Stressed out on $12 an hour
She's living paycheck to paycheck, has $11,000 in student loans and a $296-a-month car payment. What should she do?
This post comes from J.D. Roth at partner blog Get Rich Slowly.
A young Get Rich Slowly reader named Rebecca dropped a line the other day looking for help. She's just getting started in life, but feels overwhelmed by personal finance. She worries about money all of the time. Here's her story:
I am 24 years old and currently work full time, but only making $12 an hour. I get paid once a month, which sucks. But the reason I am writing this email is because I need financial advice. I will tell you all my bills that I have:
I have $11,000 in student loans. I make biweekly payments, sending in $100 every two weeks. I'm nowhere near making a dent in that debt.
I have a $296 car payment, which hopefully will go down with the next car I get. I want a 2012 Camry, but I can't afford the monthly payments without leasing and I don't want to lease.
I have a $76 cellphone bill.
I have a savings account at a local credit union, which I put $200 in every month. But the $1,600 I have in my savings is going toward a down payment on my next car. That means I will have to start over on building up my savings account and I don't have an emergency fund.
I opened up a Roth IRA with a local credit union in December because I needed somewhere to roll over my $360 that had built up in my 401k at Best Buy, so I put $200 in every month. I only opened it with the credit union because everywhere else had a "minimum." I want to move to Vanguard when I hit $1,000, but I don't know if that is the best place to move to.
Besides my regular bills, I set aside $80 for gas a month, pay medical bills if I have them, and if I even have enough money left over I buy groceries when I stay at my boyfriend's house. I live paycheck to paycheck and I don't want to do that. I need help. I want out of debt. I want to be comfortable (if not more than comfortable) with money. I don't want to worry about money anymore; it's all I ever worry about.
Do you have any financial advice for me? Because I need a lot. I thought the Roth IRA was a smart move, because I don't even get retirement where I work right now, but I don't even really understand everything I should about it. When I did some research on it, it seemed to be the best option for me compared to a traditional IRA.
I think maybe I should find another job. I feel underpaid here. I've only been here four months, but have accomplished quite a bit. I get full insurance, but I don't get retirement, paid vacation, or anything. Earning $12 an hour and only getting paid monthly is terrible.
To start, I think Rebecca is a prime candidate for using the Balanced Money Formula, one of my favorite personal-finance tools. To refresh your memory, this simple budget framework contains just three categories:
- 30% wants.
- 20% savings.
- 50% needs.
This budget uses take-home (after-tax) dollars as a starting point. Here's a breakdown of the three categories:
- Needs are things you must pay no matter what: housing, food, utilities, transportation costs, insurance.
- Wants are everything else: cable television, restaurant meals, concert tickets, comic books, clothing beyond the basics, etc.
- Saving comes last in this plan. Everything left after you take care of wants and needs is set aside for the future. (If you want to get out of debt, that's also tackled here.)
(Post continues below.)
Going with some rough numbers, Rebecca's $12 an hour translates to $24,000 per year before taxes. Guessing a 25% tax bite leaves Rebecca with $18,000 per year, or $1,500 per month. Using the Balanced Money Formula, that means her targets should be to:
- Spend less than $750 per month on needs.
- Spend up to $450 per month on wants.
- Save the rest, with a target of more than $300 per month. (And remember: With the Balanced Money Formula, debt payments count as saving.)
And what is Rebecca actually spending?
It's tough to say for certain, but we know she's spending at least $376 (or about 25% of her income) on her car -- and that's only for the car payment and the gas! We also know that she's setting aside $600 (or about 40% of her income) for debt reduction and savings.
So, based on this, I have three recommendations for Rebecca.
First and foremost, she should do everything possible to get her transportation costs down. They're outrageous. The car payment and the gas alone take 25% of her take-home pay. Add insurance and maintenance, and the number is probably more like 40%. This is a tremendous drag on Rebecca's budget, and she should do whatever she can to cut this number drastically. Buy a beater. Bike. Explore public transportation.
Aside: To look at Rebecca's transportation spending another way, one common recommendation is that people spend no more than 33% of their pretax income on housing. Rebecca's getting close to that level with just her car!
Second -- and I can't believe I'm saying this -- Rebecca might actually be one of those people who ought to save less than she is right now. It's admirable that she's saving 40% of her income, but it's also making things feel pinched.
I do not think she should touch the $1,600 she's already saved. Instead, she should use this as her basic emergency fund (using it only for emergencies). But I do think it's OK for her to stop contributing the $200 to savings if it will help take some of the financial pressure off her shoulders. If she wants to use that $200 in a productive way, she could put it toward her student loans. Then maybe it would seem like she's making a dent in them.
Finally, I agree with Rebecca that it's a good idea to find some ways to make more money. I don't think she should quit her job at the moment, but she might try to find a second job, make money from a hobby, or sell some of the things she owns. At this stage, every dollar of extra income will help her out.
Note: I also think Rebecca should ditch the expensive cellphone. I know that many folks believe smartphones are necessary, but they're not. They’re a want and not a need. Ditching the $76-a-month cellphone for a prepaid cellphone plan could probably save her about $50 a month. That's $600 a year!
That's what I would do if I were in Rebecca's situation.
What advice do you have for Rebecca? Do you agree that she should ditch her car? Or am I off target? And what about the cellphone? Looking back at your own life, what moves would you have made differently when you were 24? What did you do right? How can Rebecca go from worrying about money to feeling confident about her future?
More on Get Rich Slowly and MSN Money:
xyz123 u goddam stupid pathetic clown
sit on your pedestal and give bs advice
im sure your more screwed up than anyone u offer advice to
i will not drop what u said and eventually u will be caught up in the current u created
Locally, wages for skilled and educated employees with less than 5 years of experience have plummeted. Skilled support staff jobs are paying much less too. A lot of people here are making it on less money than you make.
Do you live in a city with reliable public transit? I would get rid of the car. If you live in a low cost of living area, you can live on your own or you can have the new vehicle. Choosing an apartment on the same bus line that runs past your employer will save you a fortune.
Do your student loans run $100 a month? Do you want to get a second job to get rid of this debt and enslave yourself with another car payment and be forced to keep living with your family? I guess I always preferred to drive an older car and live on my own just for the freedom of other choices.
Been there done that - what is she rally getting for $76.00/month
cell phone service. I can live on a lot less !!! Remeber before we
had them? How many app's do you need vs how many do you want ?
If you make $12/hr, you shouldn't be driving a 2012 ANYTHING. Buy a 3-5 year old car with 40k miles on it. It will last long enough to get you to your next career phase, where you can afford something more luxurious. And computers are everywhere; ditch the smartphone. You'll get one eventually when your employer decides you must have one to answer emails 24/7, at which time, they'll foot the bill.
What is the interest rate on the student loan? Most federally subsidized loans (stafford loans) are right around 2%. The interest savings on an $11k student loan debt with a VERY low interest rate are not worth the liquidity crunch. I would suggest making minimum payments on the student loans, and putting the leftovers in your emergency fund. After a few months of living expenses are saved, consider making extra contributions to your IRA or using the cash to make yourself more marketable for better jobs (attend networking events, take classes at the local college or university, enroll in a masters program...etc.).
I would mostly agree that a smartphone is not necessary. However when you sell online for self employment income and regularly do business via a website, eBay, Facebook pages and email, a smart phone makes sense.
My full time job provides a salary comparable to that of her's. However I have a house I rent for $400 a month, a $200/month electric bill, absurd heating fuel costs (oops, already over budget for the house, and my rent is CHEAP compared to what most people pay.) I have recently purchased an SUV and have paid about half of it off in the first two months of owning it (lump sum payment from tax return). I use the SUV to pull my trailer which I use for my resale business as the minivan just was not large enough anymore. Growing pains I suppose.
However all the whining aside I will take close look at my budget. I have recently cut back to the 'lowest' high speed internet and I still do everything I need to just fine. I also cut the home phone by buying a microcell unit for my house and cut the cable back to basic. The result? a $130+ bundle bill is now $60 a month. Thankfully my spouse is receiving unemployment from her last job, else we would have to decide between paying the bills and buying groceries.
Rebecca, you need to call Dave Ramsey, and you need to get another part-time job.
Ditch the idea of a new car. This is ridiculous for her to even consider. Ditch the car payment...buy a beater and sell the one she has. (take the money put into savings and
buy the beater cash.
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