Case Study: How are we doing?

[Midwest_Handlebar]

Hello Everyone,

I have been reading in the forums for several months, and wanted to get everyone's perspective on how my wife and I are doing.

Ages: 32, and 29

Income
Jobs ~ 160,000/year
Rent ~ $6,500/year after expenses (entirely in mortgage reduction, breaks even monthly)
~8,000/month after taxes/insurance/401k's etc

Expenses (Low cost of living area)
Food $600/month
Mortgage/interest/taxes = $1,800/month
Clothes = $200/month
Vacation = $200/month
Utilities= $150/month
Restaurants = $150/month
Gas=$100/month
Misc=$500/month
Car Insurance= $100/month
Total =$3,800/month

Savings
401k 10% with 4% match for both my wife and I.
Roughly $4,200/month excess cash

Assets
Retirement = $93,000
Cars =$28,000
Cash $10,000
Primary = $260,000
Rental = $140,000

Liabilities
Primary = $205,000 @ 15 year fixed 3.25
Rental = $100,000 @ 15 year fixed 3.25

Net worth $226,000

My primary question is what to do with the excess cash flow? I would like to diversify our income so if either of us gets laid off we would have an additional income stream to rely on. I am less concerned with maxing out our retirement accounts right now, as both of us have undergone multiple job losses in the past 5 years. I would like to achieve this through additional rental properties, but am open to suggestions.

My 15 year plan:
Buy 3 duplexes for ~ $160,000 per duplex/gross $1,600 rent/month per duplex in the next 3 years. At age of 35, and 32, start maxing out retirement accounts and throwing any excess to highest rental mortgage rates. Once we reach age 45 and 43 we should have little to no debt, decent retirement, and $5-$6k coming in which at this point we FIRE.

I know these numbers are a little rough, but I would love to know everybody's thoughts.

Thanks for the great forum,
Midwest Handlebar

 

[Gone Fishing]

I didn't re-run your ER numbers, but they sound plausible.  You might get some face punches on some of your expenses such as housing, clothing, vacation and food/restaurants.  Everyone has to do what's right for them, but with some agressive work on the expense side you could probably shave SEVERAL years off of your ER date, you certainly have the income to make it happen.  Just sayin'...     

[Mother Fussbudget]

First off, you're doing great!  Keep it up.  Be more specific on those 'other' expenses.  Cell Phone? Cable? Internet?

You may need a change of perspective on the retirement accounts - I know *I* did.  Put as much in those pre-tax accounts (and as young) as possible. Those dollars continue to work for you like little-dollar-bill-wage-slaves via the magic of compound interest earning their 4-to-11% returns.  Why?  Especially the pre-tax accounts reduce your taxable income - so you pay less income tax every year.  You're young enough that the disappearance of pension plans, the pending implosion of Social Security, perhaps even Medicare will happen in your lifetime. 

You should give AT LEAST enough to max out the employer match (if any) now and in the future.  But in 3 years, you don't want to find yourself in the position of "wishing you'd maxed out your retirement accounts 3 years ago".

[Midwest_Handlebar]

Thanks for the responses Mother and So Close. We canceled cable this year and my employer pays for my cell phone. My wife pays $40 for a cell phone and we have Netflix ($15?). I backed into the $500 Misc expense as it seems we average $4,200 in cash savings a month. This is an area that needs improvement. I feel incredibly lucky to be in the position that we are in, but can't help but think that it could end all tomorrow, and we could end up living under a bridge in the near future. I think the job instability that we have both experienced have scarred me a bit. Does anyone else feel this way, and at what point does this go away?

[mozar]

I'm 31 and I think this fear is unique to our generation. People who grew up during the great depression can probably relate. My grandparents were of the silent generation (younger than people who grew up during the great depression) and their lives were just easy their whole lives.

We've had to deal with two recessions during the time when we were just starting out (2001/2002, 2008/2009). I definitely feel scarred, and from what I've heard from older people, it never goes away.

When I finally don't have to rely on an employer for income, I'll start to feel better.

[Ricky]

I think you're obviously doing great.

If you're truly worried about the impending doom - then just lower your unnecessary expenses. You could easily lower the clothes and travel expenses to $100/mo - netting you an extra $2,200 a year. Lower your restaurant expenses to $100/mo and that will be an extra $2,800 a year. That's an extra ~$41k over the next 10 years in the stock market.

Then again, take that with a grain of salt. No one here can make spending decisions for you. If those things get you through your daily grind and headache, and are definitely worth the $2,800 a year, then you should keep doing them. But I nor anyone else should be telling you what you should or shouldn't do, I'm just illustrating how these small compromises can actually make a big difference.

$600/mo in groceries for some would seem too much for some but I actually think that this is reasonable. That's basically $10/day/person. It could be done much cheaper, sure, but again its all about your state of mind and willing to compromise for a better tomorrow.

If you didn't have housing to worry about, your spending is only about $17k a year and that's actually really impressive.

Could you convert your house into a duplex and downsize for yourselves?

Is raising the rent on your rental an option? Have you recently evaluated market rates and kept up with them? I was a little shocked you were only breaking even until I read that it was a 15 yr, which is still not too bad considering you're paying double the monthly mortgage of a 30 yr loan.

[Midwest_Handlebar]

Thanks Ricky. I updated the Misc expense, it should have read $500/month. So non-housing related expenses are roughly $2k/month. The vacation, restaurant clothing expenses are a compromise with my spouse who doesn't want to live as mustachian. The housing expense could be cheaper with a 30 year, but I don't see the point since we are trying to eliminate this expense altogether as soon as possible. I don't see many more cost cuts without causing strife in our marriage.

[themagicman]

Hello Everyone,

I have been reading in the forums for several months, and wanted to get everyone's perspective on how my wife and I are doing.

Ages: 32, and 29

Income
Jobs ~ 160,000/year   
Rent ~ $6,500/year after expenses (entirely in mortgage reduction, breaks even monthly)
~8,000/month after taxes/insurance/401k's etc     Great income!

Expenses (Low cost of living area)
Food $600/month In my opinion, this is way too high. This combined with the $150 for restaurants is way too high for just you two. My wife and I spend about $275 a month on groceries and eating out and go out to eat quite a bit. Do you all have an Aldi that you can do you grocery shopping at?
Mortgage/interest/taxes = $1,800/month
Clothes = $200/month Seems very high. ~$2,500 a year on clothes? That is a whole lot to spend. Can this be cut down?
Vacation = $200/month
Utilities= $150/month
Restaurants = $150/month
Gas=$100/month
Misc=$500/month I think you really need to see what is coming out of this category. It is a lot of spending to go unaccounted for!
Car Insurance= $100/month
Total =$3,800/month

I think cutting those expenses will help you to save a ton. I would be maxing out all of your retirement accounts! You will not get the chance to go back and do this!

I think with as high as you all's income is, you should be able to max out your retirement accounts and still meet your goals with the duplexes!

[Bikeguy]

Maxing out retirement now gives instant 28% increase in investment,  due to not paying taxes on it.

Looks good over all.

[mozar]

That's probably the bigger issue here, your spouse.

[Davids]

$200/month on clothes, I am not sure all my clothes combined are worth $200.

[GlassStash]

$200/month on clothes, I am not sure all my clothes combined are worth $200.

So much this. I work in a professional setting which requires suits, ties, etc. and I don't spend close to that on clothes.

[MDM]

Midwest_Handlebar, welcome to the forums.

The thing we can't answer for you is whether you should concentrate on rental properties, vs. stocks, vs. whatever, as the primary investment vehicle to achieve your goal.  For most people passive stock investing will be best, but there is a significant fraction who do well with rentals.

If you really want to do rentals, see http://forum.mrmoneymustache.com/real-estate-and-landlording/, www.biggerpockets.com, etc.

Otherwise, I concur with all those saying "put $35K/yr (in 2015, $36K) into 401ks, $11K into Roth IRAs (I'm guessing you make too much for tIRAs), and split whatever is left among reduced expenses, index funds, and loan prepayments according to your risk tolerance."

Good luck!

[rmendpara]

Hello Everyone,

I have been reading in the forums for several months, and wanted to get everyone's perspective on how my wife and I are doing.

Ages: 32, and 29

Income
Jobs ~ 160,000/year
Rent ~ $6,500/year after expenses (entirely in mortgage reduction, breaks even monthly)
~8,000/month after taxes/insurance/401k's etc

Expenses (Low cost of living area)
Food $600/month
Mortgage/interest/taxes = $1,800/month
Clothes = $200/month
Vacation = $200/month
Utilities= $150/month
Restaurants = $150/month
Gas=$100/month
Misc=$500/month
Car Insurance= $100/month
Total =$3,800/month

Savings
401k 10% with 4% match for both my wife and I.
Roughly $4,200/month excess cash

Assets
Retirement = $93,000
Cars =$28,000
Cash $10,000
Primary = $260,000
Rental = $140,000

Liabilities
Primary = $205,000 @ 15 year fixed 3.25
Rental = $100,000 @ 15 year fixed 3.25

Net worth $226,000

My primary question is what to do with the excess cash flow? I would like to diversify our income so if either of us gets laid off we would have an additional income stream to rely on. I am less concerned with maxing out our retirement accounts right now, as both of us have undergone multiple job losses in the past 5 years. I would like to achieve this through additional rental properties, but am open to suggestions.

My 15 year plan:
Buy 3 duplexes for ~ $160,000 per duplex/gross $1,600 rent/month per duplex in the next 3 years. At age of 35, and 32, start maxing out retirement accounts and throwing any excess to highest rental mortgage rates. Once we reach age 45 and 43 we should have little to no debt, decent retirement, and $5-$6k coming in which at this point we FIRE.

I know these numbers are a little rough, but I would love to know everybody's thoughts.

Thanks for the great forum,
Midwest Handlebar

Looks like you're doing just fine. Another 10 years and you'll definitely be FI and can either slow down at work, or keep going.

In any case, I think your budget is fine. You could cut back in some areas, but it won't be a make or break idea. Others have posted how 1-2k extra could turn into 30-40k+ in a decade, so consider that in your budgeting.

In any case, you have a 50% aftertax savings rate, so you're doing great.

As far as how to increase cash flow, it's probably a good idea to diversify in a few different assets. It's great to have rentals, as the amount of cash flow they produce is just fantastic, though physical RE (real estate) is not without risk.

Personally, my target NW in 20 years will be around 20% RE, 65% equities, 5% cash, and 10% fixed income (excluding primary home). RE is really a time game, so the sooner you get in the better off you will be.... obviously you need to get a decent deal, but that's a given.

I'd encourage you to think about an allocation you'd be comfortable with in 15 years, and then start moving in that direction.