Author Topic: Okay, What Now? A Case Study  (Read 3696 times)

Optimiser

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Okay, What Now? A Case Study
« on: August 26, 2017, 10:38:07 AM »
Iím married with 2 kids. One is 11 and with me half the time, the other is 1. I am 34 and my wife is 32. We worked low paying jobs for most of our adult life and have a bunch of student loan debt. As our careers have started to take off, we are finally starting to make some financial headway, but I want to make sure we are heading in the right direction. Iíve tried to give sufficient detail without making this too hard to follow. Please ask questions if you want more info or something doesnít make sense.

Income:
Iím an account, but not yet a CPA. My gross salary is $3,800/month. I get overtime on top of that especially during tax season, but I can choose when to cash it out, so Iíve been spreading it out over the year. Most months I cash out about $500 of overtime. Iíve been told I can expect to make at least $500-600/month more if and when I pass the CPA exam. I donít love my job and feel burned out at the end of each day so Iíve been having a really hard time studying and havenít sat for any sections of the exam yet.

My wife has 2 jobs, one a part time nanny, and one as a real estate agent. She is a sole proprietor for both jobs and her income varies considerably. She is also takes care of our 1 year old full time, and has been taking the baby with her to work. Because of this she decided she was only going to do real estate for friends and family for the time being, but it has actually been her best year of real estate yet. She doesnít seem fond of either job, but doesnít know what she wants to do. She also doesnít want to put the baby in childcare, so itís possible she becomes a SAHM in the future. Itís hard to know what will happen. Her average monthly income over the last 12 months has been $1,884 in real estate, net of expenses (except gas and SE tax) and $254 as nanny.

My monthly payroll deductions are as follows:
401(k) 5% of gross wages so $215, I get a match on the first 4%
FSA $100
Dental insurance for wife $45

Other Income: Iíve been making about $125/month on Swagbucks lately

Taxes:
FICA-SS $257
FICA-Med $60
FED $303
OR $271

I also pay 30% of my wifeís gross real estate income as quarterly taxes

Monthly Expenses:
Rent: $790 I wouldnít be surprised if this is the cheapest 3 bedroom in my town
Groceries: $450
Gas: $115
Discretionary: $50 each for my wife and me
Kid expenses: $100
Restaurants: $20
Medical: $240 Ė This is $212 for wifeís health insurance + $28 for co-pays etc. Kids are currently on Medicaid, but they may not qualify soon because of our income has gone up.
Family Fun: $20
Charitable Giving: $365
Internet: $40
Electricity: $115
Car Insurance: $60
Renterís Insurance: $17
Car Repairs: $200
Vacation: $50
Birthdays/Christmas: $45
Student Loans: $400

Major Misc. Exp. From last 12 months: portable A/C $500, fancy pants European vacation $4,500, new computer $900

Assets:
Cash: $15,000 We have allocated $5,000 as emergency fund and $6,000 for a down payment
Roth IRA: $17,000
IRA: $3,000
401(k): $5,000
Silver: $2,100
Taxable stock account: $200
Accrued overtime: $6000
2003 Civic Hybrid 105,000 miles
1990 Miata 145,000 miles
2002 Honda Metropolitan 10,000 miles

Liabilities:
Student Loan 1: $42,700 @3.47% variable Ė payment $243
Student Loan 2: 45,500 @5.55% fixed Ė payment $156 Ė Min. payment is income based and half of unpaid interest is paid by govít.

Feel free to facepuch with abandon on anything that seems out of line. Iím here because I want to do better, donít go easy on me, I can take it. Having said that, my main question is what should we be focusing our surplus income on?
Iíve been on the forums for a few years, and I suspect people will say student loans, but according to the investment order sticky thread, the interest rates arenít high enough to prioritize them. We did have another student loan that was at 7.125%, but I paid that off as soon as I could. It felt really good to pay it off, but I hated being cash poor while we did it. Our current loan balances are so big I feel like we would be cash poor forever if we focused on them and Iím worried that we would be priced out of our hot housing market by the time we did it.

We would really like to buy a multi-family property to owner occupy. So far we have put offers (about $300,000) on 2 different properties, but have been beat out on both of them. This would get us out of our current home which is CHEAP, but kind of a dump, without increasing our monthly payment too much. In order to be ready to make a competitive offer I feel like having a bigger down payment would be good. This is where my wife would like us to focus. We can also use my wifeís commission from the purchase of a property as part of our down payment or closing costs.

The third option would be to invest any surplus funds. I would really like to max out our IRAs this year, because it would lower our tax liability, and decrease our income based loan payment. I also really like seeing my investment balances grow, and with where they are currently at FIRE is a long way off.

Thanks for reading my case study, I look forward to your responses.

dandarc

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Re: Okay, What Now? A Case Study
« Reply #1 on: August 26, 2017, 11:05:23 AM »
Why aren't you taking the overtime pay as soon as you can after you earn it?  You're giving your employer an interest-free loan by spreading it out like this.

Could you provide more info on these multi-family properties you're looking at?  How many units, expected rent, etc?  If I'm reading correctly, you're going to buy the place, and your mortgage will actually be higher than your current rent, even after netting out rent-received.  Then you've got to deal with all the issues of being a landlord and a homeowner.  I'm not sure this is a great idea when your financial position is somewhat precarious - your balance sheet looks like someone who is just starting out - some assets but a negative net-worth.  This is not a position of financial strength, so taking on real-estate investing is a risky proposition for you.  The banks will usually loan you far more money than would be prudent, so "I qualify for a mortgage" needs to be taken with a grain of salt.  I guess what I'm getting at - have you factored in maintenance, capital expense, vacancy, etc. when you say this move "wouldn't increase our monthly payment too much"?

The expense that jumps out at me is $365 / month to charity.  That's enough to buy a house in some places.
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BlueHouse

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Re: Okay, What Now? A Case Study
« Reply #2 on: August 26, 2017, 11:57:35 AM »
Why aren't you taking the overtime pay as soon as you can after you earn it?  You're giving your employer an interest-free loan by spreading it out like this.
I was going to say the same thing, but for a different reason.  Never ever give your employer the impression that you don't need your money immediately.   As soon as you earn money, take it and never discuss it again.  When it comes time to get a raise, you wouldn't be my priority because I would think you don't really need or even want the money. 
Sometimes nothing can be a real cool hand

fluffmuffin

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Re: Okay, What Now? A Case Study
« Reply #3 on: August 26, 2017, 02:43:41 PM »
Agreed that you should be taking the overtime as you earn it.

Why do you need three cars? Sell one and either put it towards your debt, or roll it into your savings. As someone who defended having a $5,000 emergency fund in my own case study, I can say that I would NOT feel comfortable--even as a renter--with that amount in savings if I had kids.

Also, I understand why you feel it's important to contribute to charity. But I agree that $365 is really high in comparison with your income and current level of savings. And with your level of student loan debt! Are you tithing? I really can't wrap my mind around that one.

dandarc

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Re: Okay, What Now? A Case Study
« Reply #4 on: August 26, 2017, 02:56:28 PM »
Should mention -

Priority #1 should be preparing for, and taking the CPA exam.  You're in a profession where doing that one thing will give you an immediate income boost, and better career options should you want to make a change down the road.  Suck it up and get it done.

I get that it is hard, and you're already exhausted, but the return on investment for doing that is huge.  I'd go so far as to take some time off if needed to get this accomplished.
Link to my journal, so I can find it quickly - http://forum.mrmoneymustache.com/journals/dandarc's-journal/

marty998

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Re: Okay, What Now? A Case Study
« Reply #5 on: August 26, 2017, 03:30:49 PM »
Should mention -

Priority #1 should be preparing for, and taking the CPA exam.  You're in a profession where doing that one thing will give you an immediate income boost, and better career options should you want to make a change down the road.  Suck it up and get it done.

I get that it is hard, and you're already exhausted, but the return on investment for doing that is huge.  I'd go so far as to take some time off if needed to get this accomplished.

Hi OP. Read and implement this post.

Cannot underline this enough.

Optimiser

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Re: Okay, What Now? A Case Study
« Reply #6 on: August 26, 2017, 05:29:58 PM »
Why aren't you taking the overtime pay as soon as you can after you earn it?  You're giving your employer an interest-free loan by spreading it out like this.
We get our annual performance review and potential raise at the end of tax season, so I wanted to keep my hours and cash them out at my new pay rate instead of my old one. Then I was worried that it would look like I was doing that, so I didn't cash them all out when I got my raise. Last month my employer told me I had been calculating my OT incorrectly and they basically doubled the amount of overtime I had saved up. I am certain that I was calculating it the way I was supposed to and I told them this, but they said they'd prefer to go with their numbers. I also sort of viewed it as a secondary emergency fund. Lastly, I just didn't know what to do with it, so I figured if I didn't have it I wouldn't be tempted to spend it.

But I get what your saying, and what a poster below said about it making it look like I don't need the money, and I'll cash it out next month.

Could you provide more info on these multi-family properties you're looking at?  How many units, expected rent, etc?  If I'm reading correctly, you're going to buy the place, and your mortgage will actually be higher than your current rent, even after netting out rent-received.  Then you've got to deal with all the issues of being a landlord and a homeowner.  I'm not sure this is a great idea when your financial position is somewhat precarious - your balance sheet looks like someone who is just starting out - some assets but a negative net-worth.  This is not a position of financial strength, so taking on real-estate investing is a risky proposition for you.  The banks will usually loan you far more money than would be prudent, so "I qualify for a mortgage" needs to be taken with a grain of salt.  I guess what I'm getting at - have you factored in maintenance, capital expense, vacancy, etc. when you say this move "wouldn't increase our monthly payment too much"?
The first property we tried to buy was a 3 unit. Expected rent about $1600. Our mortgage payment would have been less than we currently pay in rent after factoring in rental income, but not counting maintenance, cap ex, etc. Housing is in short supply here and long term vacancy is a non-issue, but I tried to take expenses into account and it still seemed affordable.

The second property was a duplex. Expected rent was $1100. We would have been paying more than we currently do just for the mortgage. It was in our dream neighborhood though and we felt like it was worth the extra cost and would be a wise long term decision.

I was able to qualify for loans on both properties without counting my wife's income, so I didn't feel like we were over extending ourselves.

I mentioned above that we probably have the cheapest rent in our town for a 3 bedroom. Rentometer.com says average rent for a 3 bedroom in my area is $1622 and we pay $790. So we are definitely getting a good deal, which is why I have lived here for 11 years, but it is also cheap for a reason. It is 800 square feet, and receives less attention from the landlord than it should. We have to call about leaks in the roof at least once a year. The carpet is way past due for replacement. The sheetrock around the shower is crumbling, etc. We also got new neighbors a few months ago and we can hear them swearing at their kids through the walls. If it were only up to me, I'd stay here a few more years, but my wife would really like to move. I feel like buying a multi-family, is a good compromise to keep costs down while moving to a nicer place.

I don't disagree with you that it definitely increases our financial risk. Do you have any guidelines that could help us figure out when we would actually be ready to move up without being to risky?

The expense that jumps out at me is $365 / month to charity.  That's enough to buy a house in some places.

I hear you. We actually cut back on this some in recent months, but I will talk to my talk to my wife about reducing it further. I know some people would say no charity while we have debt, but it is important to us to help others. Decreasing the amount is possible.
« Last Edit: August 26, 2017, 05:33:41 PM by Optimiser »

ejacobson

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Re: Okay, What Now? A Case Study
« Reply #7 on: August 26, 2017, 07:22:30 PM »
Completely agree that the charity is excessive. You need to help your family first and have the CPA taken care of and establish solid cash flow to get your nest egg growing.

The CPA is key. Consider bootcamp/exam prep to help yourself focus and to get a condensed refresher. I am not in this field so I can't recommend a provider but the exam prep courses helped me a lot.

Optimiser

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Re: Okay, What Now? A Case Study
« Reply #8 on: August 26, 2017, 08:21:39 PM »
Agreed that you should be taking the overtime as you earn it.

Why do you need three cars? Sell one and either put it towards your debt, or roll it into your savings.
The Metropolitan is actually a moped. It is worth about $650, but we should probably sell it because it doesn't get used enough to justify paying insurance on it every month.


As someone who defended having a $5,000 emergency fund in my own case study, I can say that I would NOT feel comfortable--even as a renter--with that amount in savings if I had kids.
I was relying on the unpaid overtime as emergency fund if needed too, but I should at least cash it out and put it in the bank

Also, I understand why you feel it's important to contribute to charity. But I agree that $365 is really high in comparison with your income and current level of savings. And with your level of student loan debt! Are you tithing? I really can't wrap my mind around that one.
If by tithing you mean giving 10% of our income to our local church, no. But, some of the money does go to our church.

Optimiser

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Re: Okay, What Now? A Case Study
« Reply #9 on: August 26, 2017, 08:23:35 PM »
Should mention -

Priority #1 should be preparing for, and taking the CPA exam.  You're in a profession where doing that one thing will give you an immediate income boost, and better career options should you want to make a change down the road.  Suck it up and get it done.

I get that it is hard, and you're already exhausted, but the return on investment for doing that is huge.  I'd go so far as to take some time off if needed to get this accomplished.

Hi OP. Read and implement this post.

Cannot underline this enough.
You are right. This should be my priority. I calculated that every hour I spend studying means I can retire 1.5 weeks sooner. That is an unbeatable ROI. I've been very on again off again with my studying, but I need to do better.

Optimiser

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Re: Okay, What Now? A Case Study
« Reply #10 on: August 26, 2017, 08:24:54 PM »
Completely agree that the charity is excessive. You need to help your family first and have the CPA taken care of and establish solid cash flow to get your nest egg growing.

The CPA is key. Consider bootcamp/exam prep to help yourself focus and to get a condensed refresher. I am not in this field so I can't recommend a provider but the exam prep courses helped me a lot.

I had an online/textbook prep course that expired, but I still have the textbooks and have been using those.

Optimiser

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Re: Okay, What Now? A Case Study
« Reply #11 on: August 26, 2017, 08:26:32 PM »
Agreed that you should be taking the overtime as you earn it.

Why do you need three cars? Sell one and either put it towards your debt, or roll it into your savings.
The Metropolitan is actually a moped. It is worth about $650, but we should probably sell it because it doesn't get used enough to justify paying insurance on it every month.


As someone who defended having a $5,000 emergency fund in my own case study, I can say that I would NOT feel comfortable--even as a renter--with that amount in savings if I had kids.
I was relying on the unpaid overtime as emergency fund if needed too, but I should at least cash it out and put it in the bank. How much of an emergency fund do you recommend?

Also, I understand why you feel it's important to contribute to charity. But I agree that $365 is really high in comparison with your income and current level of savings. And with your level of student loan debt! Are you tithing? I really can't wrap my mind around that one.
If by tithing you mean giving 10% of our income to our local church, no. But, some of the money does go to our church.

MDM

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Re: Okay, What Now? A Case Study
« Reply #12 on: August 26, 2017, 09:14:17 PM »
...my main question is what should we be focusing our surplus income on?
Your marginal rate on 401k contributions may have an interesting shape, similar to the chart below:

Yours will be slightly different because I didn't do an exact Oregon state income tax calculation.

Given the relatively large marginal saving rate, due to the saver's and earned income credits, for large 401k (including a solo 401k for your wife) contributions, the following is offered for the two of you to consider.  In short, no change from what you are doing now, except one minor ;) thing: contribute $34,205 to traditional 401ks.
CategoryMonthly
Comments
Annual
Salary/Wages for earner #1$4,300$51,600
Pretax Vision/Dental Ins.$45$540
Healthcare Flex Savings Acct. (FSA)$100$1,200
FICA base salary/wages$4,155$49,860
401(k) / 403(b) / TSP / etc.$2,850Room to increase?$34,205
Employer Match$172$2,064
Subtotal 1$1,305$15,655
Schedule C net profit$2,138$25,656
Federal Total Income (for IRS tax)$3,443$41,311
Federal tax-$3302017 rates, MFJ, stand. ded., 4 exempt.-$3,956
State/City tax$108Guess, using 5.75% * (AGI - Exempt'n)$1,300
Soc. Sec. tax$258Assumes 1 earner paying$3,091
Medicare tax$60$723
Self-employment Tax$302$3,625
Total income taxes$399$4,784
Add Health + Daycare reimb.$100$1,200
Income before other expenses  $3,144$37,727
Monthly Average Expenses:
Rent$790$9,480
Home/Rent Insurance$17$204
Car Insurance$60$720
Car Maintenance, Registration, etc.$200$2,400
Charitable contributions$365Input to Itemized Deductions$4,380
Child activities $100$1,200
Christmas/Holidays$45$540
Dining (Lunch/Dinner/Etc.)$20$240
Electricity$115$1,380
Entertainment$20$240
Fuel/Public Transport$115$1,380
Groceries$450$5,400
Internet$40$480
Medical (Doctor, Hospital, etc.)$28Input to Itemized Deductions$336
Medical Insurance (if not paid pre-tax)$212Input to Itemized Deductions$2,544
Miscellaneous$100$1,200
Travel/Vacation$50$600
Non-mortgage total$2,727$32,724
Loans:
Student Loan$243$2,914
Student Loan$157$1,884
Total Expense$3,127$37,522
Total to invest$17$205
Summary:
"Gross" income$6,438$77,256
Income taxes$399$4,784
After-tax income$6,039$72,472
IRA+401k/403b/TSP/457$2,850$34,205
Living expenses$2,772$33,264
Non-mortgage loans$400$4,798
After-tax investable$17$205
Time to FI?:


Filing Status21=S, 2=MFJ, 3=HOH
# Exemptions4
# Children <172
# Children <132
# Children for EIC2
Adult #1Adult #2
Age3432
# of earners1
Total Income$41,311
Std. Deduct.$12,700
Act. Deduct.$12,700
Exemption$16,200
Deductible SE tax$1,813
SL int. (approx.)$2,500
AGI$36,998
MAGI$39,498
Taxable$8,098
1040 Tax$810
Saver's credit$2,000
EIC$1,956
Child Tax Cred.$2,000
Education Credit$0
Net Tax-$3,956
State tax$1,3005.75%
Charity$4,380
Item. Deduct.$5,680
VersionV9.02

Loans:Orig. Prin.Orig. LengthCurr. Prin.Yrs leftRate
Student Loan$42,70020.5$42,700203.470%
Student Loan$45,50040$45,500402.775%

Hargrove

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Re: Okay, What Now? A Case Study
« Reply #13 on: August 27, 2017, 12:17:19 PM »
Whatever cash you're not going to spend, put it in a high-yield account. Vanguard's money market is 1%, you can find 3% and even 5% accounts out there that will make your emergency fund an investment.

Because your cash appears low and you said you already made offers on multis, I'm guessing you're betting on the real estate loans that price themselves into higher monthly payments when you're already having a hard time... I'm not going to say this disqualifies you immediately, but you've made like four separate plans on a Jenga tower you keep taking pieces from.

1) CPA: the right time is immediately, as other posters have said. You need to find out if you can do this job ASAP, get the credentials to do something else if you need to, get in a career track in that if you're going to switch. Burnout at this stage will not be distracted away by an enormous real-estate purchase. Your career is the battery that grows your Mustache until your assets do, and multi-family units don't necessarily (or often) do that on day 1.

2) Figure out what you would even do with a multi-family. You're right that the student loans are low enough (with the gov paying half on the 5%) that you can invest your money elsewhere, but how exactly will you operate the mutli-family? If your wife is going to be a SAHM and she has real-estate experience, she COULD do it, but is she going to? If not, would you be able to? Figure out if you have too many irons in the fire here. Leverage you can't handle won't actually help you at all - the money may be better growing in stocks.

3) You can optimize that spending. Cut electricity - if you don't negotiate your rates, do it. Most places you can save up to half by just shopping your rate and keeping an eye on it. Sell the moped. Charity is awfully high for where you are financially. Groceries are way too high. You could cut 75% - start with 25%. Costco, BJs, Aldi's, whatever you have in your area. Travel and buy in bulk.

If you sold the moped for a few hundred, cut electricity by 25, cut shopping by 113, cut charity by 150, cut entertainment/internet/child activity/miscellaneous budgets by at least 50 total (are these really all separate? :p), you'd be looking at 338/month + moped money + CPA raise, putting you at 1k/month in ADDITIONAL surplus income PLUS the moped money. Obviously you would also sell your portable AC (imagine it mounted on an artillery bipod with a crank attached that shoots shredded money into the air when you crank it, laughing maniacally). The European vacation was completely bonkers, but just don't take another one.

Once you give yourself these hilarious raises, you're looking at over 1k in additional money per month and you may price yourself right out of your loan's income-based-repayment. Which is good. That means that, also, the loan would become a target. Guess what? You have 21k in spendable assets and, with the additional money coming in, you could wipe it out (or almost) in a single year. Cashflow of over 1150 more every month would make it more reasonable to use your allocated emergency fund. Without improving cashflow, buying the multi may be a very high gamble.

MDM's post for 401k contributions may be your most efficient investment, as it won't price out your loan benefits/health insurance and it will also enjoy 401k benefits.

Bracken_Joy

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Re: Okay, What Now? A Case Study
« Reply #14 on: August 27, 2017, 12:27:09 PM »
-I think it's a little insane you spent $4500 on a fancy European vacation when you live in a self-described "dump". Do you think travel will continue to be a budget item for you? Because I'm not sure you have the room in your budget for it if you want FI, frankly.

-Your wife's income is very uncertain and you have dependents. Do you have disability insurance? A will? An advance directive? Term life insurance? Get your legal house in order, if you haven't, and protect those who rely on you.

-I don't own rentals, but I know a lot goes into the expected expenses with them. We see a ton of people on the forums who think they're doing well by having rentals, but when you look at the numbers, it's a lot of work for a really poor ROI. Do your homework before you do anymore offers. Delve into the real estate podcasts/blogs/websites, like bigger pockets and afford anything.

-Right now it feels like you're adrift without clear goals. Frugality thrives with goals. http://www.frugalwoods.com/2015/05/08/is-frugality-sustainable-without-a-goal/

-Get that CPA exam done =) Sorry work sucks for you. But a guaranteed raise... man, you can't leave that on the table! Do a prep course if you need to, if you aren't self motivating on studying. Put some of that OT money toward it if you need to.

-Good luck.
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Optimiser

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Re: Okay, What Now? A Case Study
« Reply #15 on: August 27, 2017, 03:32:55 PM »
First, thanks everyone for your thoughtful responses. If I sound defensive in my responses, I don't mean to be.

Whatever cash you're not going to spend, put it in a high-yield account. Vanguard's money market is 1%, you can find 3% and even 5% accounts out there that will make your emergency fund an investment.

I talked to my wife last night, and I'm going to move the money we had saved for a down payment as well as the money from overtime I have accrued into our emergency fund. This will put our emergency fund at $15,000+ which should be enough for 6 months of bare bones expenses. I currently have my emergency fund at Sallie Mae Bank in a money market earning 1.3%. I'm not aware of anywhere that pays a risk free 3 or 5% return while allowing easy access to the money, so please let me know of where those rates are available.

Because your cash appears low and you said you already made offers on multis, I'm guessing you're betting on the real estate loans that price themselves into higher monthly payments when you're already having a hard time... I'm not going to say this disqualifies you immediately, but you've made like four separate plans on a Jenga tower you keep taking pieces from.
I'm not sure I understand what you are saying here.

1) CPA: the right time is immediately, as other posters have said. You need to find out if you can do this job ASAP, get the credentials to do something else if you need to, get in a career track in that if you're going to switch. Burnout at this stage will not be distracted away by an enormous real-estate purchase. Your career is the battery that grows your Mustache until your assets do, and multi-family units don't necessarily (or often) do that on day 1.
Everyone in thread is right about making studying a priority. I studied for 2 hours last night after the kids went to bad, and plan on keeping up the habit. I have also printed off the exam application so I can get my first section scheduled and have a deadline to work toward. Even if I do plan to switch employers or careers, becoming a CPA will still help with that.

2) Figure out what you would even do with a multi-family. You're right that the student loans are low enough (with the gov paying half on the 5%) that you can invest your money elsewhere, but how exactly will you operate the mutli-family? If your wife is going to be a SAHM and she has real-estate experience, she COULD do it, but is she going to? If not, would you be able to? Figure out if you have too many irons in the fire here. Leverage you can't handle won't actually help you at all - the money may be better growing in stocks.
The plan is to owner-occupy the multi-family and self-manage it. Neither of us have property management experience, but I've spent a fair amount of time educating myself on rental real-estate. I've listened to every episode of the bigger pockets podcast, talked to landlords about their properties, read several real-estate books, and done tax returns for big and small landlords. I'm sure I will make mistakes and I don't expect it to be easy, but I think we can handle it. Having said that, it is probably best to get the CPA exam out of the way before I put more on my plate with rental management.

3) You can optimize that spending. Cut electricity - if you don't negotiate your rates, do it. Most places you can save up to half by just shopping your rate and keeping an eye on it.
We only have one electricity provider so shopping rates is not an option. I was not aware that negotiating rates was possible, but I'll look into it. We certainly try to keep our electrical costs as low as we can though. Our thermostat is set at 64 in the winter during the day and 58 at night. We did by the A/C unit because we had some weather over 100 and my wife was very concerned about our little one, but we only cooled the house down to 80. We line dry our clothes outside during the summer and inside during the winter. We use a dehimidifier to help with this which uses up some electricity, but it also creates waste heat that we can use rather than the dryer which blows its waste heat outside. Hang drying clothes in th winter without the dehumidifier takes so long that clothes start to smell before they get dry.  I have a kill-a-watt and have searched the house for everything that uses power while not in use, such as the stereo and tv and have put them on power strips so they can be fully turned off when not in use. I have tried to insulate things as much as I can do in rental. I have replaced showerheads and faucets with low flow versions. I'm open to other ideas about cutting electricity, but I think I have already tackled the low hanging fruit.

Sell the moped.
Will do.

Charity is awfully high for where you are financially.
I talked to my wife about this last night and we will be reducing it to $163 per month. I know this is probably still too high for some, but I think this is the lowest we are willing to do.

Groceries are way too high. You could cut 75% - start with 25%. Costco, BJs, Aldi's, whatever you have in your area. Travel and buy in bulk.
I have been fighting this battle with my wife for a long time. I am sure there is room to cut here, but I think the only way it will happen is if I do all of the meal planning, grocery shopping, and cooking myself. I'm not sure I could get anywhere close to the 75% that you suggest though. That is $.35 per person per meal. For the time being I think my time is better spent studying.


If you sold the moped for a few hundred, cut electricity by 25, cut shopping by 113, cut charity by 150, cut entertainment/internet/child activity/miscellaneous budgets by at least 50 total (are these really all separate? :p), you'd be looking at 338/month + moped money + CPA raise, putting you at 1k/month in ADDITIONAL surplus income PLUS the moped money. Obviously you would also sell your portable AC (imagine it mounted on an artillery bipod with a crank attached that shoots shredded money into the air when you crank it, laughing maniacally). The European vacation was completely bonkers, but just don't take another one.

Once you give yourself these hilarious raises, you're looking at over 1k in additional money per month and you may price yourself right out of your loan's income-based-repayment. Which is good. That means that, also, the loan would become a target. Guess what? You have 21k in spendable assets and, with the additional money coming in, you could wipe it out (or almost) in a single year. Cashflow of over 1150 more every month would make it more reasonable to use your allocated emergency fund. Without improving cashflow, buying the multi may be a very high gamble.

MDM's post for 401k contributions may be your most efficient investment, as it won't price out your loan benefits/health insurance and it will also enjoy 401k benefits.

Wiping out the loan in one year would be amazing. I wiped out a 13k loan last year and it felt really good. I will get the moped on craigslist tonight and put in a few more hours on the CPA studying.

Optimiser

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Re: Okay, What Now? A Case Study
« Reply #16 on: August 27, 2017, 04:02:41 PM »
-I think it's a little insane you spent $4500 on a fancy European vacation when you live in a self-described "dump". Do you think travel will continue to be a budget item for you? Because I'm not sure you have the room in your budget for it if you want FI, frankly.
I completely agree with you more. Since we have gotten married my wife has really, really wanted to travel. For years I said we couldn't afford it unless she put some serious time into travel hacking and figured out how to do it on the cheap. Eventually she did start researching travel hacking, signed up for travel miles 101 and we started signing up for CC bonuses. She was eager to plan a big trip, and I agreed, but said I didn't think we should spend over $1,000. She told me we could go to Europe for that much, and I believed her. As the trip grew closer I realized there was no way that was going to happen, but she assured me if we just got a few more sign-up bonuses it wouldn't be much over budget. It turned out to be way over budget. Lesson learned. Moving forward we have been budgeting $50/month toward travel. I don't mean to pass all the blame to my wife, I'm just as responsible for our spending decisions(mistakes) as she is, and in the future I will play a much more active role in vacation planning and budgeting.

-Your wife's income is very uncertain and you have dependents. Do you have disability insurance? A will? An advance directive? Term life insurance? Get your legal house in order, if you haven't, and protect those who rely on you.
No, thank you for pointing out this blind spot. Is there a good rule of thumb regarding what % of income or expenses to spend or risk mitigation.

-I don't own rentals, but I know a lot goes into the expected expenses with them. We see a ton of people on the forums who think they're doing well by having rentals, but when you look at the numbers, it's a lot of work for a really poor ROI. Do your homework before you do anymore offers. Delve into the real estate podcasts/blogs/websites, like bigger pockets and afford anything.
I've spent a lot of time researching real estate, house hacking, etc. Honestly, I might spend too much time on learning about this stuff because it gets me really excited to do something when I should be focusing on becoming a CPA first.

-Right now it feels like you're adrift without clear goals. Frugality thrives with goals. http://www.frugalwoods.com/2015/05/08/is-frugality-sustainable-without-a-goal/
You hit the nail on the head with this one. The main reason I started this case study is because I feel adrift. I have learned that there are ways that I can further optimize my spending, and I've been reminded that the CPA exam is where I need to be focusing my energy. But I need to figure out what to do with the surplus cash that keeps coming in, because when I don't have a clear goal for it I end up putting some extra on student loans, some extra into retirement funds, some towards a down payment, and some on luxuries like air conditioners and vacations. 

My plan right now is to beef up the emergency fund and hold off on buying a house, but where should I focus my extra money? I think a clear plan/goal here will make the frugality feel worth it (not that I really mind it), and make work more bearable.
-Get that CPA exam done =) Sorry work sucks for you. But a guaranteed raise... man, you can't leave that on the table! Do a prep course if you need to, if you aren't self motivating on studying. Put some of that OT money toward it if you need to.

-Good luck.

Bracken_Joy

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Re: Okay, What Now? A Case Study
« Reply #17 on: August 27, 2017, 05:00:00 PM »
Re:  "Is there a good rule of thumb regarding what % of income or expenses to spend or risk mitigation." I'll admit, I don't know the answer to this. I have seen, when people have a mortgage, they'll do term life for the value of the mortgage + a funeral, so at least spouse and kids would have the house paid off as a point of stability. It sounds like you rent though. From this forbes article, it sounds like they basically recommend 25x expenses: https://www.forbes.com/sites/lawrencelight/2013/04/29/how-much-life-insurance-do-i-need/#f50db2f6c3cb But that seems high to me. Maybe others could weigh in here.

Re: feeling adrift.

Unfortunately (fortunately?) goals are something only you and your wife can determine, really. You want to travel. You want to give to charity. You want a house. You want to be out of debt. Okay. Those are all great, but... which one first? "If you chase two rabbits, both will escape".
I can give you my thoughts: travel with a toddler will be hard, and the toddler won't remember any of it. I would save that until down the road. You're probably already too old for hostels and backpacking anyway, so it's not like there's a ticking clock on that style of travel. Charity is a great goal for when you're stable. In fact, I love this frugalwoods post on charitable trusts: http://www.frugalwoods.com/2016/12/15/how-we-make-meaningful-and-tax-efficient-charitable-donations/ BUT, I don't think you're there yet. I think getting your own house in order, so you don't take resources needed by others, is a priority to large charitable giving.

I guess I picture this trajectory as a possibility for you:
-Get to the point where you're as tax efficient as possible. This means max your IRAs.
-Save up for a downpayment. You seem legitimately excited about rentals. Okay, then pursue that. But make sure it meets the less than 30% of takehome pay rule- principal and interest + taxes + insurance + 1-3% of purchase price per year maintenance cost should be less than 30% of your takehome pay.

It seems to me that, of all your goals, the home will be the most galvanizing and directing. It's a very tangible goal, and one that less-mustachian spouses are usually way more willing to get on board with. Make a goal, draw up a visual charts, make it an exciting group effort. Esoteric goals like FI can follow more easily after a big tangible win.

And on another note- usually feeling adrift is a holistic thing. Do you have satisfying hobbies? Deep friendships? Does your marriage feel stable and fulfilling? Do you have a sense of your purpose in life? All the financial planning in the world is no substitute for asking yourself hard questions about the ways in which you feel unfulfilled.
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Re: Okay, What Now? A Case Study
« Reply #18 on: August 27, 2017, 05:53:24 PM »
Moped is up on Craigslist.

Hargrove

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Re: Okay, What Now? A Case Study
« Reply #19 on: August 28, 2017, 04:06:17 PM »
On >1%:

https://www.lmcu.org/
https://redneck.bank/

I find the second one uninspiring and the first has a number of hoops, but this is really a question of what you'll overcome for hundreds of dollars in interest. I can't vouch for these personally (they've been mentioned elsewhere). AAA offers 1.4% on a 1 yr CD if you have a Discover card, or higher if you can put it in a longer-term CD. You forfeit some interest if you break the CD, though, so if the above accounts don't interest you, your 1.3% isn't bad (if you don't want to use bonds).

On real-estate: careful overbidding your cash-flow. Mostly I was just saying that a multi will tie up more money than you may be projecting, and it sounds like you have a little cash-flow crunch.

On groceries: http://www.mrmoneymustache.com/2012/03/29/killing-your-1000-grocery-bill/
http://www.mrmoneymustache.com/2011/08/23/grocery-shopping-with-your-middle-finger/

On electric: not sure you can negotiate if you have only one provider, but the worst they can do is say no.

Your attitude is fantastic - I look forward to hearing your updates.

reeshau

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Re: Okay, What Now? A Case Study
« Reply #20 on: August 29, 2017, 09:13:07 AM »


1) CPA: the right time is immediately, as other posters have said. You need to find out if you can do this job ASAP, get the credentials to do something else if you need to, get in a career track in that if you're going to switch. Burnout at this stage will not be distracted away by an enormous real-estate purchase. Your career is the battery that grows your Mustache until your assets do, and multi-family units don't necessarily (or often) do that on day 1.
Everyone in thread is right about making studying a priority. I studied for 2 hours last night after the kids went to bad, and plan on keeping up the habit. I have also printed off the exam application so I can get my first section scheduled and have a deadline to work toward. Even if I do plan to switch employers or careers, becoming a CPA will still help with that.

If a tag line helps, it sounds like getting a CPA is your side hustle right now.  Of course, once you get it, it also opens up a number of other side hustles.

Goldielocks

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Re: Okay, What Now? A Case Study
« Reply #21 on: August 29, 2017, 01:53:27 PM »
Overall,  I think your budget is quite good. Obviously a lot of student loans right now for your income.

PP had an excellent comment about the vacation portion, and the charity line, while higher than most, is a personal choice of trade offs versus monetary goals...   

A couple more thoughts:

1)  CPA studying plus looking into multi-family plus young family -- I think you are trying to chew too much right now.  I would drop the multi family aspect and optimize your attention on only a couple of things, family, personal expenses, personal career and building CPA income....

2)  I think you could optimize more of your realtor business expenses, some of the personal expenses (home office, car transportation or other expenses), could be attributed to the business, and kept separate.  You have opportunities to lower your net costs now and future, through improved tax planning with the business.  (If already optimized then fine, but if you have not aggressively looked at this yet, do so).   


Finances_With_Purpose

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Re: Okay, What Now? A Case Study
« Reply #22 on: August 30, 2017, 12:37:23 AM »
Overall,  I think your budget is quite good. Obviously a lot of student loans right now for your income.

PP had an excellent comment about the vacation portion, and the charity line, while higher than most, is a personal choice of trade offs versus monetary goals...   

A couple more thoughts:

1)  CPA studying plus looking into multi-family plus young family -- I think you are trying to chew too much right now.  I would drop the multi family aspect and optimize your attention on only a couple of things, family, personal expenses, personal career and building CPA income....


Second this.  You're way early into your job/career.  You may decide you don't like it.  Or you want to switch jobs.  Or switch gears altogether.

You're searching for direction still (and great job being honest here!).  So you're looking at life backwards: instead of purchases, get your financial house in order this year.  Learn about yourself, your job, and what you'll want to do for life.

You want to figure out your life's work (notice I didn't say job) and go for *that*.  Then, see what lifestyle that will sustain.

You really don't want to be the person who bought a house, a multi-plex, didn't pay student loans...and then realizes his life calling is any of four or five jobs which all start out at $20,000/year until you work your way up.  Guaranteed unhappiness, and very little way to change - only painful choices.

It's like the stoicism line (thanks, Tim Ferriss): hard choices, easy life.  Easy choices [now], hard life. 

Do the hard work now - and you'll thank yourself later.  Plus, you'll be in a better position wisdom-wise a year or two in, and you won't have lost anything financially.  You'll be in a stronger position. 

Use two years - at least - to nail down your vocation (notice I didn't say job), your income, your finances, pay back student loans, and then and only then revisit these big, life-altering purchasing decisions.  Otherwise, you can get into a ton of trouble really quickly and then be stuck for years undoing it.  Instead, focus on carving out an awesome life and living with less, then your life will (likely) just improve. 

sobezen

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Re: Okay, What Now? A Case Study
« Reply #23 on: August 30, 2017, 01:49:22 AM »
OP you can benefit from clearly writing down your goals.  Your energies and aspirations are quite spread out.  If you have not made time to read "Your Money Or Your Life" I strongly recommend you and your wife read it.  I recommend discussing what you discover about your values, hopes and dreams, together.

As I see it your top priority is not paying down the debts it is completing your CPA exam before the end of 2017.  Have you already taken the additional required classes?  If not take some online while studying for the other sections.  If you haven't signed up for Beckers study guides, strongly consider it.  The audio/video guides are particularly helpful study aids.  After you knock out your CPA monkey it will open new doors for you.  Also have you considered working for the big four?  Not sure if you are located near a large metropolitan area, but if you are, consider working in one, it will advance your career much further.  You are young enough to bounce back from the late hours, stress, travel and politics.  Even if you do not pursue working in a larger firm, after obtaining your CPA license you will be better equipped to start assessing your employment options at other businesses and plan a lateral move for better benefits and compensation.

Another concern involves your wife's unstable income and likelihood of quitting.  Based on your description are you ok if she completely stops working and becomes a SAHM?  If so, for how long?  I think it is really important for both of you to quantify exactly how long she exits the workforce and has gaps in her career.  She is quite young and if she upgraded her skills or even considered obtaining new licensing such as daycare, it will help your family immensely, while reducing the full financial burden on you.  Have you had a honest discussion with her regarding her goals and income projections?

As the primary earner OP, you absolutely need disability insurance and permanent insurance (so you can take it with you when you leave your employer).   For term life insurance you need at the very least ten times your base pay, though I go as high as 15 times base.  The life insurance generally helps your dependents cover the mortgage, children's education, your funeral expenses, and a portion for your spouse.  And do not overlook setting up a living trust sooner than later.  Establishing a trust will avoid probate and will help reduce the legal stress on your dependents in the event you prematurely leave.  Make sure to designate legal guardians for your children in a worse case scenario.

Also regarding your budget, regardless if your wife quits, you both should consider selling other assets or things that are not needed to free up more cash.  So for example if your wife becomes a SAHM have her list and sell things you do not need online on Craigslist, Nextdoor or even ebay.  I hope you are buying most things used or leveraging friends and family for children clothing and toys.  On a slight budget tangent, consider eliminating travel.  Consider eliminating international travel until your large loans are destroyed.  If you must get away, drive places with the family, and find creative alternative vacation ideas.  And since charity is important to you have you considered volunteering your time and/or skills instead of donating money? 

Lastly, I'd strongly advise against buying a multi-unit property until your CPA licensing is complete plus you've changed employers for over a year and established steady income  Your income is on shaky ground and financially it is ALL on you (which is not the best place to be when your wife can also contribute).  You mentioned you would self manage the property if purchased but this might not the best use of your time and resources.  I use to manage properties and it is not something you can do while dedicating 50+ hours/week to your career.  You are actually setting yourself up for a lot of unnecessary stress and added responsibilities that you probably will not have time to deal with.  Good luck and let us know how things develop.
The best thing money can buy is financial freedom.

Optimiser

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Re: Okay, What Now? A Case Study
« Reply #24 on: August 30, 2017, 07:44:51 PM »
Overall,  I think your budget is quite good. Obviously a lot of student loans right now for your income.

PP had an excellent comment about the vacation portion, and the charity line, while higher than most, is a personal choice of trade offs versus monetary goals...   

A couple more thoughts:

1)  CPA studying plus looking into multi-family plus young family -- I think you are trying to chew too much right now.  I would drop the multi family aspect and optimize your attention on only a couple of things, family, personal expenses, personal career and building CPA income....
I think you are right on this. My current plan is to pass my exams before purchasing something.
2)  I think you could optimize more of your realtor business expenses, some of the personal expenses (home office, car transportation or other expenses), could be attributed to the business, and kept separate.  You have opportunities to lower your net costs now and future, through improved tax planning with the business.  (If already optimized then fine, but if you have not aggressively looked at this yet, do so).
Yes, we are deducting all of the business expenses, including or portion of my wife's cell phone bill and a portion of our home internet.

Optimiser

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Re: Okay, What Now? A Case Study
« Reply #25 on: August 30, 2017, 07:48:15 PM »
Overall,  I think your budget is quite good. Obviously a lot of student loans right now for your income.

PP had an excellent comment about the vacation portion, and the charity line, while higher than most, is a personal choice of trade offs versus monetary goals...   

A couple more thoughts:

1)  CPA studying plus looking into multi-family plus young family -- I think you are trying to chew too much right now.  I would drop the multi family aspect and optimize your attention on only a couple of things, family, personal expenses, personal career and building CPA income....


Second this.  You're way early into your job/career.  You may decide you don't like it.  Or you want to switch jobs.  Or switch gears altogether.

You're searching for direction still (and great job being honest here!).  So you're looking at life backwards: instead of purchases, get your financial house in order this year.  Learn about yourself, your job, and what you'll want to do for life.

You want to figure out your life's work (notice I didn't say job) and go for *that*.  Then, see what lifestyle that will sustain.
Been trying to figure that one out for 15+ years
You really don't want to be the person who bought a house, a multi-plex, didn't pay student loans...and then realizes his life calling is any of four or five jobs which all start out at $20,000/year until you work your way up.  Guaranteed unhappiness, and very little way to change - only painful choices.

It's like the stoicism line (thanks, Tim Ferriss): hard choices, easy life.  Easy choices [now], hard life. 

Do the hard work now - and you'll thank yourself later.  Plus, you'll be in a better position wisdom-wise a year or two in, and you won't have lost anything financially.  You'll be in a stronger position. 

Use two years - at least - to nail down your vocation (notice I didn't say job), your income, your finances, pay back student loans, and then and only then revisit these big, life-altering purchasing decisions.  Otherwise, you can get into a ton of trouble really quickly and then be stuck for years undoing it.  Instead, focus on carving out an awesome life and living with less, then your life will (likely) just improve.

Optimiser

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Re: Okay, What Now? A Case Study
« Reply #26 on: August 30, 2017, 08:10:01 PM »
OP you can benefit from clearly writing down your goals.  Your energies and aspirations are quite spread out.  If you have not made time to read "Your Money Or Your Life" I strongly recommend you and your wife read it.  I recommend discussing what you discover about your values, hopes and dreams, together.
I have read Your Money or Your Life, but I'm sure I would benefit from rereading it. My wife and I sat down for a couple years in a row and wrote down short, mid, and long term goals. I thought it was really helpful, but didn't end up doing it this year for some reason.
As I see it your top priority is not paying down the debts it is completing your CPA exam before the end of 2017.  Have you already taken the additional required classes?  If not take some online while studying for the other sections.  If you haven't signed up for Beckers study guides, strongly consider it.  The audio/video guides are particularly helpful study aids.  After you knock out your CPA monkey it will open new doors for you. 
Yes. I got my MBA so I have plenty of credit hours and all the classes I need to sit for the exam. I had the option for my company to buy me whatever study course I wanted and I chose the Roger prep course. It seemed to be the most engaging of the ones I sampled. Unfortunately my online access just expired this month, but I am currently studying from the textbooks from the course.
Also have you considered working for the big four?  Not sure if you are located near a large metropolitan area, but if you are, consider working in one, it will advance your career much further.  You are young enough to bounce back from the late hours, stress, travel and politics.  Even if you do not pursue working in a larger firm, after obtaining your CPA license you will be better equipped to start assessing your employment options at other businesses and plan a lateral move for better benefits and compensation.
Unfortunately I'm about an hour and a half away from a metropolitan area, so I am at a smallish local firm. I do plan to reassess my options after I get certified though.
Another concern involves your wife's unstable income and likelihood of quitting.  Based on your description are you ok if she completely stops working and becomes a SAHM?  If so, for how long?  I think it is really important for both of you to quantify exactly how long she exits the workforce and has gaps in her career.  She is quite young and if she upgraded her skills or even considered obtaining new licensing such as daycare, it will help your family immensely, while reducing the full financial burden on you.  Have you had a honest discussion with her regarding her goals and income projections?
We have talked about it some. She really doesn't know what she wants to do though. We would be able to pay all of our bills on just my income, but there wouldn't be much left for saving.
As the primary earner OP, you absolutely need disability insurance and permanent insurance (so you can take it with you when you leave your employer).   For term life insurance you need at the very least ten times your base pay, though I go as high as 15 times base.  The life insurance generally helps your dependents cover the mortgage, children's education, your funeral expenses, and a portion for your spouse.  And do not overlook setting up a living trust sooner than later.  Establishing a trust will avoid probate and will help reduce the legal stress on your dependents in the event you prematurely leave.  Make sure to designate legal guardians for your children in a worse case scenario.
Yeah, this is definitely something I need to do more research on.
Also regarding your budget, regardless if your wife quits, you both should consider selling other assets or things that are not needed to free up more cash.  So for example if your wife becomes a SAHM have her list and sell things you do not need online on Craigslist, Nextdoor or even ebay.
We did a lot of this when I was in grad school, but we could probably find more to get rid of.
I hope you are buying most things used or leveraging friends and family for children clothing and toys.
We do a lot of this. Our current budget allows $25/month for baby purchases, and so far we have been pretty close to this.
On a slight budget tangent, consider eliminating travel.  Consider eliminating international travel until your large loans are destroyed.  If you must get away, drive places with the family, and find creative alternative vacation ideas.
We won't be going on any more international trips. We will still probably do 1-2 low cost vacations per year. (camping, etc.)

And since charity is important to you have you considered volunteering your time and/or skills instead of donating money?
We have historically done some of this as well. Though not as much lately, but I think that is temporary. 
Lastly, I'd strongly advise against buying a multi-unit property until your CPA licensing is complete plus you've changed employers for over a year and established steady income  Your income is on shaky ground and financially it is ALL on you (which is not the best place to be when your wife can also contribute).  You mentioned you would self manage the property if purchased but this might not the best use of your time and resources.  I use to manage properties and it is not something you can do while dedicating 50+ hours/week to your career.  You are actually setting yourself up for a lot of unnecessary stress and added responsibilities that you probably will not have time to deal with.  Good luck and let us know how things develop.
I'm not necessarily planning to change employers, but I am planning to postpone a property purchase until I'm done with the CPA exam.

I may be completely wrong, but I don't think managing 1-2 units will take an large amount of my time if I can setup clear guidelines and boundaries with my tenants and deal with maintenance issues before they become emergencies. I know things will always come up at unexpected times, but it shouldn't be more than a few hours a month on average.
« Last Edit: August 30, 2017, 08:11:44 PM by Optimiser »

Finances_With_Purpose

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Re: Okay, What Now? A Case Study
« Reply #27 on: August 31, 2017, 02:30:55 PM »
Overall,  I think your budget is quite good. Obviously a lot of student loans right now for your income.

PP had an excellent comment about the vacation portion, and the charity line, while higher than most, is a personal choice of trade offs versus monetary goals...   

A couple more thoughts:

1)  CPA studying plus looking into multi-family plus young family -- I think you are trying to chew too much right now.  I would drop the multi family aspect and optimize your attention on only a couple of things, family, personal expenses, personal career and building CPA income....


Second this.  You're way early into your job/career.  You may decide you don't like it.  Or you want to switch jobs.  Or switch gears altogether.

You're searching for direction still (and great job being honest here!).  So you're looking at life backwards: instead of purchases, get your financial house in order this year.  Learn about yourself, your job, and what you'll want to do for life.

You want to figure out your life's work (notice I didn't say job) and go for *that*.  Then, see what lifestyle that will sustain.
Been trying to figure that one out for 15+ years
You really don't want to be the person who bought a house, a multi-plex, didn't pay student loans...and then realizes his life calling is any of four or five jobs which all start out at $20,000/year until you work your way up.  Guaranteed unhappiness, and very little way to change - only painful choices.

It's like the stoicism line (thanks, Tim Ferriss): hard choices, easy life.  Easy choices [now], hard life. 

Do the hard work now - and you'll thank yourself later.  Plus, you'll be in a better position wisdom-wise a year or two in, and you won't have lost anything financially.  You'll be in a stronger position. 

Use two years - at least - to nail down your vocation (notice I didn't say job), your income, your finances, pay back student loans, and then and only then revisit these big, life-altering purchasing decisions.  Otherwise, you can get into a ton of trouble really quickly and then be stuck for years undoing it.  Instead, focus on carving out an awesome life and living with less, then your life will (likely) just improve.

Heh: we have that in common, then!  :)

dandarc

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Re: Okay, What Now? A Case Study
« Reply #28 on: August 31, 2017, 02:46:21 PM »
Quote
I may be completely wrong, but I don't think managing 1-2 units will take an large amount of my time if I can setup clear guidelines and boundaries with my tenants and deal with maintenance issues before they become emergencies. I know things will always come up at unexpected times, but it shouldn't be more than a few hours a month on average.

It is not the average case with real estate that is likely to get you in terms of money and time.  It is the worst case. 

Example - we bought an older home in 2014.  Everything was more or less OK until 2016 - the sewer pipe had to be replaced.  And just for fun, the HVAC system crapped out a couple months later - this one stung because it was not that old, but the prior owner never bothered to register the warranty so it was a "spend thousands fixing" vs. "spend twice as much replacing" decision.  End result - $10K and many hours of meeting contractors for us in 2016.  Would have been much more time, though less money if we had the skills and free time to do either of these ourselves.  Averaged over the expected life of the repairs, the cost is actually not so bad, but tell that to my bank account on the days I had to write those checks.  And we don't have tenants to deal with.  I mean, who asks how old the sewer pipe is?  I didn't even know that was a thing that could be nearing the end of its life - next time I'll know better.

That's why you want to be in a strong financial position before buying real estate - you need this type of thing to be a blip on the radar, not a reason to take on onerous debt or push you over the edge into insolvency.
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Optimiser

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Re: Okay, What Now? A Case Study
« Reply #29 on: August 31, 2017, 02:51:18 PM »
Quote
I may be completely wrong, but I don't think managing 1-2 units will take an large amount of my time if I can setup clear guidelines and boundaries with my tenants and deal with maintenance issues before they become emergencies. I know things will always come up at unexpected times, but it shouldn't be more than a few hours a month on average.

It is not the average case with real estate that is likely to get you in terms of money and time.  It is the worst case. 

Example - we bought an older home in 2014.  Everything was more or less OK until 2016 - the sewer pipe had to be replaced.  And just for fun, the HVAC system crapped out a couple months later - this one stung because it was not that old, but the prior owner never bothered to register the warranty so it was a "spend thousands fixing" vs. "spend twice as much replacing" decision.  End result - $10K and many hours of meeting contractors for us in 2016.  Would have been much more time, though less money if we had the skills and free time to do either of these ourselves.  Averaged over the expected life of the repairs, the cost is actually not so bad, but tell that to my bank account on the days I had to write those checks.  And we don't have tenants to deal with.  I mean, who asks how old the sewer pipe is?  I didn't even know that was a thing that could be nearing the end of its life - next time I'll know better.

That's why you want to be in a strong financial position before buying real estate - you need this type of thing to be a blip on the radar, not a reason to take on onerous debt or push you over the edge into insolvency.

Point taken.

FYI, it is fairly common to order a sewer scope when you get a home inspection around here.

dandarc

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Re: Okay, What Now? A Case Study
« Reply #30 on: August 31, 2017, 03:24:32 PM »
Quote
I may be completely wrong, but I don't think managing 1-2 units will take an large amount of my time if I can setup clear guidelines and boundaries with my tenants and deal with maintenance issues before they become emergencies. I know things will always come up at unexpected times, but it shouldn't be more than a few hours a month on average.

It is not the average case with real estate that is likely to get you in terms of money and time.  It is the worst case. 

Example - we bought an older home in 2014.  Everything was more or less OK until 2016 - the sewer pipe had to be replaced.  And just for fun, the HVAC system crapped out a couple months later - this one stung because it was not that old, but the prior owner never bothered to register the warranty so it was a "spend thousands fixing" vs. "spend twice as much replacing" decision.  End result - $10K and many hours of meeting contractors for us in 2016.  Would have been much more time, though less money if we had the skills and free time to do either of these ourselves.  Averaged over the expected life of the repairs, the cost is actually not so bad, but tell that to my bank account on the days I had to write those checks.  And we don't have tenants to deal with.  I mean, who asks how old the sewer pipe is?  I didn't even know that was a thing that could be nearing the end of its life - next time I'll know better.

That's why you want to be in a strong financial position before buying real estate - you need this type of thing to be a blip on the radar, not a reason to take on onerous debt or push you over the edge into insolvency.

Point taken.

FYI, it is fairly common to order a sewer scope when you get a home inspection around here.
Huh - guess I just didn't know to ask for that.  Why did I hire that home inspector again?
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Goldielocks

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Re: Okay, What Now? A Case Study
« Reply #31 on: September 01, 2017, 12:08:02 AM »

2)  I think you could optimize more of your realtor business expenses, some of the personal expenses (home office, car transportation or other expenses), could be attributed to the business, and kept separate.  You have opportunities to lower your net costs now and future, through improved tax planning with the business.  (If already optimized then fine, but if you have not aggressively looked at this yet, do so).
Yes, we are deducting all of the business expenses, including or portion of my wife's cell phone bill and a portion of our home internet.

Great!  Now you need to do the next step -- separate out your business and personal.  I think you may have mixed items classed as "business expense" under your personal expenses in the original case study.   (I have read several case studies this week, so I may have you mixed up with someone else).

The only way to evaluate business profitability is to completely split the expenses and look at personal and business separately.   I struggle with this myself..

Optimiser

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Re: Okay, What Now? A Case Study
« Reply #32 on: September 01, 2017, 10:50:27 AM »

2)  I think you could optimize more of your realtor business expenses, some of the personal expenses (home office, car transportation or other expenses), could be attributed to the business, and kept separate.  You have opportunities to lower your net costs now and future, through improved tax planning with the business.  (If already optimized then fine, but if you have not aggressively looked at this yet, do so).
Yes, we are deducting all of the business expenses, including or portion of my wife's cell phone bill and a portion of our home internet.

Great!  Now you need to do the next step -- separate out your business and personal.  I think you may have mixed items classed as "business expense" under your personal expenses in the original case study.   (I have read several case studies this week, so I may have you mixed up with someone else).

The only way to evaluate business profitability is to completely split the expenses and look at personal and business separately.   I struggle with this myself..

There are really only two expenses that run through our personal checking, well three if you count taxes.

The first is auto expenses. DW tracks all of her business miles throughout the year and we take the mileage deduction on her schedule Cs, but because her car is used for business and personal trips all of the gas is bought out of the personal account.

The second is home internet. This is also a mix of business and personal, so some percentage of the annual expense (I can't what percentage I use off the top of my head) is deducted on her real estate schedule C, even though we pay it out of our personal account.

All of the other business expenses come out of a separate checking account that is only for business. Every time she closes a sale her check is deposited in the business account. Then I look at the balance of the business account and anything that is over $5,000 gets transferred into our personal account. For example if she had $4,500 in the business account and gets paid $3,000, then $2,500 get transferred to our personal checking and $500 stays in the business account to cover future business expenses. The next thing I do is take 30% of her  gross pay, so in this case $900 and allocate it to quarterly taxes in YNAB.

So I guess I have internet, car repairs, and gas slightly overstated in the case study budget, but not by a material amount.

sobezen

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Re: Okay, What Now? A Case Study
« Reply #33 on: September 01, 2017, 03:43:52 PM »
Based on what you have shared it sounds like you and your wife have very different ideas how to achieve your financial goals.  This overall fuzziness needs to be addressed.  As I understand it you are both very young in your life and careers with tremendous responsibilities and limited retirement savings.  One thing that helps me is to carefully assess all known options by objectively weighing (all the logical pros and cons) before taking any actions.  Because your wife has no idea how to develop her career, or even what direction to move towards, wouldn't it make sense if she first honestly clarified her own life goals, hopes, and fears?  This exercise will help her focus on careers more aligned with her values and enable both of you to work towards shared goals.

OP you mention how you and your wife use to sit down together and write down your short, mid and long term goals.  Since you have not done it recently, do you feel it might be helpful to sit down now?  For example you mention your family can survive on just your income when your wife quits and becomes a SAHM, but there would not be much left for savings.  In this situation does it sound prudent to place the full responsibility for your family finances on your shoulders?  Another exercise is to imagine how will your finances be impacted in the next five, ten, and fifteen years if you both continue on your current path.  Also examine how either or both of you will be impacted if one should pass.  This is another strong recommendation for you to set up a living trust, legal guardian, and obtain more life insurance.

I think your property management expectations are overly optimistic.  Try answering the following questions:
1)  Are you or your wife a skilled plumber, electrician, or contractor?  If not, do either of you intend to dedicate time to learn these skills?
2)  Do you already have a database of contractors and lawyers that you've already researched and vetted?  Expect your first couple to be busy or otherwise unavailable.
3)  Are you financially prepared with cash reserves to cover vacant rental units?  If so, for how long?  Do not assume it will rent out immediately.
4)  How much cash reserves do you intend to put aside to replace broken essentials like the water heater, roofing, windows, piping, garage door, insulation, deal with mold, rodents, etc?  What will you do if you lack funds?

These questions may sound negative or nitpicking, but in my experience as a property manager I have encountered each of these scenarios (and worse) and they always come when the owners least expected it.  The main difference between owner self managing their properties and my clients is the financial resources, time and experience.  The businesses who use property managers are leveraging the time, resources, and expertise of other people.  To help illustrate, I want to share with you three examples.  One owner bought duplex and despite doing a thorough building inspection had cracked iron pipes under the lawn.  These pipes broke during winter and flooded.  Another owner, bought a condo, mold was hidden in bedrooms and closets until after the tenants moved out.  This is a concern if there are pre-existing tenants.  So on that note you might buy a duplex or multi-unit property but are you going to evict all of them?  If not, you will not completely know the existing issues in the units.  I forewarn clients to expect to do repairs to any property purchased and understand during the repairs they will not have any rental income generated.  Another owner a family, had a multi-unit and one set of renters sublet adding four more people not on lease to reach a grand total of seven people in a three bedroom unit; the renters partied on the roof that was off-limits (they clogging the drains), smoked marijuna, had a loud pet, and utterly disturbed the entire building and created hostility.  When the owner tried to evict for just cause, the city they resided in required the owners to "buy" the renters out because they were in a rent controlled city.  Bottomline, OP expect the property to have issues upon purchase and expect problems to continue for the life of ownership.  Property management is filled with unexpected hurdles and all it takes is one incident to suck up your limited time and resources.
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Optimiser

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Re: Okay, What Now? A Case Study
« Reply #34 on: September 01, 2017, 04:47:49 PM »
Based on what you have shared it sounds like you and your wife have very different ideas how to achieve your financial goals.  This overall fuzziness needs to be addressed. 
This is somewhat accurate. We are on agreement with regard to our big picture goals. I think the difference is more one of personalities. DW is on board theoritically, and I do believe she is trying, but she is not naturally frugal and doesn't have the same delayed gratification tendencies that I do.  When I read other case studies and the struggles some people have getting their spouses on board, I am grateful that she is as accepting of my frugality as she is, and that she sees the big picture. She is happy to drive a 14 year old hybrid, but isn't going to turn off the A/C on the way to work to save gas. She doesn't mind sticking to the grocery budget, but if there is room she isn't going to forgo a kombucha at the grocery store so we can come in under budget and throw more money at student loans next month. Frugality is a spectrum and we aren't in the same spot on that spectrum.

As I understand it you are both very young in your life and careers with tremendous responsibilities and limited retirement savings.  One thing that helps me is to carefully assess all known options by objectively weighing (all the logical pros and cons) before taking any actions.  Because your wife has no idea how to develop her career, or even what direction to move towards, wouldn't it make sense if she first honestly clarified her own life goals, hopes, and fears?  This exercise will help her focus on careers more aligned with her values and enable both of you to work towards shared goals.
We have attempted this before. I am very much a sit down and weigh all the logical pros and cons type of person. She is not. She doesn't know what she wants her life work to be, or how to get there. We have talked about it a lot, but it hasn't produced much in terms of answers or direction.

OP you mention how you and your wife use to sit down together and write down your short, mid and long term goals.  Since you have not done it recently, do you feel it might be helpful to sit down now?
I do think it would be helpful, and I will try it again. The main reason I stopped is because it was too hard to get her engaged in the discussion. But I need to at least do it for my own benefit even if she doesn't contribute much.

For example you mention your family can survive on just your income when your wife quits and becomes a SAHM, but there would not be much left for savings.  In this situation does it sound prudent to place the full responsibility for your family finances on your shoulders?  Another exercise is to imagine how will your finances be impacted in the next five, ten, and fifteen years if you both continue on your current path.
We talked about this the other night, and I was surprised to hear that she plans to continue doing real estate and would be willing to find someone to watch the little one as needed.  I'm not sure how much time and energy she wants to put into real estate, whether she would be actively pursuing new leads or just waiting for referrals to slowly roll in. So there is definitely more for us to discuss here.

Also examine how either or both of you will be impacted if one should pass.  This is another strong recommendation for you to set up a living trust, legal guardian, and obtain more life insurance.
We definitely need to address this. I have a hard time thinking about diverting money from savings/debt paydown toward a recurring insurance bill, but I know it's the right thing to do.

I think your property management expectations are overly optimistic.  Try answering the following questions:
1)  Are you or your wife a skilled plumber, electrician, or contractor?  If not, do either of you intend to dedicate time to learn these skills?
No, and I would love to learn more about these skills, but the plan would be to hire people to do these tasks.

2)  Do you already have a database of contractors and lawyers that you've already researched and vetted?  Expect your first couple to be busy or otherwise unavailable.
Yes, my wife has access to vetted and recommended vendors through her job.

3)  Are you financially prepared with cash reserves to cover vacant rental units?  If so, for how long?  Do not assume it will rent out immediately.
Yes, when we were putting in offers we had enough in cash reserves to cover at least 3 months of vacancies. We live in town with very high rental saturation though so this is not something I worry very much about.

4)  How much cash reserves do you intend to put aside to replace broken essentials like the water heater, roofing, windows, piping, garage door, insulation, deal with mold, rodents, etc?  What will you do if you lack funds?
My plan was to set aside 20% of gross rents to cover maintenance and capital expenditures. To mitigate the risk of a large system failure in the first year we planned to buy or have the seller buy a home warranty. Of course we would also get a professional inspection prior to making a purchase to reduce the risk of a unknown expenses in the short term. In a worst case scenario, my plan was to pull funds from my Roth IRA, but I would obviously avoid that if at all possible.

These questions may sound negative or nitpicking, but in my experience as a property manager I have encountered each of these scenarios (and worse) and they always come when the owners least expected it.  The main difference between owner self managing their properties and my clients is the financial resources, time and experience.  The businesses who use property managers are leveraging the time, resources, and expertise of other people.  To help illustrate, I want to share with you three examples.  One owner bought duplex and despite doing a thorough building inspection had cracked iron pipes under the lawn.  These pipes broke during winter and flooded.  Another owner, bought a condo, mold was hidden in bedrooms and closets until after the tenants moved out.  This is a concern if there are pre-existing tenants.  So on that note you might buy a duplex or multi-unit property but are you going to evict all of them? 
I wouldn't necessarily evict existing tenants, but I would have all units professionally inspected prior to purchase.

If not, you will not completely know the existing issues in the units.  I forewarn clients to expect to do repairs to any property purchased and understand during the repairs they will not have any rental income generated.  Another owner a family, had a multi-unit and one set of renters sublet adding four more people not on lease to reach a grand total of seven people in a three bedroom unit; the renters partied on the roof that was off-limits (they clogging the drains), smoked marijuna, had a loud pet, and utterly disturbed the entire building and created hostility.  When the owner tried to evict for just cause, the city they resided in required the owners to "buy" the renters out because they were in a rent controlled city.  Bottomline, OP expect the property to have issues upon purchase and expect problems to continue for the life of ownership.  Property management is filled with unexpected hurdles and all it takes is one incident to suck up your limited time and resources.

I appreciate your concern and your thoughtful reply.

Based on recommendations in this thread and discussions with my wife, I am planning to pass the CPA exam to increase my income, and pay down the higher interest of my our two student loans to reduce our expenses before purchasing a property.

However, barring a large change in life circumstances or the housing market, I do still plan to purchase a multi-family property to owner occupy and self manage at some point in the future. This will provide cheaper housing costs than buying a single family home as well as the possibility of an additional income stream in retirement.

Based on the expectation that owning a rental property has inherent risks and costly problems that come at unexpected times, how much do you recommend having as a rental property specific emergency fund either in terms of dollars, percentage of purchase price, percentage of rent, etc?

What non-financial steps (book to read, experience to acquire, skills to learn, etc.) do you recommend that someone take to prepare to be a landlord?
« Last Edit: September 01, 2017, 05:00:44 PM by Optimiser »

Optimiser

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Re: Okay, What Now? A Case Study
« Reply #35 on: September 04, 2017, 06:21:23 PM »
Just sold the scooter for $300 more than we paid for it 7 years ago and $50 more than asking! Cancelled the insurance on it too, so that's $950 for loan pay down now and $9.16 lower expenses every month forever.

Hargrove

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Re: Okay, What Now? A Case Study
« Reply #36 on: September 04, 2017, 06:56:22 PM »
This is great. Congratulations so far, and great job on the moped sale.

It's even better than you think... that money gained, then invested or paid on a loan, is additional money saved/earned every month forever, too. You said last year you cleared a 13k loan, which is terrific. This year, you did about a month's worth of similar progress in what, a few days?