Author Topic: Case Study-Decision Paralysis and Optimization  (Read 4536 times)

mrsggrowsveg

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Case Study-Decision Paralysis and Optimization
« on: April 06, 2015, 10:54:58 AM »
I have been on here for a while, but haven't done an actual case study.  I feel like I am a bit stuck right now and could use some direction and advice.  A little background on us:  We are a 20 something couple with one child and another (final child) on the way.  Our goal is to become full time homesteaders and we currently live on the homestead that we wish to stay at.  We are both currently working.  My DH has a job that requires significant travel that has been a bit hard on us.  Here is a breakdown of our average finances:

Income: (10% into retirement at this time.  We have about $62K in retirement accounts)
DH:  $3580
Me:  $1720
Car Reimb:  $800
DH Bonus Average:  $400
Daycare Reimb:  $500
Total: $7,000


Bills
Mortgage:  $1256  (We have PMI on this loan)
Trash: $26
Cell:  $32
Internet:  $54.95
Electric:  $80
Water:  $40
Life Insurance:  $34
Daycare:  $580
Total: $2,102.95

Debt
Student Loans DH:  $150  ($7,000 left)
Total:$150

Monthly Spending
Fuel:  $175
Groceries:  $300
Eating out:  $20
Alcohol:  $30
Spending Money:  $100
Household Items:  $25
Total:$650

Rainy Day Funds
Pet:  $40
Clothing:  $25
Propane:  $46
Pellets:  $72
Farm:  $200
Home Maint:  $137.50
Car Ins:  $110
Auto Repairs and maint:  $200
Total:$830.50

Savings Goals
Travel:  $100
Car Replacement:  $300
Total: $400

Grand Total Spending:  $4133.45

Current Leftover:  $2,866.55

We recently paid off my student loans and then bought a nicer cash car.  We would like to increase retirement contributions or potentially move to one income after baby 2.  Farm income is low and is reinvested into the farm.  I would like some feedback about areas we can optimize our spending habits and some ideas for our next step.


velocistar237

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Re: Case Study-Decision Paralysis and Optimization
« Reply #1 on: April 06, 2015, 11:16:27 AM »
You look like you're doing alright. Is the 10% into retirement pre-tax, so that you're saving around $700 in addition to the $2866 leftover?

The thing that stands out is the PMI. What's your mortgage interest rate, and what's the feasibility of paying down your mortgage to remove PMI, maybe with a refinance?

Will your daycare reimbursement increase with child #2?

What's the interest rate on the student loan?

The car insurance looks a bit high.

What's the reason for the car savings if you bought a car recently?

MDM

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Re: Case Study-Decision Paralysis and Optimization
« Reply #2 on: April 06, 2015, 11:35:50 AM »
Didn't see anything about taxes - is the $7K/mo after taxes and pre-tax deductions?

The rest of the post looks great.  Clarifying the "getting from gross to spendable income" part would make the whole thing even better.

mrsggrowsveg

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Re: Case Study-Decision Paralysis and Optimization
« Reply #3 on: April 06, 2015, 11:54:27 AM »
You look like you're doing alright. Is the 10% into retirement pre-tax, so that you're saving around $700 in addition to the $2866 leftover?

The thing that stands out is the PMI. What's your mortgage interest rate, and what's the feasibility of paying down your mortgage to remove PMI, maybe with a refinance?

Will your daycare reimbursement increase with child #2?

What's the interest rate on the student loan?

The car insurance looks a bit high.

What's the reason for the car savings if you bought a car recently?

The mortgage is at 4.3% interest right now.  The PMI makes that number higher.  My daycare reimbursement is at the max.  It is a dependent FSA that comes out of my paycheck for tax savings.  The student loan interest is about 3%.  Our car insurance is for three vehicles.  One has full coverage as required by my husbands work.  We have the option of getting rid of the extra car that we use for the farm and hauling to lower it a bit.  We need to replace my husbands daily driver within the next couple years.  The car we recently purchased was for me so I wouldn't commute in a Jeep.  The retirement is pretax.

mrsggrowsveg

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Re: Case Study-Decision Paralysis and Optimization
« Reply #4 on: April 06, 2015, 11:55:08 AM »
Didn't see anything about taxes - is the $7K/mo after taxes and pre-tax deductions?

The rest of the post looks great.  Clarifying the "getting from gross to spendable income" part would make the whole thing even better.

That is after taxes, insurance, hsa and fsa are taken out.

Retired To Win

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Re: Case Study-Decision Paralysis and Optimization
« Reply #5 on: April 06, 2015, 12:00:41 PM »
OP, you did not list your assets and debts (if any).  So I don't know whether you've already made provision for an emergency reserve fund.  If not, give that a high priority. Set up a separate savings account with at least 6 months' worth of your basic living expenses. If you are mentally okay with doing it, you could count your "rainy day" funds as part of that reserve -- as long as you are confident that if necessary you would override the funds' designations and use them as emergency cash.

Good luck.


MDM

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Re: Case Study-Decision Paralysis and Optimization
« Reply #6 on: April 06, 2015, 12:31:17 PM »
That is after taxes, insurance, hsa and fsa are taken out.

From http://www.irs.gov/publications/p969/ar02.html:
Quote
An employee covered by an HDHP and a health FSA or an HRA that pays or reimburses qualified medical expenses generally cannot make contributions to an HSA.
They do note exceptions to "generally cannot" - just checking to ensure you fit within one of those exceptions...?


The case study sticky suggests starting with gross income because many things (e.g., IRA cutoffs, etc.) are based on some form of Adjusted Gross Income.  If you prefer not to disclose that, of course no problem.  If, however, you started with "net" income just to simplify things for readers - go ahead and add the details so folks can comment on opportunities you may have in those areas.

mrsggrowsveg

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Re: Case Study-Decision Paralysis and Optimization
« Reply #7 on: April 06, 2015, 12:36:52 PM »
The FSA is strictly for dependent daycare, so it doesn't conflict with the HSA.  I did not looks at the Case Study sticky. 

Gross income:
DH:  $65,000.  I am not exactly sure of the number, but I think the bonuses usually bring it to $70,000.  It could be higher, but that is a conservative guess.
Me:  $40,000

FranzJoseph

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Re: Case Study-Decision Paralysis and Optimization
« Reply #8 on: April 06, 2015, 12:48:29 PM »
Why life insurance?  Check out MMM's post - Insurance: A Tax on People who are Bad at Math?

I keep harping on maxing out 401k, HSA, FSA, etc., anything pre-tax to maximize savings and reduce your AGI and therefore your taxes especially after the results I'll be getting this year.  GoCurryCracker has a great synopsis of how and why: http://www.gocurrycracker.com/turbocharge-savings/

MDM

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Re: Case Study-Decision Paralysis and Optimization
« Reply #9 on: April 06, 2015, 01:35:57 PM »
Appears you could maximize 401k ($36K/yr), IRA ($11K/yr) and HSA ($6,650/yr) and still have money left over with your current income.  By "appears" I mean taking some guesses based on the OP - see the case study sticky to download and enter your own numbers if interested.

The more you can invest now, the more flexibility you should have later....  Good luck!

CategoryMonthlyCommentsAnnual
Salary/Wages$9,967$119,600
Pretax Health Ins.$250$3,000
Daycare FSA$500Above IRS limit?$6,000
HSA/Pension$554$6,650
FICA base salary/wages$8,663$103,950
Traditional IRA$458Room to increase?$5,500
401(k) / 403(b) / TSP / etc.$3,000At maximum$36,000
Income subject to IRS tax$5,204$62,450
Federal Adj. Gross Inc.$5,204$62,450
Federal tax$1682015 rates, MFJ, stand. ded., 4 exempt.$2,020
State/City tax$208Guess, using 4.00% * Fed. AGI$2,498
Soc. Sec.$537Assumes 2 earners paying$6,445
Medicare$126$1,507
Total income taxes$1,039$12,468
Add Daycare reimb.$500$6,000
Income before other expenses  $4,665$55,982
Monthly Expenses:
Mortgage$884$10,607
Property Tax$298$3,572
Home/Rent Insurance$74$893
Car Insurance$110$1,320
Car Maintenance, Registration, etc.$500$6,000
Childcare$580$6,960
Clothing/Shoes$25$300
Dining (Pizza, Restaurant, etc.)$20$240
Electricity$80$960
Fuel/Public Transport$175$2,100
Gas/Oil for heating$46$552
Groceries$300$3,600
Household; Maintenance$163$1,950
Internet$55$660
Landscaping/Yard work$272$3,264
Life Insurance$34$408
Miscellaneous$100$1,200
Pets$40$480
Phone (cell)$32$384
Recycling/Trash$26$312
Travel/Vacation$100$1,200
Water/Sewer$40$480
Wine/Beer/Tobacco$30$360
Non-mortgage total$3,100$37,195
Loans:
Student Loan$150$1,804
Other tax-advantaged investments:
Roth IRA$458$5,500
Total Expense$4,592$55,106
Total to invest$73$876
Summary:
"Gross" income$9,967$119,600
Income taxes$1,039$12,468
After-tax income$8,928$107,132
IRA+401k/403b/TSP/457 (Savers' credit)$3,917$47,000
Living expenses$4,788$57,452
Non-mortgage loans$150$1,804
After-tax investable$73$876
« Last Edit: April 06, 2015, 03:39:14 PM by MDM »

velocistar237

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Re: Case Study-Decision Paralysis and Optimization
« Reply #10 on: April 06, 2015, 01:51:09 PM »
Why life insurance?  Check out MMM's post - Insurance: A Tax on People who are Bad at Math?

Short term life insurance seems like a decent idea for young parents starting out on their FI journey.

An average 25 year-old American has a 1 in 150 chance of dying in the next 5 years. Getting $250K of life insurance for $150/year would cost $750, while the weighted payoff is $250K * 1/150 = $1666. OP's DH drives a lot, so he's probably not below average. I'm guessing the margins on term life are not that high.

Am I still bad a math?

mrsggrowsveg

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Re: Case Study-Decision Paralysis and Optimization
« Reply #11 on: April 06, 2015, 02:15:52 PM »
Appears you could maximize 401k ($36K/yr), IRA ($11K/yr) and HSA ($6,650/yr) and still have money left over with your current income.  By "appears" I mean taking some guesses based on the OP - see the case study sticky to download and enter your own numbers if interested.

The more you can invest now, the more flexibility you should have later....  Good luck!


Thank you for taking the time to do this.  I will try to plug my numbers into the case study sticky when I get home.  This definitely gives me something to think about.  My guess on the daycare FSA reimbursement could be wrong.