pocketmint

As I’ve started to write up my experiences grocery shopping in Mexico, I’ve realized that in order for the comparisons to make any sense I first need to give them some context.

If you’ve been reading Pocketmint for any length of time, you’ve probably noticed that I place a lot of emphasis on food. From a purely economic standpoint, it’s the second or third biggest expense in our lives, after housing and vying with health care/insurance. And for me personally, food is a primary source of satisfaction and pleasure.

If you look over at the keyword cloud in the right sidebar, you’ll see that the only topic larger than ‘groceries’ is ‘frugal living’. In many ways, two of my top directives — save money and eat well — are in direct conflict. I’ve spent years refining my methods for doing both at the same time, with maximum efficiency.

The result is that I feed my family — currently two adults, one half-time teenager, plus two cats and a dog — on just over $10 per day, including predominantly local and/or organic produce, sustainably-caught seafood, and top-quality ingredients (from the perspective of both taste and health), as well as consumable supplies like soap and toilet paper. As I discovered when I recently did the math, that’s way below the federal food stamp budget, in a city with higher-than-average food costs.

So … leaving Mexico aside for a moment, let me describe my usual grocery-shopping system.

Price Tracking

When you’re standing in the grocery store aisle making a purchase decision, the information you need most is not printed on the label, or written on the little shelf sticker, or in fact available anywhere in the store. The single most important thing to know is price over time: what that item has cost each week, at every store you shop at, for the last several months.

Say you’re looking at a display of tuna cans, on sale 4 for $5. Just because it says SALE doesn’t automatically make it a good deal. Even the fact that the posted regular price is $1.69 doesn’t tell you anything useful.

For all you know, that store never sells tuna at $1.69 per can, because it’s perpetually ‘on sale’. That $1.69 is just there to make you think you’re getting a good deal (in behavioral economics, this is called ‘anchoring’). Or maybe it sold for $1.69 last week, but two weeks ago the same tuna was $.99 per can. Puts that $1.25 in a whole different light.

Or what if you knew that a different store down the street regularly uses tuna as a loss leader at 10 for $10, at least once every eight weeks. Or that buying an 8-can pack at Costco costs $1.47 per can, and their cans are two ounces larger.

If you know all of these things, you can make an informed decision about whether to buy tuna at this store, and this price, today.

The best way to go about this when you’re starting out is to keep a ‘price book’. There are many variations on this system, but here’s mine: I take a little pocket-sized notebook and at the top of each page I write the name of an item that I purchase frequently. Then, each time I am in a store, I add a line on that page containing the date, the store, and the price per quantity. So for example (not real numbers, I’m making this up):

In just a few weeks you will start to get a sense for what the best deals are, and you can start setting your ‘buy prices’. In the above case, I would set $1 per 5oz can as my buy price — any higher than that, and you know the Costco price will match or beat it. When you see a sale at or below your buy price, you know it’s time to stock up.

After several months, you may find that you don’t need the actual price book anymore, because you’ve memorized 90% or more of the relevant buy prices. I don’t carry a book with me in Seattle now — though when we move again, and I’m faced with a different selection of neighborhood stores, I may start up again until I’ve internalized the new data.

Weekly Sale Ads

Price history is critical background knowledge, but it doesn’t determine what I put on my shopping list. That would be the weekly sales.

There are five major grocery stores within reasonable driving distance for me. Each puts out a weekly circular advertising their sale prices. Most of the stores run on a Wednesday to Tuesday cycle, and the ads arrive in Tuesday’s mail. Fred Meyer runs Sunday to Saturday, and since I don’t get a local newspaper I check their circular online.

Combing through five circulars of six to eight full newsprint pages each could be time-consuming, but I’ve got it down to a science.

First, I have learned to ignore Albertsons altogether, despite it being the closest store to our house. Albertsons’ sale prices rarely beat the regular prices of other stores in the area. When they do have a good deal, they often have it only in limited supply, which means they run out of stock early and won’t issue a raincheck. After about the fourth or fifth time I came out empty-handed, pissed off, and feeling like I’d wasted my time, I decided I was done. So the Albertsons ad? Goes directly to recycling.

That leaves paper ads for Safeway, QFC, and Top Foods, plus the online Fred Meyer ad. (For the record, I would happily shop at Trader Joe’s, but there isn’t one close enough to make it worthwhile.)

When I first scan the weekly ads I’m looking for just two things: loss leaders and fresh produce.

The best loss leaders are often on the front or back pages, where they get the most exposure. They’re also invariably the largest items on each page. In my initial scan I just note the highlights — anything large — and ignore the rows and rows of smaller items.

Next, I find the produce section of each ad. For the 20 weeks that our CSA is in effect, we’re already getting plenty of produce delivered, so I rarely need to supplement. But for the other 32 weeks, fresh fruits and vegetables are a priority. So I mentally catalog what vegetables are on sale, and start thinking of meals that I can plan around them.

I also briefly check the seafood section, looking for a sale on wild-caught shrimp or a sustainable variety of fish. (I don’t eat, or cook, meat or poultry; if I did I’d pay similar attention to those sales.) Most weeks I don’t buy seafood, but if a great deal comes along I’ll stock up (if frozen) or plan a special meal around it (if fresh).

Note the order of operations in those last two paragraphs, because this is a critical strategy: I don’t decide what I want to eat, and then look for the lowest price — I first see what fresh food is cheap, and then plan meals based on those ingredients.

Once I know what the loss leaders and produce sales are at each store, I can choose which ones I will actually visit. I never want to go to four different stores in the same week — too time-consuming. Usually I pick two, sometimes just one. Fred Meyer makes the cut more often than not; not only do they often have multiple good deals, but from years of comparisons I have learned that Fred Meyer has the best regular prices for a majority of items, if something I need is not on sale anywhere.

Especially with seasonal produce, the same item will sometimes be on sale at multiple stores — though not always for the same price. However, I will sometimes pay a bit more at one store to save the gas and time of driving to a second or third. Asparagus might be $1.69 per pound this week at Safeway, but if Safeway has nothing else to draw me in, I might instead pay $1.99 at QFC, which has three other really great deals as well.

Time and money, as usual, are a tradeoff, and you have to do your own calculations about where to draw the line. When I’m commuting to a 50-hour job, I will spend a little more money to save time; when I’m primarily homemaking and freelancing, I’ll spend a little more time to save money.

Once I’ve chosen the one or two stores that I intend to visit, I will spend another few minutes scanning the interiors of those ads for nonperishables that meet my buy price points, and make a shopping list for each store.

The final money-saving trick is to stick to those lists once I’m actually in the store. Every once in a while I will pick up something I didn’t plan for — an unadvertised special, for example — but most times I’m in and out with exactly what’s on the list and no more.

Storage

Perishable produce has to be restocked once a week or so, but nearly everything else can be bought when cheap and kept until needed. For this, decent storage is necessary. Keeping a stocked pantry means that I’m almost never caught out by having to buy a particular thing right away, regardless of price. Occasionally I do have to buy something not on sale, but at the very least I know that it’s coming up and I can add it to my next trip to Costco or Fred Meyer.

Cabinet space in our current kitchen is minimal, so I repurposed a corner of a tiny closetless bedroom down the hall that we use only for storage. (And currently, as a staging area for Getting Rid of Stuff.) My pantry is two sets of metal shelves, six feet high and about three wide. Everything is organized and clearly visible, so I can see with a quick glance what I have on hand.

Then we have the chest freezer, which is as problematic as it is indispensable. Aside from a couple of wimpy wire drawers, the only available organization method is to pile things on top of other things. If you dig far enough down, you’re bound to uncover some random item from the previous year, freezer-burned and long-forgotten. Worse, because only a fraction of the stash is readily visible, I occasionally purchase a large package of something only to discover later that I already had one. Or two.

I don’t recommend anyone copy the freezer part of my system. I’m trying to both reduce how much frozen food I buy, and cycle through what I do have more frequently. Still, I rely on the freezer space enough that I’m not sure how I’d fare if I were suddenly busted back to only the little fridge freezer.

Coupons

I don’t use many manufacturer’s coupons. I tried the whole hardcore couponing thing for several months a couple of years ago, and in the end I concluded it wasn’t worthwhile for me in particular. Yes, I did save some money. However, it cost quite a bit in extra time and increased logistical stress. Also, it moved me in the direction of buying more packaged, highly-processed items than I would otherwise have purchased or than I could really feel good about. I decided that I would rather, for example, save money by making my own salad dressings, cookies, and soup from scratch, than spend that time hunting down coupons so I could purchase them already made.

Of course, this would not be possible if no one in our house either wanted to cook or was any good at it. Fortunately, my love for eating good food also extends to cooking. My homemade meals are both tastier and healthier than premade packaged foods and much cheaper than restaurant dinners, and most days I’m happy to make them.

My approach to coupons now is: if a manufacturer’s coupon shows up without any effort on my part (we get a Red Plum insert in the mail each week, plus the occasional unexpected Catalina printout at the register) for one of the few packaged items that I regularly buy anyway, I’ll make a point of using it. This happens maybe all of once a month. Otherwise, I don’t worry about it.

Grocery store coupons, though, are another thing entirely. I use Fred Meyer’s ad coupons more weeks than not, and occasionally Top Foods’ as well. Plus, about once a quarter I get a set of QFC coupons in the mail — targeted based on my purchases in the store — and they always include several coupons for completely free items. Plus I make full use of rainchecks if something is sold out.

That’s my weekly routine, more or less. I’ve left out a few alternate options — Costco and the salvage grocer and the ethnic supermarket — that I utilize often but not every week, for specific kinds of things. And of course there are dozens of other minor strategies that help keep the grocery expenses low; I’ll cover those another time.

But this should give you enough of a sense of how I usually shop — with preplanned lists and meals organized around weekly sales at a couple of stores, buttressed by a stockpile of staples — to give you some context for my next post, about how wildly different an experience buying groceries in Mexico has been.

Pocketmint is documenting a month of personal finance in Mexico. For the backstory, see this post.

Where Cash is King

At home in Seattle, I almost never use cash. I carry five to ten dollars around in my wallet ‘just in case’ … and it’s the same five or ten dollars for months at a time. Our last ATM withdrawal was in 2010, for the special circumstance of buying a used car. Before that, 2007.

In person, I pay either by credit card or debit card. Twelve debit card purchases a month gets us a great interest rate on our checking account (which doubles as our emergency savings); we use the credit card at Costco and to get cash back on gas and restaurants.

In Mexico – at least outside of major gringo tourist areas – it’s the exact opposite. Credit cards are nearly useless, and debit cards are only good at ATMs. In Mexico, cash is not just king, it’s pretty much the only game in town.

The consensus among expats in Mexico is that the best exchange rate can be had by getting pesos via ATM using your U.S. debit card, so that’s what we’ve done. Turns out the airport ATM wasn’t so great, but the one local ATM we’ve tried here in Ajijic had a much better exchange rate and a smaller fee.

Pockets of Pesos

Once you have the cash there’s the matter of carrying it around. Even at home I don’t bother with a purse, so most of my clothes are well-supplied with pockets. But my stateside habit of carrying a wallet in my back pocket is ill-advised here, where pickpocketing is more common; instead I simply put loose pesos in my front pockets.

Waving a lot of cash around also seemed unwise, so I developed a system where I put larger denominations (500, 200, 100 peso bills and 10 peso coins) in my left pocket and smaller denominations (50 and 20 peso bills and all other coins) in my right pocket. That way I can pay for, say, a 15 peso pineapple without flashing several hundred.

Peso bills are colored, which makes quick identification easy. Peso coins, on the other hand, are sometimes frustratingly similar. $1 and $2 coins are so close in size that I have to flip them to see the number before I know what I’ve got, which means I can be embarrassingly slow counting out change. (Writing that, I think maybe I should put twos in the left pocket and ones in the right. Hmm.)

Accounting for Change

At home, using debit and credit cards almost exclusively means that all of our purchases are picked up automatically by Mint, where two or three times a week I log in and assign each one to a budget category. Only once in a blue moon do I have to enter a cash transaction, and then there’s always a good chance that it will be missed – either Jak fails to mention it, or I forget to record it.

Here in Mexico, it’s all cash all the time, which means a whole new tracking system. Most of our purchases are one- or two-item transactions with individual vendors where there is no receipt – much like going to a farmer’s market. But I came prepared: the former wallet back pocket is now home to a little notebook in which I write all sorts of things, including sometimes a record of checked prices or what I’ve spent.

Ironically, the fact that everything is cash means nothing gets forgotten, as it immediately became clear that I need to do an accounting at the end of each day. I started a simple spreadsheet where I record our cash withdrawals and subtract each day’s expenditures. Then I count our cash pesos and check the total against the spreadsheet.

Then, in order to keep using our budget categories in Mint and square everything with our dollar-denominated bank accounts, I have to sit with a calculator and convert each peso purchase to dollars at the exchange rate of our most recent ATM withdrawal. Because there are so many individual purchases, that’s a lot of line items to manually enter.

For the first couple of days this seemed like a great deal of trouble, but within just a week it’s become a quick little routine. Of course, I can enjoy spreadsheets and data and making the numbers come out right; Jak, on the other hand, was so annoyed the first day when I made him account for every peso that he simply turned over all the money to me. I am now the sole Keeper of Cash, unless he’s going out by himself.

I think if we lived here permanently I would start to compile, say, all the individual grocery purchases from one day’s street market into a single entry: Chapala tianguis, 131 pesos. But right now I am gathering detailed price data, so I want to record that 4 bananas (at 8 pesos per kilo) cost 5.5 pesos and a kilo of dried black beans was 19.5, instead of lumping them together.

The running tally of cash has one other benefit: it keeps me from misplacing money, which is apparently a significant problem otherwise. If my daily count comes up short, I know I’m missing something somewhere, and go hunting for it. So far I’ve found coins stuck inside a folding map, and a crumpled $100 peso note in a shorts pocket in the laundry.

So with a little practice the prospect of change, in either sense of the word, has become less daunting. On to the next challenge!

After I posted What to do — and not do — with your former mortgage dollars, I received a request for advice on a strategic default from a woman I’ll call Tricia. I agreed to give her some (friendly, I-am-not-a-lawyer) suggestions based on my own research, and she gave me permission to share our exchange here.

The Scenario

First, here are Tricia’s original questions:

My husband and I are in a similar situation, only a year behind you in the process. We just stopped making payments this month. We also have Bank of America with a first and second loan (100% financing) from 2007 and we, like you, waited two years in the making homes affordable program and sent and re-sent paperwork with absolutely no progress. We hope to short sale or do a deed in lieu of foreclosure.

Do you have any advice based on your experience? Anything you would do differently?

We have a few loans we would like to pay off with our “extra” cash. Do you know of any downfall to paying off debt while trying to convince the bank that the mortgage is too much?

I corresponded with Tricia a bit and got some additional information.

Family

Tricia’s family lives in California. She is married with two children — a toddler and a baby.

Debt

The Zillow estimate for her home is $403k, but her personal estimate is closer to $350k.

Their first mortgage, for $429k, is an interest-only 7-year ARM. Since it’s interest-only, they still owe all $429k. The second mortgage was a variable-rate loan for $107k, of which they still owe $99k.

Total monthly mortgage payments, including escrow: $3010

They also have $23k in car loans at 5.35%:

• $9k on a 2005 Saab sedan
• $14k on a 2008 Suzuki SUV

… plus another $25k of student loans at 4.25%. They did have a substantial (~$20k) loan from family members, but that debt appears to have been forgiven.

On the positive side, they have zero credit-card debt (yay!) and they want to pay everything else off and keep it off. “We plan and hope to never have debt again,” Tricia writes.

Income

Tricia’s husband is a tenured college professor — so his income is stable! — with a gross salary of $83k across ten months. Last year he was able to work extra in the summer for a total of $103k, but that was an unusual situation; usually they live off savings for two months in the summer. Also, she says,

This next year we are taking a 35% cut in pay in order to take a sabbatical so that he can advance his career. (He is writing a textbook and making lab equipment.)

I am a nurse and I work per diem so I get roughly 3 days of work a month. Last year my W2 was just over $5,000. I am mainly a stay at home mom.

(I note that Tricia was pregnant or had a newborn for most of 2011, so I assume she was working less then than the three days per month she cites now — otherwise, her hourly wage would have been only $17 per hour, in a state where the average hourly wage for nurses is $43.) A 35% reduction means that her husband’s expected income for 2012 is about $54k.

Savings

After their first month without paying a mortgage, they have about $23k in non-retirement savings.

Tricia’s husband has been contributing $670 per month to his 403b retirement plan. Neither one contributes to an IRA.

Expenses

We didn’t delve fully into expenses, as Tricia was mainly asking for help with the mortgage walkaway and distributing the resulting money rather than cutting costs, but she did mention:

My budget is so bare bones that we don’t have a clothing fund. I’ve been wearing the same wardrobe for 5 years. I’m not a fashionista but come on! A new dress would be nice. One thing we have not and will not sacrifice is food. It’s expensive to eat healthy. We don’t eat out a lot. We average around $75 between the two of us for restaurants per month. My grocery bill is large, around $900 a month.

Also, her plan for 2013 involves living — presumably rent-free — with relatives:

We want to have this all resolved by December 2012, mainly because we want to go back east for 2013 while my husband does his sabbatical work. Our families are in Indiana and North Carolina so we can live with them for the year.

The System

First, let me correct a few misconceptions about mortgage default.

Recourse and Non-Recourse Loans

You are extremely fortunate that California, like my own state of Washington, is a non-recourse state. In your case that means that you will be able to walk away from your primary mortgage (because it was an original ‘purchase money’ loan, never refinanced) and the lien holder must accept the house as full payment. State law. You don’t need to negotiate with the bank over this at all.

So that $429k, you can stop worrying about it now.

The second mortgage is a little trickier. When the holder of the first mortgage forecloses (or sells short, or whatever), the second becomes a ‘sold-out junior’ loan — an unsecured debt much like a credit card debt.

Without going too far into abstruse legalities (because the recourse status of sold-out juniors in non-recourse states is a little fuzzy), you will still owe $99k on that second loan, and the lienholder might get a judgment against you for it if they went to court. This, you do not want.

Now, the downside for them is that going to court is expensive, as well as risky because of the aforementioned fuzzy status. They will certainly threaten to sue you, but they’re only going to actually do it if they think you have enough money to make it worth their while.

I will give you my best advice for handling this, but you should seriously consider consulting a California real-estate lawyer on the specific matter of the sold-out junior. Or even two lawyers, because they don’t all give the same answers. (As I said, fuzzy.)

Bankruptcy Options

The hole card against being sued for a debt is bankruptcy. Chapter 7 is the one that clears your debts; Chapter 13 puts you on a 3- or 5-year repayment plan. In both cases, any assets beyond specific state or federal exemptions will be used to repay your creditors.

It’s my educated guess, based on the information you gave me, that you and your husband will not qualify for Chapter 7 bankruptcy. However, the only way to know for sure is to run through the lengthy test yourself. You should do this first, as the answer will impact other decisions.

If you do qualify for Chapter 7, you are — well, worse-off financially, but in an excellent negotiating position with regard to the sold-out junior. (This is our own situation, and I’ll go more into those details in a future post.)

Chapter 13 is, as far as I can tell, of limited use to you either. If you wanted to keep your house — and if your primary mortgage weren’t so amazingly awful — you might be able to strip the second lien entirely. But that would still leave you with a primary loan that’s interest-only, turning adjustable, and as much as $80k underwater.

However, I’m personally less familiar with Chapter 13 (since it didn’t apply in our case), so there may be an advantage I’m missing. You should probably do further research on your own. You can also talk with a bankruptcy lawyer, but be careful — the lawyer makes money if you file and nothing if you don’t, so your interests and his are not necessarily aligned.

In your case, assuming you don’t qualify for Chapter 7 bankruptcy, and don’t want to apply for Chapter 13, you should expect that at some point down the line you will be negotiating a settlement with the second lienholder. I’ll come back to that below.

Foreclosure, Short Sale, or Deed-in-Lieu

Now, as to the idea of doing a deed-in-lieu or a short sale: forget it.

First of all, even though Bank of America is your servicer for both loans, they probably don’t own either one of them (despite what some random customer service rep may tell you).

Deed-in-lieu would only be an option if both mortgages are owned by the same entity, which is almost never the case. (Not that you can tell, because there isn’t any way — at least that I could find — for a homeowner to determine who owns a given loan, unless the owning bank decides it wants to contact you directly for some reason.)

Short sales are also notoriously difficult to get approved when there is more than one lender in the mix, because the junior lender is able to indefinitely sabotage the process, and — with no equity in the property — has no incentive to play along.

Furthermore, there is zero benefit to you in pursuing either a DIL or a short sale — at best it will play out much like a foreclosure; at worst it could drag out the whole process by an extra year or two, and cost you thousands of additional dollars.

According to FICO, keeper of the credit score, if you’re underwater on your home a deed-in-lieu, a short sale, and a foreclosure all have the exact same impact on your credit score.

Furthermore, both DILs and short sales require full financial disclosure, which you want to avoid — on general principle, but especially in your case where there’s a chance you might get sued down the line. You don’t want to give them any more ammunition.

You indicated that you thought the bank would be more likely to agree to ‘accept the deficit’ on the house and not take further action against you for the balance if you arranged a deed-in-lieu or a short sale. But in California the first lienholder has no choice and must accept the deficit without recourse. And I can promise you that the second lienholder will not treat you more favorably in a short-sale or DIL situation. They are completely out of the money and will get nothing in any case, except by coming after you.

Foreclosure Timing

Believe me, I know what it’s like to want to just move on, but I’m sorry to say that your hope that this will all be over by December 2012 is wildly unrealistic. The legal minimum length of the process in California is 170 days from first default — just shy of six months. But in reality a) bureaucratic processes rarely move with maximum efficiency even if all parties are motivated to do so, and b) the bank determines the foreclosure start date, and it’s typically in their interest to delay, often a year or even two. Even after the foreclosure is complete, you’ll still have to deal with the second lienholder. Based on a large (albeit unscientifically distributed) sample of prior cases, I’d say it’s likely to be at least 2014 before you can close the books on this, maybe even 2015.

This doesn’t mean that you can’t abandon your house and move in with your family back east if that’s what you really want, but it does mean that you risk being on the hook for income tax on the deficiency — the difference between the eventual sale price of your home and the value of your loans — as the current tax break expires in December 2012. If your house sells for the expected $350k, that could be as much as $178k in ‘income’ that you have to pay tax on. (Ouch!)

I think the odds are good that come December, Congress will extend the tax break another couple of years … but you should be prepared for that to not happen, which means having access to enough money to pay the tax in the year following your actual foreclosure. Plus, California will still be levying state income tax on the deficiency, regardless. Since we’re probably talking over $40k in income tax here, that could be a huge burden, wiping out more than an entire year’s saved mortgage payments.

Settlement Negotiation

There is no benefit to, and much potential harm in, dealing with the junior loan before foreclosure proceedings are final. Just ignore them and wait.

By that point — probably at least two years from now — you will not be dealing with BoA anymore but with a debt buyer which has purchased the now-unsecured junior loan for pennies on the dollar.

Assume that this company will be ruthless, even cruel, in harassing you for payment. You will have to remain firm. Do not trust anything a debt collector says. Do not give them any financial documents. Get a quit-claim in writing, contingent upon an agreed payment amount, before sending any money at all.

This is where past actions in good faith may unfortunately hurt you now, because the bank has your full financial information as of your last HAMP application in February 2011. You have to assume this will be passed on to the debt buyer. Even if you never give them another scrap of data (which you should not), they may be able to tell (for example) that you aren’t eligible for Chapter 7, or to infer that a tenured professor has a guaranteed income which could be garnished. In short, they might have enough information to suspect — correctly or not — that they could recoup a big chunk of that $99k if they try for it.

In your situation, I would expect to pay around 10%-12% — enough of a profit carrot to make a lawsuit look unattractive by comparison. (Hard-line negotiators have settled for as little as 5%; less-skilled negotiators sometimes pay 20% or more.) Remember that the creditor probably paid 3%-4% for the loan, so 10% would be a 250% to 300% profit.

Standard negotiating tactics apply — let them name the first number, then counter with a number much lower than where you are prepared to end up.

Mind you, we aren’t even in foreclosure (after 14 months!) so I haven’t personally been through these negotiations yet; this is just based on the best advice I’ve read from people who have.

The Strategy

Upsides and Downsides

The walkaway will free up $3k per month, or $36k per year, until you need to start renting again (presumably fall 2013). But it also adds the following future expenses:

• Extra income tax due to lack of mortgage interest deduction
• State and potential federal income tax on discharged debt (estimated $40-50k)
• Settlement of the second loan (estimated $10-12k)
• Moving — in your case, across the country (and back!)
• Extra rental security deposit when you return to California

Plus, you’ll need to keep enough savings to get you through the two summer months each year where your husband doesn’t draw a salary, as well as a solid emergency fund to cover random acts of life.

Further complicating matters is that you’ve been living paycheck-to-paycheck at full employment, so you’re going to have to cut back on your monthly spending — over and above the dropped mortgage payment — in order to see any savings at all during the sabbatical year. If you don’t make any other changes, most of that $36k will be eaten up by ‘normal’ spending.

Also, you’ve been saving only about $8000 per year for retirement for two people, which isn’t nearly enough.

Moving Ahead, a Step by Step Plan

Frankly, strategic default is not a clear win in your family’s situation; if you had come to me with the question ‘should we walk away?’, I would be cautioning you against the many downsides, and exploring some other options.

However, I’m going to assume here that you’re set in that decision, as well as your intention to move cross-country for a year. Also, I’m assuming that (after doing further research) you decide to try to avoid Chapter 13 bankruptcy. (If you were filing for Chapter 13, I’d create an entirely different plan — for example, leaving the car loans alone and paying off the student loans with your existing cash.) Here, then, is what I would recommend:

Step 1: Immediately open up two Roth IRA accounts — one for yourself and one for your husband. Take $10k of your existing cash and deposit $5000 in each for 2011. You have until April 17 to do this for last year. Don’t get stuck on picking investments up front, just get the money in an account before the deadline.

Step 2: Recalculate withholding for the rest of 2012, given your husband’s upcoming drop in salary and the loss of around $30k in mortgage interest deductions.

Step 3: Sell the SUV. It gets lower gas mileage, costs more in insurance, and you owe more on it. Pay off the remainder of that loan. You should have a loss of under $2000 there, and might even break even.

Step 4: Pay off the loan on the Saab. (I’m hoping here by the way that your auto loans are non-predatory, with no prepayment penalty.) It’s now your highest-rate debt, and you need to save yourselves the extra interest and get rid of that monthly payment.

Step 4, Advanced: Sell the Saab also and buy a better used car. I realize this may be a big leap for someone in your position, but objectively it’s the best course. The Saab gets mediocre gas mileage and has a poor track record on repairs. Pick a compact sedan with excellent gas mileage and repair history, then find a car in above-average condition that’s at least ten years old. This will cost you around $4000 now but will save you much more in gas, repairs, and annual insurance across the next few years. You might want to sell the Saab in California and buy the replacement once you get to Indiana or North Carolina, where prices are probably cheaper. Bonus: this would be a car that you could actually keep if you are forced into Chapter 13, whereas the two expensive ones you have now would be sold to pay your debts.

Step 5: Set aside $500 per person per month toward your 2012 Roth IRAs. Have it withdrawn directly from your husband’s paycheck into your respective accounts, so you don’t even see it. Retirement savings, incidentally, aren’t touched in bankruptcy … and until you’ve settled the junior loan and dealt with the tax consequences of foreclosure, there’s still a chance that you will be forced down that road.

Step 6: Make a monthly budget. Start with the new monthly take-home amount, after both taxes and the Roth contributions. Include your student loan payments, plus at least 30% of your total expenses each month in additional savings. (You need to save 20% of your average monthly expenses for each of ten months just to cover your two salary-free summer months; the other 10% will go to rebuild a non-Roth emergency fund and to cover moving expenses, settlement money, and so forth.) So for example, if your husband’s monthly take-home totals $2800, you have a maximum of $2150 to actually spend.

Step 7: Find ways to reduce your spending. Though we didn’t go into much detail on expenses, it’s clear that even aside from the mortgage payment, your family has been spending more than it makes. And even though you might have as much as a year and a half without mortgage or rent coming up, it won’t be a cakewalk, because at the same time your income will be considerably reduced and you are accruing tens of thousands of dollars in new expenses as a result of the default and move. So if you can’t substantially reduce your daily expenditures, you’ll be headed right back down the hole.

Step 8: Increase your income. For this next year, between your at-home husband and your extended family, hopefully you have access to occasional free childcare. If possible, you should take the opportunity to pick up some extra nursing shifts. Unfortunately wages won’t be as high in Indiana or North Carolina as you’re accustomed to in California, but if you’re serious about becoming debt-free (and it sounds like you are) it will still be worth it. Shovel any extra earnings into savings until you have at least $4000 in your emergency fund and another $10k in a settlement fund for the junior loan, and then …

Step 9: Accelerate student loan repayments. Student loans survive a bankruptcy, so it’s worth throwing cash at those even before you know whether you’re going to end up owing a pile of income tax on the loan deficiencies. Hopefully, Congress will give the millions of us with negative equity a tax break for a little bit longer.

I hope this information is helpful. Good luck!

Here in middle-class America, there’s a formula you’re supposed to follow in order to be considered a successful adult. With only minor variations, you’re expected to:
get a college degree,
find a lucrative career,
get married,
buy a house,
fill it with stuff,
and have kids
… all while continuing to work at that same career until (sometime in your mid-sixties) you can afford to retire. Those of us in ‘Generation X’ took our early lessons from the boardgame Life, with its little pink and blue people-pegs in plastic cars that followed exactly that course.

That early programming sits there, largely unexamined, in the back of everyone’s head. Even if you make a conscious choice to route yourself around some part of the preordained path — maybe you skip the church wedding, or resolve not to have kids — the rest of the success script is still influencing every major life decision.

Which is to a large extent how I found myself in my mid-thirties with a de facto husband, two stepkids, a house full of ‘nice’ possessions, and a corporate career. And why, when I had all of those things, I felt like I could finally call myself a success.

But although I felt accomplished, I certainly wasn’t happy. The truth is that the career part has never really worked out for me, or for Jak. Despite repeated attempts, neither of us have ever thrived in a corporate environment. The best I’ve managed is ‘temporarily bearable’, and my condition has more often been ‘full-on miserable’. The day in October 2008 that I was fired from my job? I had spent that morning at my doctor’s office, getting a prescription for anti-anxiety medication so I could make it through the panic attacks I was suffering almost every morning before work.

For his part, Jak has only ever really wanted to do one thing, and that’s write novels. My enthusiasms are broader, and include design, illustration, and non-fiction writing as well … but not in the ways and for the reasons that corporations want to pay for.

In short, we both want to be self-employed artists.

There’s one good way to be a self-employed artist, and that’s to have a working spouse who is happy to fully support you. Clearly that’s not going to happen for us.

We know a lot of writers, and even the fantastically successful ones still have other jobs, by and large. The ones who are making a living writing fiction now didn’t just jump in; they spent fifteen or twenty years cramming writing around their day jobs and family life, until the trickle of royalties from dozens of prior publications finally added up to something substantial.

Jak is more of a dreamer; I’m more of a pragmatist. So every time Jak broaches the subject of quitting his job to write novels, my brain calls up a mental model of the economic realities. For quite a few years now, it’s looked something like this:

In this graph, purple is our approximate annual expenses — given our best efforts at thrift, in our current location — and green is the amount of reliable income from self-directed work.

As you can see, there’s at minimum a $60,000 gap between what we absolutely needed and what we could reasonably count on making from our artistic pursuits. Which is why every time Jak would mention his desire to write for a living, I would respond with — well, a sympathetic shrug at best, and irritated grousing at worst. It just wasn’t even close to realistic, so yearning after it did no one any good.

Last winter, the picture started to change. Once we decided to jettison the house and go back to renting, our future situation looked something like this:

Now the disparity was down to maybe as little as $35,000. Something that a part-time job might bridge, if the idea of a part-time job in either of our careers weren’t completely ludicrous. (Of course the kind of jobs that do come in part-time flavors pay much, much less.)

But that wasn’t the end of it. In the past few years, some economically interesting things have been happening in the world of publishing, what with ebooks and all. My conservative estimate of income from writing and other creative pursuits ticked upward. Also, with a larger pool of savings, we’d have the option of withdrawing perhaps as much as a few thousand dollars per year, even before official retirement age.

So then my mental graph started to look more like this:

Still a gap of at least $15k per year — but now we were out of the realm of ‘laughably absurd’ and into ‘merely impossible’.

And there, about a year ago, is where we made a sharp left turn. We decided to consciously set aside society’s idea of success, and look for a way to succeed on our own terms.

We didn’t quite wake up one day and decide to chuck our entire life plan out the window. But we did change course surprisingly fast, over a span of just a few weeks.

We had already — in part out of necessity, but also out of a pointed ethical reconsideration — become increasingly comfortable with eschewing the possession-centric, consumer-driven lifestyle that’s part of the price of admission to the upper-middle class.

Now, in choosing to abandon both our house and the entire idea of owning property, we had put ourselves firmly and irrevocably off the accepted path. Having gone that far, we started to seriously discuss — to stretch the metaphor just a little bit farther — the possibility of driving right off the game board altogether.

Going back to the graph: expenses are generally easier for us to control than income. But we’d already tightened those belts about as far as they could go. Rent accounts for well over half our total budget. Because of shared custody, we don’t have the option of moving more than a few miles in any direction.

As long as we were both supporting a child and tied to Seattle, that gap wasn’t going to get appreciably smaller. But in just a few years, our final fledgling would be leaving the nest. At that point we could conceivably move … anywhere.

So the question became: is there anyplace we could go — that wouldn’t be intolerable for other reasons — that would allow us to bridge the income-expense gap and do work that didn’t make us miserable?

I set about finding out.

To make a long story … um, slightly less long, I found one place that looked particularly promising: the Lake Chapala area of central Mexico — a series of small towns along the north shore of Mexico’s largest lake, about 45 minutes from Guadalajara.

Based on my best research, if we moved to Chapala, we could realistically expect our graph to look something like this:

Not a guarantee of success, but at least a reasonable probability. This could be our path to a happier way of life.

Of course, I was trying to evaluate the feasibility of living in an area I’d never even visited, in a country with which I had only passing familiarity. Lots of room for error there.

Which is why next week Jak and I will be heading down to Mexico to test-drive the expense side of the plan. We’re going to live in the Chapala area for a full month — not as tourists, but as much like residents as possible. We’ll take the local buses and shop in the local markets and see if the two of us really can live there, happily, on less than $2000 per month.

What this means for Pocketmint is a month of personal finance, Mexican-style. It should be pretty different from anything you’ll be reading anywhere else. I hope you’ll come along for the ride!