The next phase in living strategically is to develop an action plan based on my goals and critical challenges and start taking action. A breakdown of these goals and challenges is available in my previous post kicking off this topic Forget Resolutions & Live Strategically.
I’ll go ahead and pull forward the financial summary for my cash flow and that will be the basis for developing the action plan.
High-Level Financial Summary
- Costs on Former Marital Home (mortgage & utilities) – 40% Net Income
- Divorce Related – 40% of Net Income
- Current Living Expenses (rent & utilities) – 30% Net Income
- Automotive Expenses – 7% Net Income
- Debt Minimums – 25% Net Income
- Discretionary Spending (Food, Clothing, etc) – 10% Net Income
That totals up to just over 150% of my Net Income.
Costs of Former Marital Home
This is a very significant expense. I am responsible for making the payments until the property sells. Unfortunately, it is currently the off-season in the real estate market. In addition, it is a larger home that is in a slower moving price range, with many brand-new builds as competition.
- List the home with REX Real Estate at 2% commission during the slow season. This service does not list on the MLS, so it will not collect days on market. There are extenuating circumstances that do not allow me to do For Sale by Owner.
- If I haven’t gotten any traction by mid-March, move over to a standard agent, hopefully one with a 4%-5% rate instead of the standard 6%.
If I am able to sell the house with a 6% commission at my target price, I will walk away even. Every 45 days that I hold onto the house, I lose the equivalent of 1%. It is not worth holding on any longer than I must to unload this house to save on real estate commissions.
Expected Impact – Reduce Expenses by 40% of Net Income
Divorce Related Expenses
These expenses are ongoing and do not include additional legal fees. These are pre-tax costs but are being paid with post-tax earnings. Completing the final decree will enable me to update my tax filing to stop paying taxes on the income that is going to pay these.
- Complete final decree
- Update tax withholding to exclude these expenses from taxable income.
Expected Impact – Reduce Expense from 40% of Net Income to 25%
Current Living Expenses
These expenses are essentially my rent payment and utilities. The only utilities that I have are electric, water, trash, and Internet. I work from home, so cutting home Internet is not a viable option. I could potentially do with a smaller house, but I am not able to move until July without paying significant fees. In addition, I need to be able to accommodate the occasional temporary night nanny for when I need to travel for work.
- Investigate downsizing a bit when my oldest goes off to college this fall.
Expected Impact – None currently planned
I currently lease a car which expires in Feb 2020. The costs of exiting the lease early would wipe out any benefits from doing so. Unlike the illustrious Mr. Money Mustache, I am not able to transition my transportation to primarily using a bicycle.
- Investigate cheaper options when this lease expires.
Expected Impact – None currently Planned
I currently have 3 credit cards going, a personal loan, and two student loans. The 3 credit cards are each at 20% annual interest, the personal loan is at 10%, and the student loans have not transitioned into the repayment phase.
- Open a Citi Simplicity Card for 0% Balance Transfer for 18 months. (Completed, Credit Limit = 20% of my current credit card debt.)
- Potential Bonus at work in March, will pay down the high interest credit card debt as much as possible along with one of the student loans. I am choosing one of the student loans because it was part of the divorce settlement and reducing entanglement is more important than the financial savings.
- Back-up Option – Liquidate my 401k. It’s not very large after the settlement, but may cover 30%-40% of my outstanding debt. If I don’t receive the bonus or if the bonus is not sufficient to cover enough of the outstanding debt, this may be the best option. I will do a future blog post after I’ve done the financial analysis.
As I mentioned, I’ve already opened the balance transfer card. Due to my high existing debt, my credit rating has dropped significantly, so that had a bit impact on how much I was able to transfer over. Paying off a chunk of my debt before the balance transfer promotion ends will save me a couple thousand dollars in interest.
Expected Impact – Reduce Expense from 25% of Net Income to 10%
These expenses are monthly food allotment, kid’s school expenses, clothing, and minor entertainment expenses (Read: Netflix). This is normally where a budget really enters the picture, because these are the items over which you have the most day to day control.
Let’s talk about budgets. I manage them for a living, but I do not have one personally. I will be developing a budget, but right now I am treating every category as if the budgeted amount is zero. Everything that I spend is over budget, so my focus will be on absolutely minimizing spend in every category.
- Minimize any spending in these categories.
I’ve already gone through and cut out everything that I can from this area but will continue to look for ways to make any gains possible. The biggest portion of this is actually the grocery expense. Eating out has been reduced to the occasional carry-out pizza for $6 from Papa Johns. I am currently managing the grocery bill at about $120/week for myself and 3 pre-teen/teenage children. I will work on trying to bring this down to $80/week.
Expected Impact – No specific recurring savings identified at this point.
Action Plan Impact Summary
|Category||Current Net Income Impact||New Net Income Impact|
|Former Marital Home||40%||0%|
|Current Living Expenses||30%||30%|
This action plan reduces my monthly expenses by 47% overall and is enough to bring me back into the black. It’s a good start, but no where close to my ultimate target.
Wrapping It All Up – Taking Action
In the previous post, I identified my primary goals and determined what the biggest challenges are to reach those goals. I followed up with an action plan to address the challenges that I identified.
Successfully following through on this action plan, I can expect to reduce my debt load by approximately 50% and get my monthly cash flow back into the black.
After I complete this phase of the plan, my goals will not necessarily change, but I will need to go back and identify new challenges to meeting them and develop an action plan for the next phase.
Living strategically is about developing the high-level aspirational goals that I desire for my life but following through with understanding what will prevent me from reaching them and create a specific action plan to surmount those challenges.
I haven’t decided yet what course of action to take with the 401k but will wait until I see how things play out with selling the house and my bonus, then run the numbers and see if this makes financial sense. A post on this financial analysis and resulting decision when the time comes.
Regular updates to follow as I work through the this plan. Now it’s time for taking action!
If you have any thoughts or suggestions, please feel free to leave a comment!