Author Topic: Case study: 2nd baby on the way, help me plan the next few years  (Read 1981 times)

getmoneyeatpizza

  • 5 O'Clock Shadow
  • *
  • Posts: 23
Case study: 2nd baby on the way, help me plan the next few years
« on: February 10, 2018, 07:08:25 PM »
Topic Title: Case Study - 2nd baby on the way, expenses going up

Life Situation: Married filing jointly. Ages 33/36. 1 toddler dependent. Another baby on the way this November.

We live downtown, bike to work and daycare and love it but need to move in 3 years due to schools. Our current house is small but near a college and is very rentable and we want to keep. Good school districts in the city are very expensive but living in the suburbs sucks.

We need a car big enough to accommodate two car seats. Having to buy a new car is bumming me out. We are doing well saving a lot but donít as a result we donít have savings to put towards these purchases. Additionally, we donít really track our spending figuring we pay off everything and force our spending lower by contributing a lot to retirement.

Gross Salary/Wages: Now 138,000 (Note: these numbers are based on about 128k, my wife got a raise last year) I've provided all numbers as yearly, based on what we have for our 2017 taxes.

Individual amounts of each Pre-tax deductions

33k 457 (3k away from maxing)

Trad. IRA: 11k maxed (however, since daycare started, i have been been transferring this straight from a taxable brokerage account, noted below)

FSA: 600
Dependent care: 5000

Adjusted Gross Income: 63k before the raise, it will likely be 69k this year

Taxes: according to this years taxes it will be
$4,400 fed
$2,300 state
$2,515 property tax

Current expenses:

Mortgage monthly: $1,253.86 total, P: $311.64 Interest payment:  $591.44 Escrow payment:
$350.78 (one year property tax $2,514.60) (one year home insurance: $1481)

Utilities: $1884
Car insurance: $870
Electricity: $1078
Health insurance: $2400
Mortgage: $15,046
Daycare $13,218
Student Loan: $4900
Health Insurance: $2400
Groceries: $6900 (Costco, Safeway and Aldi) hair on fire here I guess
Car repair: $1200 (getting new car in a few months)
Plane tickets: $1250

Total: 51k ? not sure where the rest went, hair on fire I guess

Assets:
Tax advantage:
Pension cash out value: 53k
Trad IRA: 50k
ROTH: 25k
457: 182k

Taxable brokerage: 37k
(All target date 2045 or 80/20 stocks/bonds)

House: 105k equity estimate
Car: 3k

Liabilities:

188k left on mortgage.
60k Student loan to be forgiven in 2020. The payment is based on AGI, which is why we use a Trad. IRA.

Specific Question(s):

How can I do better? Expenses going up with getting a newer car, another kid in daycare in a year, and a another house in 3 years. However when our daughter goes to school in 2021 and the loan payments end in 2020 our expense will go down again. Our only "cash" is in the taxable brokerage, I guess we need to take some of this out for a car and eventually for a house down payment.

Should we switch to Roth in 2020? Should i back door Roth? I need change car insurance and homeowners insurance.
« Last Edit: February 11, 2018, 12:21:34 PM by getmoneyeatpizza »

Tuskalusa

  • Stubble
  • **
  • Posts: 233
Re: Case study: 2nd baby on the way, help me plan the next few years
« Reply #1 on: February 11, 2018, 04:13:23 PM »
Hi There. The first few years with young kids are crazy hard and expensive. Daycare is a killer, but at least the high cost portion goes down when they get into school.

Is sounds like you like your house, and itís convenient to your work. And it sounds like a looming move is adding a lot of concern to your long term planning. You might want to do some more research into your district and look at what your options are. One of the biggest indicators of school success is parent involvement. Sounds like thatís covered!  So, maybe there are some school options in your district that have more parent involvement, or that have a great community or other student programs. A good place to start is you district and school web sites, as well as greatschool.org. If you could find some alternatives, maybe you can postpone a move for a bit.

Sounds like a good used car is in your future. Maybe start there and take some time to look at your longer term options.

lhamo

  • Walrus Stache
  • *******
  • Posts: 7617
  • Location: Seattle
Re: Case study: 2nd baby on the way, help me plan the next few years
« Reply #2 on: February 11, 2018, 04:37:39 PM »
Do you REALLY need a new car?   Most cars can handle two car seats.  And it is cheaper to buy newer/smaller car seats than to upgrade a car....

Also concur with the advice to look more closely at the school situation.  Low test scores sometimes correlate with a high percentage of English language learners.  In such situations, it is important to look at rates of improvement on standardized test measures.  We have a few schools in my area that still rank low in terms of overall test scores, but that have consistently shown up on the "most improved" list statewide.   I would not hesitate to send my kids to those schools for elementary if they were still in that age range.  And once you get into middle/high school the issue is really whether the school can provide an appropriate level of challenge for your kids.

getmoneyeatpizza

  • 5 O'Clock Shadow
  • *
  • Posts: 23
Re: Case study: 2nd baby on the way, help me plan the next few years
« Reply #3 on: February 12, 2018, 06:50:45 PM »
Yes, I literally won't be able to drive with a another rear facing car seat behind me.

The schools are bad. The facilities are terrible, its hard to recruit, and the scores are bad too. The question is not whether to move, its whether to live close are pay more (but still be able to bike to work, the park, groceries etc.)  or live in suburbs with a cheap house but buy two cars and drive everywhere and drive to work and sit in traffic everyday.

I guess I'm curious about how to just handle the next few years considering the massive amount of new expense.

New house (is it worth it to keep my existing house and rent it, I might be forced to sell for another down payment)
New-er car (still used)
2nd kid in daycare

In 2023 both kids will be in school and my wife's loan will be paid off and we'll be OK I hope. But the next 5 years will be rough and very hard to keep my savings rate at what it has been when I finally felt like I was getting in the groove.

Tuskalusa

  • Stubble
  • **
  • Posts: 233
Re: Case study: 2nd baby on the way, help me plan the next few years
« Reply #4 on: February 12, 2018, 07:33:33 PM »
Youíre right. The first few years are crazy expensive, especially with daycare and school decisions. Hereís my take, for what itís worth.

One step at a time. Get a car that fits everyone comfortably. Iíd recommend a used Toyota Camry. Plenty of room. Easy to drive. Will last a long time. Affordable.

Then Iíd say just focus on your family and getting through the next few years. Sounds like youíll need to move. You donít have to decide today whether to sell or rent. Both are fine decisions. You might have a different perspective when you have 2 kids. Maybe you wonít want to be a landlord, or maybe you will. Either way, you will be fine.

If you can get the student loans accelerated, youíll have more options. Maybe itís worth going through your expenses to see what you can do before your daycare doubles.

The good news is that youíll get some relief financially when the kids get to school. (I clearly remember this when our son went to school, and I was glorious!) So your big challenge is to decide where you want to land for school, and what kind of expense/commute do you want to take on. The good news is that you have some time to figure it out. Then you can start getting the pieces in place. :-)

Ben Kurtz

  • Stubble
  • **
  • Posts: 120
Re: Case study: 2nd baby on the way, help me plan the next few years
« Reply #5 on: February 13, 2018, 10:02:42 AM »
Congratulations on the upcoming second child!

I'm seconding Tuskalusa's approach here. Take things one step at a time. Don't jump the gun.

It sounds like the new kid on the way must be a very recent development. So there is certainly an emotional reason to start planning out all your next steps and even slightly panicking over all the changes you'll have to make. Life happens quickly enough, but there is certainly enough time to take a breath, think things through, and choose to take each step only in its appointed season.

You need a good used car sometime before the new baby arrives in November. So go car shopping sometime in August, once a new crop of summer trade-ins hit the lots. No need to buy anything sooner than that. I agree that a used Camry is a good choice. I'm also partial to older Volvos; a used Accord would also work fine. I would stress not spending more than $10,000 on the car no matter what (which gets you a 5-7 year old Camry with less than 100,000 miles); a more ambitious thrift target of $5,000 is also quite reasonable. I generally pay 3 figures for my cars, but I'm crazy. If the current car has been fixed up and is in roadworthy shape, there is no need to panic into buying immediately just because you are expecting a second child come November.

You are contemplating moving once your older child is school aged. She will start school in 2021, I'm guessing August, so you need to start house shopping in late 2020 or early 2021-- not next month. Accordingly, in mid-2020 you will need to sit down and decide where you want to move, whether you want to rent or own in that new neighborhood, whether you want to carry through on the plan of being a landlord by retaining your existing home (which may be too much bother with two children underfoot), etc. You can start looking into these questions, but you hardly need to decide them now. And not only will your daughter's starting school cut down day care expenses, but you state that certain student loans will qualify for forgiveness by 2020, improving your balance sheet and cash flow (but do look into whether the forgiveness has any tax implications -- in many cases it will), so you will need to take that into account at the time.

One thing you can do in the immediate future is deep background research on your neighborhood options for moving. You claim that the good school districts in town all have prohibitively expensive houses while the good suburban school districts all have terrible lifestyle / commute implications. With respect to the in-town neighborhoods: do your homework carefully and also consider the buy-vs-rent decision. If you feel strongly about keeping your current job (which appears to be in town) while sending your daughter to good schools and avoiding a clownish commute, perhaps it makes sense to rent in that good neighborhood and pack away the savings until you are FIRE and can re-consider your location and school options without a job commute to worry about. Very often, relatively expensive residential neighborhoods have purchase and rental pricing trends which favor renting from a financial point of view, not purchasing.

With respect to the suburban options: It might appear that all the neighborhoods have terrible lifestyle / commute implications, at least at first glance and on average, but in many parts of America those suburban towns that are largely filled with sprawling, non-walkable subdivisions and car-centric commercial strips will have old walkable historic pockets here and there, or at least mid-century neighborhoods with bike-friendly residential streets and the ability to get to shops without driving. You don't have to live in all the suburban houses, just one. There are good odds that even in a suburban belt where most of the housing stock is annoying from a Mustachian point of view, there are still a few good houses. Is there a commuter rail station or commuter bus service that you could live close to? Could you switch jobs to one based in a suburban office park, and then strategically live close enough to bike to that?

Take your car and bike out one weekend once the weather improves a bit and start exploring, before locking your thinking into too narrow a rut. You have years to figure this part out.

Regarding your finances: I've got you down at a net worth of $450,000 (assuming the student loan forgiveness happens in 2020), which is good for your age.

But your spending habits are totally uncontrolled, or very poorly recorded. I have your take-home cash flow last year down at $85,215, which is your family's $128,000 gross salary after deducting retirement contributions ($33,000) and income tax withholding ($6,700), as well as FSA ($600) and dependent care account contributions ($5,000), which in each case I assume are applied to defray some of the spending categories you detail. I tally your recorded expenditures at $43,746, which includes mortgage (PITI), health insurance (which may actually be deducted by your employer before your paycheck is deposited but doesn't affect the math here), the portion of daycare costs above the $5,000 defrayed by the dependent care account above, and all the rest. Note that you put down health insurance at $2,400 twice -- I don't know if that was an error.

So we're looking at around $40,000 of phantom spending. I assume you're spending it all, because if you weren't you wouldn't need to be raiding your taxable brokerage to move cash to your IRA to earn your tax deduction for the year. Where's the money going? That's a mystery worthy of Agatha Christie.

So what you need to do between now and this August, when you go out and buy that used Camry or Volvo, is take a very deep dive into your spending habits and get them under control. With a gross salary now at $138,000 you should have no problem fully maxing out your tax-advantaged space this year, which appears to be $47,000 for long-term retirement savings (plus tax advantaged current spending accounts like FSA and dependent care) using new money (not money recycled from your taxable account), plus paying $13,000 in daycare charges, $15,000 toward your mortgage and $30,000 towards a semi-frugal "everything else" budget (food, clothing, car, travel, utilities, entertainment), while having plenty left over to pay your taxes, save for one-off labor and delivery costs, and put a bit back into your taxable account.

If you can commit to saving at least $50,000 a year for the next ten years you should be very well placed to FIRE while your kids are still more or less elementary school aged. But if you poke along at your current rate of about $30,000 per year you will probably be chained to your desk until your youngest graduates high school, if you are lucky.

The choice is yours.

getmoneyeatpizza

  • 5 O'Clock Shadow
  • *
  • Posts: 23
Re: Case study: 2nd baby on the way, help me plan the next few years
« Reply #6 on: February 15, 2018, 08:31:50 PM »
No decision is made quick around here, so thanks for the reinforcement.

There is no rush about decision on car but my wife is sick of our breaking car and wants a different car that suits our needs for the future by May. Waiting until summer seems fine to me but if our car needs more repair it will be a deal breaker.

Safety has been on my mind like crazy and I'm trying to reconcile this with being cheap. I want some type of emergency braking technology on the new vehicle. If I'm going to have 3 of the most important of people in the world with me in the car I want to do everything in the world to keep them safe. $5000 extra seems like nothing in comparsion to a lifelong injury or death. This leads to thinking about a Subaru forester 2015 with eyesight for $22k or a Honda CRV 2017 EX for $24k. I would never even consider these for myself but my family is worth it.

I looked into it and there are no tax implications for the student loan repayment. So in 2020 we can start back with Roths.

I will seriously look into renting in the other close by, good school, neighborhood in a few years. I guess I need to run some rent vs. buy calculations. I did not mention my current house is only 2 bedrooms and we have a lot of out of town guests and family. When baby #2 needs to move out of our room there will be some pressure to find more space I guess. People all over the world figure this out so it seems silly.

The suburban option is pretty much how I laid out. No jobs, no parks, no transit, no bike paths, and no sidewalks. Not fun.

RE: net worth. We've been trying hard to put a lot into 457s the past few years.

Yes, spending in totally uncontrolled. We have been just trying to rely on not having much extra money to spend bc it goes to 457 to try to keep it down and it works a little but not enough. We have family all over the country and travel. Now with a child over 2 and another on the way, all travel will be by car.

We will try to fully itemize expenses to account for spending. Look for a follow up to this thread.

Being able to FIRE in 10 years would be amazing and felt so encouraged by this.  My goal all along has been to fully max tax advantage at $47k so 50k is not a huge stretch. I will analyze and return to this discussion with additional thoughts and decisions!











Tuskalusa

  • Stubble
  • **
  • Posts: 233
Re: Case study: 2nd baby on the way, help me plan the next few years
« Reply #7 on: February 15, 2018, 10:37:18 PM »
Wow! Sounds like you have an excellent start of a plan!  Very motivating.

Have you looked at YNAB, by chance. We started to use it about a year ago, and I really like it. Easy to use. Makes it easy to track spending and budgets. For me, it eased my financial stress because I could plan a few months out and see how we are (slowly) getting spending under control. We are far from mustacian, but at least we understand where how our money is coming and going. Itís a start!

mxt0133

  • Handlebar Stache
  • *****
  • Posts: 1506
  • Location: San Francisco
Re: Case study: 2nd baby on the way, help me plan the next few years
« Reply #8 on: February 16, 2018, 12:14:35 AM »
Just want to add that since you will be a family of 4 traveling I would look into travel hacking to help you bring those costs down.  We constantly fly back east for family and buying 5 plane tickets is painful but doing some travel hacking easily cuts it down by 1/2 or 2/3.


Ben Kurtz

  • Stubble
  • **
  • Posts: 120
Re: Case study: 2nd baby on the way, help me plan the next few years
« Reply #9 on: February 16, 2018, 11:00:34 AM »
Quote
Safety has been on my mind like crazy and I'm trying to reconcile this with being cheap. I want some type of emergency braking technology on the new vehicle. If I'm going to have 3 of the most important of people in the world with me in the car I want to do everything in the world to keep them safe. $5000 extra seems like nothing in comparsion to a lifelong injury or death. This leads to thinking about a Subaru forester 2015 with eyesight for $22k or a Honda CRV 2017 EX for $24k. I would never even consider these for myself but my family is worth it.

The blog has a classic article on the "safety illusion" and the importance of being fact-driven and analytical when you find yourself being emotionally pushed to spend far too much money on something because of some ill-defined safety advantage.

https://www.mrmoneymustache.com/2012/06/07/safety-is-an-expensive-illusion/

Do you really have good figures showing much the newest whiz-bang feature improved fatality and serious injury rates? Have you run an analysis showing the long-term cost to yourself of adopting a lifestyle that owns new(ish), expensive cars, replaces them at too rapid a clip, and therefore depreciates cars at an excessive pace for a lifetime?