With their investment portfolio in tatters, this couple found ways to cut spending by $24,000 a year and rebuild their savings
Stock market declines have laid waste to many people's retirement plans, including my own. Since my wife and I don't expect the market to retrace its highs anytime soon, we are trying to replenish our nest egg another way--by attacking our budget. We're on a mission to make up the losses and add to our principal so we're ready to pounce on opportunities when the market turns. A couple in our mid-40s with a child, we are using this crisis to rid ourselves of bad habits and to impart some valuable lessons to our son.
The first move we made was to fire the wealth-management firm we'd signed on with 16 months ago. They were charging 1.15% on the assets in our portfolio, and had advised us to go 65% in equities shortly before the market tanked. Luckily, I didn't take their advice. (Our advisers didn't even try to stop us from leaving.) Now we are steadily funneling money into a bond index fund, a municipal bond fund, and a stock index fund at Vanguard; 25% will remain split between cash, money market funds, and certificates of deposit. Estimated savings from not using our adviser: $7,000 a year.
The next part of the Kiley Family Recovery & Reinvestment Act of 2009 involved our mortgage. We pay monthly, like most people. To knock down the principal, we are going to make smaller payments twice a month, which will add the equivalent of one extra monthly payment a year. That will reduce the 27 years we have left on our mortgage to a little more than 22 years, saving us $77,000 in interest. And we're refinancing from a 6% rate to 5.12%, with no fees and no closing costs--that's $212 less a month.
With household expenses, some economies we and other budget-minded consumers can make may seem like piddling savings. But it all adds up. And we're finding chasing savings can get addictive. Here are a few of our cuts:
I was seeing a chiropractor twice a week at $35 per visit. Cancelled; I think I can get the same relief by working out more on my underused Total Gym. Also, my wife was seeing an out-of-network specialist, which could have cost $2,000 this year. She is now seeing an in-network specialist, which requires a 90-minute round trip. With gas at $2.00 a gallon, the added fuel cost doesn't bother me.
We've piggybacked family trips onto two business trips this year, to New York and Florida, to save some airfare and hotel expenses. That will whittle about $3,000 off what we would have spent taking those trips on our own. We're also dining out twice a month now, rather than weekly.
When my wife and I left our advisers, we sold our actively managed mutual funds and I paid off a $6,000 credit-card balance, saving the 13.9% I'd been paying in interest on the debt. We also got out of the American Express (AXP) Rewards program. For 10 years, I'd paid a $40 annual fee to get one rewards point for each dollar spent. Each 10,000 points buys a $50 traveler's check; the 70,000 points I'd earned got me only $350 in traveler's checks--not worth the cost.
Where does all this get us? If we add what we would have spent on an adviser to the cash saved from fewer dinners out, cheaper vacations, lower debt payments, and a host of smaller cuts, we can boost principal by about $15,000 per year. If the markets bounce back sooner than we think, we hope our new habits will die harder than our old ones.