Author Topic: Case Study - Recently laid off - need help to review financial situation  (Read 2763 times)

bornInFlorida

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Life Situation:
Married
Me - 44,
DW - 37
Two kids, ages, 7, 8

Income:
My Gross salary per year (prior to layoff): $160,000
Wifeís Gross salary per year: $115,000


Approx Current Expenses (yearly).

Auto, $7,000 (no car payments, gas, maintenance and comprehensive car Insurance)
Clothing, $6,400
Dining out, $ 6,400
Education, $ 12,000 (kids camp during summer, some private tutoring, childcare, kids do go to public school)
Groceries, $10,000
Life Insurance, $1,100
Housing, $2,500 (shampoo, laundry detergent, new furniture/replacement of anything breaking etc. )
Medical, $1,200
Personal Care, $3,000
Recreation, $8,000 (personal travel, vacation related etc.)
Rent Expense, $25,200 (decent deal on my rent from a family member who is the landlord. Market rate would be $48K per year)
Subscriptions, $6,000 (group fitness classes, kids swimming, kids tennis classes etc.)
Telephones and Internet, $2,088
Utilities, $4,000

Total expenses per year are $94,100 per year


Assets:

Tax Advantage accounts (Rollover IRA, Roth IRA, Health Equity, 401K):
$666,000

Brokerage (non tax advantage):
$650,000

The assets in Tax advantage accounts and Brokerage are invested with an Asset allocation of (80% stocks, 20% bonds). Funds being VTSAX and VBTLX. The bond fund is only in tax advantage accounts due to tax efficiency.

Former Primary Home now a rental property (about 6 hours driving distance from current residence). Still in a position where I can sell this and avoid paying capital taxes since I have lived there for two years out of the past five years.
Market Value $550,000
Mortgage outstanding  $260,000
Cash flow - Breaks even on a yearly basis (considering vacancy, repairs etc.)
I am keeping the above property mainly because it is in a top notch neighborhood and expect decent appreciation overtime (not beyond stock market historical returns). May sell this property once we purchase a new home around the area we currently rent and use the equity in the rental to pay towards the new home mortgage.

Cash
$250,000
The cash above is sitting in a Money Market account. I am keeping it there as a down payment on a primary residence. For the time being, I am deferring the purchase of a primary residence (which will cost about $700K) because not only will it make our expenses go up but will also increase my wifeís work commute and my proximity to quality jobs.

Liabilities:
No other liabilities, apart from the mortgage on the rental property listed above.

Summary of Assets:
Current Investments in Stock Market: $1,316,000
Equity in Rental Property: $205,000 (after selling expenses - real estate commission etc., fix up etc.)
Cash reserves to purchase primary residence: $250,000

Other info:
Currently renting in a HCOL area.
While I consider myself as Mustachian, my Wife not so much. She rather enjoy the material luxuries of life and doesnít mind working longer in the corporate world. For me, I value my time & freedom over being forced to work.

Questions:

1. Please provide optimizations on the above? Since my wife is not a mustachian, I canít trim the budget much. I have tried methods/ideas recommended by others on this forum but DW is not ready for any major/decent shift in cutting any costs.

2. I am considering taking a few months off from work before going back to work. However, a part of me also tells me to defer freedom and gratification for later once I achieve the FIRE number. My FIRE number (for me and wife) assuming we purchase a new home (about $700K) would be $2,775,000. The home purchase will mean a new mortgage, property tax, HOA and insurance. My yearly expense will increase to $111,000. FIRE number calculated = 25 years * 111,000 = $2,775,000. Any comments here?

3. Any other constructive financial feedback would be appreciated.
« Last Edit: July 13, 2018, 10:59:38 AM by bornInFlorida »

lhamo

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There's a useful thread on how to win over a non-Mustachian spouse.

Your household is a giant volcano of wasteful spending.  But if your wife is resistant to making changes then you are kind of stuck. 

The kid-related expenses are totally ridiculous -- if you could get a WFH position and get rid of afterschool care and at least some of the camps, you could seriously drop that number AND spend more time with your kids.  Do they really NEED private tutoring?  I never hired a private tutor for my kid and he started university at age 15.  I also question the value of multiple paid-for sports.  Get a family membership at the Y and spend  more time with them yourself doing physical things -- you all will benefit.

Why do you want/need a 700k house that will also make your commute worse?  Stick with your great rental deal, sell the distant home, and put the extra 500k into either the market or a rental that cashflows better. 

You're probably paying more than you need to for both phones and internet "But I need Verizon" -- yeah, I'm sure you've got an excuse for everything you overspend on. 

Sorry, I'm in a crappy mood I guess. It is just frustrating to see someone with your net worth who is questioning whether or not he has to go back to work.  You could TOTALLY be FIREd now if you/your spouse were willing to cut back on the spending and step out of the race to the imagined top of the pyramid with your kids.  You don't even see that spending all that money on them is actually hurting them, because it creates certain lifestyle expectations that they will need to run on the career treadmill after as adults. 

Suggestion:  See if the spouse would be ok with you taking 6-12 months off to try a different approach. Don't look for a FT job immediately.  Plan to take your kids to school/pick them up every day.  Cook dinners with them.  Clean the house together.  Cut off cable for a year.  See what happens to the quality of your life if you step back from the grind and live a more MMM-style life.  You may well find you neither want nor need to go back.

You could totally do this financially on your wife's salary + your unemployment benefits + the considerable savings you would create by DIYing more of your lifestyle.  You would have over 1mill in non-retirement investments you could draw on at a 3-4% rate if you sold the old residence and invested the cash you are saving for the house purchase.  Sadly, I predict you will say it is impossible, and back to the grind and spend you will go at the earliest opportunity....


gpyros85

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What part of Florida has a market rate rent of $4,000/month? I think this might be your problem here, surrounded by large spenders...  Big lavish lifestyle all around.


Florida is a wonder state, I was born and raised there, can be extremely expensive or very cheap.. i.e. 750k homes next to 150k homes in certain parts...

Paul der Krake

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Well, you can't sustain your current spending with just your wife's income. Something has to give.

The good news is that you can trim $1,000-3,000 in almost every line item of this ridiculous budget of yours, with little effort.

bornInFlorida

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@lhamo Thanks for the feedback. I consider myself mustachian. However, my spouse is not. I have tried converting her over but I can't force her to. From time to time, I do leverage the suggestions posted in another thread on how to convert your SO but it hasn't made too much of a difference to her.

@gpyros85 Thanks for reviewing the content. I never said I currently reside in Florida. I am far from Florida in HCOL area.

@Paul der Krake Thanks for the suggestion.

gpyros85

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@lhamo Thanks for the feedback. I consider myself mustachian. However, my spouse is not. I have tried converting her over but I can't force her to. From time to time, I do leverage the suggestions posted in another thread on how to convert your SO but it hasn't made too much of a difference to her.

@gpyros85 Thanks for reviewing the content. I never said I currently reside in Florida. I am far from Florida in HCOL area.

@Paul der Krake Thanks for the suggestion.


Made a slight assumption due to username!

lhamo

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How much of the household spending do you control vs. your wife?

You really could make a go at being FIREd yourself if she is on board with handing over the household budget and most purchasing decisions to you. 

What needs to be done on the former residence to prep for sale?  You lopped off nearly 50k in equity -- that seems high.  Unfortunately it sounds like you missed the window for the cap gains exclusion, so maybe that is where the loss of equity comes from.  Still, I would not hang on to that place with the thought that you MIGHT go back some day.  It isn't that expensive -- you could buy another place for cash and still have plenty to live off of.

I really like the idea of you becoming household manager for the next 6-12 months as a way to try out the FIREd lifestyle.  Learn to cook like  a chef.  Take care of your own kids.  Let DW come up with the list of what the kids need (clothes, shoes, school gear etc) but YOU take responsibility for getting those things for them.  Give her a budget for her own personal expenses, but you take over the research and most of the purchasing for everything else.  YOU change your phone plan first -- when you can show her no decrease in quality of service, then you can port her over, too. 

650k current investments + 250k cash + 200k equity from rental sale = 1.1 mill in taxable reserves to play with directly.  And you aren't even touching your retirement accounts.

3% SWR on that gives you 33k -- take an additional 3k/month from DW's paychecks and fund the basic household expenses from that 66k.  Both retirement and non-retirement funds will continue to grow nicely at that level of SWR, especially since DW will still be contributing to retirement, etc.  If you need to draw an extra 10k/year for splurges, you can do that if the market is up, or you can take side jobs to generate money for those extras.


The Fake Cheap

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Other info:
Currently renting in a HCOL area.
While I consider myself as Mustachian, my Wife not so much. She rather enjoy the material luxuries of life and doesnít mind working longer in the corporate world. For me, I value my time & freedom over being forced to work.

I feel your pain here, I like to consider myself a mustachian, my wife, not so much, although not quite to the same extent as your wife it seems.  Please be advised if you buy a nice house (250k as a downpayment scream nice house to me), your wife will want nice things in it, and since you have a nice house you are going to need a nice car/cars to go in the driveway. Neighoubrs have boats?  You'll have a boat.   

Not much advise to give other than the obvious...many areas where you can easily trim expenses, so at least there is that.

Good luck!

gpyros85

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Former Primary Home now a rental property (about 6 hours driving distance from current residence):
Market Value $550,000
Mortgage outstanding  $260,000
Cash flow - Breaks even on a yearly basis (considering vacancy, repairs etc.)
I am keeping the above property mainly because it is in a top notch neighborhood and expect decent appreciation overtime (not beyond stock market historical returns). May sell this property once we purchase a new home around the area we currently rent and use the equity in the rental to pay towards the new home mortgage.


How long ago did you live in this property? If it was recent you seriously would want to think about the tax consequences of selling NOW vs later.... I think it is 2 our the last 5 years to avoid....

reeshau

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I will add to the chorus that you could look at a SAHP option.  Is it a goal, or would you find it a benefit, to spend more time with your kids?  Do you like to cook? It seems like there are tens of thousands of dollars that you could  free up by adjusting what you do, to reach a balance that seems to match the future your both imagine, even if that isn't exactly the same thing.
« Last Edit: July 13, 2018, 06:55:25 AM by reeshau »

jlcnuke

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Quote
Auto, $7,000 (no car payments, mainly gas and maintenance) - Ridiculously high here. Are you driving a couple Ferraris to have maintenance and gas that high? My BMW didn't cost that much in gas and maintenance over 5 years, including fixing things that broke! You can almost certainly drop these expenses by a massive amount without negatively impacting your wife's quality of life (unless she needs that Ferrari)
Clothing, $6,400 -Again, tons of room to drop these costs. At $100/outfit, that's 64 outfits being bought every year, and $100/outfit is way more than necessary. At $30/outfit you're buying more than 50 outfits per person every year. Buying few clothes and/or a bit less expensive clothes should not hurt anyone.
Dining out, $ 6,400 -Go out half as often... cook a nice meal at home for a fraction of the price the other half when you would have went out to eat. Large savings, little impact...
Education, $ 12,000 (kids camp during summer, some private tutoring, childcare, kids do go to public school)
Groceries, $10,000
Life Insurance, $1,100
Housing, $2,500 (shampoo, laundry detergent, new furniture/replacement of anything breaking etc. )
Medical, $1,200
Personal Care, $3,000 ~$250/month on what? Shampoo etc is covered above, so are you having $250 worth of haircuts every month? Seems massively excessive..probably room to drop these costs without significant impact on anyone's quality of life... maybe get that expensive haircut every 6 weeks instead of every month?
Recreation, $8,000 (personal travel, vacation related etc.)
Rent Expense, $25,200 (decent deal on my rent from a family member who is the landlord. Market rate would be $48K per year)
Subscriptions, $6,000 (group fitness classes, kids swimming, kids tennis classes etc.)
Telephones and Internet, $2,800 Shop around because $233/month for cell phones and internet is way overpriced.
Utilities, $4,000

Some quick notes on your spending, specifically items that are easy to reduce without hurting your quality of life.


Kierun

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SNIP

How long ago did you live in this property? If it was recent you seriously would want to think about the tax consequences of selling NOW vs later.... I think it is 2 our the last 5 years to avoid....
Yes, definitely keep this in mind.  With almost 300k difference between market price and remaining obligation, the tax implications are worth noting.

bornInFlorida

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All, thank you for your suggestions. I've updated the original post with the following:

I can still sell the rental property and avoid paying capital taxes. Lived there 2 years out of the last 5 year exclusion.

I updated my Telephone and internet expenses. I had taken the number from last year when I had verizon. I have switched carriers and the new number is lower.

@lhamo  excellent suggestions regarding the becoming a household manager and the other recommendations you gave. Thank you.

@jlcnuke  thanks for your review of my expenses. The auto and telephone categories I have more control over and will do more optimizations there.

lhamo

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Another thought:  You aren't paying a ridiculous amount for life insurance (of course that depends on the policy amount), but have you checked to see what you/your spouse and kids would get in SS survivor benefits were one of you to die young?  We had quite a bit in home equity and investments, so once I learned our family benefit would be around 3k/month for spouse and kids (spouse gets benefits up to kids turning 16, kids get benefit to 18 or high school graduation), we decided NOT to buy additional policies outside of what our jobs provided.

TL/DR summary:  Once you have a substantial asset base, supplemental life insurance may be optional due to SS survivor benefits.

Do you want us to keep facepunching suggesting areas to optimize?  Would love to see more detailed breakdowns on the different categories.  I think there is probably a LOT we could identify for targeted reductions without any impact on quality of life.

doggyfizzle

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RE can you take time off (4 months)?

Yes, you have the asset base (plus income from your wife's job) to do just that.  Are you eligible for unemployment or severance from your former position?

On a different note, the rental property needs to go.  While you've got significant equity in the property, you aren't benefiting in any meaningful way by "breaking even" each month, especially if you're anticipating lower than stock market returns.  If you're dead-set on buying a $700k primary residence, sell the rental and roll the equity over as a down payment, and invest the $250k of cash you've got in the bank, and you could work a basic part-time job and combined with your wife's income and decreased childcare/tutoring expenses you should be set financially.

Also, $6500/year on clothing?  I mean that's $80k lost assuming 5% returns and $6500/year on clothing over a decade of spending. 

bornInFlorida

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@lhamo  thanks for the additional tip. Regarding further suggestions on additional categories, feel free to suggest any other that comes to mind. I do think the others are where my wife exudes significant control. Such as clothing, dinning out, personal care. Canít do much. Not an excuse but she is the type that likes working hard and playing hard also. For her play hard means being able to spend money on nice clothes, going out to a nice fine dinning place etc.

@doggyfizzle  thank you. Excellent suggestion regarding the rental. And yes, I am eligible for unemployment which these days is about six months.

lhamo

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So -- you're just going to suck it up and go back to work so that you and your DW can continue mindlessly spending tons of money just to avoid the challenge of finding ways to have the SAME HIGH QUALITY LIFESTYLE at a much reduced cost?

Doesn't sound very Mustachian to me.

I'm not saying your wife can't continue to indulge in nice clothes and a good haircut if those really bring her pleasure/satisfaction.  But to not even look at/consider lower-cost options that might make her JUST AS HAPPY is absurd.

Example from my life:  DH and I just bought new touring bikes from REI.  List price $1400 each, so not the cheapest option.  BUT, I was able to stack about $600 worth of cc bonuses, rebates and discounts on them, and we will get another 10% in dividends to use on our REI purchases next year.  And we can return them any time up to a year if they turn out to not be all that or if we find a different option we like better. 

Could we have waited for something on CL?  Probably -- we actually already bought CL bikes last year but decided we wanted something higher end.  Those will be resold for basically what we paid for them.  Touring bikes don't come up that often, especially not in the smaller frame sizes we need.  So we decided to splurge.  Barring a major accident, we will probably ride these bikes until we can't ride any more.  So over a 10-20 year lifespan, the annual investment is reasonable even on a somewhat pricey bike.

Most importantly, we are spending our money on things that we value highly.  We both enjoy biking and look forward to getting tons of use out of these bikes.  It is a healthy hobby that will keep us both fit as we age.  With every ride, the cost per mile goes down. 

Can a weekly fancy dinner give you that kind of bang for your buck?  Maybe, but so could a bi-weekly fancy dinner out, with the alternating weeks being opportunities to learn to cook like a boss yourself.

I'm probably not going to convince you, much less your wife.  Seems like the best option if you really want to FIRE but she is resistant is to adopt a split spending model similar to what I suggested above -- both of you put some money into a common pot, and then after a certain agreed upon savings level your DW can spend on whatever she wants.  That way you get to FIRE on your existing asset base, and she gets to try to spend her way to happiness.  I do think, though, that if you take over more of the day to day grind/management of your finances, her proclivity to spend may decrease dramatically.  I mean, if you can plan out 8 weeks of "Camp Dad" next summer wouldn't that be better than putting the kids in somebody else's camp?  If you can take over as "private tutor" and be involved in your kids learning, wouldn't that be better than outsourcing it?  If you are putting a gourmet meal on the table every Saturday night, where is the urge to go out and pay someone else to do it going to come from?   

bornInFlorida

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@lhamo excellent points. thank you. You made me aware of several things that are within my control that could reduce expenses. Appreciate the feedback. thank you. :-)

red_pill

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OP,  your income and spending are very similar  to what mine was. And my wife was also very reluctant to make cuts.. But Iím happy to report my wife is becoming increasingly on board (and doing a great job of keeping me on the right path when I get weak). But it was all in how I approached it.

I tried the ďhoney, according to this blog I read no amount of spending will actually result in happiness, ergo we can reduce spending in all categories without resulting in unhappiness. Hedonic adaptation, donít you know. Now, letís start cutting.Ē   Guess how well that went over.

Anytime I said our spending was high she would have a retort. Yeah but our mortgage is lower than our neighbors. Yeah but we donít buy nice clothes like our friends do.  Yeah but we have good pensions. . Etc etc.  All true statements, but totally irrelevant to my assertion that we were (and still are but itís getting better ) hemorrhaging cash.

What I found was instead of suggested we cut something, Iíd just find a replacement for it.  Want to eat out less?  Then when she suggests going out for dinner you say you wanted to make something special for dinner and have a family movie night. Who can say no to that? No one.

I did this flanking attack on a number of areas and it has been successful.

My other tactic was to lay out how much our paychecks were and then what payments for stuff were coming out in the next two weeks, and then how much was left over for spending. That was an eye opener and there were a few weeks where we were in the red.  Scary shit. But I never said anything about it - I just said, ďoh, hereís the financial projection for the next two weekĒ and show her the numbers. (Okay several times I failed at remaining calm and had some nice freak outs). But until she saw it written out like that she had no idea.  Our spending was so mindless and unconscious that we didnít even know how much was flying out the door. We do now.

We now talk about money a lot more, and in a more positive way. Instead of focusing on cuts and what we DONíT want to do with our money (which made us feel like we were depriving ourselves), we talk more about what we DO want to do with it. And that makes it seem like spending it elsewhere is depriving us of what we actually want. Total reversal.

Anyway, I bet your wifeís spending habits arenít as immutable as you  think.  MMM is a rational endeavour.  Hell, itís  far more rational than the bullshit lifestyle weíve all been conditioned to want. But it takes a bit of deprogramming to get over that conditioning, which I think is best done through small doses. Small, iterative steps.  Thatís been working for me, although Iím very much early on.

Good luck!

Finances_With_Purpose

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To add to that last comment: it's better to talk about your shared goals and what you DO want to do with money.  Not what to cut. 

First, you need to get on the same page re: your life goals/priorities.  Then, figure out how to put money to the best use to get there.  Not the other way around. 

Your wife should buy in a lot more.  My wife did once she realized how much time and freedom we were trading away just for wasteful spending on things like food or new clothes.  We have the same lifestyle we had before (e.g., still drinking lattes, but from a very nice latte maker I bought off of Craigslist which she loves).   We just plan more, take things slower (healthier anyway), and focus more on how we're achieving our long-term goals. 

bornInFlorida

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@red_pill  & @Finances_With_Purpose   - Thank you for sharing your stories and examples.

TassieFI

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PTF

ohmylookatthat

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just ignore the hate from the el cheapos here. you're doing fine

Finances_With_Purpose

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