (Orthodox) Jewish family with four children and a fifth on the way. Each family pulls in combined income in the low six figures, and each family incurs religious based expenses, particularly tithes. Personally, I have a difficult time thinking of tithes as a religious expense, as we learn in Pirkei Avot that tithes (done right) are a protective fence for wealth.

The Muslim couple's issues don't particularly interest me. Being observant of one's religion comes at a price, and the $1,800 they pay to maintain a mortgage according to Islamic law seems more than manageable. Additionally, the mortgage won't last forever and given their current income and spending habits, I see no reason they couldn't knock off the mortgage early and rid themselves of the expense. Sure, they have racked up some student loans that they wished they hadn't. But they have no credit card debt, and have even managed to put together $17,000 in liquid savings, which will start to grow now that they have been educated about some of their options regarding investing and Muslim law (think heter iska). They are well on their way to creating a small, but reliable passive income.

And, while they have made some errors, such as passing on 401(k) match due to lack of education, they have a lot going for them. They are young (28 years old), have not yet started a family, although they plan to do so, appear to spend modestly and only on a cash flow basis, make a decent combined salary, and are saving. While I can see it is difficult not to have a full smorgasbord of potential investments, they do have options, and most importantly they have decently sound financial behavior. (My own preference would be to knock off the student loans before buying a home, but I don't see their situation as unmanageable).

The Christian family is a bit more interesting. Only recently has their combined income surpassed six figures. Amongst loyal Christians there are those that believe in wealth building and those that believe that wealth building detracts from service to the church. We seem to have a similar divide amongst Orthodox Jews. Already into their 40's and with 3 growing children, they found themselves tired of living on the edge and decided that perhaps taking care of their own needs isn't quite the distraction they had been raised to believe it to be. They discovered that not having funds to fall back upon, worrying about how they would educate their children in the future, and having to take on 2nd and 3rd jobs, was also a bit of a distraction. So, the husband trained for a higher paying position and now they are firmly within the middle class.

Like the Muslim couple, I don't see impending doom and gloom. The Christian couple, while a bit older, certainly has time ahead of them. They are using their increased income to save, and in only two years have put away $18,000 ($8,000 in retirement accounts and $10,000 in liquid savings). Assuming that they continue to save consistently and do not touch their savings, it won't be too much longer until those savings start to provide a second, yet passive income of their own. The family seems committed to debt free living, e.g. the wife is planning to attend divinity school, but they are saving for the expense in cash. And while cutting spending, as recommended by the financial planner, was met with some skepticism, they are putting in effort and surprising themselves by just how much extra savings they can squeeze out of their budgets by changing their habits. One hopes that buying a new, larger home, won't be a mistake. I wish they had went in for something at a lesser cost, but they seem to be on the up and up.

And now we come to the Jewish Family. . . . . . . . . and I think the financial planner procured by Money Magazine should have called Yours Truly before dispensing advice!!!

The good news is this: this family can get out of debt and this family can build a better financial future. But, they won't do so following the financial planner's advice which have little to do with the underlying issues. (I don't really blame the financial planner. He probably believes that the ritual and religious costs are completely non-negotiable).

The bad news is this: The numbers presented don't tell the entire story and I believe that the situation is worse than it appears.

Here is my math. The article notes that they sold a home in Los Angeles and walked away with a $300,000 profit. The article notes that they bought a home in Houston for $270,00 and paid an additional $30,000 to renovate the kitchen (total: $300,000). Yet, the family lists its investments at $95,000 and they have a current mortgage liability of just over $105,000.

Scenario 1: Not having a multi-year balance sheet, I can't presume to know the entire story, but the most positive version of the story would be that the couple hasn't saved a penny since they sold their Los Angeles home for a $300,000 gain and that the missing $100,000 disappeared in the fall of the market making it "on paper."

Scenario 2: Another, unfortunately likely scenario is that the couple took about a mortgage in the low $100,000's, leaving them with a bit less than $200K from their $300K gain. Their moving costs and the $30,000 for the kitchen remodel, left them with a large chunk of change, perhaps around $150,000. The $95K, much or all of which I believe sits in the 401(k) came from annual contributes and employer match, and therefore did not come from the $300K the couple had in cash at one point. Somehow, between their move from Los Angeles to Houston, they have worked through a sizable chunk of change and more, evidenced by their sizable and mounting credit card debt of $25,000. In other words, they are spending more cash than even they (or the financial planner) cares to realize.

Perhaps the truth as what has happened along the way lies somewhere between scenario 1 and 2. No matter what happened in the past, the couple needs to change course via a change of spending habits. The money that has disappeared somewhere along the line isn't coming back, and it appears they have some out of the ordinary needs with their 3rd child.

The financial planner recommended the following:
*Restructuring their debt from their current 15 year mortgage to a 30 year mortgage that the planner predicts will be somewhere between a .5% or 1% lower. He suggests rolling their $25,000 of credit card debt into a new mortgage.

The financial planner notes that the increased cash flow should take care of future tuition increases and allow them to contribute more to retirement. (I don't think the financial planner has a clue about day schools and how "financial aid" works! I also don't know how financial aid works in Houston either, but in other areas, restructuring liabilities to free up cash sticks you with a higher tuition bill. Many people refinance regularly to make more room for tuition).

The wife is perhaps a step ahead of the financial planner noting that she fears they will just end up in the same position, i.e. running up credit card debt, because of *behavior.* She is willing to consider the idea after seeing if they can stick to a strict budget. I think that if they stick with a strict budget, they should be able to knock off a good amount of their credit card debt and won't have to worry so much about refinancing.

*Increase the amount of life insurance they carry to cover day school in the event of early death of the breadwinner.

Talk about one step forward and two steps back. I am in disbelief that the Mrs. believes that if her husband passes that the community will 1) take care of her children and 2) marry her off within 2 years [getting her back on her feet]. Of course, it isn't that a school doesn't want to help the widow and her children (we are rachamim bnei rachamim), but it seems that day schools from North to South and West to East are coming to the realization that it is sink or swim time, or in other words, not all can be helped to the extent needed. Sad, but true. Regarding remarriage, I simply don't think it is always in the best interest of the widow and children to remarry quickly, even if it were so easy.

* Write a will, especially to provide for the needs of their special needs child.

Fine advice, but it simply doesn't address the here and now. But, we all (and I'm talking to myself here) should probably get on task.

Here is my advice:

*Go on a super-duper-financial-diet because credit card debt is an EMERGENCY. Track every single penny that is spent (including the amount spend every month to pay for financing the debt because that is likely to provide some serious motivation):
1. Put the credit cards on ice. They are completely off-limits.
2. Put together a small cash emergency fund as quick as possible, perhaps $1,000. If you have to advertise yourself as a fill in cleaning lady, do it. If you can watch neighborhood kids when you aren't working, do it. If you have stuff you can sale through Ebay, Craigslist, or a consignment store, part with it. You need cash and you need it quickly.
3. Take a full accounting of all credit card debt. Your inventory should list amounts due from the card with the highest APR to the lowest. Make minimum payments on the cards with the lower APRs and throw cash at the card with the highest APR. Once you have paid off a card, start throwing money at the next card.
4. Stop contributing to your 401(k) because you are going to get out of debt asap and will soon resume contributions after that. (Some might say stop contributing beyond match).
5. Make sure you are only withholding the taxes you need to pay. Many Americans over withhold and love to get their refund. Don't give Uncle Sam an interest free loan while your credit cards explode.
6. Cut the grocery bill in half immediately. Over $1,000 a month is simply too much to spend. $14.99 a pound brisket gets replaced by chicken or fish. Chicken and fish get replaced by canned tuna, beans, or legumes. Hard cheese gets replaced by soft cheese. And you start looking for alternatives to the $9 a bottle grape juice. If you can't buy grape juice for under $9 a bottle in Houston (Houston readers, I need your comments), you need to start freezing the 64 ounce bottle in four ounce increments for making kiddush. Even at $9 a bottle, this shouldn't be the thorn in the budget.
7. Medical expenses should be tracked for the past year or two so a reasonable prediction of future needs can be made. Set up a Flexible Spending Account with pre-tax dollars and pay expenses from the FSA.
8. Sponsoring a $500 kiddush is going to have to wait until it can be paid for in cash. According to the article, the family contributes $3,600 a year to their synagogue, of which $600 is dues. It also mentioned sponsoring a kiddush for birthdays. While the question of cutting back of tzedakah in order to get out of debt should be left to qualified Rabbonim, sponsoring kiddushes is something that can be cut back on, especially because it means IRREPARIABLE LONG TERM FINANCIAL DAMAGE.
9. Reprice your auto and home insurance. Shop for new quotes every 6 months to a year. Look into lower cost alternatives for all major expenses, from camp to childcare to auto insurance.
10. Slash all variable expenses. Turn off lights, put the lights you use on Shabbat on timers, hang laundry to dry, take shorter showers, etc.

While I see the Christian family and Muslim family building wealth little by little, I see the Jewish family loosing ground and quickly. $25,000 of revolving credit card debt can easily cost between $3,000 and $7,000 annually to finance. Think about this for a second. . . . . .that is a lot of money! It is easy to see their debt doubling in just a handful of years. But, if they get out of debt, they will be freeing up thousands of dollars a year, and they don't even need to refinance their home. The Jewish family can also get themselves on far better financial footing, even without cutting tuition out of the budget. They need to speak to a Rav about how to give tzedakah in the here and now. They need to cut their spending like their is no tomorrow. What they don't need to do right now is refinance their home. They are already likely a few years into their 15 year 5.5% mortgage. The size of their mortgage is not unreasonable, in fact is is lower than their combined annual incomes. While I will not declare that they should not refinance, I will declare that it won't solve the underlying problem.

I wouldn't leave a stone unturned, mostly because I believe that the family can win this battle.

Your comments.

31 comments:

SephardiLady said...

Another note: I do believe the home that they bought is high for the area. Sometimes selling a home for something smaller and more manageable should be considered. But selling a home is a huge change and since this home appears affordable should the credit card debt not continue to mount, I did not recommend it as they should be able to get a clean start by just knocking off the debt.

rosie said...

Rather than spend their tzedukah money to sponsor the kiddush in shul,
the same money can be given to sponsor a day of learning in the yeshiva of your choice. My husband would rather see people learn for the yartzeits of our parents rather than eat. I realize that some have a minhag to sponsor a kiddush for a yartzeit, but I feel that in this economy a kiddush should be reserved for the birth of a girl, a Bar Mitzvah or an Aufruf.

SephardiLady said...

True rosie. But I'd say get out of debt first. Also, the family gives tzedakah of $5000, of which a good amount may go to schools (in additional to the mentioned meshulachim).

rosie said...

SL, I just read the whole article and these people are in need of more guidance than the financial planner would give. Everyone with kids must designate who should get the kids in case both parents die. It means asking someone to agree to raise the kids. They sound like they don't exactly want their families to raise the kids but they need to put a plan in place. They need to look into institutions for the handicapped child in case there is no home for him. (Unless of course someone agrees to take him).
Does she really think that her community would marry off a widow with 5 kids, one of whom has health issues, within 2 years? I would like the phone number of her shadchan please. I know of lots and lots and lots of normal unmarried women who would like results like that.
Does she think that her day schools let yesomim off the hook for tuition? I have seen quite the opposite behavior so again, I would like to find out where to send widows with kids who want a free ride through yeshiva.
Her underlying problem is a false sense of security that the community takes care of it's members. They might send meals to a person sitting shiva but the buck often ends there.

Anonymous said...

None of these families should be struggling. Even after paying for tuition, kosher, etc., the OJ family has 100,000 before taxes and a relatively small mortage and they are young. That would still leave them in at least the top 10%. (I realize their tuition costs will go up as more of their children are school age.) The amount of credit card debt is puzzling and disturbing. Balking at 400$ year for life insurance is irresponsible. I wonder if this mom shouldn't think about going back to school part-time to finish her college degree. Living in a large city, there must be schools where she can study part-time. It would be good for this family to have a potential second or alternative source of income. I can appreciate that full time work might be out of the question while her children are young, and potentially longer depending on the needs of the special needs child, but getting a degree or some more education to prepare for that possibility may be doable.

Anonymous said...

Having a special needs child makes having a will much more important. In addition, the will needs to set up a special needs trust to hold the share of the estate that goes to the special needs child. If a special needs trust is done properly, then the funds in the trust won't count as assets for determining the child's eligibility for medicaid, SSI and other benefits. The trust must be set up with the aid of a lawyer who is familiar with government benefits and special needs trusts.

SephardiLady said...

Anonymous-The credit card debt is extremely disturbing. In fact, the more I think about it, the more disturbing it becomes.

I have a client with a similar income ($135K) that is also struggling, paycheck to paycheck. But they never had a huge sum land in their lap from the sale of a property. Their mortgage liability is over 3 times the amount, although it is a 30 year mortgage. And, they have an incredible amount of student debt in addition to daycare, yet they aren't running up $25K in cc debt.

SephardiLady said...

$135K is the combined income of the family featured in Money mag.

Conservative scifi said...

First, I read the Money article and I give a lot of credit to the families for sharing their information.

Given the pervasive nature of Jewish geography, remember that it would not be surprising for the couple to read this blog.

With Dan lekaf zechut, I wonder if the article understates the costs of the challenged child. In my area (near Silver Spring), the county does a pretty good job of covering the school related expenses (though not always to the satisfaction of the parents). In Houston, I wonder if they get the same educational support.

However, I agree with Sephardi lady that having a $25,000 revolving credit debt is a financial emergency. Any use of credit cards which generates interest income for the credit card company is a dangerous use.

I am not sure that a mother of five young children can easily step back into the working world, without significant support in raising the kids. Even the dedicated dad has to work (and if orthodox has minyanim and at least some Torah study).

SephardiLady said...

Conservative SciFi-
I do hope the couple (or other couples in similar situations. . . and I know plenty) do read this blog, as it presents a different option from that of the professional.

I also commend them for being willing to participate in such a feature. It take a lot of guts. When it comes to money issues, people tend to be both shy about disclosing and shy about offering direct advice. If they lived in my own community, I don't know if I would have the guts to pull them aside and help with a plan, although I would want to. I've done financial chessed through taking friends to the grocery store to learn the system, showing friends around the neighborhood so they know where the best stores are off the bat, or review self prepared tax forms for errors. But offering advice that might not be taken to so kindly is something I tend to shy away from.

Perhaps I too am underestimating the costs of a special needs child. We too have had years with incredible health expenses. These can definitely put a budget into a tail spin. Hence the tightening up (and the need for an FSA, especially if you are higher income and have little chance of being able to itemize much).

The mother IS already working. I don't know how much she makes or if she incurs extra childcare costs that wipe out her income or put it into negative.

I do NOT think that the time to go back to school is when you have 5 young children and $25,000 in debt. If you end up with even more credit card debt and even student loans, you can end up in a worse situation. Better to find jobs that you can work either around your kids (the freelance writing she does probably falls into that category, after school babysitting for a neighbor child is another possible gig, albeit not too glamorous).

I think the best course of action right now is to make FRUGAL living a profession and create a "tax free second income." I'd certainly recommend that before returning to school at this stage. School likely would more debt.

Shoshana said...

SL-

What is your definition of a "tax free second income?" I am doing some of the type of "emergency" work you recommend for paying down debt and making an emergency fund. I am currently setting aside 15% of what I make in case I need to pay taxes next year. What are your thoughts?

nuqotw said...

The Jewish couple is overspending, and we could look at any number of things that are wrong in their "budget", and it seems that if they got their books in order they could be paying a great deal more in tuition. (And it sounds like their differences in spending/saving attitudes are not great for their marriage...) BUT:

They, along with most Orthodox Jews in this country, have bought into the idea that they must send their kids to day school / yeshiva, to the tune of $10k - $20k per year per kid. It is simply not realistic to expect that all or even most families will have $30 - $80K per year to spend *after* expenses, or even $18K that this couple needs to spend after financial aid. As such, it is not realistic for everyone, or even most people to send their kids to day school/yeshiva. Since it's not realistic, we need another way of educating our kids. There's no fixing a system that is fundamentally incapable of funding itself.

SephardiLady said...

Shoshana-I'm referring to the savings created by running a frugal household.

When a person finds savings of say $5,000, they have $5,000. If a person makes $5,000 they have whatever is left after the Federal government and the state government take their cuts. It varies by the tax braket you fall into.

Of course I'm not against earning. I have my own business ventures and little jobs I pick up here and there. But, I think that before a mother with a situation like this runs back into the workplace, it is best to try to cut back on household expenses in a very aggressive way. Such is more easily done where full attention can be dedicated to such a task. No different than a "real" job.

aml said...

This is a systemic problem. In general, Muslim men don't marry until they have completed their education and have a job to support their families. Radical idea. And the Muslim schools in my area run $5-7k/ year while the Jewish schools are at least double that. We are in major trouble.

conservative scifi said...

Just to add some information.

The Beren Hebrew Academy (orthodox) in Houston lists tuition for grades 1-6 at $12,975 (Kindergarten is $9,150). It rises to a max of $15,800 for grades 10-12. The Torah Day School (orthodox) is $10,700 for elementary school and $9,400 for Kindergarten, rising to a max of $11,500. By comparison, there is a reform Elementary school which costs about the same $11,860.

While I don't know what Grape Juice costs in Houston, if it is really $9 a bottle, then it would probably be worth while to get a group of people together to order a few cases online. At Kosher.com, they sell Kedem Grape Juice for $4.49 for 64 oz. Even with shipping, I bet it would come in at significantly less than $9.

Shoshana said...

"I'm referring to the savings created by running a frugal household."

Absolutely agreed! We are really doing this in a big way and have seen significant results. Just focusing on the basics makes a real difference: bulk cooking, making sure the laundry is done, kids responsible for own possessions, prioritizing time, shopping regularly at the thrift store (got hiking boots for four kids for a total of $15 this month!).

Jim Harper said...

Sam's Club in Houston sells two 96 ounce bottles of Kedem for $9.16 -- per the Sam's Club website.

I lived in Houston 15-18 years ago. The cost of living was among the lowest of any established frum community that I'm aware of. I don't believe anything has changed in that regard. -- Remember that energy and housing are below the national average in Houston. Plus, there's no state income tax.

SephardiLady said...

Great points James. A family with a similar income in other states could easily pay $4000-$6000 in state income tax.

SephardiLady said...

Oops, Jim. I'm not quite awake.

Offwinger said...

Four items I can think of that would rack up so much debt so quickly & kill the house-sale profit:

(1) Serious health issue + inadequate insurance coverage of it. As indicated above, care of a special needs child can fall into this category.

(2) Travel. Costs for a family of 6 traveling to Israel, going on a ski trip or taking another vacation can add up pretty quickly.

(3) Car. What kind of cars do they drive? When & how were they acquired?

(4) Moving & move-in. Moving can costs thousands of dollars. Did they pay for movers to pack the stuff up or do it themselves? How did they house-hunt? Did it require frequent short trips to Houston from LA? Did they buy new furnishings for the home they bought?

That article doesn't tell us enough to get any sense of what's really going on. You can replace brisket with chicken every shabbat for a year, and it won't undo the effects if any one of these "big ticket" items is/was the problem.

JS said...

SL,

I agree with all you've said. What I wonder though is, let's say the family didn't have credit card debt, but everything else remains the same.

Would it be possible on $135K to pay tuition, save appropriately for retirement+emergencies, save for kids' colleges, pay the mortgage, eat meats/chickens at least 1-2 times a week, etc? Keep in mind 4 kids, 1 on the way, and 1 with special needs.

Even if the child did not have special needs, would it be possible?

I agree cuts need to be made, but the thrust of my question is, even with reasonable cuts, is it even possible?

Also, Houston has very low cost of living as has already been mentioned. Near me a house in the eruv for 5 children would be at least $400K ($600K if you want a nicer home and bedrooms for all or most of the kids). We also have state taxes, yeshivas are around $12-15K K-8, $20K 9-12, higher property taxes, plus much higher cost of living in general.

Chana said...

"You can replace brisket with chicken every shabbat for a year,"

Why not? We eat chicken every Shabbat. Meat is just to expensive, so we hardly EVER eat it. And surprise surprise, we're doing just fine! Kosher meat is ridiculously expensive- cutting that brisket from the shopping list will add up and will save that family a few hundred dollars a year. Other money-saving hacks that SL has mentioned will also save a nice amount of money. These things do add up week after week, month after month, and at the end of a year you can see a savings of several thousand dollars just by living and shopping frugally. Look at the many money saving and personal finance blogs out there and they all agree with this- and can prove it by their own lowered bills.

Jim Harper said...

JS - You can get a 2100 square foot, 4 bedroom, home in the eruv in Houston for around $200K - plus or minus.

"Would it be possible?" Yes. Absolutely. We have 3 children; 1 on the way, BE"H. $90K income in a area with similar housing cost to Houston but outrageous state income and property tax ($10K per year for both.) -- The Houston couple makes $45K more than we do; $18K of their salaries goes to tuition while we home school. But, they also don't have the tax burden we have. All in all, they have more net after taxes and tuition than we do.

In addition, we make two transcontinental trips each year with the whole family to see relatives.

Having said that, we save about 17% of our income and have absolutely no debts except for our mortgage.

Chana said...

I'm sorry, I just realized that the commenter said you CAN replace chicken with brisket. I thought he said you CAN'T replace it, meaning that the very thought of no meat on Shabbat is unthinkable, which is what many Orthodox Jews do in fact think. Hence the rest of my comment. Sorry for the mistake. But I do stand by my statement that living frugally can save you a lot of money. Every little bit helps.

Offwinger said...

Thanks for clearing that up, Chana! :) I was a bit confused.

I agree that you can save a lot of money by living frugally. I wasn't trying to dismiss that.

The problem with "big ticket" debt items is that while saving here & there adds up, it would take a LONG time for it to make up the difference. And if someone has learned the lesson re: paying less for grape juice, switching to chicken (or even away from animal protein more generally), buying things on sale, etc. yet still does not see how one big ticket item can "undo" months or years of fiscally responsible behavior, it's a problem.

I think you're right to point out the flip side, though. All too often people get discouraged from changing the "little things" precisely because it is so hard to dig out of debt or off-set a big ticket debt item. As a result, people think, "oh, what's another $5?" and when you add up all those $5s, it just compounds the debt problem.

One last thing - in case anyone is wondering, you can put "paying for a simcha" on my list of big ticket debt items as well. I just did not include it in my original post, because it would'nt seem to apply to the family profiled (they have children ages 3-9).

SephardiLady said...

JS-Yes, I think they can save, although meeting every single goal might be difficult.

I have some rules I've always tried to follow myself. Adherence to the principals we have set have paid off. Perhaps I will share them, but in a nutshell it is live on less than you make, save consistently, and reinvest all interest income. Fun large purchases with past earnings, not future earnings.

SephardiLady said...

JS-(PS) Those in high cost areas are going to have a very difficult time. And the tuition situation is near impossible with many children. I think we have to keep in mind that in most cases, 5 children don't show up at once. When you know a huge hit is coming, you have to recognize there is a limited time frame to set yourself up for a more manageable financial future. All the more reason not to get in debt in the first place and save early and often.

SephardiLady said...

JS-(PS) Those in high cost areas are going to have a very difficult time. And the tuition situation is near impossible with many children. I think we have to keep in mind that in most cases, 5 children don't show up at once. When you know a huge hit is coming, you have to recognize there is a limited time frame to set yourself up for a more manageable financial future. All the more reason not to get in debt in the first place and save early and often.

Anonymous said...

The problem is that the hubby is too plastic happy...big problem..we can't expect to babysit our spouses. I had this situation in my marriage and threatened divorce. That scared him..today I have the credit cards and he pays his stuff with cash. We are a two income family so it makes things a lot easier.

smily said...
This comment has been removed by a blog administrator.
Blogger said...

New Diet Taps into Innovative Concept to Help Dieters LOSE 15 Pounds within Just 21 Days!