Author Topic: Case Study - Where to from here?  (Read 2988 times)

Louis the Cat

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Case Study - Where to from here?
« on: August 16, 2014, 09:43:59 PM »
Case Study Ė Where to from here?

First an apology, this is VERY LONG, but the post on case studies says details so I gave you all of them. Get a drink, you may be here for a while:

Good things to know that arenít (strictly) numbers
1.   Spouse (30) and I (32) are on the same page, very compatible and very communicative. After a financial debacle years ago, we got very good about being honest about money and have no major conflicts in this area (or any other areas, really).
2.   We have 3-year-old twins and plenty of bad decisions were made in the early days because we were too tired to care. Only in the last year have we really gone back to something resembling a normal life and there may very well be bad decisions carrying over that we canít see.
3.   We have 1 dog and 3 cats, all older (youngest is 9) but low maintenance at this point.
4.   We bought a house with a million known issues and who knew how many unknown issues because we enjoyed fixing up and working on our last house, and it was a good way for us to mitigate sticker shock when buying a house in an area where housing prices are far higher than where we came from (we moved from central Indiana to the Front Range area of Colorado, not far from MMM himself, right before the girls were born).

Income
Spouse: $93,500 (this includes two large raises in the last year, one 13%, then one 10%; a year ago this number was $75,000 + bonus; the 10% was a corporate adjustment away from bonuses)
Me: $7,000 +/- this year; Iím a musician so what I make varies but is generally on the rise as I get re-established living in a new area; last year I made a little over $6,000, this year should be between $7-8k

All told, this translates to $7,023 take home per month in the last 12 months, according to Mint.

Expenses
Iím going to give you our numbers straight from Mint as the last 12 months divided out as monthly expenses. Mint got frisky with some of the categories so there are some inaccuracies but this is a pretty good approximation. Some changes have already been made; I will note those as I go.

HOUSE: $2,499
PITI: $1,390
Repairs/Improvements: $1,109 (This includes a new kitchen at around $9k, new floors, new paint, etc.)

FOOD: $1,853
Groceries: $1,325
Alcohol & Bars: $213
Restaurants: $315 (this includes several fancy restaurants on a trip we took in June that doesnít usually happen)

This is INSANE, we know this is INSANE, we have no idea what happened other than we clearly spent FAR too much on groceries; in our defense, we have lots of visitors and happily spend extra both to feed them and to keep lots of organic and local food in the houseÖstill, this is INSANE; also, our 3 year olds eat like teenagers, itís a little scary. Whatís REALLY INSANE is we already cook from scratch, eat at home most nights, make our own bread, shop at CostCo, etc.

TRANSPORTATION: $350
Fuel: $112 (this includes 2-5 road trips a year)
Bike Maintenance: $78 (something is squirrely with this number but the money was spent, just not on bikes; probably some on clothing)
Insurance: $72 (dropped to cover only minimum required because of the age of the cars)
Registration/Emissions Testing: $23 (updated to correct brain fart - 8.17.14)
Maintenance: $45 (we do all our own maintenance but between the two cars, they have over 400,000 miles on them so stuff come up: for instance, the Golf needs a new suspension which is not included in this number)
Misc: $28 (this includes parking various places, including the airport and $122 when the Golf got towed after I abandoned it in the snow: a longish story Iím happy to share but is not relevant here ☺)

UTILITIES: $294
Power (gas and electric are billed together):  $103 (no AC but the house leaks like a sieve, so in the summer, our usage is down around $65, but itís pretty high in the winter, ~$180)
Water: $45
Trash: $23
Cell: $60 (was $130 but we ditched AT&T and embraced the Ting lifestyle)
Internet: $34

ENTERTAINMENT: $315
This category is messy as it includes everything from a museum membership to haircuts. We each get $150 per month to spend as we please with no justification required but we pay for clothes and haircuts out of that in addition to true Ďentertainmentí expenses.

STUDENT LOAN: $217 (This is the minimum, every now and then I throw a little extra at it. We are planning on upping the payment to $500 as that gets the term down to 4 years from 12 and saves ~$4,000 in interest over the remaining term of the loan)

OTHER: $735 (another ugly category as this includes everything from medical expenses (which come out of the HSA, contributions to which arenít included in the $7,000 take home) to pet food and contributions to my IRA; this is also going to include my business expenses which arenít high but between that, the IRA and the medical, this number is probably closer to $450-$500)

TOTAL EXPENSES: $6,263

ER Expenses and Thoughts
Expenses should be whatever we get them down to from above minus the student loan and house payments. We donít have a clear picture of when exactly weíd like to retire at this point but the house will be paid off and the children will be off to college at about the same time (+/- 15 years from now) so that might be a good time to bite the bullet. As a musician who has been playing for 20 years now, I donít plan to retire until I canít physically play anymore. Spouse is also a musician and would like to quit his job in software development to basically do what Iím doing which is teaching private lessons and playing wherever I can get paid to play.

Assets
House: $250,000
401k: $50,100 (contribution is 8% + 4% match, goes up 1% each raise and every March)
HSA: $6,000 (contribution is $4250 per year as that is our deductible; we spend far less and would like to start maxing out the contribution here)
Roth IRA: $5,300 (contribution is 25% of my income; I generally get paid by check, and when I deposit them, I skim 25% off the top)
2003 Golf TDI: $5,000
1999 BMW 528iT: $5,000 (mini facepunch: this car is for sale at this very moment bc weíre sick of putting up with its crap)
Emergency Fund: $4,200
529: $500 (just opened this two weeks ago; contribution is $100 per month)
529: $500 (same as above)

Liabilities
Mortgage: $155,600 remaining at 2.5% fixed, 14 years left on 15-year loan
Student Loan: $22,500 remaining at 4.5% fixed, 12 years left on 20-year loan
CC Debt: $1,800 at an embarrassing interest rate (FACEPUNCH; this was never high, we just werenít paying attention, and it will be gone by fall. This is where most of that food spending went.)

The Questions
1.   Are there any glaring items in our budget (aside from food, holy hell, what is that?!) that could use adjustment. It seems to me that at the very least, we should sit down with Mint and get that ĎOtherí category defined a little (a lot) better.
2.   We have lots of investment options available to us that we arenít utilizing. Maxing the 401k, maxing IRA contributions, maxing the HSA contribution, opening more IRAs, things Iím sure we havenít thought of. Where do we go first here?
3.   We also have a few more medium to high dollar things we want/need to do to the house in addition to some general upgrades/updates as seem reasonable.
a.   For example, the basement bathroom (frequently used by us on a daily basis and by guests every few months) is in dire need of a full gut and replace due to questionable maintenance and some possible water damage at some point in the past (the CATS have knocked tiles off the shower wall!).
b.   The siding is in questionable shape and needs attention probably within the next 5 years, and we have several windows and exterior doors that are in need of replacing if only for the energy efficiency (thankfully we as a people have managed to improve upon single-pane, aluminum frame windows and sliding doors in the past 50 years- now how to bring those improvements to our own lives?)
c.   Also, we are in dire need of additional/new attic insulation. Again, this can pay for itself in a relatively short time, but again, because our energy use is pretty low to begin with, it doesnít feel like itís actually costing us that much on an ongoing basis right now.
d.   We do virtually all of this work ourselves and source materials from Craigslist and the like whenever possible, thus keeping costs down dramatically. That said, itís still replacing an entire bathroom and/or residing an entire house.
e.   Do we continue to split our excess between the house and investments or focus on one then the other?
« Last Edit: August 17, 2014, 04:36:54 PM by Louis the Cat »

lhamo

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Re: Case Study - Where to from here?
« Reply #1 on: August 16, 2014, 10:26:29 PM »
Given the fact that you have twin toddlers, I think you are doing pretty well financially -- especially given that you are able to avoid the incredibly high cost of childcare and still work on building up your teaching practice. 

Yes, your grocery bills are insane.  What kinds of meals do you eat typically?  If heavy on the free-range and organic meat/egg/dairy side of things, you might try switching portions and eating less of the animal proteins and more vegetables.  That will be somewhat cheaper, and also better for all of you healthwise.  If you aren't averse to carbs then a slightly larger ratio of carbs to protein will also help bring down the food bill.  But as a carb avoider myself I understand if you don't want to go that route.  Some of us were doing a "track your grocery spending by subcategory" challenge a few weeks ago that you might want to revive/jump in on -- it takes a little bit of effort to break the food bill down, but it is really enlightening to see exactly where your food dollars are going and can help you make choices that are both healthy and more economical (nothing like seeing that junk food spending is a significant portion of your spending to remind yourself to set limits in that category, for example).

Definitely try to refine the fuzzy entertainment and "other" categories, as that is probably where you will find most of the rest of your savings.

In terms of future upgrades to the house, you might want to tackle the energy-efficiency related ones earlier, as there are often tax breaks on those and they will help you earn some of the money back through savings on utilities as well.  I'd do the attic insulation first, as that is pretty easy and will probably get you the most bang for minimal buck.  Doors and windows next, maybe, though I would say have a couple of contractors come in and evaluate the basement situation and make sure you won't be compounding the problem by letting it sit -- you don't want to end up with a mold infestation or major rotting, as those things will just get worse over time.  If there isn't damage under the tiling you can probably replace that yourself -- tiling is really easy.  Siding I would save for the last and wait until your kids are in school so that you can ramp up your earnings from teaching to cover that cost.

In terms of investments, I would tackle them in the following order:

1)  Maxing out Roths for both of you -- your contributions double as an emergency fund and will be accessible to you if/when DH decides to leave his day job

2)  Maxing out your DH's 401k.  The tax benefits are substantial, especially as your income ramps up

3)  Upping contribution to the HSA.  I don't really understand the part of the post about this, but as your medical expenses are low for now I think this takes a lower priority.

4)  529 lowest priority of the investment options, for reasons noted below.  Probably worth it to keep putting in a bit, but no more than what you are currently doing, maybe less

5)  Need to save for new cars, as your current ones sound unreliable/short lived.  Would save a decent amount for this before increasing amount paid on student loans.

6)  Student loan

7)  Mortgage prepayment -- great rate, no need to stress about paying down early.

That is where you really stand to gain traction, actually -- when you have time to build up your teaching practice after your kids are in school.  Though I suppose that most of your students may also be school aged kids, so maybe you don't have so much flexibility there.  Good to note that you might want to start thinking early about how to ramp up a body of students who you can teach DURING THE DAY in order to maximize your use of time.  Homeschoolers would be one good market to start focusing on (bonus in that  homeschooling networks are often very tight, and if you get a good reference from one family it will likely lead to other clients).  Adult students of different sorts would also probably have more flexibility. 

Be sure you are charging competitive rates as well, and adjust them as your practice/your reputation builds up.  How much do you charge an hour now?  Something tells me it might be on the low side.  Don't sell yourself short. 

I personally would not worry too much about putting too much money in your kids college savings now.  Build up retirement accounts as much as you can, and get the house paid off.  The year before your kids go to high school would be a good time for your partner to quit his day job and go back to music, if he hasn't already.  Financial aid calculations are based mostly on income, and at most schools they don't take retirement accounts into account, and only estimate a bit against home equity.  With two kids the same age, if your income is low in the year they fill out the FAFSA, they are likely to get generous financial aid.






MDM

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Re: Case Study - Where to from here?
« Reply #2 on: August 17, 2014, 12:13:29 AM »
Louis the Cat('s Mom), welcome to the forums!

lhamo has already provided a good, comprehensive reply so I'll just give some perspectives on a few things.

  - Consider traditional instead of Roth, particularly if DH can plan retirement in advance.  You are currently in the 25% marginal tax bracket, so better to avoid those taxes now and pay lower rates later.
  - To help with various "what if?" analyses, consider the attached spreadsheet (also see background here), or anything similar you have done or will do (e.g., Quicken has a decent "Lifetime Planner" - don't know about Mint).  The bad news: it suggests FI in 20 years is not likely given status quo.  The good news: spending reductions with corresponding increased investments can get you there.

To your specific questions:
1.   Yes, go where the money is.  Work on Groceries, Other, etc. - the big items.
2.   Pay off the CC debt today using the e-fund money.  Then maximize tax deferred (401k, traditional IRA, HSA) at least until you get taxable income below the 25% marginal rate.
3.   Need to distinguish among wants and needs.  Of course, needs need to be done.  Wants are harder.  You want the nice house now, but you also want FI ASAP - those two things are mutually exclusive.  Can't help you with that decision - but kudos to you on the DIY approach if you can pull it off.

Good luck!

Goldielocks

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Re: Case Study - Where to from here?
« Reply #3 on: August 17, 2014, 12:35:24 AM »

The responses so far have been very good.  Here are a few more thoughts.

1) I completely understand about "waking up" to finances after having kids.  My youngest was nearly 4 before I woke up.  Just know that as you move forward, you may still make poor decisions, but you will now be awake to see them coming.  (grin)


Home repairs are eating up your budget

2)  I recommend putting off the siding as long as possible,  caulk, use "great stuff" to crack fill, paint, whatever, but your mantra should be patch and repair.
3) windows and doors also are very hard to get a payback for, so don't, unless you have severe issues such as cracked single panes.  Buy the plastic shrink film for the winter, especially in under used areas.
4) Once you have a functioning kitchen, a full bathroom, and an attractive living room, the remainder can wait.   perhaps rip out a moldy second  bathroom, clean it up, (empty) then SLOWLY refit it with the craigs list finds and your know how.  Building the space to suit what you find (eg weird size shower pan) on Craig's list can save money.  Cash only home maintenance..   It is WAY to easy to borrow to fix up a home, and when you do, another $100 for a sink or what ever seems like such a minor increase, but they add up.
5)  Crack sealing with weather stripping, great stuff foam, etc may be more cost effective than insulation.  OR, rent the do it your self blow in insulation equipment and fill the attic with cellulose (and ensure proper ridge venting is in place).  See MMM posting on insulation.  It is quite good.

Food
6) Give yourself a FOOD challenge.  See if you can spend less than $700 next month. One month only to start.   You already figured this one out, now rise to the occasion and just do it.

Louis the Cat

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Re: Case Study - Where to from here?
« Reply #4 on: August 17, 2014, 03:49:27 PM »
Some clarification and follow-up:

The Cars
Both cars are mechanically sound, just quirky. The Golf has some deferred maintenance (the suspension being the biggie) and a weird problem with acceleration in high temperatures that we're working on. When I left it on the side of the road in a snowstorm, that was due to a bent tie rod from ice that had gotten thrown up under the car in the storm and could have happened to any car. The BMW is in mechanically great shape due to a PO really getting it in shape. The 'crap' we're putting up with is that some niggly plastic parts have begun to break (like the passenger side visor snapping of in hubby's hand) and because they're stamped 'BMW', they're damned expensive to replace. Also, it gets 24 mpg where the Golf gets 41. We'd like to sell the BMW and go to a Prius and call it a day.

The House
The house was unlivable when we bought it and needed the flooring and paint just to make it so. The kitchen was so inefficient as to prevent us from doing a lot of the cooking we like and prefer to do. I wasn't able to start making bread until we put in the new one. Other repairs have included a new car door for the garage (other one was falling apart and irreparable) and a new man door for the garage (other one had 1 inch gap all around). Most of the repairs and upgrades we've made since moving in have been safety issues. We could have lived with the kitchen for longer but it was inefficient enough to make it very difficult to cook in and there was virtually no storage so our kitchen stuff was scattered all over the house, making it even more inefficient. Now that we've dealt with the glaring issues, I can absolutely see knocking the amount spent on the house way back to, say, $500 per month and freeing up a ton of extra to be used more wisely.

The Basement
We have recently discovered that the current flooring in the basement is asbestos but have already paid for new carpet and will just have to figure out safe installation and that will abate about 70% of what's still exposed. Doing the bathroom floor will take care of a little more. I like the idea of gutting it and then rebuilding slowly as materials emerge. What will be left will be one bedroom (currently my sewing room where the floor is undamaged) and a laundry/storage room where the floor is actually pretty torn up and so will need to be dealt with sooner rather than later but we're leaning toward roll vinyl so it should be cheap. *A note, covering asbestos instead of removing is a perfectly reasonable and safe abatement method and preferable to disturbing it by ripping it up. (Wish we'd known it was asbestos before we ripped it out of the other downstairs bedroom.)

Ihamo: You have hit the nail on the head regarding building up my student base. No worries that I am selling myself short. I charge market rate ($50 per hour) but I teach a relatively obscure instrument (French Horn) so finding students is slow but steady. Also, as a classical musician, what I really want to do is play for orchestras and am actively seeking auditions for orchestras that I can commute to, with two auditions set up for next month. It's a really weird field; I'm lucky DH is well employed doing something he enjoys.

Goldielocks: Repairing and painting has definitely been one of the things we've thrown around on the siding and you make excellent points. There are a couple of windows with cracked panes and LOTS of caulk needs to get thrown around before winter. We had a mini-flood a few weeks ago when a gutter backed up in a downpour causing a window well to fill with water. We then discovered that the caulk on the window was insufficient, shall we say. Hubby went out in the downpour to unclog the gutter and came back looking like a drowned rat.

Food
I love the idea of a $700 challenge for next month; and it's going to have to be next month because we're already over $1000 for this month. :-/ Maybe this month's challenge can be not to spend any more than we already have. I assume you're including restaurants, coffee shops, etc in your $700? That might be harder to get DH to agree to because his team goes out for lunch every Friday and he's been adamant in the past that he's not giving that up. I'm not sure I can give up my $2 coffee at the coffee shop while the girls are in gymnastics on Thursdays either...but I can definitely give up the pastry or bagel that I often get with it. :D

INVESTMENTS
I think I understand the arguments you folks are making for Roth vs Traditional IRAs but I want to make sure I get it: the Roths are better if we want that money to double as an emergency fund, the Traditionals are better if we assume our tax rate in retirement is lower than our current tax rate (almost assuredly). Is that the idea? What about getting the money back out of a Traditional IRA before the official retirement age?

We are thinking of the HSA as an extra retirement vehicle and maxing it out is very easy from where we're at already, <$100 per check. We've only recently discovered that we can put that money in bond funds if we choose and have split it between the savings account we can access with a debit card and a Vanguard bond fund, one third/two thirds split based on current spending.

Ihamo: why do you put the student loans so far down the priority list? Because it's a relatively low, fixed rate or something else? That's actually why we haven't prioritized it before and were recently thinking that maybe we should just tackle it.

I think that's everything. Thanks for your thoughts so far. Keep them coming!

RichMoose

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Re: Case Study - Where to from here?
« Reply #5 on: August 17, 2014, 04:31:58 PM »
My advice would be to break the categories up a bit more on Mint. It would be much better to separate medical expenses from Other and grooming / beauty from Entertainment. That way you can see how much you really are spending on these variable areas. It's always to easy to brush off expenses when the categories include bits of this and that.

Your car registration and emissions testing seems high? Unless that's an annual figure.

I can't help you out with advice on investments as I'm not familiar with the US 401k / Roth IRA rules etc. But as far as your house goes, I think it may be best to set yourself a budget and work from that. For example, considering your substantial renovation needs, you may set up a HISA and put in say $500 per month and spend no more than that. So if you need to do bathroom that costs $3000, it may take 6 months of no spending to get there. That way it keeps spending under control. Because of tax advantages, long-term market returns, and that sort of thing, generally speaking retirement savings should take preference over renovation spending.

Before spending any more on renos or extra investing, get rid of the CC debt! You could get rid of it in 1 month easy by getting grocery spending under control and no spending on repairs / improvements.

Louis the Cat

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Re: Case Study - Where to from here?
« Reply #6 on: August 17, 2014, 04:35:34 PM »
You are exactly right about the Reg/Emissions. I forgot to divide by 12. Will update.

Also, absolutely right about the CC debt. DH and I will talk this evening about a budget overhaul and the changes there will easily wipe out the CC debt.