Change is about the only thing that we're guaranteed in life. As many of you know the last year and a half has been a time of big change for my wife and I. We went from the excitement of her being pregnant, to finding out that our son had a very severe case of CDH, to my wife quitting her job to be with our son every day, to him battling for his life for 8.5 months in the hospital, to lots of medical bills, to me having to take a cut in pay due to the slowdown in the oil field and to me working much less than usual which meant less income. And that's just the changes I can think of off the top of my head.
As such, financial matters weren't our real focus throughout much of 2015 as there were much bigger issues to tackle. 2015 could be defined as a year of treading water financially to say the least. We made very little progress on our journey to financial independence, but honestly we were just happy that we were on solid enough financial ground that we were able to tread water and not drown. We had finally gotten on top of all of our finances by the end of 2015 after neglecting many of the issues that had slipped through the cracks throughout the year.
We were hoping that 2016 would bring much calmer waters, but it looks like that won't be the case. I'm excited to announce that my wife is pregnant again and we are expecting another child on July 11th. While 2016 looks to be another transition year for our finances we're just hoping that everything turns out fine with our new child. Everything was "normal" during the last pregnancy until the 20th week ultrasound which my wife will reach later this month. We don't really expect there to be any issues, but then again we didn't expect there to be any issues the first time.
Honestly we're not that worried about this child having CDH, but after spending 8.5 months in the NICU with our son it's everything else that has us worried. Our frame of reference for having a child in the NICU and all of the issues that can lead to a baby being admitted there. It's one of those situations where our exposure to certain situations creates a bias within our mind of likely outcomes.
Our Current Situation
Anyways back to the topic at hand. 2016 will be another transition year for our finances and investment capital will be much lower than in years past. For the first half of the year my wife and I have re-prioritized our savings allocation plan. In years past all savings were funneled into investments; however, we'll now be working on paying down some debt that we've accumulated.
My wife and I both want her to be a stay at home mom which means that her income will drop to $0 once the school year is over in late May/early June. While I will have 3 months of family medical leave built back up by July, I expect to only use 1 month of leave assuming that everything is fine with our child. That means a complete month of $0 income for the household.
Our expenses have crept up due to poor planning on our part as well as bad luck with Luke passing away. No one expects to need to pay for funeral expenses for their child so we had to take on some debt in order to take care of everything. Luckily it's at 0% interest but it added around $320 to our monthly bills.
The big mistake came from when we purchased my wife's car which came with a hefty $565 monthly payment. That was all fine and dandy while she was teaching and working full time, but after the pay cut that I've had to take and her going to be a stay at home mom that $565 of cash flow could be put to better use. I know how in the world did we buy a car with a $565 monthly payment????
This is the first time that I'm experiencing what a slow down in the oil field is like and I can honestly say it's not much fun. It's not horrible by any means and we'll be fine but it's causing a shift in strategy for the time being. During 2015 I essentially had 2 options regarding work. I could take around a 25% cut in pay or I could quit and find another job. I've decided to continue working as long as I'm not laid off due to the downturn because even after the pay cut I'm still likely to earn much more here than at most other jobs that I could get and at some point pay raises will follow oil prices higher.
We're in the process of compiling all of our outstanding debts and a rough estimate is around $55k excluding the house. I'm ballparking many of these balance amounts because I don't currently have access to the accounts, they go through my wife's accounts, or I don't have the paperwork with me since I'm working. All told the monthly payments amount to around $1,100 which is way too much.
Our Plan Going Forward
Ideally I'd like to get all of the debt paid down prior to my wife officially becoming a stay at home mom, but the prudent thing to do in the meantime is to stockpile cash. My job situation is anything but stable right now because more layoffs at my company could easily be in the works as the E&P companies continue to slash drilling budgets. Although I do think another could be avoided due to our current workload and staffing capabilities. As with everything though time will tell.
Due to the instability with my job and my wife becoming a stay at home mom our focus will be on hoarding cash in the meantime. Here's the general outline of our plan.
1) Build up 6 months of expenses in cash.
2) Use all excess cash flow to pay down debts.
3) If job stability improves then consider reducing emergency fund to 3 months and do lump sum payments on our debts.
4) Once all debts are paid down then resume investing starting with funding Roth IRA's for both of us first and then moving back to our taxable accounts.
So How Will We Get There?
Luckily I'm expecting a windfall that might be coming as early as this week that will really push us forward in our plan. My employer reached an agreement with the Department of Labor last year where they wrongly classified my position, among others, as being exempt from overtime pay. The class action lawsuit was settled in early January although I'm still waiting on the final word and payout which unfortunately can not be told over the phone.
The estimate I received of my expected payout prior to the agreement was just over $35k. Nice, right! That can change depending on the final settlement amount, but our plan will be the same whether the windfall is higher or lower. You all don't know how badly I was hoping to use that $35k for investment purposes, especially after seeing the markets get walloped thus far in 2016. The $35k would have provided $1,050 in annual dividends at a 3% yield or $1,400 at a 4% yield. You just don't get many chances to boost your dividends that quickly by that much, but the smart thing to do is use that to execute our plan.
We're also expecting a tax refund between $3-4k which will help raise even more cash.
We're also expecting a tax refund between $3-4k which will help raise even more cash.
If the full $35k is paid out plus our tax refund of $3-4k then we'll already have step 1 completed with excess cash ready to move on to step 2.
So we're essentially starting off on step 2. Great! Progress already!
Step 2 is going to be a bit tricky because my income is extremely variable and could range from around $2,000 after tax to $8,000 after tax on a monthly basis. That's obviously a huge range and makes planning difficult. My wife is currently in a full time substitute position and brings home around $1,500 a month. So our total monthly income from work amounts to between $3,500 and $9,500 with another ~$460 each month from dividends. Man I love those dividends!
My wife and I are in the process of figuring out all the information we can about all of our debts so we can come up with the best plan moving forward. We'll apply the snowball method in some form which means we'll pay the minimum on all debts except one and use excess cash flow to pay that down. Once that debt is gone we'll move on to the next debt armed with the minimum payment from debt 1 and excess monthly cash flow with debt 2's minimum payment and then we'll just keep moving down the line until all of the debts are gone which will be a big relief both mentally and financially.
If all goes to plan then I expect we'll be able to be free of the debt overhang sometime late in the year. Although that's highly dependent on my work schedule because if I don't work much I don't earn much. Also as I mentioned earlier that if there's more clarity and stability in my job then we would likely draw down our emergency fund to no less than 3 months of expenses to accelerate debt payment.
There's a few other levers we can pull if we need to increase cash reserves, cash flow, or to accelerate debt payments but I'm reluctant to do so at this time. The following are the other options we have.
- Reduce ESPP withholding to 0% increasing our monthly after tax cash flow by ~$350 per month on average. This is a realistic option to explore although I'm hesitant to do so because oil will rebound and the withholdings from now with a 15% discount on top of that will be worth much more down the road.
- Reduce my 401k withholding to just enough to get the full match which would increase our monthly after tax cash flow ~$60 on average. This doesn't seem like a good option because it's not a meaningful improvement.
- Eliminate my 401k withholding altogether which would increase our monthly after tax cash flow ~$400 on average. A $400 increase to our cash flow would be excellent but that would mean we'd be investing absolutely $0 while we pay down our debts. We aren't at a breaking point so there's no need to go to that much of an extreme.
- Withdraw contributions from Roth IRA that was started by in 2010. By the end of June of this year we could withdraw $7,500, by the end of the year it would be a full $10,000. This isn't an ideal option but it's a possibility if we get in a pinch and would allow for a quick boost to cash reserves or debt payments in the event that I lose my job and we burn through our savings.
- The last option is to close positions within our FI Portfolio to raise cash. This would actually be the quickest way to getting back to a better cash flow situation but would set us far back on our goal of reaching financial independence. It's a last resort option once we've exhausted everything else. Although there are a few select positions that might be closed or trimmed with the proceeds going towards paying down our debts.
What does this mean for Passive-Income-Pursuit?
Essentially nothing. Even though I likely won't be able to invest any capital until sometime in the second half of the year or even into next year that doesn't mean anything will change. Well, other than Recent Buy posts, you won't be seeing any of those around here for a while unless it's accompanied with a Recent Sell post and I'm just shifting the capital into a company that I think has a better long term outlook.
I'll still analyze companies both new to me and my existing holdings. I'll still give monthly dividend and net worth updates, although I might add in a debt reduction update as well. There will still be Weekly Roundups and Dividend Growth Investing at Works. There will likely be more posts covering reasons/theory of financial independence, book reviews, portfolio allocation, new tools/spreadsheets, tax optimization, valuation questions, ways to reach financial independence faster and a whole sort of other ideas that come into my head.
This is just a pause on our journey to financial independence, but will set us up much better in the long run. Although I can't wait to get back to making progress!
Have you had to pause your long term plans due to short term situations? How many of you are debt free except for the house?