Case Study: Big Pay Raises – Now What???!!!

[Fiscal_Hawk]

Life Situation: MFJ, I’m 34 and DW is 36. Son is 3 and daughter is 6 mo.

Gross Salary: We both have recent changes here. I was making 51k/ yr and took a new job in December making 67k/ yr. DW is making 78k but just accepted a new position making 93k/yr. So these new salaries present a time to look at our finances.

Pre-tax deduction: Health Insurance ($440 a month), 401ks (15% for her and 6% for me) but we plan on maxing out both of them this year with our new salaries.

Current Expenses – these were lower in 2020 due to COVID. We expect daycare to go up quite a bit and 2 in daycare now

We spent 58k in 2020 but expect that to go up. This is an estimate based off 2020 spending and adding in increased daycare for 2021 monthly expenses:
Mortgage: 1232 (PI only – 735)
Utilities: 235
Cell: 82
Internet: 65
Youtube TV/ Netflix: 70
Student Loans: 377
Daycare: 1725
Baby expenses: 40
Groceries: 650
Household: 100
Dining Out: 220
Car Loans: 376
Gas/ Auto Ins: 260
5432
Clothing: 80
Life Ins: 48
Misc: 200
Total Monthly Expenses: ~ $5760

Assets:
My 401k: 17k
My Roth: 19k
DW 401k: 98k
DW Roth: 3k
Savings: 90k (Had planned to possibly move so was saving up for down payment but plans have changed).
House is worth about 240k (based on neighbor’s sale this past year as house is identical)
Total assets: 467k
liabilities:
House – Owe 165k, bought it 3 years ago for 208k (probably worth around 240 now). 30 yr loan at 3.75%
Student Loans – 17k (Mine are 7k at 6.5% interest, hers are 10k at varying interest but highest is 4%)
My car – 2014 Highlander owe 6k at 3.4%
DW car – 2018 RAV4 owe 9k at 3.9%

Total Liabilities: 197k

Questions:
1)   With our big raises here (about 30k) I am planning on maxing out our 401k’s. Can we still contribute to a tIRA? If so, will it be deductible? I’m a bit unsure on this one so help would be appreciated.
2)   Obviously 90k is a TON to have in savings. I am a bit conservative so I do want to keep 6 months expenses in a savings account (about 30k) so what should I do with the other 60k?
3)   As we increase our pay, what else should I do with our money?
4)   So my goal is to retire in 20 years (DW has no plans to retire early). Is this a realistic goal?

[meandmyfamily]

I would pay the student loans off immediately and probably the car loans too depending on interest rate.  Follow the investment order listed here from there.

[kpd905]

Do either of you have access to an HSA or a dependent care FSA?  Both of these would drop your MAGI a bit more.

Right now it looks like you are just barely in the fully deductible range for the traditional IRA, which is an MAGI of $105,000 to $125,000.

Salary $160,000
-5280 health insurance
-39,000 401k's
-12,000 traditional IRAs
=103,720

You should be good assuming you don't get any bonuses or raises.  You could always choose to do half traditional and half Roth as well.

I'd agree with others that said to pay off that 7% student loan ASAP, there is no reason to hold onto that with $90k in the bank.  You could wipe out all of them, but at least get rid of that one.  I assume your car loans are at low rates?

[KungfuRabbit]

Normally I'd agree with the top two, but I would not pay off student loans immediately.

I know a lot of people around here are all about personal accountability and what not, but there are VERY good odds that there will be at least $10k student loan forgiveness in the near future, potentially even more.  In my opinion the cost of paying that 6% interest is certainly worth the very real chance that it is paid off for free.  And there is no way there will be a "if you paid off your loans already we'll give you $10,000 just because you are cool".

[jeroly]

You are in a terrific position.

The best thing you can possibly do would be to bank your entire raises, except for treating yourselves to a celebratory dinner. If you can avoid hedonic adaptation to new spending levels, you will be just as happy and a lot richer.

As far as what to do with that 90,000 in savings…

History tells us that the best thing you can do would be to invest it in one lump sum into the market (for example into VTI Or VTSAX if you use Vanguard phones). If doing that in one lump sum makes you feel uncomfortable, then put it in in chunks say $10,000 a month.

Since you mentioned child care expenses, I’m assuming you have a kid or kids. You as a couple should reach some common understanding as to how you plan to approach higher education expenses. If you are in agreement to pay for some or all of your kids college costs, start throwing money into 529 fund or funds.

Overall, while your spending level isn’t ultra mustachian, there’s no face punching necessary either.  Just try to hold the line and you’ll really start racking up the net worth increases!

[Fiscal_Hawk]

Do either of you have access to an HSA or a dependent care FSA?  Both of these would drop your MAGI a bit more.

Right now it looks like you are just barely in the fully deductible range for the traditional IRA, which is an MAGI of $105,000 to $125,000.

Salary $160,000
-5280 health insurance
-39,000 401k's
-12,000 traditional IRAs
=103,720

You should be good assuming you don't get any bonuses or raises.  You could always choose to do half traditional and half Roth as well.

I'd agree with others that said to pay off that 7% student loan ASAP, there is no reason to hold onto that with $90k in the bank.  You could wipe out all of them, but at least get rid of that one.  I assume your car loans are at low rates?

We do not have access to HSA's. I do have access to dependent care FSA so I think I can contribute up to 4k/ yr on that.

As far as the car loans, I can update that. One is at 3.4% and one is at 3.9%.

[Fiscal_Hawk]

You are in a terrific position.

The best thing you can possibly do would be to bank your entire raises, except for treating yourselves to a celebratory dinner. If you can avoid hedonic adaptation to new spending levels, you will be just as happy and a lot richer.

As far as what to do with that 90,000 in savings…

History tells us that the best thing you can do would be to invest it in one lump sum into the market (for example into VTI Or VTSAX if you use Vanguard phones). If doing that in one lump sum makes you feel uncomfortable, then put it in in chunks say $10,000 a month.

Since you mentioned child care expenses, I’m assuming you have a kid or kids. You as a couple should reach some common understanding as to how you plan to approach higher education expenses. If you are in agreement to pay for some or all of your kids college costs, start throwing money into 529 fund or funds.

Overall, while your spending level isn’t ultra mustachian, there’s no face punching necessary either.  Just try to hold the line and you’ll really start racking up the net worth increases!

Thanks for the feedback. Our goal is to not let these raises lead to lifestyle inflation. We are both fairly frugal by nature anyway so it should be good.

The 539 is a good suggestion and one we have talked about before but didn't go to yet. It's amazing how quickly our savings account has creeped up on us over the past couple years.

Still want to aim for 2040 for FIRE. I ran some investment numbers and if we can invest ~50k a year for the next 20 years, that would put us around 2.6M which would likely be enough especially if DW plans to continue to work. Still need to run some more numbers on that though.

[kpd905]

Are you putting money into the dependent care FSA?  Given your daycare expense, you should be maxing it out.

Re: your 20 year timeline, I think you can retire way earlier.  Your monthly expenses after subtracting your student loans and daycare expense comes out to $3658, or $44,000 per year.  You would need somewhere around 1.3 million to sustainably withdraw that much, not 2.6 million.  Looks like you could have that much in 10-12 years based on returns.

Of course, if you wife plans to never stop working, you can just stop now.

[Freedomin5]

As mentioned above by a previous poster, follow the Investment Order:

https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153

There’s no need to try to reinvent the wheel or feel that you are the special snowflake case. Keep your expenses low, don’t succumb to lifestyle inflation, use the investment order to help you figure out where to put all your extra money. Become FI, and then if you want to keep working for 20 years, do so happily as a SWAMI.

ETA: I’m speaking from experience here. With one job switch, we went from an annual net income of $33K to an annual net income of $136K. We used the investment order to get our finances in order. Within 5 years, we entered the double comma club, reached FI, and are now SWAMIs who work just cuz we want to and can quit when we want to. All this to say that the Investment Order works especially when you have a sudden jump in income.

Btw, there’s a bit of fat in your budget that you could cut if you want, without a significant reduction in your quality of life, but based on your questions, it sounds like that’s not really a priority at the moment?

[Fiscal_Hawk]

Are you putting money into the dependent care FSA?  Given your daycare expense, you should be maxing it out.

Re: your 20 year timeline, I think you can retire way earlier.  Your monthly expenses after subtracting your student loans and daycare expense comes out to $3658, or $44,000 per year.  You would need somewhere around 1.3 million to sustainably withdraw that much, not 2.6 million.  Looks like you could have that much in 10-12 years based on returns.

Of course, if you wife plans to never stop working, you can just stop now.

I just started my new position in December so I am planning on contributing to the Dependent Care FSA. Will be doing so this week.

As for my timeline, that is good to hear that your perspective is I'm on track. I am a bit conservative in that area so not looking to FIRE anytime soon. However, you do make a good suggestion not to include daycare and student loans in those expenses. I do think our travel expenses would go up a bit (but not insane). So I figure our annual expenses would be around 50-55k/ year. So, we could very well be there in 10 years or so.

[Fiscal_Hawk]

As mentioned above by a previous poster, follow the Investment Order:

https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153

There’s no need to try to reinvent the wheel or feel that you are the special snowflake case. Keep your expenses low, don’t succumb to lifestyle inflation, use the investment order to help you figure out where to put all your extra money. Become FI, and then if you want to keep working for 20 years, do so happily as a SWAMI.

ETA: I’m speaking from experience here. With one job switch, we went from an annual net income of $33K to an annual net income of $136K. We used the investment order to get our finances in order. Within 5 years, we entered the double comma club, reached FI, and are now SWAMIs who work just cuz we want to and can quit when we want to. All this to say that the Investment Order works especially when you have a sudden jump in income.

Btw, there’s a bit of fat in your budget that you could cut if you want, without a significant reduction in your quality of life, but based on your questions, it sounds like that’s not really a priority at the moment?

Thanks for the feedback. Did not intend to imply I was special but just wanted to gather some thoughts and wasn't exactly sure if I could still contribute to a tIRA AND fully deduct it but it appears that question has been answered.

Your job switch sounds like it was a hell of an increase! Ours feels that way. Our household income has gone up so much in the past 3 or 4 years that it is pretty incredible to see. We are both fairly frugal so used cars and a "normal" house will remain the plan for us. I don't see us having lifestyle inflation much. By the way, what does SWAMI stand for?

As for our budget, we are always open to ways to trim the fat. What are your suggestions?

[Freedomin5]

As mentioned above by a previous poster, follow the Investment Order:

https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153

There’s no need to try to reinvent the wheel or feel that you are the special snowflake case. Keep your expenses low, don’t succumb to lifestyle inflation, use the investment order to help you figure out where to put all your extra money. Become FI, and then if you want to keep working for 20 years, do so happily as a SWAMI.

ETA: I’m speaking from experience here. With one job switch, we went from an annual net income of $33K to an annual net income of $136K. We used the investment order to get our finances in order. Within 5 years, we entered the double comma club, reached FI, and are now SWAMIs who work just cuz we want to and can quit when we want to. All this to say that the Investment Order works especially when you have a sudden jump in income.

Btw, there’s a bit of fat in your budget that you could cut if you want, without a significant reduction in your quality of life, but based on your questions, it sounds like that’s not really a priority at the moment?

Thanks for the feedback. Did not intend to imply I was special but just wanted to gather some thoughts and wasn't exactly sure if I could still contribute to a tIRA AND fully deduct it but it appears that question has been answered.

Your job switch sounds like it was a hell of an increase! Ours feels that way. Our household income has gone up so much in the past 3 or 4 years that it is pretty incredible to see. We are both fairly frugal so used cars and a "normal" house will remain the plan for us. I don't see us having lifestyle inflation much. By the way, what does SWAMI stand for?

As for our budget, we are always open to ways to trim the fat. What are your suggestions?

Yeah, my job switch was a huge increase. A couple years later, DH switched jobs, and our net income went to $180K per year. Now that we're FI and SWAMI, we don't feel a need to continue moving up, as any other increases in income in our fields = disproportionate increase in stress and responsibility. We're happy keeping our expenses at less than $30K per year and banking the difference.

SWAMI = Satisfied Working Advanced Mustachian Individual

Budget:

1. You're spending $870 a month on food. Check out the Groceries under $200/month thread for ideas:

https://forum.mrmoneymustache.com/share-your-badassity/have-a-sub-$200month-grocery-budget/

They can be quite badass on that thread, but even if you could cut your food bill to $500, that would free up quite a bit of money.

2. Youtube/Netflix - do you really need to be spending $70/month watching TV?

3. Clothing - you're spending almost $1000/year on clothing. Consider shopping at thrift stores. For baby clothes, try Freecycle or other websites were you can give away the clothes your kids have outgrown / swap with other people. I didn't pay for any of DD's clothes until she turned five and we had to buy her a school uniform.

Those are the low hanging fruit in terms of expenditures. If you really wanted to ramp it up, you might also consider switching cellphone plans to something cheaper. If you're in the US, there is a thread on the forum about cheap phone plans.