The Money Mustache Community
Learning, Sharing, and Teaching => Case Studies => Topic started by: HappyCamper5 on August 22, 2017, 03:50:42 PM
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Life Situation: I am a single women in my late 20's living with four other roommates in a LCL small city in the US. My parents raised me very Mustachian and I worked and paid for my undergraduate studies and my car in cash and I am lucky to have no additional debt. Now that I have a stable job, comfortable (for me) standard of living, and emergency fund, I am thinking about retirement planning and not sure where to start. My company does not offer any retirement plans and it doesn't seem like something they will start doing anytime soon. I want to save for retirement and hope to retire early. I have been thinking about saving for a down payment on a duplux so I can live there and also rent the other side to help pay the mortgage. That doesn't seem like something I could afford for a few years (I wouldn't buy now anyway, the market is not great for buying where I live) and I wouldn't want that to be the only thing I'm doing for retirement. Also, I want to get married and have kids at some point. Never know if/when that'll happen so I'm planning my life as it is now. Also, I am debating on getting a credit card that has rewards. My current card is with my bank and offers no rewards to use it. It seems like a waste when I pay it off every month. I would like to start traveling a bit more than just weekend camping trips and travel points would be helpful. If you have any suggestions on good credit cards that would great.
Gross Salary/Wages: $39,000/yr, $3,250/mo
Federal: $311.14/mo
State- single: $146.94/mo
social security: $198.40/mo
Medicare: $46.40/mo
Medical Insurance: $50/mo
Adjusted Gross Income: $2497.12/mo
Taxes: My taxes last year were not what will be normal going forward. Partway through 2016 I left the part time job where I was employed. While working part time at $10/hr, I was on "Obama-care". Because of this, I did not owe Federal taxes except to pay back the government subsidies for the healthcare plan I used for which was around $770. I didn't owe much for state taxes, under $100. Not sure what my tax situation will look like next year.
Current expenses:
Rent: $430
Utilities: $50 This fluctuates as I am in a rental unit and utilities are split unevenly.
Food: $250-300, this includes eating out a couple of times a month with friends. I cook all of my meals at home and eat simply. I am a snob about the quality of food I eat so I know this amount is higher than what it could be if I shopped non organic and ethically raised. Several months ago I quit shopping at Whole Foods so that has helped the food budget!
Gas: $175, my commute is 45 miles every day as rent is drastically cheaper and my friends/some family and the climbing gym are here. My current plan is to continue to work where I am for 7 more months until I hit the 2 yr mark then look for another job close to where I live so I can take public transit or bike to work. Hopefully this job will have higher earning potential in addition to being closer to where I live.
Car insurance: $50
Phone: $40, I am on a family plan
Gym: $73, I know, it's expensive. I wrestle with it every month but climbing is a huge part of my lifestyle. Most of my friends climb there so this is my social outlet and the social pressure to go to the gym helps me stay motivated to exercise.
Health: $250, I had some health problems earlier in the year and am spending an average of $200/ month on doctor appointments and prescriptions. My health has drastically improved so this should taper off in the near future.
Adobe lightroom: $10
Shopping: $200 give or take. Since I started a stable job I have been upgrading my wardrobe to be more professional as well as upgrading some camping/photography gear. As of now, everything I wanted to upgrade is taken care of so this will decrease (if I can stay off amazon!!!).
Savings: $900, Since starting the new job I have been working to build my savings account. I shoot for $1,000 a month. Sometimes I make it, sometimes I don't.
Total: $2,428
Assets:
Cash in savings account: $20,500
Car: 2010 Honda Civic. Paid off. Blue book prices it around $6,000 if I were to sell it but my plan is to run it into the ground. I am putting a lot of wear and tear on it with my commute and weekend climbing trips and it will need new tires before winter hits. I have $450 in a sub account of my savings to pay for those when the time comes.
Specific Question(s):
What sort of retirement plans should I set up?
Is it smart to save for a down payment on a house?
What are good credit cards with rewards?
Where does the budget need to be trimmed?
Thank you in advance!!
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A couple useful links based on your questions.
Where/How to invest? See: Investment Order. https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153 (https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153)
Good credit cards? Depends on your credit score and what sort of rewards you want, but here's a good guide. https://www.nerdwallet.com/credit-cards (https://www.nerdwallet.com/credit-cards)
Save up for a downpayment? Depends on a couple things. One, the math for your area. Run a "Rent vs Buy" scenario. http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=0 (http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=0)
Two, does it fit your lifestyle and goals? Here is some conversation around that:
http://jlcollinsnh.com/2012/02/23/rent-v-owning-your-home-opportunity-cost-and-running-some-numbers/ (http://jlcollinsnh.com/2012/02/23/rent-v-owning-your-home-opportunity-cost-and-running-some-numbers/)
http://www.gocurrycracker.com/renters-for-life/ (http://www.gocurrycracker.com/renters-for-life/)
http://affordanything.com/2015/11/24/is-renting-better-than-buying-should-i-rent-or-buy/ (http://affordanything.com/2015/11/24/is-renting-better-than-buying-should-i-rent-or-buy/)
http://lifehacker.com/renting-is-throwing-money-away-is-completely-false-1747050568 (http://lifehacker.com/renting-is-throwing-money-away-is-completely-false-1747050568)
Re the budget. Is this aspirational? Based on real tracking? Over what sort of time frame? Be sure you're using a service like Mint or Personal Capital to track your spending.
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Not sure what my tax situation will look like next year.
Good links and comments already given by Bracken_Joy for other items.
The spreadsheet referenced in the "How to write a case study" sticky could give you a pretty good idea on your federal taxes for 2017.
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The only thing I am comfortable giving advice for is food. You say you are a food snob and very careful about the quality of good you buy. That's great. But be careful about labels. Inform yourself about production practices. I can tell you from both personal experience and from results of objective studies that there is no quality difference between organic/conventional. Or GMO/non-GMO. When it comes to meat, if you prefer the taste of grass-fed get grass-fed, but remember that "grain-fed" beef is actually mostly grass-fed. Animals in the U.S. are by and large raised very ethically. Food distributors are very happy to freak consumers put with super misleading labels to gouge prices up. Just my two cents 🙄. I'm in my late 20s also and find it challenging to save for retirement- good luck!
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It sounds like you don't have a 401k plan at work is that correct? What is your tax situation like, I assume you end up paying at least some federal or state taxes? Consider opening a traditional IRA to invest in (through Vanguard is a good choice), you will have tax benefits as long as you have some taxes due. If you do that, you could try adjusting your witholdings so you pay less each paycheck, or not worry about the last thing and expect a bigger refund when you file taxes.
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An IRA at Vanguard in an index fund would be a good way to start. First time home buyers can take $10,000 out of their IRA accounts even if they are below retirement age, so it could be useful to start your retirement savings that way and know that you could use some later.
I'm not sure whether traditional IRAs or Roth IRAs are better for your situation, but I might lean toward a Roth for now since your income isn't so high and since you might later decide you want some money to go toward a house. In addition to the first time buyer thing, contributions to Roth IRAs (but not traditional IRAs) can be withdrawn at any time.
You can't put everything in an IRA all at once because there are annual limits on contributions, but you could start both a retirement account and a regular account at Vanguard. Then you can transfer more into the IRA in January with the new year.
It sounds like you're doing really well. I hope you enjoy your years with roommates as much as I did. I had housemates from my late twenties through most of my thirties, and some of them are still very dear friends. When I was looking for roommates again at 40, it was a lot harder, and I couldn't relate so well to my 20-something roommates' experiences. Now I am renting by myself and looking to buy for the first time soon.
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Several months ago I quit shopping at Whole Foods so that has helped the food budget!
Amazon just lowered prices there today!
Cash in savings account: $20,500
With no investments (I take it) this is way too high. If you want to think of this as building up to a down payment on a house, look at Vangaurd's VWINX or VASGX funds - a more conservative mix of stocks and bonds. It'll beat the 0.1% (or less) you're getting at the bank.
Also, I am debating on getting a credit card that has rewards. My current card is with my bank and offers no rewards to use it.
This is horrendous. You should strive for 1.5% cash back rewards at minimum, some even say the standard is 2%. Those rewards can be used for travel to get you to some cool places for nearly free.
I would start here - http://www.choosefi.com/all-articles/travel-rewards/ or Travel Miles 101's free e-mail class for your research on sign-up bonuses. It does take some planning and organization, but you could be seeing 30% ROI (or more) on your regular, everyday spending by taking advantage of the sign-ups and putting them towards travel.
It sounds like you've got a good start with some areas to target for improvement. I'll just echo what others have said above, if you don't have access to an HSA or a 401(k), then your next best option is an IRA. There are annual contribution limits on all of these buckets, so it would be prudent to figure out what is available to you before 12/31/17 (or 4/15/18 in the case of the Roth IRA). You need to start building up your stash ASAP, but the good thing is time is on your side.
Hope that helps. The other comments above are also very good and with many good links as well.
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If you want to think of this as building up to a down payment on a house, look at Vangaurd's VWINX or VASGX funds - a more conservative mix of stocks and bonds. It'll beat the 0.1% (or less) you're getting at the bank.
I agree she needs investments, but I'd think of VTSMX or VTSAX. The fees are lower, and the returns have historically been much higher. This sounds like a maybe-want-to-buy-a-house-at-some-point situation where you'd want your savings to grow as much as possible and could put off buying for a few years if the market went down for a year or two. When you have plenty of time but not so much to put in, it seems like you ought to think of building up rather than growing conservatively.
This is one of Mr Money Mustache's older articles on the topic:
https://www.mrmoneymustache.com/2011/05/18/how-to-make-money-in-the-stock-market/
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Food: $250-300, this includes eating out a couple of times a month with friends. I cook all of my meals at home and eat simply. I am a snob about the quality of food I eat so I know this amount is higher than what it could be if I shopped non organic and ethically raised. Several months ago I quit shopping at Whole Foods so that has helped the food budget!
Car insurance: $50
Shopping: $200 give or take. Since I started a stable job I have been upgrading my wardrobe to be more professional as well as upgrading some camping/photography gear. As of now, everything I wanted to upgrade is taken care of so this will decrease (if I can stay off amazon!!!).
Food: I second littleweedontheprairie's comment. Whether or not there is any real difference between organic/conventional is very situational. Don't buy organic thinking that it is automatically better, for you or for the environment. A well managed farm is what's best and labels can't tell you about that. One example, organic farmers use pesticides but they must be USDA approved organic. Mostly this means less synthetic chemicals which in some cases can be worse for the environment because they are less specific to the targeted pest and they need to be applied more often which increases pesticide load and fuel consumption. If you care a lot about this I would recommend reading scientific studies/articles on the topic, not food/health blogs. Bloggers are often misled themselves or are in it to make money off advertising and supplements.
Also, I would recommend splitting restaurants & groceries into two budget categories as one is for nutrition, the other is entertainment. This may make you realize you spend more eating out than you think. If eating out is already a rare occasion, great. If it's to be social, sometimes I order an appetizer and eat more before/after going out.
Car insurance: You could probably do a little better, get some quotes online.
https://www.mrmoneymustache.com/2011/06/02/insurance-a-tax-on-people-who-are-bad-at-math/
You should look at each item you purchase through your provider and make a decision on each one. Don't just stick with the default. It's a good learning experience too.
Shopping: Can't believe no one has mentioned this yet, you probably shouldn't even have a category for "shopping". Anything that falls under this category you probably didn't need to buy. Don't try to stay off Amazon, just do it (swoosh). If you really are looking to buy a specific piece of gear always look for used first.
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Definitely start with an IRA. If you invest the full $5,500 a year you should get a nice tax break at your income level. Once you've reached that point and have left over money to invest I'd go for an Index fund, as others have suggested.
I use a cash back credit card that immediately transfers the cash into my checking account, but I'm not really a credit card hacker type, so others can probably give you better advice on that front.
In terms of budget, you're doing really well on rent and utilities (for a shared space), but there are other areas that really don't make sense if saving is your priority.
Right now you save $900 a month.
Your food costs are equal to my two person home in a HCOL area. I also cook every meal and only buy high quality items. I recommend retooling your meal planning game. Balance expensive ingredients with cheap ingredients (rice, dried beans, homemade sauces, nothing premade, cheap seasonal veggies).
You should easily be able to spend $125/month on groceries. I'd put restaurant eating in a different category.
For now let's say you go out twice a month, $50 should do it if you don't go fancy. Instead, start inviting friends over more! Host stuff! I often counter offers, like a friend will ask me to get dinner and drinks and I'll say, why not come over for some food and wine at my place. People never mind, they just want to hang out.
Your shopping budget is way too high, which I think you know. You should not have to shop every month. I budget $40 a month for shopping, not because I shop every month, but because a few times a year I might need some bras, or a pair of shoes, or whatever.
Just these small adjustments would put your monthly savings at around $1,185, and that's without moving, cutting down on driving, lowering your healthcare costs, or cutting your gym membership.
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The car is like 1/5 of your spending. That will be a big raise if you found a similar job closer where you could bike!
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Ok, so FWIW, it looks like you will be in the 15% federal tax bracket and owe about $4k in federal tax - $39k minus @$4k for one exemption minus @$6k for the standard deduction = @$29k taxable income; 10% on first @$9k + 15% on next @$20k = about $4k. What this means is that if you do a traditional IRA, for every dollar you invest, you will pay $0.15 less in taxes (because that money doesn't count towards your taxable income).
So whether you do traditional or Roth depends on whether you think your tax bracket will be higher or lower in retirement (because you pay taxes either way -- it's just a question of pay them now or pay them on withdrawal). Usually, if you're in the 25% or higher bracket now, the traditional is a no-brainer, because you will likely drop down to a lower bracket in retirement, and it makes sense to take the tax break now and pay the lower taxes later. But when you're already in the 15% bracket now, you may well end up in the same or higher bracket later if your income grows, in which case a Roth would be better at least while your income remains in the 15% bracket.
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I wouldn't wait 7 months to start looking for a higher paying job closer to where you live. If you get any pushback in an interview about "job hopping" (which is total bullshit anyway), then just mention wanting to reduce your commute. Also, no retirement plan at all is pretty weak. You can do better, but finding the right job could (will) take some time.
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Just a few thoughts...
Any assets you accumulate when you are younger will eventually be "retirement" assets when you you are financially independent. People generally end up with some mix of taxable, tax-deferred (Regular IRA, 401(k), etc.) and tax-free (Roth IRAs).
If you are not sure what the better option is between a traditional IRA and a Roth, you can wait and make that decision in February or so when you are filing your taxes. Just don't wait until the tax deadline because it takes a bit of time to set up an IRA (well, at least a few days anyway). Over the next few months you can weigh the pros and cons of traditional vs. Roth.
So, for now, you can just open up a brokerage account with a good company (hard to go wrong with Vanguard or Fidelity) and start throwing that $900 or so a month into your brokerage account. You'll have to decide on an AA (asset allocation) and stick with it regardless of market fluctuations. You are young so your main focus should be on accumulating shares (of a stock fund, bond fund or whatever) and not on the rising and falling dollar amount. If you keep throwing your discretionary money in that brokerage account and don't futz with your AA, you'll see it grow over time. After a few years you'll start to see the effects of compounding kicking in and you'll want to save even more.
One question... what does a two or three-bedroom house run in your low COL area? If it's not too high, maybe you can look to flip the tables in three or four years and own the place that you are sharing with your roommates. I'm talking about getting your housing over to the positive cash-flow side of the ledger.
Overall you are doing great. I also don't get the "shopping" category but my wife definitely does!
Best of luck.
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Thank you for your comments! It has been really helpful I thought I would post an update. I am currently looking for a job that is higher paying and closer to home. It is the holiday season and there are not a lot of openings from what I can see. I am hoping there will be more jobs available in January. Also, I have switched grocery stores and now shop at an ethnic market that is drastically cheaper. I gave up on organic and have eliminated all of the specialty items. I am still debating whether I should go with a traditional or Roth IRA. I am leaning towards getting a roth most likely with Vanguard. I'm assuming my income will be higher when I retire. It's so hard to know though. It feels so far away and I have no clue what my life will be like! I have some time this weekend to research it further. I want to have it set up before the end of the year so I can max out this year.
I have also set up a Chase Sapphire card and will use those points for plane tickets. IT has a yearly fee and the first year is free. My plan is in a year and a half call them and see if they will waive the fee again or downgrade to the next lower card to avoid the fee. I chose this card because I had a lot of large expenses come up (my laptop died, I was rear-ended) and knew I could spend the $4000 required for bonus points. Those points should be able to buy me a round trip flight somewhere next year.
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Also, since I have my emergency fund where I want it, it is a bad idea to put everything I save from here on out into in investment fund? I always think "diversify" and wonder if I need to do something more than just throw it in an index fund with one company. In a few years if I want to buy a house, will I be hit with fees for withdrawing funds early from VWINX or VTSAX or something similar?
Thank you again everyone, just reading your comments makes me feel a lot better about my financial future.
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Maybe others here will disagree, but I have a "house downpayment" fund set up in a high interest savings account, totally out of the stock market and liquid. I plan to have enough in about 2.5 years for a down payment and i'm not willing to risk that particular pool of money. Sure some of it is being eaten up due to inflation, and it's not really earning squat due to that, but I don't really care. All of my other money (except for about 2-4k liquid in my checking that I use for everyday purchases) goes into the market for longer term use. It just makes me feel better to know that I have some cash for emergencies.
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You could do a CD ladder in the time frame to come due around when you want to buy a home to get a larger return on your cash as well.
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Also, since I have my emergency fund where I want it, it is a bad idea to put everything I save from here on out into in investment fund? I always think "diversify" and wonder if I need to do something more than just throw it in an index fund with one company. In a few years if I want to buy a house, will I be hit with fees for withdrawing funds early from VWINX or VTSAX or something similar?
Thank you again everyone, just reading your comments makes me feel a lot better about my financial future.
Re: the concept of diversifying because on "just one index". By definition, and index *is* diversifying. Whether it's with one company or many, you're still holding shares then in MANY companies. That's the point of an index. So owning a whole stock market index in vanguard and then also in shwab doesn't make any sense- in both cases you actually own shares in all the same stuff. I'm trying to think of a good metaphor here... like, if I was making a pie. I could buy all the ingredients from safeway. It doesn't ensure my recipe will turn out any better to then go and buy those same ingredients at albertson's. I already have all the various components I need. You just want to make sure everything you hold meets your investing policy statement https://www.bogleheads.org/wiki/Investment_policy_statement (https://www.bogleheads.org/wiki/Investment_policy_statement).
But yeah, for the specific question "should I invest my downpayment?" by and large the answer is NO for a couple years, maybe for 4-5 years. Not unless you would hold off on a home purchase if the markets were down. https://forum.mrmoneymustache.com/investor-alley/investing-for-a-down-payment/ (https://forum.mrmoneymustache.com/investor-alley/investing-for-a-down-payment/) and https://forum.mrmoneymustache.com/ask-a-mustachian/5-years-until-house-purchase-where-to-invest-downpayment-for-now/ (https://forum.mrmoneymustache.com/ask-a-mustachian/5-years-until-house-purchase-where-to-invest-downpayment-for-now/)