I'll add a new post to update our bottom line. We big time buckled down and have seen some good progress. I won't go through all the spending categories, but here is the result:
May 2018 Dec 2019 April 2021
Mortgage ($28,700) $ 0 ($51,975) - bought a Tesla, love it, no regrets
Me RRSP $ 0 $ 0 $0
TFSA $ 0 $71,700 $168,000 -bought actual Tesla, also no regrets.
Spouse RRSP $ 0 $ 0 $88,000
TFSA $ 0 $37,500 $89,000
Kid RESP $ 36,000 $46,000 $65,000
Total: $7,300 $155,200 $358,000
Of course, we still have our house (approx value: $1M) and our defined benefit pensions are one year closer to collection. Not too bad, I'd say! House value in April 2021 approx $1.3M
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Given the length of this post, and the detail included (which I hope isn’t too much), I’ll put my questions here:
We are (relatively) high income, and certainly low debt (compared to the general public, anyway). We did not fall victim to extensive consumer debt like most, so my mustachian “awakening” has been less painful than it could have been. And, we have had some financial good fortune as of late, resulting in significant extra cash flow projected for the next year and beyond. I want to maximize our utility of these “prime earning years”, and start with this next year But how? What are my blind spots? Are there areas of potential optimization that I’m not taking into account?
I have included notes at the bottom for rationale / specific questions on certain items.
The below are anticipated income / expenses for the next year.
SITUATION:
Me: 40 yrs old (thinks of himself as frugal, but actually very impulsive)
Wife: 45 yrs old (naturally somewhat frugal, but not as enamored with MMM as I am, but generally not a hard sell on things)
One child (aged 10).
Live in Au Pair
We live in a HCOL west coast Canadian City
INCOME:
Gross Salary:
Me: $128,000 (+3.5% raise June 2018, 3.5% April 2019, 2.5% Feb 2021)
Wife: $105,000 (+3.5% raise April 2019)
Pension Contributions:
Me: $12,600 / yr Employer Contribution: $12,600 / yr
Wife: $10,350 / yr Employer Contribution: $10,350 / yr
Federal Taxes & Social Security deductions:
Me: $32,100
Wife: $23,200
Take Home:
Me: $83,300 + $16,000 (net) bonus
Wife: $71,450
TOTAL (AFTER-TAX & DEDUCTIONS) CASH INFLOW: $170,750
EXPENSES:
Housing
Mortgage Interest (1) $1,080 ($90 / month)
Property Tax $3,480 ($290 / month)
House Insurance (2) $1,500 ($125 / month)
Home Improvement (3) $3,000 (est) ($250 / month – not budgeted)
Electricity (4): $1,560 ($130 / month) *reduced
Natural Gas (5): $ 750 ($60 / month)
Utilities: $ 600 ($50 / month)
Internet / home phone (6): $1,200 ($100 / month)
Netflix: $ 130 ($11 / month)
My Cell Phone (7) $ 900 ($75 / month)
Wife’s Cell Phone (8) $ 600 ($50 / month)
Housing Subtotal $14,800
Transportation
Car Lease (9) $5,880 ($490 / month)
Gas (10) $3,900 ($325 / month)
Parking (10) $ 920 ($ 76 / month)
Car insurance $2,150 ($180 / month)
SUV Insurance $2,150 ($180 / month)
Transportation Subtotal: $15,000 / yr
Recreation
Vacations (11) ? (not budgeted)
Adult activities (12) $ 3,600 ($ 300 /month)
Kid activities $ 3,900 ($ 325 / month)
Recreation Subtotal $ 7,500 / yr + vacations
Other
Charity $ 504 ($ 42 / month) – immorally low given our income levels
Childcare (13) $ 8,250 ($950/ month to $500/mo in Sept
Life insurance (14): $ 2,800 ($233 / month)
Groceries (15) $ 20,800 ($400 / week)
Cash Spending (16) $ 13,000 ($500 / bi-weekly)
Other Spending Subtotal $ 45,354 / yr
TOTAL SPENDING: $ 88,224 + vacations
SAVINGS:
Mortgage Principal $ 27,300 / yr ($1050 / biweekly)
RESP (17) $ 2,400 / yr ($200 / month)
TOTAL SAVINGS: $ 29,700 / yr
TOTAL CASH OUTFLOW = SPENDING + SAVING = $117,924
Left over = $52,826 (minus vacations)
ASSETS:
Cash (18): $13,000
House (19): $960,000 Assessed Value
Education Savings Plan: $36,000
My TFSA: (20) $0
Wife TFSA: $0
My RRSP: (21) $0
Wife RRSP: $0
My Pension: Defined benefit, fully indexed, payout approx. $65,000 / year in 7.5 years. Present value = ?
Wife Pension: Defined benefit, fully indexed, payout approx. $50,000 / year in 4 years. Present value = ?
Estimated pension take-home after taxes = $78,200 (assuming 32% tax rate which might be a bit higher than actual).
LIABILITIES
Mortgage: $28,700 (2.69%, 14 months remaining.)
Credit Card: $ 0
Line of Credit: $ 0
VEHICLES:
2011 Santa Fe w/ 100,000 km (60,000 miles) = $10,000
2017 Audi A3 with 16,000 km (10,000 miles) 36 months lease remaining (yeah, I know, see note 9)
NOTES
(1) Mortgage interest –I plan on doubling up my mortgage payments, which will reduce my remaining mortgage term from 14 months to 7 months. So, this should end up saving $500 in interest. Mortgage freedom by December!
(2) House Insurance – by shopping around, and then increasing deductible and removing a stupid “identity theft coverage” that I didn’t even know was on there (and was totally useless), I reduced this by $700 / yr.
(3) Home Improvement – we don’t actually budget this, we just pay as it goes, and I would bet that $3,000 is an under estimation as there are a few larger projects that need to be done.
(4) Electricity – historically it has been on an equal payment plan of $120 per month. I have since slashed it by over half, and am on track to be around $50 this month. But, we are approaching air conditioning season, so that will increase depending on the success I have in mitigating some of our a/c needs (exterior blind to block the sun on some big windows, etc). Estimated savings = $600 / yr
(5) Natural Gas – one of my electricity saving strategies was to switch over from my heat pump to my NG furnace as primary heat source. (I didn’t know that NG was way cheaper than electricity – that wasn’t the way it was 6 years ago when we put the heat pump in). Because of that I anticipate the average NG usage over the year will increase a bit. Estimated increase = $100/yr
(6) Internet / Home Phone. We have no cable (yay!) having gotten rid of it years ago and don’t even miss it. I re-examined this bill a few months ago and saw that I could actually get a better plan but was cheaper. Savings of $17 / month = $204 / year. There is also a potential savings of an additional $10 / month to ditch our home phone. But I just can’t bring myself to do it as our daughter uses it to call us at work. Also, we try to have an electronics free lifestyle as much as possible, so don’t always have our cell phones nearby, or ringers off – so the home phone is handy for when one spouse is trying to get a hold of the other. Still, it probably only rings about 8 times a month. Probably not worth it, but still…having trouble axing it.
(7) My cell phone: This was a pre-MMM decision, and I got a brand new iphone7 on a 2 year plan. I actually didn't even know you could buy a used cell phone - I thought people kept them till they died. My 2 year term is due up in February, 2019, so I can go to a cheaper plan then. My next phone will be a used one for sure. Savings from this TBD.
(8) Wife’s cell phone: This one we just bought a few weeks ago when her old one died. We got it used!!! She's on a contract-free plan that's pretty cheap by Canadian cell phone standards.
(9) Car Lease: Because I’m an idiot, I decided to lease a brand new 2017 Audi A3 for four years. This was before I found MMM. It was a present for my wife for going through breast cancer, and I rationalized it by saying it was only marginally more expensive than a new Corolla or Mazda3 or whatever, a lease offered cost certainty since it would be under warranty the entire time and came with (an overpriced) maintenance package, and I also felt obligated to get it since my neighbor was the sales manager at the dealership, and it seems like everyone in my neighbourhood has a nice car. I know, right? Stupid, stupid, stupid. Recently, I costed it out – the thing will cost me 60 cents per km to drive over the 64,000 km lease. Gah! But I’m not going to lie, it’s a sweet, sweet ride. I’m not really a car guy, but I love driving that damn thing. Still, we have agreed that when it’s time for it to go, we will be replacing it with something used that fits our lifestyle a little better. Our cash flow doesn’t require us to get rid of it right away, but nor are we adamant to keep it for the entire four years. I’m not sure how to make that decision of “when” to get rid of it. I would have to buy the car out, pay the taxes on it, and then trade it in for something else. I would likely lose a few grand on the transaction. Details on the lease:
May, 2017 – 4 year lease (so 12 months gone, 36 months remaining)
Cost of Lease = $20,015
Interest on Lease = $1,145 (0.91%)
Taxes on Lease = $2,453
Total cost of lease= $23,613
*this is for the entire 4 years, only ¾ of it is remaining.
Buyout:
Purchase Price: $39,703 (includes $1,179 of buy out penalties)
Taxes: $ 4,764
Total Purchase: $44,467
(this is from December, so would be less by maybe $2,000 or so by now?)
Blackbook trade in value: $26,000 - $29,000
Blackbook avg private sale price = $31,000
But I see online there are some demo models that list for $36,000 to $42,000
(10) Gas and Parking: My wife and I work in the same building. After the MMM wake up a few months ago, we started commuting together (we work slightly different shifts, so this created a small hassle for me but I saved the $76 / month parking plus reduced our driving by 400 km / month (at 12 L/100 km in our SUV = $60/ month gas). Total savings = $1,650 / year.
(11) Vacations – we’ve never budgeted for them, if we go we just pay for it out of our extra cash flow. Not ideal, as I find we justify the costs in piece meal fashion and quickly lose track of the overall pricetag. Honest assessment for the next year would be about $13,000 (we have a two week Hawaii trip planned, which is already paid for, and a few other smaller planned).
(12) Crossfit – yes, there’s cheaper ways to get my fitness on, including the free gym at my office. But this is my only social outlet, and my friends are there. Could for sure coach there and get my membership for "free" but I like it being my fun place, not another work place. Overall, our recreation expenses are high, especially for our daughter who does circus, BJJ, Crossfit, and music lessons. She is very shy, but through these activities her confidence is high and she’s very well rounded. Watching her throw an armbar on a boy who outweighs her by 20 lbs brings a tear of joy to my eye. She loves the identity of being “sporty” and has a very positive body image, which I think is important. Are there cheaper ways to get the same result – sure there are. But I’m reluctant to cancel something when I can afford it and am just being cheap. I did cancel my boxing gym membership. I liked it, but just couldn’t justify the expense on top of Crossfit. Savings = $109 / month = $1308 / year. (I've noticed that the more the word "but" appears in a case study, the more likely the expense should be analyzed).
(13) Childcare – Last year it was $11,400 because I screwed up our Au Pair contract and gave her higher than going-rate. New Au Pair is coming in July, and we have corrected this. It will be down to $8,250. Savings of $3,150 / year.
(14) Life insurance: We both have group plans from work, and term plans ourselves. I suspect we are over-insured, but I’m not sure. Don’t ask me why I’m insured for more than my wife is – it’s what the financial advisor guy suggested, possibly at the suggestion of my wife. lol.
My Group Plan: $600,000
My Term Plan: $725,000 20 year term since 2011
Wife's Group Plan: $600,000
Wife's Term Plan: $415,000 20 year term since 2011
(15) Groceries: Yes, $20,000 a year is crazy. I have a thread in Ask a Mustachian for some advice on getting it down. Ongoing project.
(16) Cash Spending: Okay, for the record, we don’t actually spend this much. But I'll tell you where this comes from. Several years ago I was frustrated with the credit card constantly being on fire. So, we created an “envelope” system for our own personal spending. That way there were no fights. We set the amount at $250 each every payday. Yeah, that’s insane, I know. I actually picked that amount after asking my wife how much money she would need for all her personal stuff (dinners out, hair stuff, coffees, shoes, etc) without going over. She said $400 a month. I said fine, let’s do $500 and never speak of this again. It was high enough that neither of us could have a rational reason for going over. So, that’s how I have it budgeted. This shows a few things to me. One, I have a mishmash of budgeting strategies – a combination of envelope system with some pay yourself first, and a bit of zero sum. It’s a mess. Second, we actually don’t stick to it. I’ve spent $8 in the last two months on personal stuff (had to get a pair of jeans hemmed). That’s it. So I just don’t take money out the next week or the week after, etc. Or, we use our cash for farmer’s market (which should be grocery expense). The problem with this is, when there’s something I do want that is more than my allowance, I easily justify spending that. Same with my wife, whose powers of justification approach super human levels. Result: We don’t actually know how much we spend on just “stuff”. I love doing cash – love it. It makes me WAY more disciplined than relying on credit cards and Mint. But, my overall strategy could use some shoring up, that’s for sure. One thing we paid cash for was our house cleaner, which I cancelled a few months ago. See, I actually LIKE cleaning and LOVE decluttering (honestly, it's my dream job), so this was easy! We had just fallen into the habit of it since we used to have a live-in nanny who did it all. Savings = $200/month = $2,400 / year (well, except we didn’t reduce our cash outs by that amount, so is it really "savings"?). Is there a better way to do this?
(17) RESP - I realized that if I had an investment product with my bank that I would get free banking if I downgraded my service package and got rid of overdraft protection. I keep a $1000 balance in my checking acct, so didn’t really need the overdraft protection. So, I moved my RESP’s to an index fund at my bank, and now I get my banking for free. Savings of $15/month = $180 / year. Plus, my RESP went from a 2.2% MER to an index fund from my bank at 1.1% MER. On the $36,000 we have in there, that equals a savings of $400 / year.
(18) Current cash on hand: $13,000. I literally have no idea what to do with it. Pay down the mortgage (I’ve already reached my max lump sum pre-payment, so to pay $10,000 more would incur a $112 penalty, which is exactly what interest I would be saving)? Maybe use this to correct the car debacle? Start up a TFSA? Suggestions on this? And there's generally $2K to $4k per month coming in for the rest of the year - what do I do with it all?
(19) House: 2700 sq ft, 4 bedrooms and 3 bathrooms of suburban joy. It has appreciated significantly since we bought it 8 years ago for $640K. The house is 10 years old, so some things are starting to need more substantial maintenance. Once we no longer need childcare, we need less space (no live in Au Pair). My wife wants to have more room for our daughter so that our house is the one that she and her friends hang out at when they are teenagers – I think that’s an awesome idea, but precludes us putting a suite in our basement ($1,000 / month income, but parking hassles to go with it). Regardless, that decision is 2 years off anyway. We could also downsize at that time. When we retire our employer will pay all moving costs to relocate to wherever in the country we want. And I mean all costs – realtor fees, moving expenses, and property transfer taxes on new place. Pretty cool benefit. But, we like it where we are for now – great schools and awesome house. However, being almost mortgage free in a million dollar home does have me thinking about opportunity costs of that money. I’m also thinking that we are at the peak of the market, and it sure would be nice to cash out now, but there’s nowhere to go – the rental market here is awful. What am I missing on this front?
(20) We haven't done any TFSAs yet - our focus has been mortgage elimination (which I really am looking forward to). I understand that from an optimization standpoint, a low interest rate mortgage shouldn't be a priority, but I value peace of mind. No opposition to TFSA's, I just haven't done them yet.
(21). I'm reluctant to do RRSPs. Due to our defined benefit pensions, we have somewhat high income projected in our retirement years so the savings will be limited, and perhaps even eliminated since the gains on them are all taxable at income tax rates.
Thanks for reading this far - looking forward to some sober second thoughts on this.