Author Topic: Case Study - Numbers don't lie!  (Read 4199 times)

20957

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Case Study - Numbers don't lie!
« on: April 09, 2018, 02:51:40 PM »
Background:

Me-37
Husband-35
3 kids – 4, 23m, 23m
Dog – 13
Cat - 8

Thank you in advance for your responses! I have learned a lot from this forum already. Our goal is FI within 20 years.

Commentary removed for TL;DR

Income (monthly):

$3640 take-home paycheck (after $830 to 403B, $500 to health, disability, life insurance)
$1450 net rental income (2 properties, $3100 gross)
$380 net average freelance work ($500 average gross)
$270 net property management business ($330 gross)

Total $5740 take-home

Expenses (monthly) not including rental, business expenses already accounted for above:

$1267 mortgage P&I
$528 mortgage T&I
$450 groceries/household
$420 preschool (saving for next year to pay lump sum in August)
$350 utilities (gas, electric, internet, water)
$300 transportation (gas, insurance, parking, train, bike membership, tolls, car repairs)
$280 vacation
$200 charity
$100 pets (food, vet, annual cat shaving for summer)
$100 saving for Christmas
$100 medical/dental copays
$30 clothes/shoes
$30 my life insurance
$16 netflix and prime

$200 Husband misc
$100 date night
$50 Me misc
$50 kids misc

IRA (mine) $340
Saving for house repairs $550
529s $225

Total $5686

Assets:
Primary residence (3b/1.5ba, 2100 sqft) $263,000
2 rental properties (2b/2ba, 1000 sqft and 3b/2ba, 1200 sqft) $340,000 combined
2007 Honda Odyssey $5000
2003 Honda Shadow $3000
1966 Bridgestone $1000

403b (his) $87,500
IRA (mine) $3,300
529s (kids) $30,000
Emergency Fund $12,200 (money market acct)
Cash (personal) $18,000
Cash (business) $9,400

Total (excluding vehicles) $763,400

Liabilities:

Primary mortgage $242,800 at 4.125%
Rental mortgage $79,600 at 4.625%
Credit card $200 (paid off every fortnight)

Total $322,600

Net worth $440,800

OK, bring on the face-punches!

« Last Edit: April 09, 2018, 09:58:35 PM by 20957 »

dmac680chi

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Re: Case Study - Numbers don't lie!
« Reply #1 on: April 09, 2018, 07:09:40 PM »
Can you break down what you pay on each mortgage each month?


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20957

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Re: Case Study - Numbers don't lie!
« Reply #2 on: April 09, 2018, 07:31:10 PM »
The mortgage on our residence is in expenses - $1267 P&I and $528 T&I. The rental mortgage is $428 P&I only but that is accounted for in the rental expenses (the gap between gross and net rental income, also included in there is property and income taxes, insurance, fees, water, pest control, and savings for repairs.)

dmac680chi

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Re: Case Study - Numbers don't lie!
« Reply #3 on: April 09, 2018, 08:22:21 PM »
Quick thought on the rental, could you turn it into an Airbnb and make more then your current payments on it?


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COEE

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Re: Case Study - Numbers don't lie!
« Reply #4 on: April 09, 2018, 08:48:46 PM »
Did you have a question?

You don't say how much longer you have to pay off your houses.
Is your husband currently contributing to his 403b?  If so how much?  I.E. What is your saving rate?

Overall it looks like your in good shape on expenses.  Transportation, utilities, and vacation all seem a tad high at first glance, but not crazy.

Just quick observations
I'm not a fan of 529's or any other child savings plans until after my retirement is fully funded.  YMMV
Do you really need $550/mo for home repairs or is that a short term transient sort of thing?  1% of your primary residence is $220/mo
I'd be shifting the money from the 529($225) and $330 of the home repairs to saving for FIRE.

If I take your monthly expenses and subtract out your savings (minus $220/mo for home repair) and net rental income.  That comes out to about $40k/yr in expenses, or you need $1M to FIRE.  If you also pay off your properties before FIRE then you only need $0.5M.  If you keep with the freelance/PM work you need even less.

Have you considered selling your rental properties, paying off the house, and accelerating retirement savings?  Equities typically have better returns over the long-haul, although rental properties provide more stable income (but much more headache).  Doing that would put you at ~50% savings rate (assuming your DH isn't contributing to his 403b) and you'd be on track to retire in 17 years.

20957

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Re: Case Study - Numbers don't lie!
« Reply #5 on: April 09, 2018, 10:35:57 PM »
Sorry, I wrote 401K where I should have written 403B, it's fixed now (in the income section as it is pre-tax). At the moment $830 is going to that every month (actually $415/paycheck), it will increase with a raise soon unless I increase the IRA instead. Neither is maxed at the moment, and the IRA is with Vanguard while 403B is Fidelity.

29 years left on primary mortgage and 27 on rental. Both rentals have appreciated a lot since purchase and may keep going as neighborhood continues to gentrify. Neither has ever been vacant and rents will probably go up too. Selling doesn't appeal to me but the point that we could pay off both mortgages is well taken. Honestly I think I'd rather sell the residence! Airbnb is an interesting idea I will investigate, it would have to wait until leases were up obviously. But I will also look into the possibility for the residence.

House repairs- lots to be done short-term that is not too expensive (porch ceiling required by insurance, yard), some big expensive things in the medium term that will add value (mini-split, 2nd bathroom), new boiler and roof in the longer term. This traditionally has been a big spending area for us, our new agreement is that in any one month no more can be spent on projects than was earned by freelancing. Plus I'm always putting $150 in savings for the eventual boiler. Much of the work is DIY.  When will it get lower- maybe in 2 years? We have only been here 8 months, it was/is in disrepair, and was built in 1906 to start with.

I hope that utilities will get lower soon, I agree $350 is terrible and am working on it. Do you think $300 is a lot for transportation given that repairs are included?  Only $100 is gas, but the $83 for insurance even after shopping around is painful, it was lower at the old zip code.

I will consider the 529 question too. We get state tax breaks for it at least! But if we added it to retirement savings it would bring us to $1395/month saving, out of $7700 income minus taxes. 18% savings rate.

Thanks for your responses.

Laura33

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Re: Case Study - Numbers don't lie!
« Reply #6 on: April 10, 2018, 06:27:28 AM »
IMO the value in the rentals is less in the appreciation and more in the cash flow.  From your numbers, it looks like you have to date focused on rentals instead of maxing out investments.  That is fine, and a lot of people have FIRE'd by using that path.  You just need to know your numbers and find what works for you.  So say your living expenses are @$5K/mo.  With $1450 net rental income, that drops your income needs down from $5K to closer to $3500.  You can fill that gap in any number of ways -- you can invest until your 'stache gets to about $1M; you can buy more rental properties until you get your net monthly rental income up to that total $5K/mo; or you can split the difference.  Just on the surface, it sounds like you have a couple of decent rentals, so I wouldn't rush to change approaches if that is working for you and you don't mind the work.

The real problem seems to me that you are relying on that rental income to live on, rather than to build more assets.  You're spending around $5K/mo, but your paychecks are netting you only about $4K.  The best way to get rich from rentals is if you can live on your paychecks, and then take all of the net income from those rentals and throw it at other rentals -- IOW, your investments are literally buying you more investments.  This is how people make money in the stock market, too:  when your investments give you dividends or capital gains, you reinvest them into more shares of stock.  If you take that money out and spend it instead, you will have a lot less over time.

So I would challenge you to maintain your current savings, but to try to live on your paychecks, and dedicate your rental income to additional investments (either more properties or cash into the market).  You have a lot going on right now, and a reasonable-but-not-huge paycheck, and you just can't do it all at the same time -- you can't do major home repair projects AND spend $4500 on vacations/gifts AND cover preschool AND spend $400/mo on fun/miscellaneous stuff AND save for the kids' colleges, etc.  At first blush, none of your individual categories are unreasonable in and of themselves; it looks to me like you're actually doing well keeping control of things, especially with three young kids.  It's just that you have so many of them put together all at once.

On a brighter note, you are in the middle of the suck -- multiple very young/needy kids, major necessary home repairs, starting preschool, etc.  This is likely to be the tightest your finances will ever be.  So it will get better -- there will come a time when you, for ex., get over the hump on the house and can afford to take a nice vacation, or when the kidcare expenses go down and you are freed up to work more and bring in more cash.  So this isn't forever.  But right now, if you want to stay on track to FIRE, you do need to make some choices to defer some of those spending categories.
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COEE

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Re: Case Study - Numbers don't lie!
« Reply #7 on: April 10, 2018, 07:20:31 AM »
Laura33 with another solid post.

To further her point of having the rentals pay for rentals.  That's not what your doing right now, and it's costing you about 5 years...

So adjusting your income and expenses to include your 401k and medical and remove savings
Currently:
Income $5740 + $830(403b) + $500(medical)= $7070
Expenses $5686 - $340(IRA) - $225(ESA) + $500(medical) = $5621
Monthly savings: $1449
Needed in retirement: (5621-1450)*12*25=$1.25M + $320k in property = $1.6M
FIRE: ~21 years

Sell Houses
Income $5740 + $830(403b) + $500(medical) - $1450(rental income)= $5620
Expenses $5686 - $340(IRA) - $225(ESA) + $500(medical) - $1795 (house payments) = $3826
Monthly Savings: $1794
Needed in Retirement: $3826*12*25 = $1.15M
FIRE: ~17 years

The problem with rentals is that even with the additional income, you still have to pay for the home.  This is a monumental task and will cost you 5 years or so - right now you have to come up with an additional $300k to pay for the houses.  And because you have the other houses it's limiting your ability to save - although each payment has a small portion that your 'saving' in principle.

You're on track to FIRE in ~20 years either way.  You'll just get there faster because you have less to save for without the rental properties.  Increasing your income, and therefore, your savings, will go a long way towards getting you FIRE'd sooner right now also.

FWIW - I continue to struggle with making our current home a rental... But the math continues to tell me that I'd have to work ~5 more years also.  I just can't justify having rental property as badly as I want the stable income.

jlcnuke

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Re: Case Study - Numbers don't lie!
« Reply #8 on: April 10, 2018, 07:28:07 AM »
You have ~$121k investment/available for investing (403b (his) $87,500, IRA (mine) $3,300, Emergency Fund $12,200 (money market acct), Cash (personal) $18,000). You are putting ~$14,040 ($830 403b + $340 IRA=$1,170/month) away per year towards retirement. In 20 years, at an average 7% return, you'll have right at $1 million investment portfolio based on those numbers (that's total, not adjusted for inflation).  Your current spending (minus investments/college savings) level is at $5,121/month. What still needs to be covered after your net rental income is thus $3,671/month, or $44,052/year. That's a little under what your stache would produce in 20 years at a 4% WR. That number, however, doesn't include medical/dental/vision insurance which is likely to be a significant additional cost (potentially much higher than your current $500/month). Thus I'd say you're not currently on track to be FI in 20 years.

Running the numbers through FIRECalc (including adding in ~$21k/year in SS around age 67), I get a ~73% chance of success FYI.

Stay in the same house and pay it off between now and then and the reduction in expenses from dropping the mortgage payment would probably make it work just fine however.
« Last Edit: April 10, 2018, 07:41:52 AM by jlcnuke »
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20957

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Re: Case Study - Numbers don't lie!
« Reply #9 on: April 10, 2018, 08:11:04 AM »
I keep finding things I should have added to the numbers that were deleted when I got rid of my huge wall o'words in the first post, because I think it would add useful info. So, H's work gives him $250/paycheck in his 403B, that's on top of our $415.  We will pay for 2 more years of preschool after this (3 more years to go but we are paying next year now).  I plan to go back to work part-time when the kids are in school and want the entire paycheck to go to savings and charity.

I appreciate the points made here, especially the one to live on paycheck and not rental income!  My plan so far for that: look again for cheaper internet and insurance, buy a modem (renting currently, that is stupid), put up a clothesline as soon as backyard is not a muddy pit, turn down heat and a/c (just did it this instant!), do some more insulation.  Continue to gently encourage selling of the Shadow (has moved from maybe to probably recently).  Cut vacation savings after my sister's wedding in October (although we cut it a few months ago, that will be a hard sell).  Cut medical expenses - they are only that high because I tore my calf muscle in the summer and then got tennis elbow in the fall (thanks kids), and each physical therapy appt was $40 copay - I stopped going as soon as the money pain > limb pain.  I was going to see a neurologist for migraines but it can wait a while, I have some rx from a friend.  Look into the childcare exchange I heard about.  Sign up for a different kid thing than planned this summer - H found a free one for July, we are going away in August, I just need something free or almost for June. Ask for memberships for our birthdays so more activities are free.

Maybe move some of the house/vacation savings to taxable investment accounts?  To make us less likely to use them for those purposes, but still more accessible than retirement accounts.  Increase emergency funds to $15000 as it makes me nervous now that we have the big mortgage.  Increase income - Husband is getting a raise soon, there is the possibility of a promotion, I can do a few hours of freelance work.  Get estimates for the house work we want to do soon-ish, stop saving once that is reached.  Consider pausing 529 contributions for a while.  Raise the rent when the leases renew.

Gotta run, thanks again for the replies.

Laura33

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Re: Case Study - Numbers don't lie!
« Reply #10 on: April 10, 2018, 08:02:10 PM »
Sounds like a bunch of good ideas!  I would encourage you to use at least some of that extra savings to max out your tax-advantaged retirement accounts - that allows you to sock more away with a lower overall hit to your budget. 
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Awesomeness

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Re: Case Study - Numbers don't lie!
« Reply #11 on: April 10, 2018, 09:16:37 PM »
Just going to politely and kindly scold you.....”woman don’t put off seeing the doc about those migraines!”

There.....

Seriously though find another place to cut back. I get it I’m a mom too but if you wouldn’t put it off for the kids or the husband, take care of yourself. 

:)

20957

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Re: Case Study - Numbers don't lie!
« Reply #12 on: April 16, 2018, 10:21:09 AM »
What I've been up to:

-increased emergency fund to $13,200, on the way to $15,000 (the $200 is just there from interest, might as well leave it?)

-increased general savings fund to $3,000 - going to stop adding to it for the moment, just replenish it when we draw down. This fund is used for vet bills, car repair, and any big unexpected expenses.

-this will decrease the pet budget by $50 and the transport budget by $100, which can get added to retirement savings.

-in process of getting estimates for the house work we want to get done this spring/summer. The house fund is at $5,264 right now, and when we hit the estimate then I will stop putting money in there from regular income.

-that also will go to the IRA and 403b.  I feel sure I can max out the IRA at least this year.

-got info that our mortgage escrow payment is decreasing by $75 a month. I am tempted to put that on principle (get rid of PMI faster! It is $84/month, scheduled to go away by 2025) but I know that the general advice is not to prepay a mortgage at lower interest.

-thinking about opening a Roth IRA for Husband to put savings from freelance in, so he can withdraw contributions if he wants but we can still get some tax advantage eventually.

-calling Husband's general practitioner today to see if I can get an appointment to discuss several things, including migraines, and avoid the specialist $40 co-pay

-because I also need to call a dermatologist. I am worried that a spot on my arm may be skin cancer.

-will recalculate tax withholding and 403b contributions very soon as small raise has been given.

-asked for zoo membership for birthdays, and a friend wants to give the oldest $ for swim lessons, someone else I know was thinking about starting a nature school one day a week, I think we can avoid camp in June, and with free camp and $25 VBS (already paid) in July, it should be a cheap summer!

-Vacations as usual will be primarily visiting family though there are more than usual.  2 of us to CA in May (maybe, just a weekend), me to TN in early June for sister's bachelorette (weekend), 1 or all of us to wedding reception in MN in late June (weekend probably), all to NH for a week in August.  And then a weekend in NH for sister's wedding in October. I know our vacation budget seems like it should pay for that and more, especially since I am trying to travel hack some flights and much of it is staying in guest rooms, but in fact 64% of our vacation savings goes to a club membership that I cannot drop without serious serious family repercussions.  I think that all of this travel will have to be under $1750 total.

-Husband needs new clothes, all of his are getting holes at the same time, he's a thrift shop guy but this will be an expense regardless.  Kids are ok on clothes except we need more diaper covers and swim diapers, my clothes are iffy but I have a pile of old gift cards that need using when I have some free time (hahahaha)

-we are actually saving $830+$340+$225+$150 = $1545 without the mortgage change or any changes from home improvement savings or raise, so already saving the entirety of rental income - rental expenses.  And I should mention that rental expenses includes saving for rental repairs, that's why the expenses are so large. 

-college savings is not going anywhere, we had a talk about it and decided it's too important to us.

-heat is off now

-entertainment expenses have been kept low - $40 this weekend for Holi buffet and color run, $27 last week for babysitting during parent conference, we haven't been on a date since mid-February (ok, that's pretty sad).

-too many birthdays in April but none in May I think

Net worth according to Mint:
4/1/18: $436,077

20957

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Re: Case Study - Numbers don't lie!
« Reply #13 on: April 30, 2018, 04:23:41 PM »
April numbers!

Income (not including taxes): $8552
Expenses: $5143
Charity: $787
Retirement savings: $1340
College savings: $225
General savings (for vacation, repairs, vet): $1644

Total: -$587

Long-term savings rate: 18.3%

We had a surplus of $632 in March, so the cash flow works.  And the negative is (coincidentally) exactly how much over we are from our usual charity budget.  Our church is doing a big project that will be increasing our operating income, so we have decided to front-load our donations for the year, but I think that is mostly done. The raise started halfway through the month, so the retirement savings will be higher next month.  The general savings will be lower because now that the vet-and-car-repairs account is at $3000, we are going to prioritize pre-tax retirement savings.  Other than that, general savings mostly corresponds with husband's freelance income, which was high this month.

Expenses were higher than budgeted in:
-transportation
-utilities
-date night
-clothing
-misc
for a total of $275

Expenses were lower than budgeted in:
-groceries
-pets
-house and garden
for a total of ($173)

I also paid for airfare and housing for my sister's bachelorette weekend out of vacation savings, total $470.

I have set the house and garden budget at $200/month for now.

Net worth according to Mint:
4/1/18:$436,077
5/1/18:$442,470
« Last Edit: April 30, 2018, 04:48:54 PM by 20957 »

20957

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Re: Case Study - Numbers don't lie!
« Reply #14 on: April 30, 2018, 04:36:42 PM »
March numbers for reference

Income (not including taxes): $8555
Expenses: $4873
Charity: $403
Retirement savings: $1172
College savings: $225
General savings: $250

Total: $1632 - $1000 moved to emergency fund = $632

Long-term savings rate: 16.3%

Higher than budgeted:
-utilities
-date night
-clothing
$175

Lower than budgeted:
-groceries
-transportation
-medical
-house and garden
-misc
($226)
« Last Edit: April 30, 2018, 04:49:48 PM by 20957 »

calimom

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Re: Case Study - Numbers don't lie!
« Reply #15 on: May 01, 2018, 08:25:55 PM »
Honestly, it sounds like you guys are doing great. 3 little kids including a set of twins? You're awesome. You're working hard, you're saving and planning for expected expenses like house improvements/repairs and preschool tuition. Kudos.

I have a couple of rentals too. I know people here scrutinize the actual expenses and ROI - as well they should -but I have always felt rental investment, done right of course, can be part of a healthy portfolio. @Laura33 brings up a good point, and if one is going to keep investing in rentals those monies should be plowed back into the LLC, but if you're stopping at the two, using the proceeds for savings into your 529 and taxable accounts seems pretty solid to me.

20957

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Re: Case Study - Numbers don't lie!
« Reply #16 on: May 31, 2018, 01:50:38 PM »
May numbers!

Income: $8134
Expenses: $5641
Charity: $627
Retirement savings: $1616
College savings: $225
General savings: $550

Total: -$525 Blech

Long-term savings rate: 22.6%

I suck, basically.  Higher than budgeted:
-Groceries. super high.
-Car (paid registration. Also insurance, but that came out of a sinking fund so not included)
-Charity
-Medical (co-pays for dr visits)
-Date night (actually family dinner out)
-Kid shoes
-Pets
-Home and garden
-All general spending. Am amazed that I spent $107 on myself and $78 on kids. Lunch with my cousin, shaving equipment (starting safety razor, has start-up costs but should be cheap from now on), sunscreen, mosquito repellant, a beer, a latte, a preschool gift, preschool photos, a theater ticket, starbucks visit. I need to get over the fact that DH spends more than me or I will never stick to my budget.  He was also over - $246 of $200 budget.  On the other hand, he had an interview for a promotion (fingers crossed!) and worked 3 jobs, so I do not ride him too hard.

-Also paid an annual fee for a credit card to get bonus miles, also paid for an air-bnb for my sister's wedding, but that came straight out of the vacation fund (thus not included in expenses). I have a line on a used bridesmaid dress, and will not be drinking at the bachelorette weekend, and still have hopes that we can cover the plane tickets and rental car via points, so maybe the wedding won't be too painful.  On the other hand, family weddings are basically what savings are meant for!

Lower than budgeted:
-utilities. Nothing else.

Must do better next month, which will be hard between bachelorette weekend and twins' birthday and father's day and must-finish household projects (porch ceiling required by 6/13 to renew home insurance, window and door stripping to remove lead paint before only decent stripper is outlawed). June is 3 paycheck month, I am going to try to put as much of the third paycheck as possible towards savings.