First off, I want to acknowledge how much resilience you’ve shown in navigating such a tough year. The fact that you made it this far while keeping your financial situation afloat is a huge accomplishment. Starting over can feel overwhelming, but breaking it into manageable steps will make the process less daunting.
1. Stabilize Your Finances: Bare Bones Budget
You’ve already cut back significantly, and that’s key. Continue with this tight budget until you’ve addressed your most urgent financial needs.
Bare Bones Budget Priorities:
- Essential Living Costs: Rent/mortgage, utilities, groceries, transportation, insurance.
- Minimum Debt Payments: Stay current on all debts to avoid late fees and additional interest.
- Healthcare: Ensure your medical needs are covered without adding further debt.
2. Tackle Credit Card Debt vs. Emergency Fund
Rebuilding your financial stability means balancing debt reduction and saving for emergencies. Here’s a strategy:
Step 1: Mini Emergency Fund
- Set aside $1,000–$2,000 first for immediate emergencies. This prevents you from relying on credit cards again for unexpected expenses.
Step 2: Debt Avalanche Method
- Focus on paying off the highest-interest credit cards first while making minimum payments on others. This saves money in the long run.
- If interest rates are particularly high, explore options like a balance transfer card or a debt management plan through a nonprofit credit counseling agency.
Suggested Allocation:
- 50% of surplus income: Toward credit card debt.
- 30% of surplus income: Toward rebuilding emergency savings beyond the mini-fund.
- 20% of surplus income: Resume retirement contributions (see below for more details).
3. Resume Retirement Contributions
Once your credit card debt is manageable and you’ve rebuilt a basic emergency fund, resume retirement savings.
- Employer Match: If your husband’s new job offers a retirement match, prioritize contributing enough to receive the full match. It’s free money.
- Incremental Contributions: Start small and increase contributions as debt payments decrease.
4. Address Federal Student Loans
These are less urgent, but stay aware of when payments resume.
- Enroll in Income-Driven Repayment (IDR) if necessary.
- Once your high-interest debts are paid off, allocate extra funds toward reducing student loan balances.
5. Build a Full Emergency Fund
Aim for 3–6 months’ worth of essential expenses once your credit card debt is eliminated and student loans are under control.
6. Emotional Support & Education
Feeling overwhelmed is normal after such a year. Equip yourself with resources to stay motivated:
Books:
- “The Total Money Makeover” by Dave Ramsey (focus on the debt snowball for psychological wins).
- “Your Money or Your Life” by Vicki Robin (shift mindset about money).
- “I Will Teach You to Be Rich” by Ramit Sethi (practical systems for rebuilding finances).
Podcasts:
- Afford Anything by Paula Pant (big-picture financial goals).
- How to Money (practical tips for budgeting, debt, and savings).
- The Dave Ramsey Show (for debt payoff motivation).
Blogs:
- Mr. Money Mustache (frugality and financial independence).
- NerdWallet and The Simple Dollar (practical budgeting and debt tips).
7. Practical Action Plan
Here’s a summarized roadmap:
Create a Mini Emergency Fund: Save $1,000–$2,000 quickly.
Focus on High-Interest Debt: Use the avalanche method to reduce credit card debt.
Maintain Bare Bones Budget: Avoid lifestyle creep until debt is under control.
Rebuild Emergency Savings: Gradually increase this to 3–6 months of expenses.
Resume Retirement Contributions: Start small, focusing on employer matches first.
You’re in a tough spot, but it’s solvable with a solid plan. Let’s break this down step-by-step:
1. Prioritize High-Interest Debt
The most pressing issue is the high-interest rates on your credit cards and loans. Your goal is to reduce these as quickly as possible to minimize the interest you’re paying.
Steps to Take:
- Minimum Payments: Continue making minimum payments on all debts to avoid penalties.
- Target the Highest Interest Debt: After meeting minimums, focus any extra money on paying down your consolidated loan (31.99%) first. Once that's tackled, move to the PC Financial card (26.99%), then BMO, and so on. This is the debt avalanche method.
2. Increase Your Income
Your income is limited, but a small boost can make a big difference.
- Ask for More Hours or a Raise: See if your current job can offer extra hours or increased pay for commission-based tasks.
- Temporary Side Hustles: Look for gig work like freelance assignments (writing, editing, graphic design), tutoring, or delivery services. An extra $100–$200/month can accelerate debt repayment.
3. Reduce Expenses
Your budget is tight, but there are areas to trim. Every dollar saved can go toward debt repayment.
- Cut subscriptions: Temporarily cancel Spotify ($6.99/month) if possible. Consider switching to a free version.
- Adobe Creative Cloud: Check if your school offers a discounted or free alternative. Otherwise, keep it if required for studies.
- Groceries: Optimize grocery spending by meal planning, buying in bulk, and using discount apps (like Flipp or Flashfood). Aim to reduce this by $20–$40/month.
4. Consider Debt Consolidation or Assistance
To manage high-interest rates, explore these options:
- Balance Transfer Credit Card: Apply for a card with a low promotional interest rate on balance transfers. This could save you money on interest if approved.
- Debt Management Program (DMP): Look into nonprofit credit counseling agencies in Canada like Credit Counselling Canada. They can negotiate lower interest rates and set up a manageable repayment plan.
- Talk to Your Bank: Some lenders may offer hardship programs or reduce interest rates temporarily. It’s worth asking.
5. Use a Detailed Debt Repayment Plan
Example Allocation (Monthly Income: ~$800):
- Minimum Payments:
- TD: $20
- PC Financial: $30
- BMO: $40
- Consolidated Loan: $158
- Essentials:
- Phone: $65
- Gas: $200
- Groceries: $200
- Subscriptions: $63 (Adobe, gym)
- Total Fixed Costs: $776
- Leftover for Extra Debt Payments: ~$24
Use any additional income or savings to pay down debt faster.
6. Long-Term Strategies
- Build Credit Wisely: After clearing your debt, keep credit usage under 30% of your limit and pay balances in full to avoid repeating this cycle.
- Emergency Fund: Once your debt is manageable, save a small fund ($500–$1,000) to avoid relying on credit for unexpected expenses.
Here’s a tailored breakdown for your situation:
1. Foreign Large Growth (FKIDX) for International Allocation
- Not Ideal for Diversification: Foreign large growth funds like FKIDX tend to focus on specific types of international stocks (growth-oriented, large-cap). This lack of diversification can leave you exposed to sector or style risk. A better international fund would include a mix of growth, value, and small/mid-cap stocks for broader exposure.
- Expense Ratio (0.6%): While not extremely high, it’s still relatively costly, especially compared to broader, lower-cost international funds available in other plans.
2. Target-Date Fund (TDF)
- Expense Ratio (0.75%): TDFs are convenient but come with a higher expense ratio. This might not be worth it if you can replicate its allocations with your other low-cost options (like the S&P 500 and Total US Bond).
- Downside: You give up control, and the higher fee eats into returns over time.
3. Suggested Allocation
To minimize costs and maximize diversification, build your own portfolio using the low-cost options:
- S&P 500: Use this for U.S. stock exposure. It's a solid foundation with a very low expense ratio.
- Foreign Large Growth (FKIDX): Allocate only a modest portion here for international exposure, as it's your only option.
- Total US Bond: Use this for the bond portion to balance out your portfolio and reduce volatility.
A sample allocation might look like this (adjust based on your risk tolerance):
- 70% S&P 500
- 20% FKIDX (International)
- 10% Total US Bond
4. Why Skip the TDF?
By replicating the TDF's allocation yourself, you:
- Save on the higher expense ratio (0.75% vs. blended lower costs).
- Gain more control over your portfolio and rebalance as needed.
You're already off to a great start by saving $10k, planning for a practical career, and having strong financial values. Here's how you can build on this solid foundation:
1. Delay Big Expenses (Like the Car)
- Hold off on buying a car for now. You mentioned you're able to wait, which is smart. A car would drain not only your savings (purchase cost) but also add recurring costs like insurance, gas, maintenance, and repairs.
- Alternatives: Use public transportation, carpool, bike, or walk for as long as possible. If you do eventually need a car, aim for a reliable, fuel-efficient used car in the $5k–$7k range.
2. Maximize Your Education Investment
- Stick to your Associate of Arts program, especially since scholarships are covering your costs. Use this time to explore practical fields (programming, cybersecurity, etc.) that can lead to in-demand, high-paying jobs.
- Leverage internships: Your plan to get internships is spot-on. Focus on building skills and experience in fields like video editing, graphic design, or programming. Practical experience often matters more than degrees in creative or tech industries.
- Use your college resources: Tap into career centers and free workshops to build your resume and portfolio.
3. Invest in Skill Development
- Online courses: Use affordable platforms like Udemy, Coursera, or Codecademy to learn programming, cybersecurity, or animation tools. Many are inexpensive and can complement your college education.
- Certifications: Look into beginner certifications like CompTIA IT Fundamentals (ITF+) or Google IT Support Certificate if you're exploring cybersecurity or IT. They’re affordable and can open entry-level doors.
4. Build and Protect Your Savings
- Emergency Fund: Keep at least $3k–$5k in a savings account to cover 3–6 months of essential expenses. This safety net is critical before making big financial decisions like buying a car.
- Conservative Investments: With the rest of your savings, consider opening a high-yield savings account (HYSA) or a Certificate of Deposit (CD) to earn a little interest while keeping your money safe.
- Avoid unnecessary risks like crypto or speculative stocks at this stage.
5. Establish and Grow Credit
- You’re already on the right track with your credit card. To keep building credit:
- Pay off your balance in full each month.
- Use no more than 30% of your credit limit (ideally under 10%).
- After 6–12 months, request a credit limit increase or consider adding a second card. This will improve your credit utilization ratio.
6. Budget and Track Your Spending
- With your income, focus on living frugally:
- Prioritize essentials (tuition, rent, groceries).
- Minimize luxuries like eating out or unnecessary subscriptions.
- Use free budgeting apps like Mint or YNAB to track your spending and savings goals.
7. Plan for the Future
- Short-term: Build your emergency fund and focus on skill-building to land internships or part-time work in your field.
- Medium-term: Transition to a high-paying, practical degree after your associate’s program. Save for a used car when it's truly necessary.
- Long-term: Once your income increases, look into investing in a Roth IRA to start building long-term wealth.
Here’s a concise breakdown of how you can make $228 per week work for food and gas for two adults and one child, plus some advice to help you stretch your budget:
Food Budget
- Estimate: A reasonable weekly grocery budget for 2 adults and 1 child is around $100–$120, depending on how frugal you are.
Tips to Save:
Plan meals in advance: Stick to affordable, nutrient-dense staples like rice, beans, pasta, frozen veggies, eggs, and chicken.
Shop sales and use store apps: Compare prices and use loyalty programs for discounts.
Limit snacks and pre-packaged foods: These are often costly and less filling.
Cook in bulk: Prepare meals like soups, casseroles, or chili to stretch ingredients over several days.
Gas Budget
- Estimate: Since your essential drives are very short (less than 2 miles total for errands), your gas cost should be minimal—around $10–$15 per week, assuming a moderately efficient car.
Tips to Save:
Combine errands into fewer trips to save fuel.
Walk or bike to the gym and store when possible to eliminate gas costs altogether.
Stretching Your Budget Further
Emergency Savings: If you don’t already have an emergency fund, aim to save any leftover money each week, even if it’s small.
Free Activities: Use free local resources for entertainment and socializing (parks, libraries, etc.) to avoid extra spending.
Avoid “little splurges”: Small indulgences like takeout or coffee runs can quickly eat into your budget.
Key Points:
QSBS Exclusion: The excluded gain from a qualified QSBS sale is generally not included in your Adjusted Gross Income (AGI).
MAGI Calculation: MAGI typically starts with AGI and adds back certain deductions. Since the QSBS gain is excluded before reaching AGI, it should not affect your MAGI.
EV Tax Credit Eligibility: If your QSBS sale is fully tax-exempt and your wages are well below $150,000, you likely still qualify for the EV tax credit.
Verification: To ensure accuracy, consider the following steps:
- Review IRS Form 8949 and Schedule D where QSBS sales are reported.
- Check that the excluded gain is not inadvertently added back to your MAGI.
- Consult with a tax professional familiar with QSBS rules and EV credits.
Alternative Consideration: The IRS allows you to use either the current year's MAGI or the previous year's MAGI, whichever is lower, for EV tax credit eligibility. This provides flexibility if your income fluctuates.
Documentation: Keep detailed records of your QSBS sale and calculations to support your EV tax credit claim if questioned by the IRS.
In conclusion, your tax-exempt QSBS sale should not count towards your MAGI for EV tax credit purposes. However, given the complexity of tax laws and the significant impact on your eligibility, it's advisable to consult with a tax professional to confirm your specific situation and ensure compliance with current IRS regulations.
Here’s a more detailed breakdown to help you understand the tax implications and other factors when withdrawing from your IRA Edge account:
1. 10% Early Withdrawal Penalty
If you’re under 59½ years old, the IRS imposes a 10% penalty on the amount you withdraw. This penalty is assessed immediately unless you qualify for specific exceptions. Common exceptions include:
- Using up to $10,000 for a first-time home purchase.
- Paying for qualified higher education expenses.
- Covering unreimbursed medical expenses exceeding 7.5% of your adjusted gross income (AGI).
- Certain hardship circumstances (e.g., permanent disability).
If you don’t qualify for an exception, the 10% penalty will apply on top of regular income taxes.
2. Income Taxes
Withdrawals from a traditional IRA are taxed as ordinary income because contributions were made pre-tax. Here’s how it works:
- The IRA provider typically withholds 10%–20% for federal taxes when you make the withdrawal.
- However, the exact tax you owe depends on your income tax bracket. If you’re in a higher tax bracket or the withdrawal bumps you into a higher bracket, you may owe more come tax season.
At tax season, you’ll report the withdrawal as income on your return and settle any remaining taxes owed. If your provider didn’t withhold enough, you might owe additional taxes.
3. Additional Fees
While the IRS itself won’t charge extra fees beyond the 10% penalty, your account provider may charge a withdrawal or processing fee. It’s worth checking with them directly to understand any additional costs.
Steps You Should Take
Check Withholding Options:
Before making the withdrawal, talk to your IRA provider to confirm how much will be withheld for federal and state taxes. If they don’t withhold enough, you could face an unexpected tax bill later.
Calculate Tax Impact:
Use your estimated income for the year to figure out how the withdrawal will affect your tax bracket. The larger the withdrawal, the higher your tax liability may be.
Avoiding the Penalty (If Possible):
If you’re withdrawing for a specific purpose, check if you qualify for an exception to the 10% early withdrawal penalty. Provide documentation to your IRA provider if necessary.
Building financial security is a journey. Don't be too hard on yourself for setbacks. Focus on consistent progress, even if it's small.
Here's a tailored action plan to help you regain control and build your savings:
Emergency Fund Priority:
- Aim to build a 3-6 month emergency fund as your top priority.
- Start small: Set a goal to save $1,000 in the next 3 months, then gradually increase.
Budget Overhaul:
- Create a detailed budget using the 50/30/20 rule: 50% for needs, 30% for wants, 20% for savings/debt repayment.
- Use budgeting apps like YNAB or Mint to track every expense.
Expense Reduction:
- Review subscriptions and cancel unnecessary ones.
- Look for cheaper alternatives for regular expenses (e.g., phone plan, insurance).
- Consider temporary lifestyle adjustments to boost savings.
Income Boost:
- Explore overtime or additional responsibilities at work.
- Consider a side hustle or part-time job to supplement income.
- Sell unused items for quick cash.
Automate Savings:
- Set up automatic transfers to your savings account on payday.
- Start with a small amount (e.g., 5% of your income) and gradually increase.
Create Multiple Savings Buckets:
- Separate your emergency fund from savings for other goals.
- Use high-yield savings accounts for better interest rates.
Debt Management:
- If you have high-interest debt, prioritize paying it off to reduce interest costs.
Financial Education:
- Read personal finance books or follow reputable financial blogs.
- Consider taking a free online course on personal finance management.
Professional Development:
- Invest in skills that could lead to a promotion or higher-paying job.
Regular Financial Check-ins:
- Schedule monthly financial reviews to track progress and adjust your plan.
Prepare for Unexpected Expenses:
- Start a sinking fund for predictable irregular expenses (e.g., car maintenance, annual subscriptions).
Based on the information provided, here's a tailored response to your situation:
1. ESOP Distribution Considerations:
Check if your husband can receive his ESOP distribution without penalties. Typically, distributions after age 59½ avoid the 10% early withdrawal penalty.
However, he may still owe income taxes on the distribution, which could push you into a higher tax bracket for that year.
2. Mortgage vs. Investment Returns:
- Compare your mortgage interest rate to potential investment returns. If your mortgage rate is low (e.g., under 4%), it might be better to keep the mortgage and invest the ESOP funds for potentially higher returns.
3. Retirement Income Security:
Paying off the house would significantly reduce monthly expenses, providing more financial flexibility during retirement.
This could be especially beneficial given the 15-year gap between your husband's retirement and yours.
4. Part-time Work Impact:
5. Long-term Financial Planning:
- Consider how paying off the house affects your overall retirement strategy, including Social Security claiming strategies and required minimum distributions from retirement accounts.
6. Tax Implications:
- Consult a tax professional to understand the full tax impact of taking a large ESOP distribution in one year.
7. Health and Long-term Care:
- Factor in potential healthcare costs, given your husband's physical condition from his work.
Recommendation:
Given your husband's age and physical condition, paying off the house could provide significant peace of mind and financial flexibility. However, this decision should be balanced against potential tax implications and investment opportunities. Before making a decision:
1. Confirm the ESOP distribution rules and potential penalties.
2. Consult with a tax professional to understand the tax impact.
3. Review your overall retirement plan with a financial advisor to ensure this aligns with your long-term goals.
If the tax impact is manageable and it significantly improves your monthly cash flow, paying off the house could be a sound strategy for your situation, especially considering your husband's desire to retire soon and transition to less physically demanding work.