Case study: Where can we improve?

[thenewguy]

My case might be a bit more complicated than some, due to my income varying month to month. But here it goes:

Life Situation:
I'm an IT contractor (34) working from home in Central Texas; my wife stays home with the kids. Married filing jointly. 3 kids -  5yo in kindergarten and 2yo twins.

Gross Wages:
Varies between ~$3500/mo and $11,000/mo. 2016's AGI totalled $104,400; This year on track to be ~$80,000. Expecting next year to pick back up to closer to 2016.

Taxes (2016 numbers):
$5600 federal
$6500 social security
$1500 medicare
$0 state (Texas :-) )


Current Monthly Expenses:
Charitable giving   10% of monthly post-tax... ends up between $350 and $900
Mortgage Escrow   $479
Mortgage P+I   $834
Dental Insurance   $83
Internet, Streaming services   $59
Water/Sewer   $88
Power   $171
Life+Disability Insurance   $205
Medishare   $226
Cell Phone   $45
Gym   $30
Gas   $100
Allowance   $100
Clothes   $100
Groceries   $675
Restaurant   $100 (works out to a sit-down restaurant maybe once per month, and fast food 1-2x per month)
Misc   $100
Total   ~$3,750-$4,300


Current Yearly expenses:
Amazon Prime   $107
Umbrella Insurance   $265
Vehicle Registrations   $205
Vehicle Inspections   $27
Auto Insurance   $746
Motorcycle Ins   $92
Sam's Membership   $45
Medical/dental costs   $2600 (est. based on previous years)
Total   ~$4,100


Assets:
House   $195,000
Savings accts   ~$26,000   Adding to this basically at the rate of [month's income]-[month's expenses], which varies from one month to the next. Last year we added about $22,000 (and then put a chunk of that towards down payment on our current house), but has been negative a couple months this year.
Taxable investments   ~$7900   Currently about 40% bonds and 60% mutual funds. Not currently adding to this.
Teacher Retirement System of Texas   $14,000 (need to roll this into an IRA as it's not gaining value since my wife is no longer working)
Thrift Savings Plan   $3300   I'm no longer elligible to contribute, but it's still earning so my plan is to leave it alone.
2002 Honda Odyssey   $3500   ~135,000 miles, and running great
1997 Saturn SC1   $600   ~183,000 miles and refuses to die (but sometimes I wish it would). Can fit my 5yo son's booster seat, but too small for the twins' car seats. Wife doesn't like to drive it unless absolutely necessary.
1979 Honda CB750   $700?   I know, I know. It's got sentimental value though, it's loads of fun, and the operating expenses are low.
Total ~$251,000


Liabilities:
Mortgage
   Original amount: $180,000
   Rate: 3.75%
   Original Length:   30 yr
   Monthly Payment: $1,313
   Current balance: $178,100
Total: $178,100


- Obviously I need to start putting money into IRAs. With our current tax deductions and relatively low marginal rate, seems like Roth is the way to go for now. My plan for this year and forward is to leave ~$20k in savings accounts, and follow the investment order beyond that (for us that would mean maxing out IRAs, then more of the taxable investments).
- Seems like we need to be able to shrink expenses during months of lower income. I expect the most room for potential improvement will be in the grocery expenditures? In practice, it's seemed pretty difficult to spend less without sacrificing nutrition.
- Expect to hear that I should cancel the dental insurance? Signed up for it about 2 years ago when we were on a Marketplace Health Insurance Plan that required us to maintain dental insurance. This particular plan has a provision such that it wouldn't cover things like root canals, crowns, etc... until you've been on the plan at least 2 years. I know I need some work done, so I was thinking of waiting until after I'd gotten that taken care of before cancelling.
- I do plan to get home gym equipment and can the gym membership. I've just had a tough time justifying doing so in the past 6 months when my income has been on the lower end of the range and I'd have to pull from savings up front to do it. Face punch accepted. What I've seen on Craigslist hasn't been much less than what I'd pay new (~$700 for a power rack, bench, barbell and weights). I've seen some nice looking DIY power racks though, which would definitely reduce the cost a bit.
- Have been considering selling the Saturn and not replacing it. I bought it 5 years ago when I was driving 55+ miles each way to work, but I now work from home. Selling would mean that most of the 3000 miles per year currently driven in this car (@~30mpg) would now be driven in the Odyssey (@~18mpg), but would also save about about $400 per year in insurance and registration fees.

[kanwedoit]

Life & Disability Insurance as well as umbrella??  You definitely seem over insured and paying well for it.  I would drop both of those.  I would not drop dental insurance if I were you depending on coverage if it’s covering regular cleanings for 5 people that is pretty good.

Pick one, car or bike.  No need for both.

Otherwise I don’t see a lot of fat to trim unless you could get a cheaper house with lower AC bill.

[Freedomin5]

Other areas to trim:

$100 worth of clothing per month!?!?  Consider shopping at thrift stores or asking family/friends for hand-me-downs. Could also look at freecycle organizations.

Also, during low-earning months, you could also cut the $100 allowance.

Other than that, unless you can find some way to reduce overall housing-related expenses (Escrow, P+I, Water/Sewer, Power), there doesn't seem to be much more to cut...except maybe try lowering the grocery bill a bit.

The idea is to keep expenses less than or equal to the lowest-earning month...that means anything over and above the lowest earning month is considered savings towards FI. At least that's how I do it -- I also have a variable income. Last year, it varied from $1300/month to $20K/month. We try to live on $1000/mth not including rent. With rent, it's closer to $2K/mth.

[omachi]

Why are you paying so much for umbrella insurance? Why have umbrella at all? I pay less than half of that on a $1M umbrella. Even if you're just being gouged for the same, that's coverage for over 13x your current net worth. Your insurance company is already legally obligated to mount a defense to claims just under your homeowners and car insurance. Kill this until you have enough assets that you need it. ~$22/mo saved.

Auto insurance seems high for what you have. You're paying over 18% of the value of all the two vehicles each year in insurance costs. If it's because you have full coverage, end that immediately. Or maybe the umbrella policy requires higher liability limits, pushing these up and dropping that will lower this. I'd bet you can save ~$10/mo here.

The bike may have low operating costs, but it leaves you with more vehicles than drivers. Since you work at home and your wife stays at home, you should be fine even if one of the cars is out of operation for a while. Sell the bike and you save the $92 yearly in insurance, plus presumably some amount of the registration and inspections. I don't see any vehicle maintenance spending category, so I'll assume it cuts some of the misc as well since you aren't changing oil, plugs, or whatever else it may need. Even on the light side, let's call that ~$15/mo saved. Invest the $700 from sale and at 5% returns you'll also be gaining ~$3/mo. Total change is ~$18/mo.

$100 on clothes each month is obscene, especially for a household where one person works from home and the other doesn't work. You likely have enough business shirts and ties for all the video conferencing you'll ever do. Buy gently used clothes for kids or get hand me downs, at least until they're not growing all the time. Half this amount immediately, then see if you can't cut out more. ~$50/mo saved.

It's small, but you have streaming services, Amazon Prime, and a Sam's club membership. Ditch Prime, since you're probably not using their streaming over the other service you have and not buying groceries there rather than Sam's. You can still get free (but not 2 day) shipping on most orders. The convenience of fast shipping can't be worth it for whatever small amounts you're ordering. ~$9/mo saved.

So a few mostly small things that add up to over $1300 per year.

Next, your savings is about 6x your monthly spending (including the yearly stuff spread out). The plan to go down to $20k in savings should be fine, that's still over 4.5x current monthly spending. And you have some wiggle in there if there's an emergency, as you can drop restaurants, allowance, clothes, gym, and charitable giving if your income goes to zero. So start getting market exposure. Follow the investment order.

[KindaichiShota]

Thenewguy Yours is amazingly details, i can learn a lot :O

[Cubert]

Welcome! You came to the right place. First off, ditch the Saturn. Having owned one, at least in my case, my old SC2 starting eating oil at 120,000 miles. Those things become highly unreliable after 100K methinks.

I'd kill the gym membership, or, better yet, see about becoming a part time gym instructor or personal trainer. Then a free gym membership is yours. My wife does this and I benefit as her spouse.

Your electric bill is excessive, but I gather you have a two storey house and have to run AC often in Texas. Could you explore side wall insulation or other creative ways to cool your living space?

You're doing great on restaurants and cell expense - hoorah! Now ditch the motorcycle and save a life. I'd also consider losing the umbrella insurance. That's best used if you own a small business. Your homeowners insurance should provide plenty of protection.

I struggle with the 10% giving somewhat. It's important to give, but man, that's a hefty cut. I wonder if doner-advised funds would give you a PRE TAX option? I need to learn more about those. We give about 5% but plan to drop a massive chunk in our old age via invested dollars we won't spend. That'll more than exceed a 10% per year given.

Best!
Cubert

[Astatine]

How much would you save per year if you got rid of one of your cars? 3 cars for 2 drivers doesn't make any sense.

Also, is there any flexibility in your charitable giving? 10%seems a bit high for your current situation. While you don't seem to be in hair on fire debt, you're vulnerable to medical expenses because of living in the US, particularly with 3 small children, and you don't seem to have a huge safety buffer.

Speaking of medical (and I don't know what Medishare is), should your budget have a line for medical expenses? Like going to the doctor for your kids if they're running a high fever or keeping their vaccinations up to date etc.

And with the caveat that I'm in Australia not the US, 3.75% mortgage interest rate seems a bit high for the US?

[Travis]

3 cars for 2 people and with both of you at home where are you going that costs $100/month in fuel?

2 adults who stay at home and 3 kids age 5 and under - why do you need so many clothes?  Get to know the local Ross or Goodwill and cut that down to almost nothing.

If your three kids were teenagers I might understand $600/mo in food, but not for three toddlers.  You can do better.

[2Birds1Stone]

You are off to a great start. I echo the sentiments on where you can cut (car, insurance, grocery?, etc).

But getting down to it, if you are spending less than you are making, keep optimizing and the path to freedom will get closer and closer.