Author Topic: Case Study - Life Optimization Tips  (Read 1300 times)

LivingTheory

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Case Study - Life Optimization Tips
« on: July 03, 2018, 10:19:57 PM »
Life Situation: Married Filing Jointly, 29 and 27 years old, 1 kid, live in an income-tax state with low property taxes, love our house. SO is more readily employable but I have much higher income potential in the next 2-5 years so we're focused on advancing my career instead of both.

Gross Salary/Wages: $92k ($62k salary + $10k bonus + $20k SO salary)

Individual amounts of Pre-tax deductions: 15% to 401k with 5% match, $100/month to HSA, $300/month to 529, $450/month to medical premiums, $60/month to life insurance/legal services/etc.

Adjusted Gross Income: $67k

Taxes: Federal = $7,600, State = $3,100, FICA = $6,100

Current expenses (monthly):
Mortgage (P&I)       $2,116
Property Tax          $212
Home Insurance     $65
HOA                      $36
Home Maintenance $60
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HOME                    $2,489

Electric                  $100
Water                    $60
Internet                 $55
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UTILITIES              $215

Car Insurance        $250
Gas                       $250         
Maintenance          $60
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VEHICLES              $560

Food                      $320
Child Needs            $200
Clothes                  $60
Hygeine                 $60
Entertainment        $100
Cell Phones            $100
Travel                    $90
Giving                    $50
Pets                       $30
Misc.                      $80
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VARIOUS               $1,090

TOTAL MONTHLY SPEND: $4,354

Expected ER expenses: We plan to keep spending constant with the P&I gone once the mortgage is paid off.

Assets
Traditional IRAs:    $174k
Roth IRAs:             $67k
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RETIREMENT          $241K

Cash Balance         $2k
Investments          $12k
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HSA                      $14k

Checking               $4k
Savings                 $21k
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TOTAL CASH          $25k

529 Account          $2k

Primary Residence $380k

Vehicles                $7k

TOTAL ASSETS           $669K

Liabilities:
15 year, 3.375% fixed rate mortgage. Original amount was just under $300k when we closed a year ago. Remaining balance is $275k. No PMI. We're putting a few hundred extra toward the loan each month. Projected payoff date is mid-2030, original loan term runs until mid-2032. Would like to have this done sooner than 2030.

TOTAL LIABILITIES   $275K

NET WORTH               $394K

Questions: What would you do differently in our situation? My SO will work part time for the foreseeable future. If my income rises significantly, SO will likely come home full time. This is to say that our income could rise but it won't be to the full extent of any raises that I get because it'll be offset slightly by the second income dropping. Best case scenario would be my $62k+$10k bonus jumping to $100k+$50k in the next year. This may or may not happen in that timeframe but is very likely within 5 years.

Right now we feel pretty cash poor because our cashflow is really tight each month. We bought our house with both of us working full time and before there was a mouth to feed at home. Our income has dropped and our expenses have risen. Just feeling the pinch on a monthly basis when $5,000 comes in the door and $4,400 is already earmarked for mostly-fixed expenses. The extra $600 we're splitting between $300 to the mortgage and $300 to the 529 to try to make more progress than just covering the bills and putting money into the 401k. Maybe I'm just stressing for no reason and this is a temporary problem but I feel like I need more wiggle room each month to feel more confident. Would you make any major changes in our situation or just keep plugging away and hope for a bump in income?

I want to give my family the best life possible and don't want to spend the best years of my kid's life trying to keep a mortgage payment going. Anything I can do to get the house paid off and bring the investment accounts up to $600k before he's too old to want to play with me would be great. We were making such quick progress in prior years that maybe my view is distorted and I need to chill. I just want this so badly for our future. Thank you.
« Last Edit: July 03, 2018, 10:31:02 PM by LivingTheory »

gpyros85

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Re: Case Study - Life Optimization Tips
« Reply #1 on: July 03, 2018, 10:45:26 PM »
Is your Net Monthy Income $50,200?

67,000-7,600-3,100-6,100=$50,200?

For your age your assets are AWESOME. Good Job.

The house is killing you! I don't feel you have a healthy enough income to support that large house. I make 98k and have a 170k house with 20% down. Loan principle of $135k. Monthly mortgage $1,020.

You are a classic case of house poor. The decision is yours if you want to work to pay for your house.

gpyros85

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Re: Case Study - Life Optimization Tips
« Reply #2 on: July 03, 2018, 10:47:16 PM »
With 105k in equity in the house frees up some things, what market are you in?

gpyros85

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Re: Case Study - Life Optimization Tips
« Reply #3 on: July 03, 2018, 10:52:51 PM »


Gross Salary/Wages: $92k ($62k salary + $10k bonus + $20k SO salary)

Individual amounts of Pre-tax deductions: 15% to 401k with 5% match, $100/month to HSA, $300/month to 529, $450/month to medical premiums, $60/month to life insurance/legal services/etc.



So 15% + 5% of the 62k + 10k salary? Is the 10k bonus guarentee? I never like to use "BONUS" in my budgets. It is exactly what it states, a bonus, if the company has a bad year this is the first to go.

Without this "BONUS" you are negative cash flow monthly.  Is this a correct statement?

LivingTheory

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Re: Case Study - Life Optimization Tips
« Reply #4 on: July 03, 2018, 10:57:14 PM »
My numbers may be a little off, our net income is around $55k without the bonus, but the picture doesn't change much with that update. Appreciate the kind words. Though we're definitely in a house-poor situation month-to-month. When we got the house the situation was a lot different, we were making about $120k together. It's a downside of sharing the income burden: you may lose a good percentage if one SO has to come home. Hopefully I can get our income back to that level. At least we have the investments as a safety net if something happens to our cashflow. Worst comes to worst, my SO can also go back to work and bring in $70k with OT while I job search. So I don't foresee losing the house in any scenario but would like to finish paying for it a lot sooner than my kid's middle school years. If that's not feasible, maybe a lower cost of living area would be worth pursuing. We're in a very hot market with low supply.

gpyros85

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Re: Case Study - Life Optimization Tips
« Reply #5 on: July 03, 2018, 11:06:36 PM »
It seems to me you are stressed my friend. You came for "Life Optimization Tips" This is more than financial and I think would help this situation out. House is a material item and don't know if you are in a HCOL and you are living in a lower end property or LCOL and purchased more house.

You are not stuck without options, many options as you stated having equity is the game changer coupled with hot market.

I hate to live life with the stress of well I will get paid XX and it will make life better.. This adds stress to life, what if you don't get that raise next year? What if XX doesn't happen. Plan your financials for now.

What field are you in? If you are willing to relocate it is also a hot market, perhaps you can relocate on the company dime and get the $18,000 realtor fees charged to a company. I have done this with 2 houses of mine.

LivingTheory

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Re: Case Study - Life Optimization Tips
« Reply #6 on: July 03, 2018, 11:22:38 PM »
Appreciate the thoughts. Very helpful just to put it in writing and get to the root of my feelings. I'd call our area MCOL with expensive housing, inexpensive everything else. The house is basically entry-level for a single family home outside of the city.

jlcnuke

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Re: Case Study - Life Optimization Tips
« Reply #7 on: July 04, 2018, 09:06:12 AM »
My numbers may be a little off, our net income is around $55k without the bonus, but the picture doesn't change much with that update. Appreciate the kind words. Though we're definitely in a house-poor situation month-to-month. When we got the house the situation was a lot different, we were making about $120k together. It's a downside of sharing the income burden: you may lose a good percentage if one SO has to come home. Hopefully I can get our income back to that level. At least we have the investments as a safety net if something happens to our cashflow. Worst comes to worst, my SO can also go back to work and bring in $70k with OT while I job search. So I don't foresee losing the house in any scenario but would like to finish paying for it a lot sooner than my kid's middle school years. If that's not feasible, maybe a lower cost of living area would be worth pursuing. We're in a very hot market with low supply.

Wait, your SO has the potential to boost your income by another $50k/year and you're not doing that while your budget is this strapped? In a MCOL area, even accounting for childcare costs, that would likely provide a HUGE buffer between your income and your expenses.

midwesterner1982

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Re: Case Study - Life Optimization Tips
« Reply #8 on: July 04, 2018, 09:33:35 AM »
Congrats on having very good assets for your age.  I would take a breath and appreciate youíre still in a very good position even if you donít prepay the mortgage and give yourself some cushion right now.  If you do get that raise then you can go back to making extra payments if you want.

LifeHappens

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Re: Case Study - Life Optimization Tips
« Reply #9 on: July 04, 2018, 09:49:02 AM »
Just feeling the pinch on a monthly basis when $5,000 comes in the door and $4,400 is already earmarked for mostly-fixed expenses. The extra $600 we're splitting between $300 to the mortgage and $300 to the 529 to try to make more progress than just covering the bills and putting money into the 401k. Maybe I'm just stressing for no reason and this is a temporary problem but I feel like I need more wiggle room each month to feel more confident. Would you make any major changes in our situation or just keep plugging away and hope for a bump in income?

I want to give my family the best life possible and don't want to spend the best years of my kid's life trying to keep a mortgage payment going. Anything I can do to get the house paid off and bring the investment accounts up to $600k before he's too old to want to play with me would be great. We were making such quick progress in prior years that maybe my view is distorted and I need to chill. I just want this so badly for our future. Thank you.
Like you said, with the birth of your child your costs went up and your income went down. Having one parent work part time or stay at home is a personal choice. Do you both find the financial sacrifice worthwhile? If so, you need to accept that your cashflow will be tight until you are in a position to earn more.

Others have mentioned the house is pretty expensive for your current income and they're correct. Again, is it worth it to you to keep the house, knowing it's going to be tight until you can earn more income?

Something you can do RIGHT NOW is stop paying extra on that mortgage. At 3.375%, that is some of the cheapest money you can get. See the Investment Order thread for suggestions on where else to put that money.

BobTheBuilder

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Re: Case Study - Life Optimization Tips
« Reply #10 on: July 04, 2018, 09:51:28 AM »
It might make sense to move the extra payments on the mortgage into a intermediate term treasuries when the FED hiked the next 0.5%. That would leave you with very little difference in interest and you would be more flexible with your money allocations. Since you are already ahead of your mortgage term, there is no risk looming at 2030.

And maybe revisit you cell phone bills?

formerlydivorcedmom

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Re: Case Study - Life Optimization Tips
« Reply #11 on: July 05, 2018, 10:22:43 AM »
don't want to spend the best years of my kid's life trying to keep a mortgage payment going. Anything I can do to get the house paid off and bring the investment accounts up to $600k before he's too old to want to play with me would be great. We were making such quick progress in prior years that maybe my view is distorted and I need to chill. I just want this so badly for our future. Thank you.

Your goals are to pay off the house and get the investment accounts up to $600k.  Are you thinking that will be FIRE-level stash?  That doesn't take into account major home maintenance (a new roof will be necessary at some point) or increased healthcare costs, or increased kid costs as your little one gets older (or gets siblings).

Your spending is not at crazy levels.  It really sounds like you are caught between competing priorities:
  • have a stay-at-home parent
  • live in an area with highish house prices
  • save a significant amount towards child's college
  • retire early

This seems to be the order that the two of you are prioritizing your saving.  Does that accurately reflect your priorities?  Because if so, these choices may mean that you don't get to retire until your kid is in middle school, but your SO has gotten to spend all that time with your kid.  Will that lead to resentment?

Pretty much all parents struggle with whether they are spending enough time with their kids.  I was a SAHM for 9 months with the oldest and then went back to work full-time (I couldn't handle an infant full-time), and I've felt guilty ever since.  After my divorce 7 years ago, I became the primary breadwinner for our family.  I outearned my new husband, so he became a part-time SAHD/full-time student for the last 3 years, and that assuaged a lot of my guilt - they had A (step)parent home, even if it wasn't me.  He's graduated and is going back to work, but he found a job at a school district, so he will still be home with them a lot.

Our kids are 9-12 now.  I enjoy spending time with them now much more than I did when they were younger.  They are way more interesting and less demanding, and they actually remember the things we do together.

 I'm looking at reaching FIRE right about the time the middle or youngest graduate from high school.  It makes me feel even more guilty to think that I'll have worked so long while they were here and then be able to quit as soon as we shoo the last of them away.  My plan is to coast - we'll get to somewhere around 60% of our number, and I will shift into a part-time or contract role.  That would give me a lot more flexibility to be around when the kids are in high school.

That long anecdote is simply to say - this is not an All or Nothing journey.  You have choices.  You and your SO need to make sure you are on the same page about your priorities and think outside the box.  Would it make more sense to rent?  Would it make sense for SO to work full-time now?  Maybe when child goes to school?  Are you in a career/industry that allows for part-time work or a periodic leave without pay?

Civex

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Re: Case Study - Life Optimization Tips
« Reply #12 on: July 05, 2018, 12:13:27 PM »
Hello!

We have similar situations (ages, baby, even our mortgages are similar amounts.)

I would recommend not contributing any extra to your mortgage right now and set that $300 into your EF, which IMO is on the low end for what is essentially a one income family at the moment. By taking the 15 year mortgage you are already contributing a larger amount to the principle than if you had gone with a 30 year.

I'd consider moving from the 529 contributions to the HSA. It is more tax advantaged. I would contribute any cash gifts from to 529.

Why is your auto insurance so high, is it a typo? You say the vehicles are worth $7k, but are paying $3k/year for insurance-if correct, that is way, way too high. Drop both to liability, and you should be at ~70/month.

You should be able to drop your cell phone costs-read up the telecommunications guide by IP Daley-we have 2 iPhones + data plans for $60/month.


It really seems like you want everything at once-what I always try to remind myself is that I can anything I want, but not everything. Right now you are trying to build the portfolio, greatly improve your earning ability, have a stay at home wife, and spend significant family time---try to prioritize and focus on what is the most important to you.