Author Topic: Case Study - New Career, New Kid, Whats Next?!  (Read 1669 times)

Flyingstache

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Case Study - New Career, New Kid, Whats Next?!
« on: May 20, 2019, 07:17:19 AM »
Hi Everyone,

I am a 28yr old from Ohio with a wife (28) & we recently added to our family with the amazing addition of our infant son. Any advice is much appreciated! Thanks in advance!

Income:
Me - $45k/annually. - I recently switched careers after being in business for 5yrs. I am currently finishing my 1st year of teaching & also will be completing my masters degree soon in education to increase my pay.
Wife - $60k/annually - She is also a teacher & has been doing so for 6 years. She has her masters & in the next few years could move into an administrative role.

Monthly Expenses: (rounded to make easier numbers)
Mortgage - $1,000 (includes home insurance) - We pay closer to $1,500/month as extra - purchased the house 1 year ago for $167,500. House is now valued at $180k & we have a 20yr mortage with $111k left.
Land - $300 - We are paying into my parents 45 acres (valued at over $300k) to obtain 25% of the land.
Auto Insurance - $80 (we pay the year in full but this is a monthly estimate)
Utilities (trash/water/sewer) - $90
Gas - $60
Electric - $50
Cable - $45 (we don't have cable but this covers internet for our house)
Cell Phone - $45 - Google Project Fi - I barely use any data
Food - $400
Babysitter - $400 (she is amazing! Family friend so doesn't charge much compared to others)
Gas (Auto) - $100
Netflix/Spotify/Amazon Prime - $40 (wife handles this so not totally sure)
Miscellaneous - $100 (including gifts/entertainment/dog care, etc)
Total - About $2,800

Assets:
Vanguard Index Fund - $25k
Vanguard IRA - $34k (was from 401k rollover)
Vanguard Roth IRA - $12k (was from 401k rollover)
Checking Account - $4k (just use for bills)
Ally Savings Account - $30k
Total - $105K
Vehicles - $10k - We own our cars outright. Have a 2004 Toyota Corrolla & a 2013 Honda CRV

Liabilities:
Mortgage - $111k - Home is valued at $180k

As I stated earlier, my wife & I recently had our first child so if there are any mistakes I apologize & blame it on the lack of sleep! We see more kids in the future (3-4 total if we are lucky enough) & don't see ourselves staying in our current home for more than 5yrs. A few specific questions or areas where I could use your expert advice...

1) The $30k in our Ally account. I struggle with how much to keep in this account. Currently we have $1,000 of each of my wifes paychecks going directly into this account. We do have some future expenses on the horizon such as possible down payment on a new home, buying a new car (with cash), & potential home improvements or educational expenses. With that being said, we don't foresee any of these expenses happening within the next year or 2. Would it be better to take a lump sum of this & invest? We currently get 2.2% return with Ally. Overall, I often feel I am missing something when it comes to where we are keeping our money.

2) College Savings. We have heard mixed things about 529 accounts & many people have suggested using a Roth IRA. Should I just consider my Roth IRA from my 401k rollover as our college savings & add to that or should we open an account for our son (& future children) & do that separately?

3) Life Insurance. We currently do not have any life insurance other than the super basic amount ($40k) that is included in our teaching contracts. Considering our financial standing, the fact that both my wife & I work, are highly educated, & have families who could provide support, what amount do you think is best for us?

4) Real Estate Investing. When we purchased our current home a year ago, we did so knowing that we likely wouldn't stay there more than 5-10 years. However, we felt we got a good deal & there is great rental potential for the home. The previous owner was renting out the home for $1,600/month. With this knowledge we plan to keep the home when we move & rent it out as our mortgage payment is $1k/month so this will provide additional income. However, we would love to buy my grandmothers home (& she wants us to as well) but we obviously don't know when she will no longer be living there. Hopefully she lives a long long time (she is 89 & fiesty as heck!) but it makes planning difficult & if we keep our current home for rental we obviously will need to have additional money for a down payment. Does it seem like a good idea to keep our house to rent out & get the $1,600/month or sell the home (would likely get $180k)? Also, a neighbor invests in multi-family homes & apartment complexes. He has done this successfully for about 5 years & essentially is financially independent & work when he wants to doing what he wants to do! He has encouraged me to look into this avenue of wealth building. Is there a certain point of financial stability that I should achieve before doing this or should I avoid this all together?

Any other tips, tricks, or thoughts would be much appreciated! My wife LOVES her job & will likely always teach but I would love to have the flexibility to pursue other passions & not be tied down to a traditional job. Thanks so much for all you guys do & the great wisdom you provide to people.



Flyingstache

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Re: Case Study - New Career, New Kid, Whats Next?!
« Reply #1 on: May 20, 2019, 07:22:44 AM »
Also forgot to ask...Should we be paying the extra $400-$500/month towards our mortgage or would we be better off using that money elsewhere? We took out a 20yr Mortgage last February when we purchased the house & our interest rate is 3.75%

Thanks again!

lhamo

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Re: Case Study - New Career, New Kid, Whats Next?!
« Reply #2 on: May 20, 2019, 08:08:43 AM »
If you really want to buy your grandmother's home, then you should build up a cash reserve to make the downpayment for that so that you can do so ASAP if/when it becomes necessary (even feisty 80 year olds can have rapid declines, and if she needs the money to get into a good assisted living or nursing facility you having it available will be a big help to everyone).  So maybe look at comps on some of the on-line websites and decide what a reasonable downpayment would be, and set those funds aside in a lower-risk account.

Are you planning to eventually build on your parents' land?  Is there some reason why you can't just wait to inherit it?  $300/month is not a lot, but there might be more efficient ways to manage their estate.

Re:  life insurance, first go to the social security website and see what you and your wife would get as survivor benefits as the caretaking parent of a minor child.  Most people overinsure because they don't know about or take into account this important SS benefit (and life insurance sales people sure don't volunteer the information...).  In our case, we never bothered to get life insurance over what our employers provided when we were working, because the SS survivor benefits were about what we were spending annually -- thus retirement accounts and other assets would have continued to grow until the kids launched, and the surviving spouse would have had enough to be FIREd.

reeshau

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Re: Case Study - New Career, New Kid, Whats Next?!
« Reply #3 on: May 20, 2019, 08:43:51 AM »
Income:
Me - $45k/annually. - I recently switched careers after being in business for 5yrs. I am currently finishing my 1st year of teaching & also will be completing my masters degree soon in education to increase my pay.
Wife - $60k/annually - She is also a teacher & has been doing so for 6 years. She has her masters & in the next few years could move into an administrative role.

...


Assets:
Vanguard Index Fund - $25k
Vanguard IRA - $34k (was from 401k rollover)
Vanguard Roth IRA - $12k (was from 401k rollover)
Checking Account - $4k (just use for bills)
Ally Savings Account - $30k
Total - $105K
Vehicles - $10k - We own our cars outright. Have a 2004 Toyota Corrolla & a 2013 Honda CRV

Liabilities:
Mortgage - $111k - Home is valued at $180k

First thing, what are your work-related retirement plans?  Traditional pensions, or 403b's?  You are asking some specific questions, and looking to monkey around with your IRA's.  No advice will be good advice, yet, unless you detail your whole picture.
 
Quote
As I stated earlier, my wife & I recently had our first child so if there are any mistakes I apologize & blame it on the lack of sleep! We see more kids in the future (3-4 total if we are lucky enough) & don't see ourselves staying in our current home for more than 5yrs. A few specific questions or areas where I could use your expert advice...

1) The $30k in our Ally account. I struggle with how much to keep in this account. Currently we have $1,000 of each of my wifes paychecks going directly into this account. We do have some future expenses on the horizon such as possible down payment on a new home, buying a new car (with cash), & potential home improvements or educational expenses. With that being said, we don't foresee any of these expenses happening within the next year or 2. Would it be better to take a lump sum of this & invest? We currently get 2.2% return with Ally. Overall, I often feel I am missing something when it comes to where we are keeping our money.

Generally speaking, you shouldn't be investing in stocks or real estate with short-term money--the potential loss within an economic cycle is too great for money that you might need.  And while nobody knows when the next downturn will hit, we look a lot closer to the eventual top than the bottom, at the moment, in basically all asset classes.  So, what is short term?  Think 5 years, not just 2.  Two years would have gotten you through 2008-2009, but that is just the down leg.  You would want your money to recover before withdrawal.

So, your cash needs to include: an emergency fund of 3-6 months' expenses, your house down payment, a (new to you, not brand new) car, plus the "wants".  Add that up.  Time it over the years, if you need to.  Keep funding it, or accelerate your funding, if you won't make your spending plan.  After you've reached that number, then look to taxable investments as you wish.

This will be a big number, but you are looking to do big things.  Don't focus only on the headline return.  Cash means options, which allow you to act when others are running the other way.

And don't forget to save up for the other kids you are thinking of having, too.

Quote
2) College Savings. We have heard mixed things about 529 accounts & many people have suggested using a Roth IRA. Should I just consider my Roth IRA from my 401k rollover as our college savings & add to that or should we open an account for our son (& future children) & do that separately?

Yes, a lot has been said, here as anywhere, about this.  From what you have shared, you need your IRA for *you*--put on your own oxygen mask, before you help others.  But as teachers, I have to think there is something else there...

I will also say that, with plans for 3-4 kids, you have a way of addressing one of the most-often cited issues with the 529:  what if I don't need it all?  You simply change beneficiaries to one of the others.  At least get started with this one; tuition is high, and there are only 18 years for returns to compound--a much shorter time than your retirement planning window.

Quote
3) Life Insurance. We currently do not have any life insurance other than the super basic amount ($40k) that is included in our teaching contracts. Considering our financial standing, the fact that both my wife & I work, are highly educated, & have families who could provide support, what amount do you think is best for us?

@lhamo 's comments aside, traditional advice is 10-12 times your income, assuming your family will need that to replace your savings for retirement.  If you are on a FIRE path, think about what the costs would be for one of you as a single parent:  do you need to pay off the house?  What about more help:  cleaning, cooking?  And of course, a single income would change the college savings equation, too.  It's never fun to think about one of you going, but being prepared can be a great gift to give each other:  not just the numbers, but a plan behind them.


Quote
4) Real Estate Investing. When we purchased our current home a year ago, we did so knowing that we likely wouldn't stay there more than 5-10 years. However, we felt we got a good deal & there is great rental potential for the home. The previous owner was renting out the home for $1,600/month. With this knowledge we plan to keep the home when we move & rent it out as our mortgage payment is $1k/month so this will provide additional income. However, we would love to buy my grandmothers home (& she wants us to as well) but we obviously don't know when she will no longer be living there. Hopefully she lives a long long time (she is 89 & fiesty as heck!) but it makes planning difficult & if we keep our current home for rental we obviously will need to have additional money for a down payment. Does it seem like a good idea to keep our house to rent out & get the $1,600/month or sell the home (would likely get $180k)? Also, a neighbor invests in multi-family homes & apartment complexes. He has done this successfully for about 5 years & essentially is financially independent & work when he wants to doing what he wants to do! He has encouraged me to look into this avenue of wealth building. Is there a certain point of financial stability that I should achieve before doing this or should I avoid this all together?

I'm not one to comment on real estate, but I think you have some financial fundamentals to work out before getting fancy.  Just remember, that's another  job!  Don't make the mistake of thinking gross rent vs. mortgage = net profit.  I would do a lot more research on what makes a profitable rental before mentally committing to this route.  (think about it:  how long did the former owner own the house?  His mortgage payment was probably a lot lower than yours now)

ysette9

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Re: Case Study - New Career, New Kid, Whats Next?!
« Reply #4 on: May 20, 2019, 10:15:49 AM »
Do you have disability insurance for both of you? While the severe under-insurance situation for life is concerning, people are more likely to need disability insurance and life insurance. Make sure that both of you are covered though work, or buy policies on your own.

I agree with the question on the land. What is the eventual goal there? It sounds like a money suck right now.

Do not pay extra on your mortgage if you have any better use for your money. It sounds like you have plenty of better uses for your money. Off the top of my head you need to make sure you are maxing out your tax-advantaged retirement savings space, you need a down payment for your next house, you want some college savings, you want new cars in the future, etc. If you get a lot of value out of the mental benefits of not having a mortgage, then save up in a side fund and pay off the entire mortgage in one fell swoop when you are able. Anything less than paying it off entirely does nothing to lower your risk of losing the house should disaster strike and actually raises your risk by lowering the amount of funds you could tap in a emergency.

Congrats on the baby! Good luck. The first 6-12 months are brutally difficult but it is so worth it later. :)

MidwestTrails

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Re: Case Study - New Career, New Kid, Whats Next?!
« Reply #5 on: May 20, 2019, 10:44:40 AM »
As a fellow Ohioan teacher, you have access to a 457 with fantastic low-cost options. You can access this account when you leave employment and avoid penalties for not waiting until retirement age. This is especially great if you're interested in more flexibility.

Additionally, is your teacher's retirement defined benefit, contribution, or combined plan? Luckily the Ohio teacher's retirement is well managed but you might come out ahead option for defined contribution, especially if your wife is going to to be a career teacher on the defined benefit path. 

Flyingstache

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Re: Case Study - New Career, New Kid, Whats Next?!
« Reply #6 on: May 21, 2019, 11:47:58 AM »
Hi everyone,

Thanks so much for the great information so far as it has been very helpful!

A few things in response to your questions:

You all bring up a great point about my parents land! When they purchased the land a few years ago, my wife & I said we would buy 25% as we thought it was a good investment. They got a great deal on the land (bought it for $212k & it is now worth over $300k) & we imagined ourselves either building out there or at least getting our money back & then some if they decided to not build & sell. I was also working in business at this time & making much more money. We do need to re-evaluate our plans at this point.

My wife & I both also get the state teachers retirement/pension. A portion of our paycheck is taken out every 2 weeks to go into this retirement fund. Otherwise, we don't use any of the other retirement programs provided by the district/state as I felt like their fees were too high & that by simply investing myself into an index fund that it would be a better investment. I could be very wrong on this & will look into it again.

In terms of insurance, we do have disability provided by the district & the basic amount of life insurance provided by the school district. We will look into increasing this life insurance as well.

If I am reading everything correctly, is it safe to summarize that we should do the following based off of your advice: we should:

Stop putting extra money towards our mortgage
Max out our Roth IRA & look into other college savings options for our son
Build up cash reserves
Put the extra money towards our cash & investments

Any other tips or ideas for how to increase our time to FIRE?

Thanks so much!

fuzzy math

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Re: Case Study - New Career, New Kid, Whats Next?!
« Reply #7 on: May 21, 2019, 03:58:50 PM »
Stop paying extra on your home, especially if you plan to rent it. The money is tied up in the rental and if you aren't living there or selling it, you are just pre paying into an account that you could have otherwise invested.

Always remember that land / property is only worth what people are willing to pay for it. Sure 45 acres looks like its worth $300k on paper, but there's no guarantee it will sell for that, it requires a buyer. Again what are your plans for this? By jointly owning land you now have the burden of having multiple parties need to agree to sell, or have someone willing to buy you out.

Consider funding your 457 and traditional or Roth IRA.

Nick_Miller

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Re: Case Study - New Career, New Kid, Whats Next?!
« Reply #8 on: May 23, 2019, 08:01:41 AM »
Stop paying extra on your home, especially if you plan to rent it. The money is tied up in the rental and if you aren't living there or selling it, you are just pre paying into an account that you could have otherwise invested.

Always remember that land / property is only worth what people are willing to pay for it. Sure 45 acres looks like its worth $300k on paper, but there's no guarantee it will sell for that, it requires a buyer. Again what are your plans for this? By jointly owning land you now have the burden of having multiple parties need to agree to sell, or have someone willing to buy you out.

Consider funding your 457 and traditional or Roth IRA.

I agree on these points for the reasons stated.

Since you mention both that your wife loves her job, and that you're also considering having 3-4 kids, what exactly would your budget look like in a few years? Even if the family friend is giving you a hell of a deal now (I assume the $400 monthly expense is for full-time child care 40 hours per week?), that would obviously change with another few kiddos added to the mix. I don't know about specific daycare costs in your area, but in our MCL area, we spent over $100K for very basic childcare for our two kiddos from infant up until they went to school. This seems to be one of the biggest potential budget busters coming up, and I was curious about your plan to handle this.

Flyingstache

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Re: Case Study - New Career, New Kid, Whats Next?!
« Reply #9 on: June 03, 2019, 02:51:31 PM »
Thank you again for all the great information as it has really made my wife & I think about what we are doing. We have realized that since our son was born we have not been doing a good job of paying attention to our spending. It has been totally survive & advance mode!

I will switch the automatic extra payments from the house to the Roth IRA & potentially part of it to our cash reserves as well.

In terms of future child care that is something I fully admit we hadn't discussed. With our teaching pay scale, we both will increase in pay about $2k each year without accounting for additional college classes. My wife has topped out the pay scale for her teaching year & just found out today she will be making about $66k next year. I am finishing up my masters & then will have a chance to take some additional college classes to max out the pay scale. I will have my masters done in the next 2 months which will put me around $48k next year. I appreciate you bringing up the child care costs because I think we just assumed we would have enough to pay but haven't thought it through.

We have a lot of work to do!

Flyingstache

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Re: Case Study - New Career, New Kid, Whats Next?!
« Reply #10 on: June 11, 2019, 05:27:21 AM »
Update - because of your advice I spoke with my parents & they are going to buy us out of their land. This will result in us getting about $20k. Any advice on how to best allocate that money?

Thanks

ysette9

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Re: Case Study - New Career, New Kid, Whats Next?!
« Reply #11 on: June 11, 2019, 11:18:07 AM »
Cool that you are getting out of the land! That should help the monthly cash flow.

It has been a while since I have read through your entire case study. Can you remind me what your biggest 2-3 goals are ?

JSMustachian

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Re: Case Study - New Career, New Kid, Whats Next?!
« Reply #12 on: June 11, 2019, 02:51:15 PM »
I would focus on maxing both of your 403b's or 457b's. You can post the investment options and fees on this forum for help on that.

You have at least $1800 free already: $1000 your wife was putting into Ally, $500 from the extra mortgage payments, and the $300 from the land. Investing this $1800 a month into those pretax accounts with save you $2600 in federal taxes per year if you are in the 12% bracket.

You could live off the $20,000 you received from the land and max out all your pretax accounts until your paychecks are $0. This way that $20,000 will get invested tax free.

I would recommend reading Root of Good's blog. He wife was a teacher as well and they basically paid no federal income tax on $150,000 of income. My wife is a teacher as well and we invest 100% of her paycheck. Try to live off your smaller paycheck and invest your wife's.