Author Topic: Case Study - Help me get to FI in 15 Years  (Read 2488 times)

Kronsey

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Case Study - Help me get to FI in 15 Years
« on: December 12, 2018, 02:10:17 PM »
Life Situation = Me - 33 years old, self-employed accountant; wife - 32 years old, helps PT with our biz and takes care of our boys; two sons - 6 & 3 years old. We file a MFJ tax return, and our only source of income is my business. The biz files as an S-Corp, and we will both receive salaries in 2019 (previous years just me). If interested, you can read a little more in depth about our background/situation here: https://forum.mrmoneymustache.com/journals/fire-pursuit-after-health-issues/

Gross Salary = $48K W-2 me, $21K W-2 wife, $26Kish pass through income from business. Total net from biz stuff about $95K.

Retirement Contributions Moving Forward = $19K pre-tax 401K for me, $19K pre-tax 401K for wife, $12,000 tIRA, and company match of 6% = $4,140. So total pre-tax savings each year = $54,140

Adjusted Gross Income = $45,000

Taxes - FICA withheld from paychecks. 0% federal income tax bracket (technically negative with EIC and CTC). State will owe around $800 each year that I will pay at time of filing return.
As mentioned above, no other forms of income.

Net Monthly Income (Cashflow) = $2,144 from paychecks. The rest I just take as a distribution and transfer to my personal checking. The last couple of months that has been $1K/month.

Current Expenses:
Mortgage Payment (PITI) - $1,071
Health Insurance - $180 (heavily subsidized due APTC and kids on state insurance)
Car Insurance & Umbrella Policy - $98
Personal Prop Taxes - $50 (just save this each month for end of year)
Term Life Ins - me - $68
Term Life Ins - wife - $19
Adobe Lightroom - $10
Sling TV - $20
Netflix - $11
Utilities - $300 (usually less than this, but this is what we budget)
Food, HH, Misc, Gas, and other spending - $1,000 (I know this isn't broken down very well, but we just budget $1K and try our best not to go over).
Amazon Prime - $10
Medical Debt (0%) - $169
Total Monthly Expenses = $3,006 - This has been pretty accurate the last few months

Assets
Home Value - $180,000
Fishing Boat - $13,000
Honda Odyssey - $7,000
Honda Pilot - $7,000
Business Valuation - $150,000
401K Balances - $35,000 (just started saving last year)
Raw Land/Acreage - $45,000
Total Assets = $437,000

Liabilities
House - $154,000 (4.25% 30 yr fixed)
Medical Debt - $7,400 (0% from surgery a few years ago)
Business and Personal Debt to relative - $105,600 (mostly at 5%, some at 0% - you can read the journal for more info, but I won't be providing a lot more details as family member wouldn't be comfortable - long story short, they really helped me us out when we almost lost everything due to illness -> surgery -> very slow recovery) - This loan is paid out of business account and considered an expense, so it doesn't show up in the personal expenses above.
Total Liabilities = $267,000

Specific Questions/Points to Consider:

1. Do you see any areas in our monthly budget that could be reduced? I am considering cancelling my wife's life insurance, but I feel like at $19/month it wouldn't really matter. I feel we need to get better at the $1,000 catch all category as well.

2. I am now working from home full time, and we are pretty confident we aren't having more kids, so we will be downsizing from two cars to one and will be getting something more fuel efficient instead of an SUV and van (probably a Camry or Prius). That should help with insurance & gas as well.

3. I am selling the boat. My parents actually purchased a lake house soon after I bought it, so we can go use their boats to fish and play anytime we want, plus stay for free. Pretty confident I can get at minimum $13K for it. I want to use excess funds from the car sales and boat sale to beef up our emergency funds. I usually keep about $5K extra in my business checking account, but that doesn't feel like enough.

4. I will be selling the raw land as well. Will use those proceeds to pay down the loan from the family member. We had planned on building a small house on the acreage, but that just doesn't seem feasible at this point in life. No point to have a slowly appreciating asset just sitting there.

5. Due to heavily subsidized insurances, I can't afford to make any more money. I know that sounds crazy, but this level of income should allow us to achieve our dreams without working too hard. I have some real health issues/problems, so working about 30 hours a week is all I can muster at the moment, so it seems like the best plan moving forward is to keep a careful eye on expenses & income.

6. Based on some calculations, it looks like I should be FI in 15 years or so. That is a very conservative estimate based on current spending/saving patterns. That is about the time our youngest will be old enough to make his own way in life, so we are thinking the timing should work out perfectly.

7. I have all my eggs in the ACA basket, and health wise we couldn't afford to keep going if that gets screwed up. This is my biggest worry/fear. I could always return to a job with great benefits, but that would be very difficult to do at this point in life.

Thanks for reading. Looking forward to your suggestions for improvement!

calimom

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Re: Case Study - Help me get to FI in 15 Years
« Reply #1 on: December 12, 2018, 06:00:56 PM »
So sorry to hear of your heath crisis and hope things are looking up. I can relate to hard times, my husband was killed in a car crash when my kids were very young.

A few observations, in no particular order: Good on you for adjusting the car situation. Savings, ka-ching. The $1K monthly for everything is not horrible, but there are likely some hidden savings if you break down a few months of expenses. You'll probably take some heat for the boat but for the moment I'll let it slide. The business valuation might be a bit aspirational, did you factor 3X yearly profit for your figures?

As an owner of a small business also, and with kids receiving SS survivors' benefits, I personally try not to be too ruled by ACA eligibility. You make more, you pay more. Even though health insurance is critical for everyone, know it will work out. $45K for two earners is not....great. Is there any chance your wife could find a full time job with benefits at some future date - kids a little older? It seems worth investigating. And you would be free of any income restrictions. Things that hold us back do just that.

Looking forward to seeing you guys make changes and move forward. It sounds like you have a strong family which is a huge part of it.


Kronsey

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Re: Case Study - Help me get to FI in 15 Years
« Reply #2 on: December 12, 2018, 09:44:48 PM »
I can relate to hard times, my husband was killed in a car crash when my kids were very young.

I am very sorry to hear of your husband passing. The last few years have been rough, but nothing compared to losing your spouse.

The $1K monthly for everything is not horrible, but there are likely some hidden savings if you break down a few months of expenses. You'll probably take some heat for the boat but for the moment I'll let it slide. The business valuation might be a bit aspirational, did you factor 3X yearly profit for your figures?

I agree about the $1k/month catch all category. We think that is the biggest room for improvement. Talking about finances was a real problem in our marriage, so I used to just take the approach that it was better to not try to get too detailed/specific as my wife would take that in a negative way. Our communication continues to improve and I am so proud of my wife for making changes and getting on board. It is tough when you have completely different financial upbringings as well as completely different personalities. I am thankful for the improvements we made but understand we still have a way to go.

I'm selling the boat, so hopefully it won't be too much of a problem. I think I will actually make a profit on it. Haha.

Regarding the business valuation, I think it is actually pretty conservative. Most accounting/bookkeeping firms sell for a multiple of 1X to 1.25X of revenue. $150,000 is in between those numbers. When my health was bad, I reached out to a few local CPAs and had offers at and above that price, so i am comfortable with the valuation. I have no plans on selling and the potential value isn't part of my FI plans, so I'm really not too worried about it either way.

As an owner of a small business also, and with kids receiving SS survivors' benefits, I personally try not to be too ruled by ACA eligibility. You make more, you pay more. Even though health insurance is critical for everyone, know it will work out. $45K for two earners is not....great. Is there any chance your wife could find a full time job with benefits at some future date - kids a little older? It seems worth investigating. And you would be free of any income restrictions. Things that hold us back do just that.

I understand about not wanting to be ruled/governed by the ACA, but the potential jumps necessary to completely pay out of pocket don't really justify the extra effort for me (more on that below). Right now, our total monthly premiums for health and dental are going to be $180/month. That is for all 4 of us. That comes with a $0 deductible and max out of pocket of $2,600 per person, $5,200 max for family. To find a comparable plan without the extra silver plan savings would be upwards of $20K/year.

On top of that, we will receive around $3K back on our taxes due to EIC and CTC. So all told, for purposely keeping our income low, we will be saving $22K/year conservatively.

As our kids get older, it is definitely an option for my wife to get a job. To find a good job with benefits would probably require additional schooling/training. We really don't want to go that route unless absolutely necessary. It would probably work better for me to get a job instead. I would probably only do so if something gets screwed up with the health insurance stuff. It is just way too easy to make a good living being self-employed compared to what most firms or corps want to pay someone with my skills and background.

Regarding the income, I think you have some misunderstandings... Our actual income isn't $45K. It is much closer to $100K. $45K is our AGI (what shows up on the bottom of page 1 of our tax return). After maxing two 401Ks and maxing two tIRAs, we get down to the $45Kish AGI. Hope that clears in up, but feel free to ask any questions as maybe my explanations in the OP weren't the best.

Thank you for your kind words and for providing some suggestions.

reeshau

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Re: Case Study - Help me get to FI in 15 Years
« Reply #3 on: December 13, 2018, 03:01:18 AM »
Three thoughts on the $1k miscellaneous category:  It's never good to have "Miscellaneous" be the #1 or #2 category, no matter what you are trying to categorize.  Another way to quantify it:  30% of your spending goes in a black hole.  That's a lot of potential change.

Perhaps a more productive comment:  what really makes me twitch about this, is that it likely holds some "wants" and some "needs" together.  This is never good, as wants can't counteract needs, so the category just "fits."  As you say, you just take what you need out of the business.  (aka Black Hole)  At least talk with your wife about splitting out true needs, which is then a basis for discussion on emergency fund, insurance needs, etc.  Then take the wants, and you can manage them in a different way, such as:  let's cut 10% next month.  Now, what to cut? (meaning, compare them against each other)  Or, let's dig into the details and really talk about what we enjoy, vs. what we just do.  (e.g. latte factor)  If she feels uncomfortable or defensive on some spending, then take a portion of that to "allowance," with no judgments.

However you do it, you will get much further comparing apples to apples.  It's the mashup of categories that makes the misc. inscrutable, as much as the total dollar value.

Freedomin5

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Re: Case Study - Help me get to FI in 15 Years
« Reply #4 on: December 13, 2018, 03:26:34 AM »
I would not cancel your wifeís insurance. If something (God forbid) were to happen to her, you might need to hire someone to take care of the kids. Even though what she does now may not generate income, it doesnít mean that there is no value. The insurance needs to cover how much it would cost to hire someone to do what she is doing now ďfor freeĒ.

I WOULD cut SlingTV/Amazon prime/Netflix.

Iíd also work on lowering utilities by setting the thermostat lower in the winter/bundling up in sweaters/blankets at home, checking that your appliances are energy-efficient, making sure your home is well-insulated, etc.

And of course, others have already commented on the $1000/month miscellaneous category, so Iím not going to beat a dead horse. Use Mint or YNAB or something similar to track all your expenses.

Also, when calculating your assets, take out the value of the car. Itís a depreciating asset and FIRE folk donít usually include it. Kudos on selling the boat and one car. Itís a shame that youíre not driving something more gas-efficient. Any chance of trading your remaining car for something with better gas mileage?

« Last Edit: December 13, 2018, 06:02:17 AM by Freedomin5 »

Dee18

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Re: Case Study - Help me get to FI in 15 Years
« Reply #5 on: December 13, 2018, 05:48:54 AM »
To help with cutting media expenses, check with your library system to see what you could get for free.  Ours recently joined a service that provides hundreds of movies, as well as magazines and audio books. Or you could rotate your subscriptions, keeping one just for a couple months at a time and dropping them all for the summer.  You can also get free trial subscriptions at least once a year.

I agree with others on the $1000.  Once you know where your money goes, you can decide if itís worth it.  If itís going for gas, you can be more conscious about combining errands. If itís going for food, what exactly is it being spent on?  Also, a lot of money can be wasted on household.  When your family was dealing with a major illness, convenience was no doubt a priority. But with parents at the house you are great candidates for cost saving slow cooker soups and meals. Maybe you are already doing all of these things, but possibly you could save a lot by looking behind the $1000.

Since you want to keep your income low, are there things your wife could do in exchange for things you need or want?  If you havenít seen it, check out the Frugalwoods blog for some ideas. 

MrThatsDifferent

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Re: Case Study - Help me get to FI in 15 Years
« Reply #6 on: December 13, 2018, 06:23:28 AM »
Thanks for sharing your story and your amazing resilience. Personally, I think you have it all well thought out and I wouldnít change a thing from your plan. Youíre on track to FIRE at 48. Thatís pretty damn good. Now, unless I missed it, I donít see anything for a HSA or something for the kids and their education. Would that allow you to earn more, but keep your income the same?  Good luck with it!

Kronsey

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Re: Case Study - Help me get to FI in 15 Years
« Reply #7 on: December 13, 2018, 08:36:47 AM »
Three thoughts on the $1k miscellaneous category:  It's never good to have "Miscellaneous" be the #1 or #2 category, no matter what you are trying to categorize.  Another way to quantify it:  30% of your spending goes in a black hole.  That's a lot of potential change.

Perhaps a more productive comment:  what really makes me twitch about this, is that it likely holds some "wants" and some "needs" together.  This is never good, as wants can't counteract needs, so the category just "fits."  As you say, you just take what you need out of the business.  (aka Black Hole)  At least talk with your wife about splitting out true needs, which is then a basis for discussion on emergency fund, insurance needs, etc.  Then take the wants, and you can manage them in a different way, such as:  let's cut 10% next month.  Now, what to cut? (meaning, compare them against each other)  Or, let's dig into the details and really talk about what we enjoy, vs. what we just do.  (e.g. latte factor)  If she feels uncomfortable or defensive on some spending, then take a portion of that to "allowance," with no judgments.

However you do it, you will get much further comparing apples to apples.  It's the mashup of categories that makes the misc. inscrutable, as much as the total dollar value.

Thanks for your insight. I agree with your points and will revisit the black hole with my wife today.

Kronsey

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Re: Case Study - Help me get to FI in 15 Years
« Reply #8 on: December 13, 2018, 08:50:46 AM »
I would not cancel your wifeís insurance. If something (God forbid) were to happen to her, you might need to hire someone to take care of the kids. Even though what she does now may not generate income, it doesnít mean that there is no value. The insurance needs to cover how much it would cost to hire someone to do what she is doing now ďfor freeĒ.

I agree with you here. $19/month doesn't really have a major impact for us. I think I would be able to handle most things myself and we have able bodied family close that would help, but trying to imagine moving on from the grief in a short amount of time isn't something I would want to risk.

I WOULD cut SlingTV/Amazon prime/Netflix.

We are getting rid of Amazon Prime. We get some enjoyment out of the other two, so I think they will stay for now.

Iíd also work on lowering utilities by setting the thermostat lower in the winter/bundling up in sweaters/blankets at home, checking that your appliances are energy-efficient, making sure your home is well-insulated, etc.

We do much better in the winter than summer. We both like the cold so the thermostat never goes above 64. We did a better job of keeping the air off this summer than previous years. The appliances need an upgrade and that will probably help. The big reason why our bill is usually $275 or so is because I take a lot of baths. A good deal of the time, bowel movements still cause extreme pain. One of the only things that relieves the pain/irritation is a hot bath. We will keep working on the utilities as well though.

And of course, others have already commented on the $1000/month miscellaneous category, so Iím not going to beat a dead horse. Use Mint or YNAB or something similar to track all your expenses.

Also, when calculating your assets, take out the value of the car. Itís a depreciating asset and FIRE folk donít usually include it. Kudos on selling the boat and one car. Itís a shame that youíre not driving something more gas-efficient. Any chance of trading your remaining car for something with better gas mileage?

I agree on the $1,000/month. I was just looking at YNAB yesterday.

I'm not counting any of my assets in my long term financial plan outside of my house and the retirement funds, but I agree with vehicles not really being assets.

We will be selling both vehicles and getting a Camry or Prius for sure. Should still come out with a few thousand as both of those options can be purchased for cheap while still in good operating condition.

Kronsey

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Re: Case Study - Help me get to FI in 15 Years
« Reply #9 on: December 13, 2018, 08:57:46 AM »
To help with cutting media expenses, check with your library system to see what you could get for free.  Ours recently joined a service that provides hundreds of movies, as well as magazines and audio books. Or you could rotate your subscriptions, keeping one just for a couple months at a time and dropping them all for the summer.  You can also get free trial subscriptions at least once a year.

I agree with others on the $1000.  Once you know where your money goes, you can decide if itís worth it.  If itís going for gas, you can be more conscious about combining errands. If itís going for food, what exactly is it being spent on?  Also, a lot of money can be wasted on household.  When your family was dealing with a major illness, convenience was no doubt a priority. But with parents at the house you are great candidates for cost saving slow cooker soups and meals. Maybe you are already doing all of these things, but possibly you could save a lot by looking behind the $1000.

Since you want to keep your income low, are there things your wife could do in exchange for things you need or want?  If you havenít seen it, check out the Frugalwoods blog for some ideas.

Thanks for your good ideas. We do utilize the library for many things already. Books, movies, a place to go, etc. I will ask my wife if there are more opportunities as she is much more familiar than me.

I agree on the $1,000. Will be reviewing that with my wife today.

Bartering is a very good suggestion. I had considered bartering my services for some services that we don't enjoy doing (house maintenance, lawn care). I will check out Frugalwoods this evening.

Kronsey

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Re: Case Study - Help me get to FI in 15 Years
« Reply #10 on: December 13, 2018, 09:10:26 AM »
Thanks for sharing your story and your amazing resilience. Personally, I think you have it all well thought out and I wouldnít change a thing from your plan. Youíre on track to FIRE at 48. Thatís pretty damn good. Now, unless I missed it, I donít see anything for a HSA or something for the kids and their education. Would that allow you to earn more, but keep your income the same?  Good luck with it!

Thank you for your kind words. We aren't eligible for an HSA because we didn't choose a HDHP. Because we qualified for the extra savings with a silver plan, our insurance doesn't even have a deductible (literally $0) and a very low max out of pocket. Also, the GI that I see on a regular basis was only an option on 4 marketplace plans, and none of those were HSA eligible.

Saving for kids education is only a deduction on the state income tax return. So it wouldn't lower overall AGI on the 1040. This is an entirely separate can of worms to open, but my personal opinion is that the education system could very well implode by the time my oldest gets to college age. Combine that with the fact that there are probably only 10-12 worthwhile degrees (from a financial standpoint), and you start to see why I'm not keen on saving for my kids education. I fully admit that I could be dead wrong and/or maybe my kids want to be a medical doctor, engineer, etc, and they will be forced to go to college. In that scenario, I would probably be willing to work a little longer to help them fund the expenses out of cash flow. I definitely want to help my kids have a leg up in this world, I am just not convinced college will be the same as it is today 12 years from now. Public opinion is already starting to change with the student debt crisis and I think that is just the tip of the iceberg.

MarciaB

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Re: Case Study - Help me get to FI in 15 Years
« Reply #11 on: December 13, 2018, 09:35:03 AM »
I would not cancel your wifeís insurance. If something (God forbid) were to happen to her, you might need to hire someone to take care of the kids. Even though what she does now may not generate income, it doesnít mean that there is no value. The insurance needs to cover how much it would cost to hire someone to do what she is doing now ďfor freeĒ.

I agree with you here. $19/month doesn't really have a major impact for us. I think I would be able to handle most things myself and we have able bodied family close that would help, but trying to imagine moving on from the grief in a short amount of time isn't something I would want to risk.


+1 to not cancelling your wife's life insurance. You think an illness is difficult? Try dealing with grief from the loss of a spouse...it's overwhelmingly disablingly unspeakably horrible (I know this first-hand). And your ability to function would be close to zero for months. $19/month is cheap - keep it!

Dee18

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Re: Case Study - Help me get to FI in 15 Years
« Reply #12 on: December 13, 2018, 11:34:17 AM »
I think you are right that college could be very different in 12 years.  I believe online degrees will be commonplace then, and should increase flexibility and reduce costs.

Kronsey

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Re: Case Study - Help me get to FI in 15 Years
« Reply #13 on: December 14, 2018, 11:36:24 AM »
A bit of an update...

I've taken some time to go through our "budget" and have found a few things that I left out/didn't consider. I've also budgeted in some buffers as this is really the first time in our marriage that we have been able to discuss finances without fighting. I've broken things down into Auto Pay/Debit, Cash Expenses, and Cash Envelope Savings. I've provided comments next to expenses that I think can be improved.

Auto Debit Expenses
Mortgage PI - $777.89 - Currently about $220 is going to principal.
Mortgage TI & PMI - $246.77 - The PMI is $45.44. I plan on calling to see how much I need to pay down to get rid of PMI. It isn't very easily accessible from online.
Utilities - $275.00 - I went back through and checked all of our utility bills to date, and we have averaged $261.64. I think we can get this down to $250 or so pretty easily.
0% Medical Debt - $168.15 - Currently around $7,400 owed. Will call for an update this afternoon.
Car Insurance & Umbrella - $105.00 - This will go down as we move to one car and liability only (the van still has full coverage as I just paid it off last month).
Life Insurance-Me - $67.86
Life Insurance-Wife - $18.71
Software & Apps (Lightroom, Sling, Ink, Amazon Prime, & Netflix) - $59.62 - We discussed these last night and decided all will be staying as they provide entertainment for not much money.
Total Auto Debit Expenses = $1,719

Cash Expenses
Groceries & HH Expenses - $800 - This will be a change going to all cash, but I think it will help out a lot. I've committed to helping with the shopping to decipher needs vs wants at my wife's request.
Fuel - $75 - After upgrading to 1 car and a more fuel efficient one at that, this should be way less as I work from home and we home-school the kids (not a lot of mandatory driving).
Dining Out - $50
Giving - $100
Wife Spending Money - $50
Total Cash Expenses = $1,075

Cash Envelope Savings
General Savings - $151 - This is just a catch all savings to save up a better emergency fund. (Edited: Took $150 out to account for homeschooling activities & $50 extra per month for gifts)
Homeschooling Supplies & Activities - $100 (Edited: Had forgotten about this category)
Vacation - $200 - Travel is important to my wife, and we have a great time as a family. I know we could get this much lower with travel hacking, but I think we spend more money when it is a swipe as opposed to cash, so it isn't worth it to me.
Auto Maintenance & Savings - $150
Home Maintenance - $130 - A little bit under 1% of purchase price. Our home is in good condition, so there shouldn't be any/many immidiate needs (new roof, HVAC, water heater all within the last 2 years).
Property Taxes - $50 - Should be less than this after downgrading vehicles.
Medical - $75 - With zero deductible and very small co-pays, I think this will be plenty. We may need to borrow from general savings if anything major comes up.
Gifts - $100 (Edited: Added $50/month after reviewing all of our gifts and strategies per year)
Total Cash Envelope Savings = $956


Monthly Budget = $3,750
Yearly Budget = $45,000


Common expenses that are missing that are paid out of the business account as expenses:
Health Insurance - $180
Cell Phones - $60
Internet - $40

I will provide some more of my thoughts/plans in the next post.

« Last Edit: December 14, 2018, 09:52:20 PM by Kronsey »

Kronsey

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Re: Case Study - Help me get to FI in 15 Years
« Reply #14 on: December 14, 2018, 12:26:40 PM »
Update on the Mortgage

Part of my long term strategy is to have a paid off home at date of retirement. That way I can either refinance or sell to get us the necessary cash to live on while I execute the ROTH conversion ladder strategy.

Since the conservative plan is FI in 15 years, I would need to plan extra principal payments around a 15 year payoff. With some basic number crunching on an Extra Mortgage Payment Calculator, I would need to add about $400 to my monthly payment to pull that off. I will probably throw that extra money into a high yield savings account and then make a largish payment at year end. I will need to be shaving $400/month off our budget to make sure the numbers work (remember my desire to keep AGI at or below $45K). I think that will be easy, but I don't want to make the budget too tight/restrictive as we are just getting started on this money journey together. I want my wife to feel very comfortable and secure before I go suggesting major changes/cuts. I will give it a couple of months to see how we do on the budget vs actual cash burn.

Pay Down the Mortgage vs Invest

Considering long term market returns, it would probably be more wise to throw this money in a taxable account at Vanguard and invest in index funds. Then pay off the mortgage once the investment account balance exceeds the mortgage balance.  I'm choosing not to do that for two reasons:

1. I will gladly take a 4.375% guaranteed return on my money vs the alternative as I'm already saving a lot in the market as is (100% of all retirement funds are in low cost index funds).

2. I don't want to risk the account growing large enough that it is throwing off dividend and interest income that could screw with my ACA income plans.

With ever changing healthcare laws in the US, we will need to stay flexible as things most likely will change drastically over the next 10-15 years.

PMI

I just got off the phone with the mortgage holder. I have two options to get rid of the PMI:

1. Make a principal payment of $26,180 (would bring down balance on mortgage to 78% of original purchase price).

2. Pay for an appraisal, then make a payment of $22,900 (would bring down balance on mortgage to 80% assuming appraisal came back at/above original purchase price).

For now, I'm not going to do anything with PMI. I will consider the extra payments mentioned above and will pay it down over time. If my calculations are correct, that should be around 4 years or so of additional PMI payments. Yes, I am throwing away about $2,100 or so, but I think I could better use the capital elsewhere.

That is it for the mortgage update.
« Last Edit: December 14, 2018, 12:43:42 PM by Kronsey »

slow hand slow plan

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Re: Case Study - Help me get to FI in 15 Years
« Reply #15 on: December 14, 2018, 12:30:56 PM »
Hi,

I am in the same exact situation family of 4 same ages etc... I think you can cut groceries quite a bit. We are around 400 for a month. Just look at flyers and try to buy less prepared foods, meal prep. It gets easy after a few months. .
Other than that it looks like you are doing pretty well and Good luck!

reeshau

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Re: Case Study - Help me get to FI in 15 Years
« Reply #16 on: December 14, 2018, 12:32:30 PM »
Seriously, congrats on the new budget line items, and the conversation to get to that level of detail.  It sounds like you have pitched in to do research, and kept an open mind.  As you both discover what has been lying under your noses, remember to keep the end goal in mind, rather than winning the battles of the past.  You need your wife as your partner in this, so the end needs to include her dreams, as well.

Onward and upward!

Kronsey

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Re: Case Study - Help me get to FI in 15 Years
« Reply #17 on: December 14, 2018, 12:58:58 PM »
Hi,
I am in the same exact situation family of 4 same ages etc... I think you can cut groceries quite a bit. We are around 400 for a month. Just look at flyers and try to buy less prepared foods, meal prep. It gets easy after a few months. .
Other than that it looks like you are doing pretty well and Good luck!

Thanks for the tip on groceries. I think we can cut this down as well. I'm trying really hard to be easy going as we go down this path as money has been such a taboo subject in the past. I'm just really thankful to be at this starting point with no worries/regrets/thinking about the past with both of us excited about our financial future.

Do you have a journal/case study anywhere? I looked at a few of your posts but didn't find much.

Kronsey

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Re: Case Study - Help me get to FI in 15 Years
« Reply #18 on: December 14, 2018, 01:08:39 PM »
Seriously, congrats on the new budget line items, and the conversation to get to that level of detail.  It sounds like you have pitched in to do research, and kept an open mind.  As you both discover what has been lying under your noses, remember to keep the end goal in mind, rather than winning the battles of the past.  You need your wife as your partner in this, so the end needs to include her dreams, as well.

Onward and upward!

Thanks reeshau! I went through our past 10 months of bank statements line by line and am so proud of my wife for the progress she has made. Spending has been down considerably the past 2 months on the misc category and all that was completely on her own. 

I definitely need my wife as a partner and am more excited about the communication improvements than anything else. We came from vastly different backgrounds and have vastly different personalities which has caused a lot of fighting in the past surrounding money. She has made major strides in trying to live a more frugal life, and I am so thankful that she was willing to make changes.

You see many people on these forums who suggest "just divorce your spouse" or "never get married" and other silly advice. I would rather have a happy marriage and work til I'm 70 than have a bitter wife and/or a relationship that ends in divorce while achieving FI at a much younger age.

Though frugality comes much more natural to some people, there is nothing inherently wrong with spending money (IMHO - I know that is another can of worms). When an individual doesn't have a naturally frugal personality and also grows up in an environment where the parents spent every single dollar earned (and more), it is life altering to learn new habits and train yourself to think differently about money.   

Thanks again for the encouragement and advice!

Kronsey

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Re: Case Study - Help me get to FI in 15 Years
« Reply #19 on: December 14, 2018, 04:35:31 PM »
Update on Available Retirement Vehicles

After taking a lot of time to review my budget line items the last few nights, that also got me thinking about availability with pre-tax retirement savings. As mentioned previously, I was a little bit nervous to be "stuck" trying to make a certain amount of income without much flexibility there.

Here is how I was calculating my "limit" on pretax space for 2019:
-$19K - employee deferral-me
-$19K - employee deferral-wife
-$6K - tIRA-me
-$6K - tIRA-wife
-$1,260 - employer match on 401K-wife
-$2,880 - employer match on 401K-me
Total = $54,140 - A lot of space, but I still felt like I could make a little more money without killing myself.

Then I got to reviewing and thinking about my 401K plan. It is through www.Guideline.com (which I would highly recommend if you are a small biz owner). I'm embarrassed to admit this as I help my clients set these up all the time, but at the time of setup I elected for the comp-to-comp profit sharing option which is completely discretionary and a company expense. It is setup for a maximum of 25% of an eligible employee's salary.

So the calculation goes like this: add up all employee salaries, and then figure out the percentage of each employees salary of the total pie. Because we are the only two employees, it is just $21,000 + $48,000 = $69,000. The comp-to-comp election would be capped at 25% of our salaries. $12,000 for me and $5,250 for my wife.

So total available space now equals $54,140 + $12,000 + $5,250 =  $71,390. I would need to increase my income to make that happen, but that is still great knowing it is an option and now not having to turn down potentially good clients.

Keeping spending constant, that should get my FI number much closer to 10 years instead of 15, and that isn't even counting the savings and debt pay down in the current budget as well as the plan to be mortgage free at FI date.

Being self employed provides the best retirement saving options around. You don't have employees to contribute on behalf of, and you have so much more space/opportunity that any employee (even those with options of 401K and 457 if you have a spouse who doesn't work).

Freedomin5

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Re: Case Study - Help me get to FI in 15 Years
« Reply #20 on: December 14, 2018, 09:28:29 PM »
That is excellent, and exactly the kind of thinking you should keep doing -- finding ways to optimize your finances! Congratulations! We are all here cheering you on as you continue to look for and implements strategies that work for your specific situation.

Kronsey

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Re: Case Study - Help me get to FI in 15 Years
« Reply #21 on: December 14, 2018, 09:57:10 PM »
That is excellent, and exactly the kind of thinking you should keep doing -- finding ways to optimize your finances! Congratulations! We are all here cheering you on as you continue to look for and implements strategies that work for your specific situation.

Thanks for the encouraging words, Freedomin5. I won't be making any drastic changes to the budget until we can compare actual vs budget for January, but do you see any glaring line items that you would recommend we reconsider?

Freedomin5

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Re: Case Study - Help me get to FI in 15 Years
« Reply #22 on: December 15, 2018, 12:22:05 AM »
That is excellent, and exactly the kind of thinking you should keep doing -- finding ways to optimize your finances! Congratulations! We are all here cheering you on as you continue to look for and implements strategies that work for your specific situation.

Thanks for the encouraging words, Freedomin5. I won't be making any drastic changes to the budget until we can compare actual vs budget for January, but do you see any glaring line items that you would recommend we reconsider?

Do what you've listed in your updates above first, and see how everything shakes out with regard to your actual expenses, lowering heating and grocery expenses, selling your car, trading in your other car for a more fuel-efficient one, etc. Also, work on increasing your income without actually increasing your taxable income, as you've outlined above.

You could always come back in a few months and post an update / another case study to ask for advice on what might be the next step in your journey.

Blackadder

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Re: Case Study - Help me get to FI in 15 Years
« Reply #23 on: December 16, 2018, 10:10:50 AM »
I read through the whole thread, it's really inspiring, hats off to you both!

We do much better in the winter than summer. We both like the cold so the thermostat never goes above 64. We did a better job of keeping the air off this summer than previous years. The appliances need an upgrade and that will probably help. The big reason why our bill is usually $275 or so is because I take a lot of baths. A good deal of the time, bowel movements still cause extreme pain. One of the only things that relieves the pain/irritation is a hot bath. We will keep working on the utilities as well though.

Just wanted to throw that one out there: Take a look at (small) electric blankets for providing warmth. We are using them when we are cold and/or ill and don't want to heat up the whole house. Maybe sandwiching yourself between two of those blankets works comparably to hot baths to you? Just a suggestion, as it would use a lot less power than hot water.

Kronsey

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Re: Case Study - Help me get to FI in 15 Years
« Reply #24 on: December 18, 2018, 05:05:30 PM »
So I've spent a considerable amount of time (maybe an understatement) doing tax projections and plugging my numbers into Networthify to see if my plans will work. Obviously noone knows the future or can predict markets, but I've used fairly conservative numbers (real return of 4.5% and withdrawal rate of 3%) and think we can get to FI in 10 years instead of 15.

Background

Fortunately (or maybe in your opinion unfortunately) you can make a pretty good living in the USA and pay absolutely no federal income taxes while getting welfare back in the form of the Earned Income Credit and the Refundable Child Tax Credit if you have a few munchkins running around the house. The entire reason I joined the forum was to plan out our spending to see if we could indeed qualify for the cost sharing reductions and the advance premium tax credit for insurance purposes. After some modeling, it almost seemed unbelievable what we would qualify for, and I began to question the ethics/morality of accepting the help. That also prompted this case study as I felt like we could be living an extremely luxurious life on $45K/year of spending.

You see, I have Crohn's disease, and unfortunately it isn't a very "mild" form of the disease. It causes me issues that I deal with on a daily basis, and I spent a good majority of 2017 just trying to keep everything in our lives from falling apart (I didn't have health insurance in 2017). I finally signed up for a health plan almost exactly one year ago so I could have insurance subsidize the cost of the medicine the GI was recommending (Remicade) as I couldn't afford the $3,000/month out of pocket (we were spending more then as well). Once on the medicine, I started feeling mostly normal again and have had a pretty healthy 2018 minus a few bumps in the road (a parotid tumor on my jaw that had to be removed, but thankfully wasn't cancerous).

So I kept going back and forth with whether it is morally acceptable for other tax payers to pay for me to receive insurance and treatment at a very low cost to us due to the subsidies. I finally concluded that it wasn't immoral to apply my knowledge of the tax laws to our situation, and it makes more sense to keep being a productive member of society rather than risk not being able to afford insurance/treatment and possibly not be able to work or run a business. Obviously I had the choice on whether or not to use all my free cash flow for insurance or for 401Ks and IRAs, and I made the decision to save for our financial future as who knows what will come of the current ACA with the very real future possibility of no longer being able to get any form of insurance if the pre-existing conditions clauses are allowed back on the table.

Financial Modeling & Tax Planning

So the income side of our equation looks like this:

Income:
Monthly Business Income = $10,000
Tax Return Only Work = $12,000
Total Gross = $132,000ish

Expenses:
Gross Payroll - $5,750
Payroll Taxes - $618
401K Matching - $345
All Other Expenses - $1,752
Total Monthly - $8,500ish
Yearly - $102,000ish

Cash Flow Available from Biz roughly = $2,500.
Net Take Home on Monthly Paychecks = $2,050.
Total Take Home = $4,550/month; $54,600/year
Spending = $45,000/year
Available for IRAs - $9,600
I figured I could pinch a few pennies and come up with the other $2,400 needed to max out tIRAs (see below for tax refund which will be available).

But the tax return results are what is crazy:
Taxable W-2 Amounts = 23,000
S-Corp Taxable Income = $32,000
Total Income - $55,000
IRA Deductions - ($12,000)
AGI - $43,000
Standard Deduction - ($24,000)
QBI Deduction - ($3,900)
Taxable Income = $15,100
Tax - $1,510
Retirement Savers Credit - $400
CTC - $1,110
Federal Tax Owed - $0
Refundable CTC - $2,890
Refundable EIC - $1,520
Total Refund (Approximate, not to the penny) - $4,410

Future Income Goals/Plans

As I mentioned in another post, I had forgotten about the comp-to-comp profit sharing plan that was attached to my 401K plan. It has no additional fees or anything, and since my wife and I are our only employees, I think it makes sense to use all of it we can as it is a dollar for dollar deduction on the tax return. It is limited to 25% of income, so for us that comes to $17,250. So I am going to try to add another $1,500/month in revenue so that we can max out the profit sharing portion as well.

ROTH Instead of Traditional

The other awesome opportunity I noticed - if we can roughly reduce spending by $12,000/year, we can then keep all the same benefits (healthcare CSR & APTC, EIC, CTC) while being able to earn $12K less per year.

That is exciting for a few reasons:

1. Gives me a better opportunity to access funds post FIRE while waiting the 5 years for the ROTH conversion ladder.
2. Speeds up the time to FI as we will be increasing our savings percentage while also decreasing our funds needed.
3. Potentially allows me to work less without cutting down the time to FI. As I am self-employed, it isn't like I have to sit at my desk 40 hours a week. Once I get done with the work, I'm done for the day. So needing to earn $1k less per month would be an improvement in quality of life.

Savings Rate

So our budget set at $3,750/month or $45,000/year. Out of that $45K, we will be "saving (via debt paydown) about $10K between the 0% medical debt, mortgage paydown, EIC welfare, etc.

If you then add up the retirement savings we get to $54,140 plus the $10K savings/debt paydown gets us to $64,140

So savings rate is approximately 65%.

If I hustle and add enough income for the additional $17,250 in profit sharing contributions, we get to 70% savings rate [($65,000 savings + $17,250 profit sharing contributions)/$117,250].

I'm pretty excited about everything and am confident I can achieve the extra $17,250 of income without killing myself.

Based on all the above, I think that puts the FI number much closer to 10 years instead of 15, and possible even sooner if I can achieve that $17,250 additional income quickly. I will also need to be flexible to changing strategies which will undoubtedly be necessary with all the healthcare changes on the horizon. Really without the healthcare restraints, I would be free to pursue higher income and therefore a higher savings rate, but at some point it just becomes pointless if you are already saving a good majority of your income.

I'd be interested to hear if you think I am calculating savings rates effectively and also if you have any general advice/questions based on this update.

Kronsey

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Re: Case Study - Help me get to FI in 15 Years
« Reply #25 on: December 18, 2018, 05:07:55 PM »
I read through the whole thread, it's really inspiring, hats off to you both!

Just wanted to throw that one out there: Take a look at (small) electric blankets for providing warmth. We are using them when we are cold and/or ill and don't want to heat up the whole house. Maybe sandwiching yourself between two of those blankets works comparably to hot baths to you? Just a suggestion, as it would use a lot less power than hot water.

Unfortunately, blankets won't help. It isn't so much getting/being cold, but irritation and pain caused by bowel movements. I'll leave it at that as any more details is more than you would want to know. I am hopeful I can really cut down on the baths though.

Thanks for the kind words and suggestions!

walkwalkwalk

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Re: Case Study - Help me get to FI in 15 Years
« Reply #26 on: December 20, 2018, 04:09:26 PM »
Just wanted to say a short thing re: monthly income from clients. The way my boss (the owner of a small EA firm) words the monthly payments for bookkeeping and tax are: monthly investment and yearend investment, which that one is about 2x the monthly investment. I just thought it was interesting since most firms word it as a "fee", when it is them investing in having a good set of books and tax returns. Not suggesting you use that, but it could help if you'd rather have a different model for billing monthly clients for yearend tax work and consulting, etc.

Kronsey

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Re: Case Study - Help me get to FI in 15 Years
« Reply #27 on: December 20, 2018, 04:44:10 PM »
Just wanted to say a short thing re: monthly income from clients. The way my boss (the owner of a small EA firm) words the monthly payments for bookkeeping and tax are: monthly investment and yearend investment, which that one is about 2x the monthly investment. I just thought it was interesting since most firms word it as a "fee", when it is them investing in having a good set of books and tax returns. Not suggesting you use that, but it could help if you'd rather have a different model for billing monthly clients for yearend tax work and consulting, etc.

Can you explain more about the monthly investment vs year end investment. I'm not sure that I follow. Just that he/she bills more for year end planning?

Thanks for commenting and for your suggestions!

walkwalkwalk

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Re: Case Study - Help me get to FI in 15 Years
« Reply #28 on: December 20, 2018, 05:27:15 PM »
So, to preface, this is how I believe it works. 11 monthly investment payments of x, one year end investment of 2x, which covers some consulting, tax work, etc. I think the only difference with what you're probably doing is you're including tax work in the 12 equal payments.