Author Topic: Case Study: Chicago 25yr old  (Read 7956 times)

james77

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Case Study: Chicago 25yr old
« on: February 03, 2014, 01:17:03 PM »
UPDATE**:  just increased my 401k contribution to 15% from 6% and upped my roth to 10% (25% of each check plus 3 percent match) so this will hopefully give me a good boost in my retirement funds this year.

I am 25 years old currently living in Chicago with my girlfriend and I have zero debt.  I started following this blog about 5 months ago and have decided to 180 my life because of Mr. & Mrs. MM.  I used to spend 500+ a month on restaurants and drinks but  I have decided to cut down considerably on (alcohol & eating out) which was really unhealthy as well.  The rest of my life is fairly Mustachian in my opinion because I have learned to live on a minimal salary of 30k for the past year and  a half plus a little commission every quarter.  I have recently taken on a new position which will pay 60k per year plus bonus which should help catapult my savings.   

I would really appreciate any critiques in my planned 2014 budget below (all expenses below are what I contribute for each line item, my gf and I currently share: rent, going out, groceries, and utilities).  My biggest concern is I have about $40,000 in cash just sitting in a brokerage account not active and I am completely lost on what to do with this money?  Should I invest in all ETFs or possibly buy a condo in 250-300k range (condo will come with minimum $400 a month HOA fees in Chi)?
 
I currently track monthly budget on Mint.com:   
Rent: (850)
Restaurants/bars: (200)
Groceries: (160)
Entertainment: 50 *carry over by month for concerts/events- mostly in summer
Taxis (lyft and UberX): (60) justified by saving 100 dollars on train a month by walking 1 mile to work
Directv & Netflix: (17)
Electric: (25)
Natural gas: 0
Internet: (24)
Gym: (65)
Hair: (21)
Shopping: (50)
Commute to work: 0
Total expenses per month:  (1522)

Income:  $3,545 per month after taxes/Healthcare costs and 401k withdraw
$5400 to $401k per year: saving 9% of income

Income: 42,540 salary plus 5,400 401k savings = $47,940
Yearly expenses (18,264) - travel expenses (4,500) = (22,764)
$25,176 total saving or 52.5% savings rate without tax return

Assets: 40,000 cash plus $25,176 current year expected savings.  Projected net worth Jan 1, 2015 = $65,176

Travel budget for 2014: $4,500
South America trip for 9 days and 1 US city this year

Also saving for a new couch estimated at $1,500 and a bike at $500.  Looking for high end to last 15+ years. 

Any help would be greatly appreciated!
« Last Edit: March 09, 2014, 12:31:07 PM by james77 »

Thegoblinchief

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Re: Case Study: Chicago 25yr old
« Reply #1 on: February 03, 2014, 02:29:41 PM »
A condo that expensive with an extra $400/month is INSANE. That would (roughly) increase your housing spend by 2.5x.

The simplest answer for the cash would be putting it into Vanguard's Total Stock Market Fund, both US and International. Others here will have better specifics.

Your spending is good, but it can be better. $200/month is still a lot to spend on going out. Try to get that under $100.

Consider dropping the gym once you get a bike. Add simple weight lifting with dumb or kettlebells at home.

$21 for hair? You are a guy, right? Make that $0 and cut your own hair or have your girlfriend do it. Wahl Peanut hair clipper is a great investment if you're okay with simple buzz trimming.

foobar

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Re: Case Study: Chicago 25yr old
« Reply #2 on: February 03, 2014, 02:42:00 PM »
Throw your travel number into your budget. It doesn't matter if comes out of a tax return or savings, it is a expense.

Personally I would be dumping more into the 401(k) since you have the free cash. Being free to invest in bonds, dividend stocks, reits, and so on without worrying about the tax ramifications provides a ton of flexibility when setting up your portfolio. 

The condo is close. I assume you are paying half the rent and your GF would pay you 850/month.

300k condo with 60k down
240k mortgage of ~1200/month
 HOA                           ~400
gives you 100 bucks for various insurance and misc fees. Probably a short term loss. Throw in 5 years of rent increases and you would likely come out ahead.



I am 25 years old currently living in Chicago with my girlfriend and I have zero debt.  I started following this blog about 5 months ago and have decided to 180 my life because of Mr. & Mrs. MM.  I used to spend 500+ a month on restaurants and drinks but  I have decided to cut down considerably on (alcohol & eating out) which was really unhealthy as well.  The rest of my life is fairly Mustachian in my opinion because I have learned to live on a minimal salary of 30k for the past year and  a half plus a little commission every quarter.  I have recently taken on a new position which will pay 60k per year plus bonus which should help catapult my savings.   

I would really appreciate any critiques in my planned 2014 budget below (all expenses below are what I contribute for each line item, my gf and I currently share: rent, going out, groceries, and utilities).  My biggest concern is I have about $40,000 in cash just sitting in a brokerage account not active and I am completely lost on what to do with this money?  Should I invest in all ETFs or possibly buy a condo in 250-300k range (condo will come with minimum $400 a month HOA fees in Chi)?
 
I currently track monthly budget on Mint.com:   
Rent: (850)
Restaurants/bars: (200)
Groceries: (160)
Entertainment: 50 *carry over by month for concerts/events- mostly in summer
Taxis (lyft and UberX): (60) justified by saving 100 dollars on train a month by walking 1 mile to work
Directv & Netflix: (17)
Electric: (25)
Natural gas: 0
Internet: (24)
Gym: (65)
Hair: (21)
Shopping: (50)
Commute to work: 0
Total expenses per month:  (1522)

Income:  $3,545 per month after taxes/Healthcare costs and 401k withdraw
$5400 to $401k per year: saving 9% of income

Income: 42,540 salary plus 5,400 401k savings = $47,940
Expenses: (18,264)
Savings: 24,276 salary plus 5,400 401k = 29,676 total saving or 61.9% savings rate without tax return

Assets: 40,000 cash plus 24,276 current year expected savings.  Projected net worth Jan 1, 2015 = 64,276

*this is without tax return and travel budget of $4500.  Plan on using 2014 tax return to pay for half of travel budget this year.   

Travel budget for 2014: $4,500
South America trip for 9 days and 1 US city this year

Also saving for a new couch estimated at $1,500 and a bike at $500.  Looking for high end to last 15+ years. 

Any help would be greatly appreciated!

Everything in Moderation

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Re: Case Study: Chicago 25yr old
« Reply #3 on: February 03, 2014, 02:44:42 PM »
I'm in Chicago here, so I have some understanding on the market. 

I would hold off on buying a condo.  So many 20 somethings buy a condo, then in 5 years, life changes (job, marriage, a kid) they have to move or want to move to the burbs.  I am 31.  I think it is better to get a good foundation to investing, see where your career takes you, and wait another 5 years to buy.  You will have a much better idea of what you want, and you will be better positioned to afford it.  Invest while you are young and take advantage of compound interest.  Renting is not all that bad: when your furnace goes out, you don't have to drop several thousand to get a new one.  Calling a landlord has its advantages. 

As far as buying a couch and bike, you need to check out Craigslist and http://www.estatesales.net.  Buying used in Chicago is great.  I have fancy tastes myself.  There are so many people moving away or getting a divorced, you can get an almost new, very expensive couch for pennies.  i.e.: I bought a King sled $8,000 bed frame orig. from Walter E. Smith for $500. 

jprince7827

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Re: Case Study: Chicago 25yr old
« Reply #4 on: February 03, 2014, 03:19:08 PM »
I'm a 26 yo in Chicago and I saw the light about a year ago. We should do a double date, and try to convince our girlfriends to be more frugal. :D

rocklebock

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Re: Case Study: Chicago 25yr old
« Reply #5 on: February 03, 2014, 03:24:19 PM »
I would hold off on buying a condo.  So many 20 somethings buy a condo, then in 5 years, life changes (job, marriage, a kid) they have to move or want to move to the burbs. 

I saw this cycle over and over in my old neighborhood, which is kind of a "my first condo" area on the north side. Couples would buy a $250-$300k 2 bedroom condo, start a family, freak out about schools, and then move to the suburbs or relocate to a lower COL city. During the recession, a lot of people sold at a loss or rented their place out. My place is now a rental  that I awkwardly manage with my ex. The whole development is now something like 60% rentals.

I miss the great food in Chicago, but not the cost of eating out. I remember two beers and two entrees at our favorite pub was about $50 including tip, and that seemed totally reasonable to me.

james77

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Re: Case Study: Chicago 25yr old
« Reply #6 on: February 03, 2014, 03:34:34 PM »
Thanks everyone for the great advice so far, I really appreciate it. 

Thegoblinchief:  i should drop the gym but i do enjoy it because i can go at lunch and it has a pool.  It is definitely on the radar for things to drop though since i have a small workout center in my building.  I am way too scared to cut my own hair haha.

Foobar:  I think the condo is a possible stretch and it could become a potential rental property down the road if I re-locate. 

Everything in Moderation: i think you are right about waiting it out because a lot can change in 5 years at this age.  I may really regret not being liquid in a few years. 
I also really appreciate you pointing out the estate sales, for some reason i have never thought of this avenue. 

Thanks everyone! I have also updated my expenses to include travel. Would you recommend upping my 401k contribution from 9% to 10-20% or more?  This scares me because i would like to save for a condo purchase within next 7 years and have a nice nest for major life events in my 30s. 
« Last Edit: February 03, 2014, 03:46:38 PM by james77 »

ChiStache

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Re: Case Study: Chicago 25yr old
« Reply #7 on: February 03, 2014, 04:20:37 PM »
Another Chicagoan here. Here's my advice: don't buy a condo. Transaction costs and HOA fees and special assessments will push your break-even point well beyond the length of time you'll want to be there. I've seen this with countless friends who bought in their twenties/early thirties. Calculate your break-even point, and you'll see what I mean. If you're really interested in a rental property, save your money for a 2 or 3 flat, live in one unit until you outgrow it, and then you can rent out all the units for some nice side income. That's the mustachian thing to do.

Also, definitely max your 401(k) -- i.e. adjust your contributions to $17,500 per year. Because you're about to get a pay hike, this is the perfect time to do it. You'll still be able to comfortably save for your first home purchase. Your future self will thank you.

ch12

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Re: Case Study: Chicago 25yr old
« Reply #8 on: February 03, 2014, 05:19:57 PM »
Another Chicagoan here. Here's my advice: don't buy a condo.

Also, definitely max your 401(k) -- i.e. adjust your contributions to $17,500 per year. Because you're about to get a pay hike, this is the perfect time to do it. You'll still be able to comfortably save for your first home purchase. Your future self will thank you.

I'm in the same age range as you. I really am just +1 ing ChiStache's comments. I'm trying to get as close as possible to maxing my 401k as possible.

Also, read about Ramit Sethi's sub accounts method for savings: http://www.iwillteachyoutoberich.com/blog/tip-using-sub-savings-accounts-for-unexpected-expenses/. I have a dedicated sub account for my first big housing (will it be a house? Condo? Duplex?) down payment. A little money drips into it from my paycheck.

Caveat: Ramit talks a lot about guilt free spending, which is frowned upon by MMM and many Mustachians. http://www.mrmoneymustache.com/2011/11/06/book-review-will-this-guy-really-teach-you-to-be-rich/

mostlybeardy

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Re: Case Study: Chicago 25yr old
« Reply #9 on: February 03, 2014, 08:01:45 PM »
Yet another Chicagoan here, roughly the same age as you. There are a lot of us, it seems.

I have little to add to the advice here except for this: buy a used bike. Go to A Nearly New Bike Shop or some similar place and buy a solid but well-worn (okay... ugly) road bike for ~$100. (You may find cheaper on Craigslist, but with a reputable shop you know a good mechanic has tuned it up beforehand.) Then get a book and learn how to fix/maintain most things yourself.

I say this as someone who years ago planned to buy a nice new bike someday but ultimately changed my mind. Over time, I watched my friends buy awesome, shiny, high-quality bikes... and then get them stolen. They usually weren't stupid about it; it just happens. Meanwhile, I'm still riding the mid-'70s scratched-to-hell Panasonic (yeah, a Panasonic bike) that I bought in 2006 for $105 (that's only 8 years vs. the 15 you plan on keeping yours, but I don't expect it to fall apart anytime soon, either).

A bike like that in a city like this pays for itself about once a month compared to taking the CTA or (yikes) having a car. I've replaced the tires, replaced the wheels, added fenders, re-wrapped the handlebars, done whatever I need to in order to make it ride smoothly over the years, but no one has ever made an attempt to steal it. And if someone did steal it, I'd be sad, but it wouldn't break the bank to replace it. I can tell you from experience, an ugly bike is a great asset to have.

james77

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Re: Case Study: Chicago 25yr old
« Reply #10 on: February 03, 2014, 08:23:25 PM »
jprince:  haha i think our gf's would run after we started lecturing over dinner

Chistache: you have confirmed my decision on holding off on the property investment right now thank you! I will also try to double my contributions in the 401k but i don't receive any match over 6%. I do receive a major discount on a stock purchase plan.  Would it be wiser to invest that extra 10% into the company stock instead of my 401k?  its not very volatile either. 

Rocklebock:  i agree the food is amazing but can be so pricey! I also don't want to be that guy who's pissed off in five years because he 's locked into a condo. 

ch12: I will have to check out his book. thanks

mostlybeardy:  thanks for the extensive insight on the bike, i appreciate it.  I will continue to search for a used bike considering i don't really need it for a few more months and I will definitely have to try local shops like you said. thanks

mlipps

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Re: Case Study: Chicago 25yr old
« Reply #11 on: February 03, 2014, 09:52:31 PM »
Have you considered moving to a cheaper neighborhood? Mm y husband and I pay only $960/month in RoPa. Longer commute maybe, but maybe there is a better balance between where you live now and being as far away as I am. $1700/month in rent is just really high for the city in my opinion.

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Re: Case Study: Chicago 25yr old
« Reply #12 on: February 07, 2014, 04:57:14 AM »
This is where the old guy tells the young guy to be patient. You seem to be doing well and on your way. Like others have said max out your 401k and you will know alot more about yourself and what you want when in your early 30's. Dont get caught up in the big city pressures. For lack of a better term this is a critical time/age for people and the right decision can make/save you a fortune so take the time to really think it out. I'm just North of you but downtown here is becoming the same way and its the young ones that are getting burned.

tyd450

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Re: Case Study: Chicago 25yr old
« Reply #13 on: March 06, 2014, 09:34:39 AM »
This is an old thread but I wanted to chime in on buying a condo in Chicago- don't do it!  I live out in the western burbs and own a house with my wife and we are so glad to have skipped the condo period.  Rent in the city and have your fun.  People in the city seem to outgrow neighborhoods very quickly.  Fresh out of college Wrigleyville is a blast, but that wears thin.  So you move to Old Town/Gold Coast or Bucktown, then maybe up to Lincoln Square.  You catch my drift.

My brother and law and sister in law both owned condos and lost money when they had to sell.  She bought for $235k maybe 7-8 years ago, just sold it for $150k last year.  $85k in the crapper.  She couldn't rent it out because her association had a strict rule of what % of units could be rentals.  This was in West Lakeview.  Her husband had bought a condo in Wrigleyville and I think he only lost $25k on the deal.

So they are a combined $110k in the hole just like that and that isn't counting transaction fees or commissions.  We rented and waited and bought the house we could raise our kids in.  Now they are renting out in the far western burbs frantically trying to find a home before their first kid comes.

No this won't necessarily happen to you too but I think stories like these are much more common than the kid who made his money back after a few years in a condo in the city.

nottoolatetostart

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Re: Case Study: Chicago 25yr old
« Reply #14 on: March 06, 2014, 09:50:57 AM »
Don't buy a condo. We have one in Evanston and it is a money pit due to neverending leaks/repairs that we have no control over since it is a building issue. Can't rent it out, can't sell it. Unit has depreciated $100K, maybe more since buying 6-7 years ago because of these new build issues.

Also, don't buy a high end couch. Your gf, if she becomes your wife, or whoever you marry will have her own tastes. Her tastes will win out and your couch will wind up on CL for $50 if you are lucky. At least, that's what happened to my poor DH, LOL. 

Max out your 401k as others mentioned.

Stay liquid. Enjoy this time. It's glorious to be 25 in Chicago (was there 9 years ago myself).

Random Hangers

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Re: Case Study: Chicago 25yr old
« Reply #15 on: March 06, 2014, 10:54:52 AM »
I will also try to double my contributions in the 401k but i don't receive any match over 6%. I do receive a major discount on a stock purchase plan.  Would it be wiser to invest that extra 10% into the company stock instead of my 401k?  its not very volatile either. 

I realize this is an older thread, but figured I'd chime in on this part. Even with a discount, I'm wary of investing too much into the stock of the company you work for. If the company starts to tank, you have the possibility of losing your job and a significant chunk of your investment. If you feel that the discount is just too good to pass up, maybe just put in 5% and shift the rest into your 401k (preferably an index fund or lower expenses).

My only other reco is to take a hard look at your vacation spending. I'm not saying you should leave out travel altogether, but $4500 is a pretty hefty chunk of your takehome pay. We take one vacation in the spring, one in the fall, and cap them to $3k total (still pretty grandiose by Mustachian standards). Every dollar you can put away now is going to be so much more later, thanks to the wonderful world of compound interest. Take advantage!

Ricky

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Re: Case Study: Chicago 25yr old
« Reply #16 on: March 06, 2014, 07:08:12 PM »
$4500 for travel?!?! South America is very cheap you know and you probably could spend less than $500 in 9 days. Check out Cuenta, Ecuador. So that would leave $4,000 for one U.S. city?


ch12

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Re: Case Study: Chicago 25yr old
« Reply #17 on: March 08, 2014, 07:51:46 AM »
$4500 for travel?!?! South America is very cheap you know and you probably could spend less than $500 in 9 days. Check out Cuenta, Ecuador. So that would leave $4,000 for one U.S. city?

While I'm pro-traveling on a budget, you're neglecting his airfare from the United States. Cuenca is a pretty awesome place (you can live like a king for less than $1000/month), but you have to get there first.

jhartt3

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Re: Case Study: Chicago 25yr old
« Reply #18 on: March 08, 2014, 09:07:06 AM »
1500 for a couch seems quite steep i'm sure someone else has made this comment.  But go on craigslist people sell high quality stuff for low prices all the time.  And since you're renting you'll have to be really careful with it every time you move to keep it nice.  you can get an amazing couch for 500 or wait a bit and find one for 250 or even less.  By the time you save 1500 you could have bought 4 different couches and resold them for a profit til you found one you liked the most thru CL

fumanchu282

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Re: Case Study: Chicago 25yr old
« Reply #19 on: March 08, 2014, 11:01:31 AM »
Tell me more about not buying a condo in Chicago in your mid twenties!

I rent in Lincoln Park/Lakeview, am in my mid twenties, and have thought for a while now that I'd soon be buying a 1 bedroom condo in the 200-350k range somewhere in the Gold Coast or maybe Old Town.

The thinking is that property values will always be strong in those areas, because people will always want to live there. It sounds like others have fallen into a similar trap in this exact situation?

james77

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Re: Case Study: Chicago 25yr old
« Reply #20 on: March 09, 2014, 12:10:39 PM »
This is where the old guy tells the young guy to be patient. You seem to be doing well and on your way. Like others have said max out your 401k and you will know alot more about yourself and what you want when in your early 30's. Dont get caught up in the big city pressures. For lack of a better term this is a critical time/age for people and the right decision can make/save you a fortune so take the time to really think it out. I'm just North of you but downtown here is becoming the same way and its the young ones that are getting burned.

thank you so much for the encouragement!

james77

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Re: Case Study: Chicago 25yr old
« Reply #21 on: March 09, 2014, 12:15:20 PM »
$4500 for travel?!?! South America is very cheap you know and you probably could spend less than $500 in 9 days. Check out Cuenta, Ecuador. So that would leave $4,000 for one U.S. city?

I don't think i could travel 2 states away for 500 LOL.  A plane ticket to south america is about 1000 bucks and I'm guessing after paying for flights in between cities and to hike certain parts of the country it will cost a minimum of another grand.  This was also a an overestimate so that I'm not freaked out when the charges rack up.  I have already paid for my US city vacation with points so that is a good start to cutting this budget down considerably. 

james77

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Re: Case Study: Chicago 25yr old
« Reply #22 on: March 09, 2014, 12:18:34 PM »
1500 for a couch seems quite steep i'm sure someone else has made this comment.  But go on craigslist people sell high quality stuff for low prices all the time.  And since you're renting you'll have to be really careful with it every time you move to keep it nice.  you can get an amazing couch for 500 or wait a bit and find one for 250 or even less.  By the time you save 1500 you could have bought 4 different couches and resold them for a profit til you found one you liked the most thru CL

you're right i definitely should check craigslist or estate sales before tacking on this massive expense for the year. 

thanks

james77

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Re: Case Study: Chicago 25yr old
« Reply #23 on: March 09, 2014, 12:28:10 PM »
Tell me more about not buying a condo in Chicago in your mid twenties!

I rent in Lincoln Park/Lakeview, am in my mid twenties, and have thought for a while now that I'd soon be buying a 1 bedroom condo in the 200-350k range somewhere in the Gold Coast or maybe Old Town.

The thinking is that property values will always be strong in those areas, because people will always want to live there. It sounds like others have fallen into a similar trap in this exact situation?

I was in your shoes for the longest time with wanting to buy in the city.  The more i thought about it i realized it wouldn't be a great investment unless i was buying in an up and coming area (which i don't want to live in) or if it was a minimum of 3 bedrooms.  When you purchase 1 and 2 bedroom places you are a dime a dozen with the rest of the young people in the city.  The neighborhoods you are looking at will have a minimum of 500 HOA fees and probably more like 800 which is insane to throw down the drain. 

I will be spending the next five years saving for money down on a 3 flat house so that I can use the other 2 units as rental properties.