Case Study: How to Grow a Mustache in College?

[CollegeStache]

OK, after a short time reading the site I am buying in big time to the MMM way.  My timing is interesting in that last year I made a big shift in my career trajectory to pursue a graduate degree (rationale was twofold: 1) I accomplished more than what I set out to accomplish in the business that I previously ran, and 2) I want to be a college professor, which requires a doctorate in my field). I will not be paying tuition or fees and will be receiving a monthly stipend when I am in school.  My situation is unique in that I have some small additional income that a typical college student does not have, in addition to the stipend.  I am married, 35 years old, have three kids (preschool and elementary school) and live in Maine.  Details follow.

Monthly Income:
4,500 (net after taxes, social security, and 401k - $2.5k from school stipend and $2k from passive side income from a business someone else runs). 

Total Monthly Income: $4,500

Current expenses:
2,600 (rent - one year lease)
1,100 (Grocery/Wal-Mart/Amazon household expenses)
100 (restaurants)
350 (gas and parking - commute is a necessity and am rural so carpooling is not an option)
450 (Propane/Oil/Electricity/Garbage and Recycling Pickup)
150 (Recreation/Lessons for the kids)
70 (Internet)
400 (Preschool)
150 (net loss on rental property - we owe more than it's worth as you'll see below, so selling is not an option, probably not for several years)

Total Monthly Expenses: $5,370

Assets:
190,000 (Savings account with small (1%) interest rate - unwittingly I employed some MMM tactics in the past year by saving a ton ($85k including $25k (net) from the sale of our previous home) in anticipation of being on a graduate student's salary for the next four years...you'll see by comparing my income and expenses above that I have a monthly deficit, so I am planning on withdrawing from savings each month to make up the shortfall.  I anticipate having 100k left in savings when I am done with school, so I view at least some of that savings as flexible and available to invest right now). 
130,000 (401(k))
11,000 (Roth - Mine)
9,000 (Roth - Wife)
60,000 (Rental property value)
Prepaid college tuition plan, fully funded for all three kids

Total Assets: $400k not including 529

Liabilities:

100,000 (Mortgage on rental property)

Total Liabilities: $100k

Specific Question(s):
1. I'd like to hear ideas of what to do to make some of my 100k available in savings work for me.  Note that my 401k and Roth IRAs are mostly low-fee index funds.  I've considered putting more in a brokerage account independent of my retirement accounts.
2. I have about 10 years of experience personally managing a rental property and have gone through multiple experiences and am not hesitant about finding another rental property.  Given my limited income for the next few years, my risk tolerance is a little lower than normal because I want my primary focus on my studies.  So any rental property would be a single-family home that I could buy for cash. 
3. My passive business income could be more than I've estimated above (perhaps an additional $500-800/month gross), so I would be interested in hearing thoughts on how/where that extra money could be directed should it become available. One thought could be to simply keep as cash to narrow that deficit between expenses and my income, then do something else with a part of that ~$90k I earmarked to help with expenses over the next four years.


Looking forward to hearing the insights of the MMM populace!

[nereo]

Specific Question(s):
1. I'd like to hear ideas of what to do to make some of my 100k available in savings work for me.  Note that my 401k and Roth IRAs are mostly low-fee index funds.  I've considered putting more in a brokerage account independent of my retirement accounts.
2. I have about 10 years of experience personally managing a rental property and have gone through multiple experiences and am not hesitant about finding another rental property.  Given my limited income for the next few years, my risk tolerance is a little lower than normal because I want my primary focus on my studies.  So any rental property would be a single-family home that I could buy for cash.
3. My passive business income could be more than I've estimated above (perhaps an additional $500-800/month gross), so I would be interested in hearing thoughts on how/where that extra money could be directed should it become available. One thought could be to simply keep as cash to narrow that deficit between expenses and my income, then do something else with a part of that ~$90k I earmarked to help with expenses over the next four years.

Ok, if I understand you correctly, your worst-case scenario has you spending about $850 more per month than you earn for the next four years - which is basically about $41k over that time period.  And, you have $190k in a low interest savings account?  So first off you certainly have teh savings to go to graduate school.  I'd say you need to get about $150k of those little green employees working for you.

First off, what is it about the rental property that has it running cash-negative?  Can you make some renovations that could allow you to raise the rent by a few hundred a month?
In terms of what you can do with that $150k - you mentioned you would be open to having another rental property, and I think that could be a very good use of your resources.  Assuming you can somehow avoid the mistake of having a property with a negative cash flow again.  With stupid-low interest rates right now I'd suggest taking out a mortgage on a multi-unit property if good ones are available in your area.  With such a large down payment the bar should be set pretty low to making it cash-flow positive.

A few other observations (and from someone who lived in Maine for 5 years)
your rent seems stupidly high for this state.  Any reason for paying $2600/month?  3br homes in downtown Portland can be found for less.
Grocery/Wal-Mart category is also very high.
Why is the rental property loosing money?

[jabber]

I don't know if this addresses your questions but the coming years of lower income may be a good time to make some roth conversions and harvest some capital gains, given what seems to be a suppressed income level.

[lakemom]

1.  Get a budget worked out....a real budget that takes into account ALL your expenses.  What I'm seeing missing at first glance are:
Insurance, renters, auto, life, health (this may be paid through the school?)
Gifts (you have 3 children and will have 3 birthdays and Christmas every year you need a gift budget)
Co-pays or medical expenses (3 kids, they'll be going to the doctor regularly even if very healthy most of the time)
Phones ( you must have at least one in there somewhere?)
Personal care (toiletries, haircuts, etc.)
Entertainment (do you have subscripition, cable, netflix etc.)
Clothing (even thrift store shopping needs a budget)

2.  Keep looking for a better living situation.  3K+ per month in housing costs (rent, trash, propane, etc.) is more than 50% of your income and should be A LOT lower than this.  Even if you cannot break your current lease, be looking well before the lease is up so you can move to a more affordable house.

3.  Your grocery etc. seems way too high for a family of 5 with three very small children.  You may want to go over this with a fine tooth comb and see where you can cut back.  I'd say something closer to $600-700 per month is very doable and closer to $500 if you got really frugal and made everything and simply eliminated any expensive goodies you currently buy.

As far as what to do with your current savings, I'd be concentrating on learning to live on my income FIRST so that I wouldn't need to dip into the savings monthly THEN you and your spouse can start a crash course on "how to invest" and learn together where to put your funds for growth and income.

[CollegeStache]

Specific Question(s):
1. I'd like to hear ideas of what to do to make some of my 100k available in savings work for me.  Note that my 401k and Roth IRAs are mostly low-fee index funds.  I've considered putting more in a brokerage account independent of my retirement accounts.
2. I have about 10 years of experience personally managing a rental property and have gone through multiple experiences and am not hesitant about finding another rental property.  Given my limited income for the next few years, my risk tolerance is a little lower than normal because I want my primary focus on my studies.  So any rental property would be a single-family home that I could buy for cash.
3. My passive business income could be more than I've estimated above (perhaps an additional $500-800/month gross), so I would be interested in hearing thoughts on how/where that extra money could be directed should it become available. One thought could be to simply keep as cash to narrow that deficit between expenses and my income, then do something else with a part of that ~$90k I earmarked to help with expenses over the next four years.

Ok, if I understand you correctly, your worst-case scenario has you spending about $850 more per month than you earn for the next four years - which is basically about $41k over that time period.  And, you have $190k in a low interest savings account?  So first off you certainly have teh savings to go to graduate school.  I'd say you need to get about $150k of those little green employees working for you.

First off, what is it about the rental property that has it running cash-negative?  Can you make some renovations that could allow you to raise the rent by a few hundred a month?
In terms of what you can do with that $150k - you mentioned you would be open to having another rental property, and I think that could be a very good use of your resources.  Assuming you can somehow avoid the mistake of having a property with a negative cash flow again.  With stupid-low interest rates right now I'd suggest taking out a mortgage on a multi-unit property if good ones are available in your area.  With such a large down payment the bar should be set pretty low to making it cash-flow positive.

A few other observations (and from someone who lived in Maine for 5 years)
your rent seems stupidly high for this state.  Any reason for paying $2600/month?  3br homes in downtown Portland can be found for less.
Grocery/Wal-Mart category is also very high.
Why is the rental property loosing money?

Great questions. Some thoughts:

1. The rental property is a 2nd floor condo in the Orlando area.  There are many other condos in the same complex that rent for a little bit more and a little bit less.  We have broken even on the property the last two years but this year was a special assessment which made our HOA fees go up by $150/month.  That will go away next year.  I've rented the property for several years - we've rented it out as high as $1,100/month (in 2006 - our tenant paid late and skipped out on the latter 6 months of the lease, with unsuccessful collections attempts).  We're currently renting it for $900 but we have a property manager to handle phone calls for us since we're far away. 
2. Our home is in an excellent school district, we have the perfect preschool for our youngest, and we very quickly made close friends with a few different neighbors.  Our area has very scarce amounts of properties for rent available (there were literally two houses in the period when we had to select a place to live).  We're deeply ingrained in the community already and is definitely a no-go to move.  Attempts to negotiate a better monthly rent or offer in-kind services have not been successful with our landlord. 
3. Good call on the grocery/wal-mart bit.  That's the tough thing with kids, it's easy to get caught up in having 'special occasions' and treats and the like.  My wife and I have already started implementing a plan that will allow us to cut back.

I see your point about the investment property, it should be something to take a look at now that I'm getting to know the area better here. 

[CollegeStache]

1.  Get a budget worked out....a real budget that takes into account ALL your expenses.  What I'm seeing missing at first glance are:
Insurance, renters, auto, life, health (this may be paid through the school?)
Gifts (you have 3 children and will have 3 birthdays and Christmas every year you need a gift budget)
Co-pays or medical expenses (3 kids, they'll be going to the doctor regularly even if very healthy most of the time)
Phones ( you must have at least one in there somewhere?)
Personal care (toiletries, haircuts, etc.)
Entertainment (do you have subscripition, cable, netflix etc.)
Clothing (even thrift store shopping needs a budget)

2.  Keep looking for a better living situation.  3K+ per month in housing costs (rent, trash, propane, etc.) is more than 50% of your income and should be A LOT lower than this.  Even if you cannot break your current lease, be looking well before the lease is up so you can move to a more affordable house.

3.  Your grocery etc. seems way too high for a family of 5 with three very small children.  You may want to go over this with a fine tooth comb and see where you can cut back.  I'd say something closer to $600-700 per month is very doable and closer to $500 if you got really frugal and made everything and simply eliminated any expensive goodies you currently buy.

As far as what to do with your current savings, I'd be concentrating on learning to live on my income FIRST so that I wouldn't need to dip into the savings monthly THEN you and your spouse can start a crash course on "how to invest" and learn together where to put your funds for growth and income.

Good advice.  I've seen the budget bytes recommendation for food/meals on some other posts - do you have any thoughts in particular on a good place to look?  I know several people on here forego meat, which I'm not willing to do, but would like to hear some ideas.   

[gildedbutterfly]

Hi, CollegeStache. I'd second the idea of looking around for housing. You are paying more in rent than I pay--and I live in a 3br in Manhattan! It might not be what you want to hear, but I'd at least look around. You might find that you can find something cheaper in your area or that there's another area close that has decent schools. As someone who went back to school full-time to get her PhD when she was 30, I understand how hard it can be to make those adjustments when you are already "settled" in life, but it's so worth it to be in a career you love AND closer to freedom!

I know several people on here forego meat, which I'm not willing to do, but would like to hear some ideas.   

I don't know what your diet is like now, but would you be willing to cut back on meat, instead of giving it up altogether? Maybe you could do Meatless Mondays or something like that? Some of my carnivorous friends have done that to save $$ and lose some weight. (Full disclosure: I'm a vegan, so it doesn't seem like a big deal to me to completely give it up, but I realize that to some people it is, and that's ok, too.)