Author Topic: Reader Case Study: How can we improve?  (Read 3446 times)

taytay

  • 5 O'Clock Shadow
  • *
  • Posts: 7
Reader Case Study: How can we improve?
« on: April 19, 2016, 11:12:28 AM »
Life Situation: Married filing jointly, one child (infant). Living in HCOL area. Ages 31.

Net Salary (monthly):
Mine-$3500
His-$5000

Other Income:
Rental net income-$450/month
Book Royalties (I self-published a book)-around $50/month

Emergency Fund/cash on hand: $6000

Pre-tax deductions/savings:
$400 Roth IRA ($200 to each)-no employer match available
(I know this is way, way too low. We just last year started making more money and had around $10k medical expenses last year for having a baby)

Debt: Student loans (no car loans, credit cards, etc)
His: $33,995 @ around 3% (monthly payment= $383.58)
Mine: $54,678.66 @5.5% (monthly payment=$469.77)
Monthly Minimum Payment for both = $853.35

Current Expenses:
Mortgage (PITI)+ HOA for 2 bedroom condo: $1074
Electricity: $80
Internet: $73
Car Insurance: $95
Gas: $80
Taxes, maintenance, etc for cars: $50
Childcare (fulltime daycare, we both love our jobs and will continue to work): $1541
Formula, diapers, etc for baby: $100
Netflix: $8
Food, home goods, and alcohol: $450 (this needs work!)
Student Loan payment: $853
Health Insurance: $400
Gym membership: $39
Restaurants/entertainment: $200 (includes babysitters fees for much-needed date nights)
Personal ‘fun’ money: $300 (hubby and I each get $150 per month for whatever we want, maybe not the best plan but it saves arguments and feels good to get a beer with a friend without making it a joint discussion)
Misc (clothes, house items, repairs, etc): $100

Total expenses: $5,443
Net savings: $3057
Savings rate: 36%

Specific questions:
-should we sell the rental property to pay off student loans? (would get around $50k profit in a sale)?
-want to start saving for college for the baby, best way to do this? 529? ESP?
-currently we are throwing money at the student loans, but should we increase 401k contributions instead? or try to do both at the same time?

Other info:
I discovered MMM about 3 years ago and love it, although I think our goals are more modest than MMMs. Both hubs and I love our jobs and are ok working but want to work toward financial independence. We'd like to have one more child. We are both self-employed business owners so our taxes are wonky, especially my husband's since he get a K-1 and can carry over losses from his business. We try to be frugal, and I know we can improve in some ways. We are also on our own for health insurance premiums and medical expenses, so that takes a big bite out of our income some months. No employer matches for anything either. We rarely eat out but have been doing this more as scheduling 'date nights' as a couple has helped us connect and we decided was important in our roles as brand-new parents.

I'd be happy to answer any other questions. Thanks in advance for your thoughts and advice!
« Last Edit: April 20, 2016, 08:33:58 AM by taytay »

AZDude

  • Handlebar Stache
  • *****
  • Posts: 1298
Re: Reader Case Study: How can we improve?
« Reply #1 on: April 19, 2016, 11:25:50 AM »
5.5% is rather high, that should be your #1 priority, so I think you are doing right attacking that before saving to a 401(k). Only exception would be to contribute enough to get the employer match, if any.

Why do you have a fun money and a rest/ent category? Seems like that is what "fun money" should pay for? When you have that much debt, I think spending $500 a month on completely frivolous stuff seems a little bit high. Not to judge too harshly, you two are doing better than a good portion of your peers, and for a HCOL area, that mortgage is a good deal. If you want to maximize your savings, then the fun money/rest is the first place to hit.

I would not sell the rental property if it is truly generating $450 a month in net income. Unless you paid $500K or more for it, then you are getting a good return.

For my LO, I use a 529 plan, but the best thing for your child is having a solid financial picture for yourselves, so I would pay off the 5.5% loan before saving for future college.

taytay

  • 5 O'Clock Shadow
  • *
  • Posts: 7
Re: Reader Case Study: How can we improve?
« Reply #2 on: April 19, 2016, 12:31:06 PM »
These are helpful thoughts, thank you so much. I agree that we need to re-think our 'fun money' category. And the misc. category I just don't know what to do with because there is inevitably something that comes up every month that I can't seem to put in another category (this month is was drywall repair because of an unfortunate but hilarious incident involving my 4 year-old niece).

And I agree we are finally doing well after 4 years of scratching by to start our businesses. I am very, very grateful for that. The mortgage is a good deal! Part of why is we put almost 30% down and looked for about a year before finding the deal.

The rental is currently renting for $1100/month and the expenses are $650. When the lease in up in July, we can easily raise the rent to $1300/month. Rents are going up so fast in our area (Denver). I bought it during the housing crash for $67k and we lived in it for 2 years so saved a ton on rent we didn't have to pay during that time. It would sell for $115k-$120k today.

Dmy0013

  • Stubble
  • **
  • Posts: 100
  • Location: Central Canada
Re: Reader Case Study: How can we improve?
« Reply #3 on: April 19, 2016, 12:53:27 PM »
If you were to sell would the profits be taxed?

MDM

  • Walrus Stache
  • *******
  • Posts: 9612
Re: Reader Case Study: How can we improve?
« Reply #4 on: April 19, 2016, 04:31:38 PM »
To your specific questions:
Quote
-should we sell the rental property to pay off student loans? (would get around $50k profit in a sale)?
If you don't mind being landlords, you seem to have a good rental property.  You may get more detailed analysis from the real estate mavens around here.

Quote
-want to start saving for college for the baby, best way to do this? 529? ESP?
I agree with the advice to take care of your retirement needs first.  Eventually you might want to do a 529.

Quote
-currently we are throwing money at the student loans, but should we increase 401k contributions instead? or try to do both at the same time?
In short, 401k before your student loans.

At length, here is the "usual advice", current as of the posting date.  See the 'Investment Order' tab in the case study spreadsheet for the latest version.   
"Max..." means "contribute up to the maximum allowed for..., subject to your ability to pay day-to-day expenses."   
   
Differences of a few tenths of a percent are not important when applicable for only a few years (in other words, these are guidelines not rules).   
   
Current 10-year Treasury note yield is ~2%.  See   
   http://quotes.wsj.com/bond/BX/TMUBMUSD10Y
   
WHAT   
0. Establish an emergency fund to your satisfaction   
1. Contribute to 401k up to any company match   
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.   
3. Max HSA    
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level   
5. Max 401k (if 401k fees are lower than available in an IRA, or if you need the 401k deduction to be eligible for a tIRA, swap #4 and #5)   
6. Fund mega backdoor Roth if applicable   
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.   
8. Invest in a taxable account with any extra.   
   
WHY   
0. Give yourself at least enough buffer to avoid worries about bouncing checks   
1. Company match rates are likely the highest percent return you can get on your money   
2. When the guaranteed return is this high, take it.   
3. HSA funds are totally tax free when used for medical expenses, making the HSA better than either traditional or Roth IRAs.   
4. Rule of thumb: traditional if current marginal rate is 25% or higher; Roth if 10% or lower; flip a coin in between (or see   
   http://forum.mrmoneymustache.com/investor-alley/deciding-between-roth-and-traditional-ira-based-on-marginal-tax-rate/
   if you want even more details on that topic).  See also
   https://www.bogleheads.org/forum/viewtopic.php?f=2&t=182081,
   http://forum.mrmoneymustache.com/ask-a-mustachian/case-study-overwhelming-student-loan-debt-how-would-you-get-started/msg868845/#msg868845
   and other posts in that thread about exceptions to the rule.
5. See #4 for choice of traditional or Roth for 401k   
6. Applicability depends on the rules for the specific 401k   
7. Again, take the risk-free return if high enough   
8. Because earnings, even if taxed, are beneficial   
   
The emergency fund is your "no risk" money.  You might consider one of these online banks:   
   http://www.magnifymoney.com/blog/earning-interest/best-online-savings-accounts275921001
      
If your 401k options are poor (i.e., high fund fees) you can check   
   http://forum.mrmoneymustache.com/investor-alley/to-401k-or-not-to-401k-that-is-the-question-43459/
for some thoughts on "how high is too high?"   
   
Priorities above apply when income is primarily through W-2 earnings.  For those running their own businesses (e.g., rental property owner, small business owner, etc.),   
   putting money into that business might come somewhere before, in parallel with, or after step 5.

taytay

  • 5 O'Clock Shadow
  • *
  • Posts: 7
Re: Reader Case Study: How can we improve?
« Reply #5 on: April 20, 2016, 08:33:15 AM »
This is so helpful! Thank you. I forgot to add out Emergency Fund/cash on hand to the picture, and will edit the original post. Right now is around $6k.

taytay

  • 5 O'Clock Shadow
  • *
  • Posts: 7
Re: Reader Case Study: How can we improve?
« Reply #6 on: April 20, 2016, 08:35:00 AM »
If you were to sell would the profits be taxed?

This I'm actually not sure about, so will look into. I know that selling a residence you lived in within a certain number of years gives you tax-free profits up to $250k. Will research this.

Mother Fussbudget

  • Pencil Stache
  • ****
  • Posts: 831
  • Age: 57
  • Location: Indianapolis, IN
Re: Reader Case Study: How can we improve?
« Reply #7 on: April 20, 2016, 10:14:44 AM »
+1 to MDM's feedback - spot on (as usual).

No mention of cellular phone expenses here.  I'm assuming you can save a bundle by switching to a bare-bones pay-as-you-go $10/month plan (AirVoice, Republic, etc).  This might mean paying off your current phones, but in the long run it's worth it. 

"But my phone is 4 years old", some might think/whine... (not you, TayTay - thinking out loud here)
Is the 4-year old iPhone 5 still a good phone?  Apple just released a new iPhone 6 SE that's essentially an iPhone 5 with updated internals.  The cell phone companies think it's a 'dog' of a phone, but I personally prefer the smaller form factor.  But yeah, Apple thinks it's a great phone.  And a 4 year old iPhone 5 has another thing in it's favor:  it's PAID FOR - 'drive' it til it dies.  Or buy one on CL, and... til it dies.

taytay

  • 5 O'Clock Shadow
  • *
  • Posts: 7
Re: Reader Case Study: How can we improve?
« Reply #8 on: April 20, 2016, 03:03:11 PM »
I didn't include cell phones because our respective businesses cover those as business expenses. I had a really cheap phone plan last year but it was dropping calls and for my business that's very harmful. I tried both Cricket and Republic Wireless. My phone plan is $80 per month.