Author Topic: Case Study: Help me cut spending, improve asset allocation to reach FI  (Read 4011 times)

BZB

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I have been reading MMM and other personal finance blogs for the last couple of years. We’ve made some changes in the right direction to cut spending, but I want to get more aggressive. I appreciate your reading through my case study and any suggestions/face punches you have.

General info:
Both of us are working full-time, one with Master’s degree in history, one with Ph.D. in biochemistry. I feel we are underpaid for our education and experience. We have one child who is in full-time daycare, and it will be one more year before public school. We may have to move next spring to be zoned to a good school if we can’t win the magnet lottery. No family support network, minimal friends and neighbor support network. I spend 1 day per weekend helping my disabled mom, plus help her with an average of 3-4 health crises/long hospitalizations per year. No pets (except a fish). No debt. We have a 2012 Honda Fit that we paid for with cash (not entirely MMM “smart” car because it is automatic transmission). In the past couple of years we have made these changes to decrease spending: air-dry clothes, cut cable, cook mostly from scratch (kid has celiac disease so mostly gluten free), got rid of second car, got rid of gym membership. I would love to be FI in 10 years but with our current income and spending I don't see that happening.

SPECIFIC QUESTIONS
1)   where can we cut spending?
2)   how can we optimize our asset allocation?
3)   how long until we could be FI if we made these changes?


INCOME AND BENEFITS
JOB 1 SCIENCE EDITOR & WRITER  AT LARGE HOSPITAL
, entry level position after post-doc, gross income $41,288 annual, regular biweekly paycheck (26 pay periods). Small quarterly bonus of approx. $200, variable and depends on all employees’ performance.
Bi-weekly after-tax paycheck is $1505 before deductions. (($1505 X 26)/12 = $3260 monthly after-tax.) Medical insurance for the family, FSA medical and daycare plans, and 403B savings get deducted from this paycheck pre-tax, leaving a current take-home biweekly paycheck of $293.92. Perks: Paid time off 2.5 weeks/year (includes vacation and sick leave), onsite gym free to employee and spouse, free bus pass. 403B plan through Fidelity, 50% matching up to 4%.

Job 1 benefits that get deducted from paycheck
Medical insurance premium for family (2 adults, 1 kid): $251.87/paycheck x 26 = $6548.62/year
Dental insurance premium for 2 adults: $629.98/year
Vision insurance for 2 adults: $142.48 (will not renew this next year)
Life insurance for employee 2X base salary $52.78/year
Life insurance for spouse 1X base salary $24.96/year
FSA medical, elected $900 this year
FSA daycare $5,000/year

JOB 2 ARCHEOLOGIST, variable income based on hours worked, was $29,969 after taxes last year. Average monthly after tax income $2,497. No medical insurance benefits, no retirement plan, one week of paid time off. Paid hourly. No overtime pay. Hourly rate is $25/hour for max 40 hour work week. Small company, paychecks occasionally arrive up to one month late, but otherwise dependable income. Perks: 1) $400 per diem paid monthly, not taxed and 2) work hours are flexible and in a pinch some work can be done from home (ex: if kid is sick or daycare is closed). There is always work to do, so income is variable because this is the job with the flexible hours and we have a young kid. 3) can work locally (this is very rare in archeology)

CURRENT SPENDING

MonthlyYearly
Total Expenses 4464.0453568.61
FixedRent137516500
Daycare7158580
Cell Phone30.25363
Landline/Internet (AT&T)88.061056.81
Electricity129.511554.11
Water33.48401.81
Netflix8.65103.8
Kid lessons68816
Spending Money ($40 each)80960
Car insurance85.51026
Renter's Insurance13.83165.96
Car Maintenance18.14217.68
Backup Daycare copays6.2575
Expenses, Fixed subtotal2651.6731820.17
VariableGrocery7008400
Gasoline83996
Restaurants861032
Doc, Rx, Copays, OTC Meds1842208
Clothing, Shoes1001200
Household Goods3404080
Kid diaper, toy, book24288
Haircuts33.5402
Family Fun (outings)25300
Gifts - social30.75369
Dues - work related560
Work related social5.363.6
Parking fees448
Christmas62.04744.48
Holidays non-Christmas11.52138.24
Birthdays, family31.34376.08
Visits to family out of town86.921043.04
Expenses, Variable subtotal1812.3721748.44

ASSETS, RETIREMENT PLANS
Vanguard Traditional IRA: $93,590 total, $31,058 in VFIAX and $62531 in VBIAX
Vanguard Roth IRA: $73,586 in VFIAX
Vanguard Rollover IRA: $15,497 in VBIAX
(IRA subtotal = $182,673)
Fidelity 403B $5,781 in FSTVX. Just increased contribution from 13% of salary to $700 per paycheck (if I can keep up this saving rate that will be $14,824 for the year, but I don’t know if we can cut our spending down enough to sustain this rate) + 50% of 4% match = 2% match.
Teacher Retirement System pension plan, no longer paying into it: if retire at age 65, get $435/month
Social Security Benefits in the future maybe – don’t know how or if to factor that in
Cash: $10,000 in Capital 360 account making 0.75% APY and about $3,000 in checking for bill paying

LIABILITIES $0

Answers to questions:
Q: Why is grocery spending so high - it could be cut in half! A: I agree it needs to be cut in half and am working on that.
Q: Why is household spending so high? A: Household category includes all toiletries, we had to replace some kitchen stuff due to celiac diagnosis (and it had to be new because gluten truly does stay in the nooks and scratches of some things like cutting boards). We bought new unlocked cell phones and are using pre-paid plans through Airvoice and Ptel. Other items in household: printer ink, any cleansers including laundry soap, dish soap, new mattress and sheets and used bed for kid, bicycle repair.
Q: mismatch on after-tax income, spending and savings. A: I am looking over my calculations and I will post the correction here.
Q: can the science editor get work in industry? A: maybe. There are a few biotech companies here in Houston. While most of the biotech companies are on the East and West Coasts, it might be possible to find telecommuter work as an editor/writer from Houston. Also a lot of the biomedical supply companies and pharma companies have people working here because of the Texas Medical Center. Probably the best option is to keep the current full-time hospital job (need 3 years before vested in the 403 B and also to gain experience and recommendations, but at the same time to look for part-time contract work through industry. Then that could open the door to higher paying full-time jobs in industry. I am the science editor, so with the time constraints taking care of my mom I don't think I could handle too many extra hours right now. I might be able to take on contract work that I could do on the weekends and evenings. There are also some academic science editing opportunities I could take on as contract work.
« Last Edit: May 18, 2014, 08:15:37 AM by BZB »

bugbaby

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A few things jump out right off the bat:

- Grocery + restaurant = 9432/ year for 2 adults and a child? Even for gluten free et al, I don't see how it can't be cut in half. Many threads here have addressed ideas for this.
- Clothes & shoes - at 1200 a year you really should have enough by now. use Craigs for the baby (max 50 a year) and maybe 100/year each for absolute essentials. See the Gauntlet thread on 'no clothes this year'
- Same thing for household goods. What specifically are these goods requiring 4k a year?

On the income side I don't get your numbers: You say Job1 is 3260 after tax but I thought all the benefit deductions are taken pre-tax. How does this work out.  In any case, if it's only 293 biweekly net ie ~600 a month, total NET income only adds up to $3100/month or 37k / year. Add in daycare pretax ( I think max is 3000 a child in US?) that's still 40k a year.  How is your spending reaching 4400 / month (52.8K / year) and still having so much saving.

Addendum - on the income side, can the science editor (presumably with the PHD in Biochem) look for a job in industry ie biotech firms? Are you in an area that could support this? I understand need to stay to care for your disabled Mum but have you exhausted the options?
« Last Edit: May 16, 2014, 10:37:17 PM by babybug »

BZB

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Thanks for taking a look, Babybug!
I absolutely agree that the grocery spending is crazy and needs to be cut in half. We are working on that. I need to figure out how to get Mr. BZB more on board with that because he is the grocery shopper. We've had a few eat from the pantry weeks but he still goes to the store to stock up on deals. Also I think our way of planning menus for the week doesn't help because we pick out recipes and then shop for the ingredients. We should be buying food at its lowest price and then planning meals around what we have. I've tried to convince Mr. BZB on this but so far he doesn't go for it. I am going to continue talking with Mr. BZB about this, or maybe I will need to take over the grocery shopping.

Clothes and shoes are high for 2 reasons: I started a "suit" job after having worked in a research lab so I needed new clothes. I used some of what I had, some thrift store shopping, but I had to buy 2 new suits, some shirts, cardigans and shoes. My plan is to not have to buy new work clothes for another 5 years, and I have plenty of regular non-work clothes. Also Mr. BZB had to buy a new suit and shirt at the last minute for a funeral and some new clothes due to weight gain. I have been getting the kid's clothes from Goodwill and Thred Up mostly but some new clothes and new shoes.

I'll look at my calculations on the after tax income and figure out the discrepancy and will post an edit on the original post.

CarDude

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What's wrong with your current school district?

MDM

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I'll look at my calculations on the after tax income and figure out the discrepancy and will post an edit on the original post.
As a double-check, you could try the spreadsheet downloadable from the link in this post: http://forum.mrmoneymustache.com/ask-a-mustachian/how-to-write-a-'case-study'-topic/msg274228/#new.  If it is helpful, great.  If you have a better one - let us know.  If your situation is too complex and specific to use the link or provide a generally better version - well, that's life.

ETA: Remembered that I had started to look at your case on a local copy of that spreadsheet.  It's attached here and will save you some typing if you are interested.  Still see link for the disclaimers, etc., and check all the entries made in the attachment - some are no doubt wrong.
« Last Edit: May 18, 2014, 02:04:49 PM by MDM »

rmendpara

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I have been reading MMM and other personal finance blogs for the last couple of years. We’ve made some changes in the right direction to cut spending, but I want to get more aggressive. I appreciate your reading through my case study and any suggestions/face punches you have.

SPECIFIC QUESTIONS
1)   where can we cut spending?
2)   how can we optimize our asset allocation?
3)   how long until we could be FI if we made these changes?


Am I reading this correctly? After tax and deductions, check #1 is $636.82 + check #2 $2,497 = Total Income $3,133 - Total Expenses $4,464 = $-1,330/mo

Are you losing $1,330/mo in cash? If so, this is a problem.

I empathize with your mom needing the care and child with celiac disease (though this is much easier to manage). Kudos to you both for the degrees and trying hard to invest as much as possible. The one bright light is $0 liabilities. That is great! Keep it this way!

[1] Looks like your spending is fairly lean. I would try to attack the biggest "discretionary" categories. By shopping for deals and being frugal, you should be able to cut, comfortably, $300/mo in total food expenses without really affecting your living situation. Other categories could use some drop (notably clothing), but this shouldn't continue as you mentioned. Plus, it's only $1k/yr, so not a huge opportunity.
[2] You didn't mention ages, but I am guessing not older than 35? You should be at least 85% stocks, 15% fixed income. The details aren't as important as being invested in low-cost funds and continuing to invest on a regular basis.
[3] The biggest opportunity is to buy a home for your long-term (read: 10+ years) financial stability. It will mostly fix your housing expense for the rest of your years, except for increases in tax/maintenance. Over the long term, this will increase by far less than your rent will go up.

Overall, not doing too bad. You have a few opportunities to cut back in Food/Clothing for ~$4k/yr. The real issue (gentle face slap) is your income. I understand you're both just starting out and working, but if you don't expect an income increase in the next 5 years, you may need to consider side income/new careers. Biotech seems to be a place you could work your way up, especially for highly educated/skilled people.

As for archaeologist, I don't know how to respond. Is there a future in this? I don't know about the industry, but am guessing a museum curator makes a decent living? Again, earning potential would be something to consider.

Having a household income of $71k is just tough to live and save without being very frugal. You're one small emergency/job loss from losing your savings.

You should continue evaluating expenses going forward, but here's the kicker:

If FI is your goal: You have the potential for maybe ~$5k in annual savings, without cutting things to the bone. On the other hand, I think your earning potential should be re-evaluated. Getting the "right" experience to pad your resume(s) will be the biggest investment in your future. Again, my applaud for doing well so far. Many in your position would have 6-figures of debt from years of school, but you two have managed to not take on any debt, and have also put away $180k into investments. Not bad at all!

plainjane

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It's great that you're thinking about Christmas, but really, while you're looking at everything else, why over $700 here annually?  You have one kid under 7.  The adults should be able to cope with something smaller as their gift.

You've already spoken to the clothing & household goods.  You should have a better idea of ongoing costs this coming year now that you've made a bunch of the needed replacements. 

Grocery - how sure is your partner on the deals that they are stocking up on are actually deals?  Do you have a tracking system to help on this?  Do you know what the deals are ahead of time?  If not, why not?  If you do, then you should be well on your way to changing your meal planning approach. 
- some things are often deals, and it's important to know that you still have a stockpile from the last big sale (e.g. peanut butter has been on a decent sale recently, but we still have 3 big jars from the last time we stocked up, so we didn't take advantage - it's important to remember that there will be other deals). 
- make sure they are deals on things you actually eat in sufficient quantity to go through it (e.g. I bought & froze chicken breasts a couple of months ago, and by the end, it was a bit freezer burnt - I'll have a better idea of volume for next time).  And then make sure you're actually putting these into your meal plans. 

BZB

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What's wrong with your current school district?
I like the school district. The specific elementary school we're zoned to, however, is one of the lowest performing in the district and uses a "drill and kill" method of teaching I think my kid would do poorly in. We're trying to get the kid into a different school within the same public school district, but with different teaching style. The magnet lottery allows you to try for a school outside your zone. We didn't win for this coming school year for the limited available public school pre-K programs, but we'll have a lot more schools to apply to for kindergarten.

bugbaby

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Having a household income of $71k is just tough to live and save without being very frugal. You're one small emergency/job loss from losing your savings.

You should continue evaluating expenses going forward, but here's the kicker:

If FI is your goal: You have the potential for maybe ~$5k in annual savings, without cutting things to the bone.



These right here are highly un-mustachian statements ... MMM lives luxuriously on 24K a year (excluding housing but including property taxes) also with a family of 3 in a higher COL area than Houston. You could live very comfortably and still save 1/3 to 1/2 of your income if you're really keen on attaining FI.

5k in annual savings without cutting to the bone? That is a statement more worthy of yahoo-finance advice.  Yeah, I agree you've done a great job in retirement savings, but taking it to the next level is what this blog is about and presumably what your case study seeks.

However, if Mr. BZB is not on board with most changes and yourself you're only ready for lightweight sampling of the immeasurable wealth of advice on this blog & forum, then yeah, ok 5k ....

However kudos on taking this step to put your stats out there, definitely the way to go.

SDREMNGR

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While the request was for help in reducing expenses, it seems like you already know what needs to be done and others will point out what may help.

My thoughts are in your income department.  I'm sure that there is a level of wanting to work in your area of education, but if only income level is considered, the jobs that you both have are paying less than some of the blue collar type jobs out there.  It seems that you are aware of this and probably want to do something about it.  While it may not be easy, finding new jobs that pay more that may or may not be in your current fields of study will really be the easiest way to reach FI.  Focusing on this may be the area of most possible gain.