Saving for retirement on a low income
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  1. #1
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    Default Saving for retirement on a low income

    Hello,

    Quick info then to the question. I was laid off last year for over 7 months and while looking for a job I had to slowly lower my pay standards from what I was making until I found a job. I also work a 2nd part time job and my wife (who was a stay at home mother) has picked up a job working when I am off. This saves on day care for us. We have a total take home pay of approx $3500/mth. We have one last debt that should be paid off by June as long as everything goes smoothly until then (here's hoping!!). After June when we are debt free, after our regular monthly bills we have about $700 left over.

    Here is my question: with $3,500 take home, 15% of that is $525 leaving only $175 to save up our emergency fund and everything else that we want to save up for. One of our cars is starting to become elderly and we should look to replace it in the next 2-4 years. $175/mth *4 years is only $8400 and then we didn't save for anything else! It's messing with my head. Hopefully in the next few years there will be more money from a job promotion that has been discussed already and when the kids start school, hopefully my wife will be able to find full time work as well for a little added income. But in the mean time, do we save the full 15% or lower it a bit to build up the Emergency Fund and what not. Plus, it would be nice to be able to relax a little with our money since we will finally be debt free.

    Thank you for any help!!

    Frugal Onin

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    Your the perfext candidate for the dave Ramsey course. You need order of operations 1. BEF baby emergency fund 2. pay off debt while cutting back on expenses. 3. Efund 4. retirement fund and if and only if college funs for the kids.
    Re examine everything. It doesnt help to make more if your spending it right out the door on wated food and bank fees, wasted gas,stamps when you can pay online etc. Dr is in the library now. A place to get free things. Incl. son=metimes free movies and passes to other entertainment.

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    Registered User Ayanka's Avatar
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    I agree with FW. DR also has a series of videos on youtube . Where is the other 2800 USD/month going?

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    Registered User CookieLee's Avatar
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    I agree that funding the emergency fund comes first - even before paying off that last debt. You need at least $1000 in savings. As soon as the debt is paid off, bulk up your savings to at least 3 months of take home pay. Once you have that, and considering your age, I'd fully fund an employer provided 401k especially if they have matching.

    What you're forgetting in your calculations is your tax savings. People often think taxes are a fixed expense when they aren't. Once you start to put good money into a 401k your tax liability - with a non-working spouse and a few kids plus low income - will be significantly reduced. As a matter of fact, I encourage you to keep your wife non-working as long as you can manage to save more money. Kids in public school are home A LOT (summer is 10 weeks after all plus all those holidays and half days) so you don't want to get into the daycare cycle just to see her paycheck evaporate into that and taxes.

    Take advantage of all the tax savings you can manage. Most employers are forcing medical plans that have a health savings account - another reduction in your taxable income. And if you do end up with some daycare costs, you there is another savings account for dependent care.

    Keep your expenses low. We found the danger with being debt-free is we think we have room in our budget for monthly recurring expenses that aren't debt (music lessons, gymnastics, scouts, etc.) Yet those items have just as much financial impact on cash flow as some debt. In short, I wouldn't be looking for a "splurge" once you're debt free. As a matter of fact, being debt-free is the BEGINNING of the financial journey, not the end.

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    *please don't take anything I say as complaints, it is expressing our feelings and I feel it is important to the conversation* Thanks for the replys. I have listened to Dave Ramsey and read his books. I haven't gone through the course though. We have paid off about 140k (in about 7 years doing various things, selling stuff etc) in debt so far and like I said, the last bit of debt will be finished in June, woohoo!!! Here is our breakdown for a family of 4 (me, wife 2 kids under 5).
    Rent -$980.00 (it was 1350 until we moved last year to save some more)
    Food -$500.00
    Health Ins -$251.98
    Mthly Car Ins -$212.22 (shopped around for a while, best rate I could find, wife has had 2 people hit her in the last couple of years, it really hurts the ins…)
    Auto Gas -$200.00
    TECO Electric -$120.00
    Gifts -$100.00
    Tax Savings -$100.00 (I set my federal income tax to $0 and we usually get a refund anyway, but I like to save a little every month just in case. It goes into our debt payments at the end of the year, it is going to help pay off our last debt in fact)
    Kids spending -$80.00 (clothes, diapers, wipes etc)
    Household -$75.00 (things that are needed around the house + toiletries and other necesseties)
    Mthly Life Ins -$61.92
    Internet -$39.99
    Cell Phone -$26.00
    Car Repair -$25.00
    Car Tags -$18.20
    Pets -$15.00 (we have one cat)
    Clothes -$20.00
    Netflix -$8.40
    Total: -$2,833.71

    As for not putting into retirement until after emergency fund, we have already stopped saving for retirement while paying off debt. And that was great!!! But at $2,833 6 months of emergency fund is $17k which at 700 per month would take over 2 years of savings. We are in our thirties and haven't but a few thousand for retirement. And again, at this rate, the feeling of success is so far away even after we pay off our debt. In 2 years the hope of additional income will alleviate these problems, but in the mean time, sheesh. It would be nice to have a family vacation for once that didn't involve camping in the backyard of grandma and grandpas.

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    She meant BEF baby emergency fund=that $1000. its too combat those small unexpected expenses
    Budget looks reasonable. W/ limited info I suggest
    -set up a dedicated fund and put that 4 deductions back. Fill the fund w/ the difference. Name what its for so you can leave it alone. Its not for cars or grams 80th birthday its for devistation. Use fear. Every 10 years there will be a big emergency. Statistically speaking. Illness.jobloss, etc. I paid off somewhere in the neighborhood of $300,000 since my Dh's near fatal accident in 2005. We are absolutely debt free incl. the house and 2 kids trying college for a couple years. We had 2 mortgages,4" thick of hosp. bills in a binder. The goal is to eventually live on 50% of your income.

    The electric seems high but Florida?? You are all electric not any gas for appliances?
    Kids-buy used esp. when they are small. They go thru clothes fast s go resale or mom to moms sites (just google your zip). YOu can recoupe more by selling them at a g.sale or back to a resale-take credit if you will shop at that store you get more. Toys too. Bleach is cheap. I used to say i rented kids clothes,toys and books at the time.
    DR would say no gifts but I say frugal gifts. Favors,baking,resale,clearance,sale,etc.

    And remember this is a process. YOu make an effort to think outside the box. Every purchase or move ask yourself-where are the leaks,are we working well together, and how can I do this for less maintaining the similar if not same outcome. Last month I had my window fixed at the junkyard. They salvaged and put it in for $280. the repair place wanted $1000. My vehicle is a 2004 minivan w/ low mileage for the age but is rusting from our winters. I have lived here 21 yrs. and never knew they did repairs.

    Oh and dont forget to use coupons and ask for discounts everywhere you go. Make friends w/ employees at local groc. and discount stores,look up where your Salvation Army and Goodwill is. Your phone is a tool to save money these days.

    We dont think your complaining. So many come on here and want magic. Like I want to whine and not change any behavior then accuse people of being judgy or rude after the people put energy into helping them for free. You dont seem that way. So welcome.
    Oh last thing. Dont let others tell you how to spend your money or what you need.
    Most of this group are the same in that we are so busy living our way we forget to keep up w/ the jones.

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    Registered User Ayanka's Avatar
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    The 3 things that struck me as being high: 500 dollars grocery budget might be something you could save on, especially with your kids under 5 and not eating tons. Seasonal produce can be a help and testing out all of the budget options might help too. And as FW said, coupons, deals etc.
    Gifts: 100 dollars a month is a lot of money for gift giving. I assume part of this is Christmas and birthdays? At the age of your kids, giving them some smaller gifts rather than one expensive gift might be an option for Christmas and some more creative ideas might be a help. Creative ideas as in a kit where the receiver gets to be creative with parts coming from a dollar store. And maybe tell some adults giving them a Christmas gift is going to be hard this year or give a token gift (think homemade cookies).
    Household: 75 if this is mainly for toiletries and such I would think this is high. Don't think that is the case, but this is one you might be able to reduce depending what is in it.

    This is a pretty reasonable budget and with a raise coming in 2 years things could be worse. I honestly expected worse. What I would do is first save up the BEF of 1K, then pay off whatever debt is left, save up 3 months of FFEF and then divide the 700 between the car funds, the rest of the FFEF and retirement. And 8400 USD will buy you a pretty okay second hand car.

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    Registered User khaski's Avatar
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    I think you've already got some great advice from some great minds here, but I wanted to throw out a few more things-
    1) I am SO pleased to see life ins. on your list! Good move!
    2) Grab a copy of 'Retire Inspired' by Chris Hogan from your local library for free. He is a Ramsey 'personality'. I am about 2/3rds through the book and finding it inspiring indeed, even though we've been working on bettering our retirement track for a while now. His book may be very helpful to you, even with a low income.

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    Khaski-thanks. IDK that book and need to check it. Retirement is really where we fall down. After the accident we thought no retirement ever but feel we may have a chance now. I am going to look on Amazon for blurbs.

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    I am a big advocate of putting 10 % into retirement. You are young & getting into the habit early is a good thing. Now that I am old I am maxing out my retirement contributions. The contributions are before tax, so win-win. We are debt free, but I do not know a whole lot about Dave Ramsey.

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    Registered User CookieLee's Avatar
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    I just want to point out that you paid off $140K in debt in 7 years (an average of $20K a year)! Congratulations. That is fantastic. And I'm betting that isn't all from selling stuff.

    Given that, what makes you think you can't acquire $10,500 in a 3-month emergency fund once all your debts are paid off? With a $1000 baby emergency fund under your belt and $700/mo to contribute to savings you make a nice dent toward that goal in the first month! (Given your tax savings account you really have $800/mo that you're saving.)

    Once you have 3 months, simply work toward 6 months.

    I'm also glad you have life insurance. I'm wondering, though, why a 31-yr old married man would have a premium of $62/ month. Seems high for term life insurance. My husband is turning 60 this year and isn't in great health and even his premium isn't that high. If that is life insurance for both of you (good idea because if your wife should suddenly pass away you'll need the financial help), it still seems high given your age.

    And I also question the $100 a month for gifts unless that is your slush fund that helps cover budget hiccups like unexpected medical bills, entertainment, etc.

    I guess I didn't emphasize how much I believe in retirement savings. I am contrary to Dave in that I think people should continue to contribute to retirement even while paying off debt. Like I mentioned, you get that great tax break which helps pay for what is going into savings and you really can't make up for lost time if it takes many years to pay off debt. I'm all for you contributing to retirement as soon as possible!

    On taxes, do you take the Earned Income Credit? By my calculations, it looks like you could. The savings would be significant - up to $5500 which will go a long way toward retirement savings. Given the taxes you pay (on the federal level, approx $190/mo without the EIC, and approx $100/mo with it) a reserve account of $100 a month to cover a tax debt seems excessive.

    Lastly, you don't have to claim your reality for your withholding. For instance, back in the 1980's taxes were so high my husband and I each claimed "single" even though we re were married just so we would have enough money withheld. I don't like my tax bill being a surprise so I usually put our withholding at whatever it need to be to withhold an adequate amount based on our previous year's tax bill. Then in July or August, I check on how we're doing (irs.gov actually has a calculator for this) and make adjustments to our withholding accordingly. I admit, I prefer to have to write a small check rather than get money back. However, how it usually works is we get a refund from one government and that goes to pay the bill for the other government (fed vs state, state vs fed).

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    So many replies! Thank you all!!!

    Frugalwarrior2, the electric is all we have, no gas. We do buy a lot of used stuff for the girls, we go to a place I call play it again baby. It's called Once a upon a child maybe? Love it and selling stuff back afterwards is awesome!!!

    Ayanka, The grocery bill is probably our biggest contention in all of this. My wife thinks we don’t spend enough, I think we spend too much, we agreed to $500. Our 2nd biggest is our gifts budget. But she has a bigger heart than I do apparently.

    CookieLee, Thanks! We sold a house in that time, stayed hunkered down, lots of student loans and I was making much better money before the layoff, so that helped too. Alas…

    The 3 month emergency fund with 1k already started would still take us over a year at 700/ month to save up. This further delays retirement savings. The tax savings that I put away is there as a just in case. We did owe a few years back, but not since our 2nd child have we had to pay, so really it is just there as an oh poop, something crappy happened. I also use that money to pay the accountant. Whatever is left over gets put straight into our debt after we file and we start over at $0.

    The life insurance is for both me and my wife. We shopped around and that those were the best plans we could find.

    I think I like the idea of starting something anyway. Putting $0 into retirement still bugs me and sometimes peace of mind is valuable. Plus, we will be debt free, that’s a huge weight lifted.

    Pretty sure we get the ETC, I had an account review my taxes a couple of years ago and when I did them myself, he found a significant amount that I missed, and easily paid for his costs, so I use an accountant now to make sure I maximize my refund. Also, I set my deductions to like 15 or something, we pay $0 in federal income tax from our paychecks. That’s why we set aside $100 every month. It is a just in case. I prefer to owe the government money rather than get a refund.

    Thank you all for the help!! I really appreciate all the advice and the quick response time!!

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    Registered User CookieLee's Avatar
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    Please fire the accountant. With on-line tax software and your income situation (simple single employee, no home mortgage) you absolutely don't need one. The software will automatically check to see if you qualify for the EIC. The hope is one year your income will be so high, you won't.

    I'm also wondering about your plans for home ownership. Almost $1000 a month for rent is a lot. The home mortgage deduction may not help you much (we take the standard deduction) but there are other benefits to owning your home.

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    yes,I was wondering the same. You dont have a house or signifigant investments why not just google questions and let him go. I only pay mine $100. a year for some of the odd situations related to DH and his traveling IT job. And last yr. she charged me $25. because of our job loss. DD does hers free on her phone.

    And yes,a house. Are you in the market or is just renting your goal. Plus you need a vehicle fund. I suggest you invest 3% in retirement or if you get matching funds from your job you have to take advantage of that.

    FYI great that you doing resale but Once upon is the most costly one. S.A. had $5/5. specials Fri and Sat on all clothes of the deignated color every week and 1/2 off all clothing on many holidays (expect lines). Go to thier website for your local store. When the kids are little many items wil have new tags on them.

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    The life insurance is for both me and my wife. We shopped around and that those were the best plans we could find.
    $62 - I was surprised at that - usually people in your age group can get $500,000 policies for about $20/m? But it's a small part of your expenses, not a biggie.

    One of our cars is starting to become elderly and we should look to replace it in the next 2-4 years.
    How elderly? I've noticed that lots of people trade cars way too often - modern cars provide trouble-free service for about 200,000 miles, yet many people trade them early, at only about 100,000 miles.

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