Life Situation:IRS filing status: MFJ
Number of current kids: 0 (planning to have 1 child, within 2 years)
Age: Early 30s Spouse 1 / Late 20s Spouse 2
Tax bracket: 33% Federal (2017), 5% State
All incomes and expenses annualGross SalaryTotal W-2 Salary Pretax: 300k
Pretax Deductions H.S.A. 6,800
Health Insurance 1,820
Post-tax Retirement ContributionsRoth IRA 11,000
Roth 401k (just changed from traditional this year because of Trump tax cuts) 37,000
Current Expenses | |
| |
Rent on 1BR apartment | 17,400 |
Car Payment (0% interest) | 4,800 |
Car Insurance | 700 |
Gas for Car | 500 |
Restaurants+Bars | 3,600 |
Entertainment | 1,200 |
Groceries | 2,400 |
Internet (only 1 choice in my area) | 900 |
Cell phones | 1,200 |
Natural Gas | 360 |
Electric bill | 480 |
Gym Membership | 360 |
Travel and Hobbies (we like traveling) | 7200 |
Others | 2400 |
Total Expenses | 43,500 |
Assets Taxable Mutual Funds (mostly index funds) 550k
401k (50% roth, 50% traditional index funds) 230k
Roth IRA (mostly index funds) 220k
H.S.A 15k
Car 10k
Cash 50k
Liabilities Car Loan (0% interest) 3k
Plan for 1 child and buying a homeCurrently, our invested assets in mutual funds are about 1M, my spouse and I spend about 45k (rounded up from 43.5k) per year. Using the “mustachian time-to-FI calculator
http://mustachecalc.com/#/calcs/time-to-fi”, if we say a SWR of 3%, investment return of 7%, inflation of 3%,
then our time to FI would be about 2 years.
We are spending relatively little compared to our income now. But, my spouse and I are planning have 1 child within the next 2 years, thus causing our expenses to rise and our income to fall. We also live in a HCOL area, and are considering buying a townhouse, which would really make the housing costs go up.
So, let’s say this is what happens: We cut back on one of our careers for at least several years with 1 child.
Our new pretax income would fall from 300k to 175k.To estimate the increase in spending from 1 child, I used this calculator (
https://www.cnpp.usda.gov/tools/CRC_Calculator/) for Northeast region, 100k+ income, but subtracted housing cost (because we will calculate that separately),
the annual cost is for a 1st child excluding housing cost is: 19k. This cost includes the child’s cost in the areas of food, transportation, clothing, healthcare, education, and other.
We are also considering buying a house in this HCOL area. In this area, a 2BR townhouse would cost around 600k. This is a mid-range townhome, perhaps ~1200-1400 sq.ft. Assuming a downpayment of 200k, this would result in a mortgage of 400k. On this home, the annual costs (assuming about 4.4% mortgage rate over 30 years) would be:
Property tax: 9600
Insurance: 840
HOA: 1800
P&I: 24000
If we buy such a townhouse, the downpayment would also decrease of our mutual fund investments from 1M to 800k. It would increase our current spending from 43.5k to 43.5k+9k+0.84k+1.8k+24k=79k.
With our reduced income of 175k (assuming effective total tax rate of about 25%), our annual savings amount would be 175k-79k-44k tax=52k.
Edit: made an mistake with the initial post and forgot to both add the child cost of 19k and subtract the current rent cost of 17.4k. With these two corrected, it would be 43.5k (current spending)+9k (property tax)+0.84k (home insurance)+1.8k(HOA)+24k (principle+interest)-17.4k(current apartment rent)+19k (annual spend for 1 child)=80.7k current spending instead of the 79kNow estimating FI time again, we are looking at an expenditure of 79k, SWR of 3%, current networth 800k, yearly savings 52k, interest 7%, inflation 3%, resulting in
a new time to FI of 16 years.
Some questions I have- Am I estimating the housing cost and having a child cost correctly? Is the budget of 19k per year for our child excluding housing costs reasonable? I feel it’s a bit high starting out, but then again this includes future college cost, which could be very high in the future. It's also hard to know what unexpected expenses will happen for a hypothetical child, so perhaps I'm estimating. If I'm estimating too high, what would be more reasonable given we would want public school education but fully fund college costs.
- The new time to FI of 16 years also feels wrong because I’m not including the equity we would be building as we pay the mortage every year. How do we quantitatively estimate the effect home equity would have on time to FI?