Reader Case Study - Please critique our plan/goals

[TheSimpleLife]

Hello fellow Mustachians!

I've been following MMM after finding him from the ERE link back in 2011.  I've recently been reading the forums and thought I'd register to post my own situation and offer advice to others on our paths to FI.

Details About Us:

28 year old male, married to a beautiful wife (28 also), have a 2 year old son.  Wife is a SAHM, I'm a CPA working in public accounting.  Live in Missouri.

Income: (All take home amounts).

Monthly take home = $3,154 (This is actually the total for two bi-weekly checks.  We do all monthly budgeting/bill pay/planning based on this number).
Two extra checks that we put towards debt/savings/investing = $3,154
Tax Season Bonus = $13,000
Tax Refund = $1,400 (even though I try to break even, we usually seem to get money back each year from Fed/state combined.)

Total Net Take Home Pay Each Year = $55,403

Current Monthly Expenses:

Phones (RW) = $20.00
Netflix = $8.00
Term Life Insurance = $87.00 ($1M for me, $500K for wife)
Utilities = $220.00 (includes electric, natural gas, water, and trash service)
Internet = $54.00  (only option we have, used for work and subsidized from work, so not up for reduction)
House Payment = $442.00
HO Insurance = $97.00  (currently shopping insurance coverage as this seems high)
Car Insurance = $29.00 (liability only on our paid off car)
Property Tax and HO Dues = $110.00  (property tax around $1,200 and HO Dues around $120)
Health Insurance = $345.00
Food, Household, Fuel, Misc = $800.00  (includes everything it takes to live not listed above)
Pmt to Family Member = $254.00  (we consolidated some student loans with a lump sum from a family member that provided some decent rates to them with a lower rate to us)

Total Monthly Spending = $2,466

In round numbers, the income less expenses allows us to save/pay off debt each year of around $24,000.  We have been using this money to pay back student loans, remodel the house we purchased two years ago, establish an emergency fund, etc.

Assets:
Home - $120,000 (conservative estimate of value)
IRA/Retirment Savings - $5,000
2006 Car w/ 165K miles - $2,500
Savings Acct 1 = $2,000 (a lean emergency fund, don't have any plans on increasing or decreasing this amount)
Savings Acct 2 = $20,000

Liabilities:
Home Loan = $86,724 (4.25% on 30 yr note)
Family Member = $50,000

Specific Questions/Issues:

1.  Would like to get our family member paid off ASAP.  It has been a great situation for all involved and they would prefer we didn't pay it off (they like the interest income), but we are weary of something happening to them and then being in debt to the estate/descendants.  Have an option to take out a HELOC on house for additional $20K, combined with $20K from savings gets us to $40K.  Will have the other $10K easily within the year, just becoming impatient.  Any thoughts on this situation?

2.  I don't think we have many holes in the monthly spending.  Some will say the $800 is high and I agree it isn't the leanest, but we're pretty satisfied with everything else.  Any other areas you think I'm missing?

3.  Obviously a long way from true FI, but our goals are different than many here.  Would like to work into a lifestyle practice (25-30 hours a week max and/or tax season only) after paying off family and possibly paying off the house.  I'm not interested/desiring to completely retire anytime soon.  I would be able to clear around $50K from only working 12 weeks out of the year in a similar situation to current one (or just tell current firm I'm only working tax season).  Thoughts on this?

4.  I'm in a somewhat unique situation with my work environment.  I left a large public accounting firm to eventually take over for a retiring partner (a handshake agreement if you will).  That hasn't gone according to my plan or anyone else's leaving me in a sticky situation.

Good things about current situation:
-Autonomy - Besides the long hours during tax season, I can pretty much do as I please the other 9 months of the year as long as the work gets done.
-I like the people I work with for the most part.
-The pay is decent for the responsibility levels I have.

Bad things:
-Company is run like it is still the 80's.
-I'm being sold a story of "act and sell like an owner for some future payoff" but obviously none of that is guaranteed.
-The two partners couldn't manage their way out of a closet.  They sure can't successful grow a professional services firm in this slow growth economy.

Biggest delimma:
-Current managing partner would like to start a financial planning business (registered investment advisory firm) as a partnership with me, thereby tying me to himself and the CPA firm as well.  He funds the start up costs, I manage most of the business.  Expenses are shared, but profits split based on who brings in the clients and who does the work.

5.  The age old "pay off our home or invest."  I understand time value of money, compounding, historic stock market returns vs. the 4.25% loan, etc.  But I still find the desire to be free of any debt payments more appealing that sticking it in some Vanguard Index funds.  I think I would be happy with less money in old age knowing that we paid off our house early than the other way around.  Is this poor thinking/planning?

6.  Currently helping our firm set up a SIMPLE IRA through Vanguard, so that will add another 3% raise.  Outside of getting the match on the SIMPLE IRA and fully funding two ROTHs for my wife and I, I plan on using all other funds to pay off debt aggressively.  At our marginal tax rate, I don't think it is that beneficial to put in pre-tax funds and will not invest post tax until the family member and house are paid off as well.  Good strategy?

7.  Side income - I have the ability to generate income from consulting, tax planning/prep, and accounting on the side.  Any work I currently bring in I run through the current firm.  I have no non-competes or anything of that nature (like I said, a handshake agreement).  I'm considering taking on some side work for a few extra thousand each month to accelerate the process.  I'm pretty sure if the managing partner found out I would be terminated.  Too risky or worth it?

In summary, I'm kind of asking for career advice and financial advice in the same thread.  Thanks for taking the time to read my case study!

[ADK_Junkie]

Hello TheSimpleLife:

First, I can't tie your Income amounts to the Total Net Take Home... what's going on here, is your Take Home north of $100K or is it $55K?
Here are some ideas to your questions:

1)  I wouldn't acquire additional debt to pay off current debt to Family Member.  Also, I would leave the $20K in Savings 2 alone... treat THIS as an Emergency Savings Stash (keep in a high yield account like ALLY BANK).  While some hate any debt, I personally think a balanced approach is best (paying down debt and saving at the same time).  Let's assume you have $24K extra a year, max out your ROTH IRA (you and wife = $11K) then use the remainder ($13K) to pay off the Family Member (be sure to get a new amortization schedule every time you prepay).

2)  I think $800 is reasonable, but you may find surprising ways to cut corners if you are looking.  Using only Cash can sometimes help here.  I think you need to accumulate addition funds for expected Wear & Tear on house and car.

3) I think this is great idea (and as you say, after eliminating all your debt).  Time is the most valuable commodity we have and you never know what tomorrow brings.

4) Keep an eye out for opportunities to change employers.  Bring up the "handshake deal" saying you'd like to see some forward movement/progress on this front if you are to stay dedicated.  Regarding the Biggest Dilemma: I'd say only enter the business after you develop an LP/LLC agreement, split the start-up costs (should be minimal) 50/50 but spell out the client driven profit sharing formula.  Also, have a clear legal EXIT PLAN in place so you aren't taken advantage of.  Be sure to have legal counsel available to review any and all things you are signing.

I think you should consider starting your own CPA firm.  It shouldn't take too long to set up, but work for yourself in evenings and get it going before you resign from your current firm.  This means you may have to steal away from family for networking.

5) Don't forget the tax benefit of your mortgage interest, you are probably paying closer to 3% (or lower!!) for your house financing.  Again, I personally believe in a balanced approach... right now, you could walk away from your home if underwater (and it's the bank's loss, assuming they don't come after you).  Tax benefits can really accrue major savings.  Save some and pay off debt some.  (I also believe strongly in all types of diversification: including pre-tax; post-tax retirement savings).  If you max your Roth IRAs, steamroll the rest in debt paydowns.  I hope, as a CPA, you have mapped out in Excel your expected future finances, including savings (& growth rate) to hit FI.

6)  Again, the housing cost is fairly minimal.  I understand the psychology of debt payoff (and if it helps you to save/paydown more, then by all means you should employ it).  Just remember "Dollar Cost Averaging" is the best way to realize significant gains in the equities markets.   Again, diversify everything (debt/savings/investments/career prospects).

7) It is risky, but I really think you have it in you (after reading your post) to start your own company.  Start the process today.  At 28, you have a lot of time to recover if things don't go your way.  A very successful hedge fund manager I know believes that young people don't leverage themselves enough.  Throw yourself out there and get something started.  With the CPA credential, you will also be employable, so cast off your current chains (or at least work towards it).  Do it now, you'll be 35/40 before you know it.

Good luck!

[Catbert]

How much are you really going to save with a HELOC?  If it's substantial then I might save up the 10K additional and pay-off the family member.  However, if the real savings is minimal (taking into account the floating HELOC interest rate) then I would leave with the family member and pay it off as quickly as you want.

On the one hand I understand why you wouldn't want to be in debt to descendants.  OTOH this family member did you a favor by loaning you money to pay off your higher student loans.  Return the favor by giving them the interest rather than paying a bank the interest instead.  You could go the HELOC route if the family member dies.

No advice on your other questions.

[TheSimpleLife]

How much are you really going to save with a HELOC?

As you alluded to, it really has nothing to do with "savings" from an interest rate standpoint or even a monthly payment standpoint.  We just don't want to owe them money any longer as they are approaching their golden years (middle 70's and late 60's).

Thanks for taking the time to reply!

[TheSimpleLife]

First, I can't tie your Income amounts to the Total Net Take Home... what's going on here, is your Take Home north of $100K or is it $55K?

$3,154 x 12 months = $37,848
Two extra paychecks = $3,154
Tax Season Bonus (one time pmt) = $13,000
Tax Refund = $1,400

Total Income = $55,402  No??

Keep an eye out for opportunities to change employers.  Bring up the "handshake deal" saying you'd like to see some forward movement/progress on this front if you are to stay dedicated.  Regarding the Biggest Dilemma: I'd say only enter the business after you develop an LP/LLC agreement, split the start-up costs (should be minimal) 50/50 but spell out the client driven profit sharing formula.  Also, have a clear legal EXIT PLAN in place so you aren't taken advantage of.  Be sure to have legal counsel available to review any and all things you are signing.

All good advice and all things that are already in place.  I recently negotiated a 10% or so raise, so I'll give it a while before approaching again.

I think you should consider starting your own CPA firm.  It shouldn't take too long to set up, but work for yourself in evenings and get it going before you resign from your current firm.  This means you may have to steal away from family for networking.

I think this is the direction I'm leaning.  This is also what most friends & family encourage.

Don't forget the tax benefit of your mortgage interest, you are probably paying closer to 3% (or lower!!) for your house financing.

We don't itemize.  Total interest last year on mortgage was only $3,500 or so.

It is risky, but I really think you have it in you (after reading your post) to start your own company.  Start the process today.  At 28, you have a lot of time to recover if things don't go your way.  A very successful hedge fund manager I know believes that young people don't leverage themselves enough.  Throw yourself out there and get something started.  With the CPA credential, you will also be employable, so cast off your current chains (or at least work towards it).  Do it now, you'll be 35/40 before you know it.

Thank you for the advice and kick in the pants.  That is what my wife tells me...  If things fail, I can always get some flunky accounting job for decent wages that will easily cover our bills. 

[GRSConstruction]

In regards to your income, I believe the confusion is that you said that is your "bi-weekly take home" which would infer you make that every 2 weeks, not your monthly income. Wouldn't bi-weekly mean you would make $3,154 x 26wks = $82,004?

[TheSimpleLife]

In regards to your income, I believe the confusion is that you said that is your "bi-weekly take home" which would infer you make that every 2 weeks, not your monthly income. Wouldn't bi-weekly mean you would make $3,154 x 26wks = $82,004?

I read the original post again and agree with you.  I went back and edited original post.  Thanks.

[Cpa Cat]

-I'm being sold a story of "act and sell like an owner for some future payoff" but obviously none of that is guaranteed.

Just think - if you were doing this for your own business, you would actually be an owner and the payoff would be current. Then, if you want to do financial planning in the future, you can get the necessary certification and expand your own business.

What's the point of putting the time and effort into someone else's business in the hopes of getting a share when you have the experience and know-how to build the exact same business in less time.

Then there's the uncertainty of not knowing what kind of "buy-in" they will require of you - when you could be "buying in" to your own business right now.

[TheSimpleLife]

Just think - if you were doing this for your own business, you would actually be an owner and the payoff would be current. Then, if you want to do financial planning in the future, you can get the necessary certification and expand your own business.

What's the point of putting the time and effort into someone else's business in the hopes of getting a share when you have the experience and know-how to build the exact same business in less time.

Then there's the uncertainty of not knowing what kind of "buy-in" they will require of you - when you could be "buying in" to your own business right now.

All very good points.  Thanks!

[Hugerat]

Hi SimpleLife,

Your budget looks pretty good, although you may be able to squeeze a little bit from a couple of areas. I have no idea what various rates are like in your area, but $220 for utilities might have a little room for improvement. You might make sure that all of your light bulbs are CFLs, that you don't have any ancient appliances, and that all of your faucets are low flow. It might also help to have the $800 misc category broken down but this doesn't strike me as unreasonable at all.

The big problem that I see is that you have all of your liquid assets stuffed in a savings account, most likely earning a negligible interest rate. You need to start getting some growth out of your $20,000 in assets. This is where your plans for running your own business might need to be fleshed out some more because this could become necessary for business expenses. Otherwise, you should really read MMM's take on emergency funds (I believe it was in a recent Market Watch interview). I tend to agree with him that emergency funds can be useful for financial beginners but are unecessary for advanced Mustachians. Let your $700 monthly cash surplus, your general savviness with spending, and your investment accounts be your emergency fund. Remember, just because you invest money doesn't mean you will never have access to it again in the event of an emergency. Mutual funds offer a very high degree of liquidity and you have a monthly buffer so something like needing a new washing machine won't require that you liquidate investments.

Given the current unattractiveness of stock and bond markets right now, you might consider dollar-cost-averaging your savings into a basket of index funds over the course of a year or two. But whatever you do, you need to get that $20k working for you.

[TheSimpleLife]

Your budget looks pretty good, although you may be able to squeeze a little bit from a couple of areas. I have no idea what various rates are like in your area, but $220 for utilities might have a little room for improvement. You might make sure that all of your light bulbs are CFLs, that you don't have any ancient appliances, and that all of your faucets are low flow. It might also help to have the $800 misc category broken down but this doesn't strike me as unreasonable at all.

Yes, we could save a little bit on utilities.  Trying to encourage the spouse on simple things like shutting off lights, fewer loads of laundry each week, getting comfortable w/ the AC set to a higher temp, etc.  We're making good strides, so I'm not going to push my luck too far.

All appliances are pretty much brand new except the stove, which we will upgrade before too much longer.  CFLs are a good idea.  Low flow faucets as well.

We're trying this month to reduce the $800 to $700 this month by taking out cash of $350 a paycheck rather than $400.

The big problem that I see is that you have all of your liquid assets stuffed in a savings account, most likely earning a negligible interest rate. You need to start getting some growth out of your $20,000 in assets. This is where your plans for running your own business might need to be fleshed out some more because this could become necessary for business expenses. Otherwise, you should really read MMM's take on emergency funds (I believe it was in a recent Market Watch interview). I tend to agree with him that emergency funds can be useful for financial beginners but are unecessary for advanced Mustachians. Let your $700 monthly cash surplus, your general savviness with spending, and your investment accounts be your emergency fund. Remember, just because you invest money doesn't mean you will never have access to it again in the event of an emergency. Mutual funds offer a very high degree of liquidity and you have a monthly buffer so something like needing a new washing machine won't require that you liquidate investments.

I agree on the emergency fund issue.  I have plenty of credit and can't foresee needing much more than a few grand even in the worst case scenario.  The other $20K I would like to put to use by paying off debt.  Yes, I would potentially be losing out on the difference between the potential higher returns, but I'm willing to take that bet at this point in our lives.

Given the current unattractiveness of stock and bond markets right now, you might consider dollar-cost-averaging your savings into a basket of index funds over the course of a year or two. But whatever you do, you need to get that $20k working for you.

Although I respect the line of thinking that thinks the market is currently overvalued, I do not believe it is possible, over the long term, to properly time said market.  I do agree DCA is a great way to help ease that stress both financially and "mentally."  Thanks for taking time to reply to my thread!

[rmendpara]

Always good to hear from a fellow CPA! I was also a former Big firm auditor, but left for a corp fin role late last year.

Anyway, few points:

1) Not sure why you want to pay them back ASAP. Mathematically, you are both benefiting. Regardless, if you're so inclined, I would say don't take out debt to pay back debt, unless you can get a lower rate than what they are offering you. Just pay it down as your first priority. Based on your extra monthly income of ~688, this could be managed in a few years.
2) You could lower the food/misc a little bit, but it's splitting hairs. I would just concentrate on not inflating your costs over time rather than cutting to the bone.
3) This is the coolest thing about being a CPA. I've thought in depth about working as a part-time tax preparer/financial advisor, and could probably make $50k a year, or more if I become successful, on very favorable terms. I would prefer to do so as a part-time gig at a firm, if possible. But, if you are reasonable at entrepreneurship and selling work (getting clients), then I'd give it a go this upcoming tax season to see if you can find enough people wanting you to do their tax work. See how it goes from there.
4) Let's supposed a few things: you trust the partner(s) and they have done a good job running their business so anyone could step in and maintain/grow it.
 - If not, ditch them when the time is right. Sorry for being blunt, but handshake promises are a terrible deal. If someone comes along in a year and offers to buy their book of business at a good price, they may just renege on the "promise".
- In any case, up to you.
5) Pay off the house. In accounting terms, you could keep the loan and start putting excess cash flow into investments, but you would just end up expanding your personal balance sheet. Technically, exchanging cash for investments, or exchanging cash for paying off liabilities is the same effect on your net worth; however, few differences. Paying off your debt is a 4.25% guaranteed return. I mean guaranteed even more than T-bills. Plus, over the not so far away term, you will be in a great cash flow position with no mortgage payments. I would pay off your debt after fully funding your IRAs. Being debt free will allow you the freedom/flexibility to start your business and really get it going, since you will have very low operating costs in your personal life.
6) At your income level, it's probably a wash to invest in a Roth vs Traditional. Pick whichever helps you sleep at night. And always contribute enough to get the 401k match from the firm.
7) Side work for a few thousand per month? Dude, keep contributing to your current firm and keep x% of earnings, or build your own business and keep 100% of earnings. Your choice.

One day, if you have a somewhat successful book of business, you could merge/sell it to another accountant to "cash out" the equity in your clients, and also probably easily set up a deal where you work every year from Dec-Apr full time, and then as-needed for the rest of the year. You could probably out earn what you're making now, as well as find a good partner to help spread the workload as well as some of the risk. All you have to do is set up a good deal. Tax services will keep your firm busy during Q1, and financial planning could be a part-time thing throughout the year to make even more income at a very doable 10-15 hours per week/as-needed.

Good luck!

[former player]

You seem to be doing pretty well.  I have just two thoughts.

1.  I understand that you would like to pay off the loan from your family member.  But this is not just about your feelings and finances, it is about your family member's feelings and finances, as well.  I wonder whether you have bought into the idea (its a very pervasive one) that "mortgage debt is good debt and all other debt is bad debt", and thus that your family loan is "bad debt".   I would say that your family loan is actually the best debt you have: you have cut out the commercial middle man and both you and your family member are splitting that commercial profit between you.  In other words, try looking at it not as a debt but as a profitable business arrangement.  You are an accountant, so you should understand this, you just need to adjust your world view a little.

The answer to this loan I think is for you to carry on with it on schedule but pay off your mortgage at an accelerated rate.  If you do need to repay the family member (or their estate) in a hurry, you would be in a good position to increase your mortgage again to do so.

2.  You had a handshake agreement at work which has not gone to plan.  It has left you in a sticky situation.  You are being sold a story of "act and sell like an owner for some future payoff.  The two partners couldn't manage their way out of a closet.  They sure can't successful grow a professional services firm in this slow growth economy.

That paragraph was all your own words.  Wow.  One of those partners now wants you to go into partnership which would tie you into this arrangement?  But from what you have said, this is a business going nowhere run by untrustworthy users.  Look seriously at your own words and don't have anything to do with these people that you don't have to.  Work up your side hussle, put in place plans to jump to your own business as soon as you are ready and don't look back.  Good luck.

[TheSimpleLife]

Thanks rmendpara and former player for the comments.  I agree with all/most of your points.  I think I will start a journal about building out the side hustle.  Thanks again.

[TheSimpleLife]

I had taken some time away from the forums to start my own accounting practice, so I thought I would give an update to inspire people who might be in a similar situation.

Rough details:

After getting some more feedback from trusted advisors, friends and family, I knew it was time to pull the plug and venture out on my own. In November of 2014, I informed both partners that I planned on leaving the firm after the 2015 tax season. We agreed for me to stay until July to make sure some client hand offs were handled properly. My first day solo was July 9th, 2015. I had about 6 months of living expenses saved and about $2,000/month in gross revenue from clients I had built on the side as well as clients that came with me. We were committed to my wife continuing to care for our kids full-time, so I had about 9 months of opportunity to land more clients before I would go back to work (the savings plus the $2K income less biz expenses).

Fast forward to today: I netted more in my first year solo than I did my last year at the firm. We sold our house in a suburb and moved within 2 miles of my new shared office. Our two year old is now 4, and we have a one year old son as well (he was born just after tax season ended and right as I was planning my departure).

Even with the craziness of getting things off the ground, I worked way less hours during tax season than I did my last tax season at the firm. I've hired a part-time bookkeeper and am looking to bring on more talent. I posted about that here in case anyone who sees this might be interested: http://forum.mrmoneymustache.com/mustachian-marketplace/work-from-home-opportunity-for-accountant. I've been blessed that growth has rapidly progressed these last few months and see no reason why the growth won't continue.

I've actually somewhat shifted from a heavy tax focus to a more year round lifestyle practice. We primarily provide a combination of accounting & tax services for small businesses. We try to have clients monthly reports out by the 10th of the following month, so I usually just use the last half of each month to prospect or enjoy with my wife and boys. Small business tax returns are extremely simple when you do the monthly accounting work for them.

There isn't really much else to say. As I mentioned in my original post back in 2014, I can't ever see myself fully retiring and have found that the ability to step away or take a few days off when needed combined with the thrill of entrepreneurship is a great life. Our lifestyle hasn't really increased so we should easily hit FI by 40 as I understand the excitement and enjoyment could wear off eventually.

If anyone is in a similar position and has any questions about the process, I'd be glad to answer.

My main point of advice would be this: regardless of profession, once you hang out your own shingle your main objective should be finding ideal clients and converting them into paying clients.

Thanks for reading!

[former player]

Thanks for coming back and posting the results of your case study - it's great for us readers and commentators to find out what's happened.

Congratulations on the second child and on starting up a business which is successful both financially and from a lifestyle point of view.

(And phew to myself re-reading my advice two years later to find that it didn't suck).