Author Topic: Case study- Make it more better  (Read 2536 times)

JZinCO

  • Pencil Stache
  • ****
  • Posts: 701
Case study- Make it more better
« on: October 20, 2015, 01:09:59 AM »
Hey guys. I've been able to start cranking up savings in 2015 after getting a 40% bump in income. It's been great getting out of a paycheck to paycheck life wherein my net worth is flat and below zero. I've also finally gotten out of chasing seasonal/temp jobs that do not have access to retirement accts or benefits. I've got an investment policy, outlined some basic financial goals and feel I'm set up for a good critique. I'd like your general thoughts on my situation and my questions.

Life Situation: 27, single with significant not living with me, Education is BS and MS, US citizen

Gross Salary/Wages (all numbers annual accompanied by % of gross day job income)
day job: $45,000 (expected bump by Jan 2016 to $50-53K)

Pre-tax deductions
401(a) DCP: $3600(8%)/4950(11%), employee/employer (immediately vested).
403(b): $1350 (3%)
tIRA: $1000 (2%)
HSA:  $360 (0.8%)
Health insurance: 0$ employee contribution

Other Ordinary Income
~$1000 from CC rewards, checking promotions, bank interest, lending club interest
$3-4K in side consulting which is paid around Dec 31, so depending on contract completion will occur in 2015 or 2016. The net will be deposited into solo 401k.

Qualified Dividends & Long Term Capital Gains
Not significant

Taxes
Federal income: $4579 (10.2%)
Medicare: $650 (1.4%)
State income $1560 (3.4%) (4.63% pre-deductions)
no SS withheld

Current expenses (last 6 mo avg)

Rent: $6000 (13%)
Groceries: $1044 (2.3%)
Other/shopping: $944 (2.1%)
Restaurants: $910 (2.0%)
Auto insurance: $644 (1.4%) (for 2 vehicles, looking to sell one)
Automotive parts/vehicle storage for 1 vehicle: $624 (1.4%)
Cell: $488 (1.1%)
Gas: $368 (0.8%)
----
Total:$11022 (24.5%)

Assets

Cash
reserved for 'everyday' checking: $2090, earning~0.25%
reserved for occasional large purchases:  $100, earning 1%
emergency fund (cash portion): $14,350, earning 4%

Investments I won't get into details but the target AA is 95% equities. With exception of Lending Club, all is invested in index funds. The old pension fund is screwing with that.
Retirement
Old 401 (a) pension: $3900, not vested, currently earning 3% acting as if fixed income I suppose
new 403b: $120
new 401(a) DCP: $1512
rIRA: $4050
tIRA: $3030

Taxable accts
(2) $1500

Play/learning money

Robinhood: $94
Lending club: $1100

Debts
None

Planning
I'll be taking a pay bump soon to ~50K.
My budget for 2016 is as follows:
50K gross, 20K into 401(a), 403(b) and tIRA.
Spend $12,600 (28% gross income) for regular expenses
Reach an emergency savings of $20K
Set aside 5% for large expenses
Save 7% for a house downpayment (purchase date unknown)
Increase Lending Club to between $2500 and $5000 to diversify in consumer debt loans

Specific Questions

- First, apologies if my breakdown isn't consistent/clear.
- Looking at my spending now (<25% of gross income), any suggestions for improvement?
- Any thoughts on letting the old 401(a) pension fund sit there? I'm not sure if I'll return to a position to actually get a defined benefit in retirement. My current job will not last forever and if I put my money on it, I'd bet there's a 50% chance I go back to a state job (making the pension fund active again). I'm okay earning just 3% on it for now.
- I hate going out restaurants, nice bars, etc. but the significant other and friends want to and I don't want to alienate anyone by disagreeing (or myself for that matter). Looking at my current spending, am I being a miser?
- I have the option to opt in to SS. I plan on doing this by 30. I would hate for my eventual benefit to be averaged across years with zeroes. Right now, I have 9 years with earnings according to mySS.
- I plan on aggressively saving in retirement accounts (40% gross income). With that, I feel that I'm going to make it harder to save up for a house. Any suggestions? I am comfortable with a lower actual retirement savings rate and holding some pre-tax retirement dollars in safe places such as money market within my IRAs. I can then use first time home buyer's withdrawal from the IRAs. Is that a solution?
   I've been going back and forth on the idea of owning a home. It's a definite want, but median home prices have been rising here (13% this year) to 330K or so. I wouldn't feel comfortable with a mortgage over 160K and that's anticipating renting a room.
Essentially, I'd like any general guidance on helping me cut any fat or optimize savings. For one, I've learned that there are alot of cool options out there, but I need to stick with just a few places to stuff my money.

In case any one asks why I am building up for over 1.5 yr for emergency savings, it's because I want to be prepared for some true, rare and likely costly emergency. As in, I hit a pedestrian driving and their medical bills exceed my insurance.
« Last Edit: October 20, 2015, 09:34:55 AM by JZinCO »

thedayisbrave

  • Pencil Stache
  • ****
  • Posts: 700
  • Location: Raleigh, NC
  • CFO @ My Life
Re: Case study- Make it more better
« Reply #1 on: October 20, 2015, 05:16:26 AM »
In case any one asks why I am building up for over 1.5 yr for emergency savings, it's because I want to be prepared for some true, rare and likely costly emergency. As in, I hit a pedestrian driving and their medical bills exceed my insurance.

If you're truly worried about this happening, I don't think a large emergency fund would be large enough.  Instead, you could opt for an umbrella policy that is extra insurance over your limits.  They are pretty cheap, the premium on my $1MM policy is $115/year.

nereo

  • Senior Mustachian
  • ********
  • Posts: 11895
  • Location: Just south of Canada
    • Here's how you can support science today:
Re: Case study- Make it more better
« Reply #2 on: October 20, 2015, 06:54:20 AM »
Quote
Specific Questions
- Looking at my spending now (<25% of gross income), any suggestions for improvement?
The only thing that jumps out is the two cars and car 'storage'.  You are single - sell the second car and use the proceeds to build your stache.

Quote
- Any thoughts on letting the old 401(a) pension fund sit there? I'm not sure if I'll return to a position to actually get a defined benefit in retirement, and I'm okay earning just 3% on it for now.
Not sure of the rules for 401(a) pension but if allowed/favorable I would convert it into your tIRA. 

Quote
- I hate going out restaurants, nice bars, etc. but the significant other and friends want to and I don't want to alienate anyone by disagreeing (or myself for that matter). Looking at my current spending, am I being a miser?
quote]
not if it is something you don't like to do.  Lots of ways you can interact with friends and SO without going to restaurants - often you need to be the catlyst though.  Instead of going out to a restauarnt, invite people over for board games and make-your-own pizza night, or to go out on a hike, or something you want to do.
It's ok to do things occasionally you don't like for the sake of the group, but IME 'the group' just does whatever the most motivated person wants to do.

Quote
- I have the option to opt in to SS. I plan on doing this by 30. I would hate for my eventual benefit to be averaged across years with zeroes.
[/
I'm guessing you are a foreign worker?  To know whether opting into SS is your best option (most of us don't have that option) you can calculate your 35 highest earning years.  Since you are already 27 and are aiming for FI this may include quite a bit of zeros - and you wouldn't recieve payouts until age 67.  When reaching ER before age 40 you can effectively ignore SS because the size of your stach is independent of future SS payouts (because your stach must persist for 27++ years).
All of which means.... no, I probably would not opt into SS in your case.

Quote
- I plan on aggressively saving in retirement accounts (40% gross income). With that, I feel that I'm going to make it harder to save up for a house. Any suggestions?
Yeah - don't buy a house right now.  It's not a very good investment and as young and mobile as you are right now you will very likely do better not buying a home until much later.  Maybe never.

Quote
I am comfortable with a lower actual retirement savings rate and holding some pre-tax retirement dollars in safe places such as money market within my IRAs. I can then use first time home buyer's withdrawal from the IRAs. Is that a solution?
PLEASE do not hold cash (or cash-equivalent) inside your IRA.  That's what taxable accounts are for.  You would really be giving your future self the shaft investing your IRA in a money market account and then withdrawing those contributions to pay for a home later.

Quote
   I've been going back and forth on the idea of owning a home. It's a definite want, but median home prices have been rising here (13% this year) to 330K or so. I wouldn't feel comfortable with a mortgage over 160K and that's anticipating renting a room.
Again - you don't seem certain about owning a home right now, so don't own a home.  You are living independently, you are young, you are mobile.  Wait until those things change and then ocnsider buying a home.  And it is perfectly ok to decide NOT to own a home, ever. 

JZinCO

  • Pencil Stache
  • ****
  • Posts: 701
Re: Case study- Make it more better
« Reply #3 on: October 22, 2015, 10:15:43 PM »
In case any one asks why I am building up for over 1.5 yr for emergency savings, it's because I want to be prepared for some true, rare and likely costly emergency. As in, I hit a pedestrian driving and their medical bills exceed my insurance.

If you're truly worried about this happening, I don't think a large emergency fund would be large enough.  Instead, you could opt for an umbrella policy that is extra insurance over your limits.  They are pretty cheap, the premium on my $1MM policy is $115/year.
Eh, maybe my example was too specific. I do carry general liability, and E &O for the business, but as far as personal assets being at risk, I'm not really over concerned. Thank you though.
It's more that it just helps me sleep at night. I can attempt to rationalize it several ways. One way might be to pay for some damages as I mentioned. Another might be to move a chunk into another bank as part of some rewards sign-up bonus. Or, what is likely to happen is, I might be taking a couple $15K contracts in 2016. I'm going to have to pay subs before I get paid on the contract. In that case, being able to use the reserves as working capital without impinging on my baseline cash flow is great.

JZinCO

  • Pencil Stache
  • ****
  • Posts: 701
Re: Case study- Make it more better
« Reply #4 on: October 22, 2015, 10:40:22 PM »
The only thing that jumps out is the two cars and car 'storage'.  You are single - sell the second car and use the proceeds to build your stache.
Thanks for your detailed response. I've waited a few days and thought about what I and you have wrote.

Both vehicles are 'projects'. I will sell one (not in storage) and keep the stored one. Storing one has helped me defer spending [more] money on it. But I do have $200/mo budgeted next summer to work on it and bring it out of storage. This is my non-mustachian hobby and I am okay with that.

Not sure of the rules for 401(a) pension but if allowed/favorable I would convert it into your tIRA. 
There is some chance I might be under the same state pension in the future. If I move out the money, my vestment schedule restarts. I'm going to leave it here and revisit the topic in the year.

not if it is something you don't like to do.  Lots of ways you can interact with friends and SO without going to restaurants - often you need to be the catlyst though.  Instead of going out to a restauarnt, invite people over for board games and make-your-own pizza night, or to go out on a hike, or something you want to do.
It's ok to do things occasionally you don't like for the sake of the group, but IME 'the group' just does whatever the most motivated person wants to do.
In the past, I pushed for making dinner from scratch. It tends to go nowhere with my friends or SO's friends. Also, I've talked with the SO who recognizes it matters to me. It means alot to her that I'm involved and will go out to dinner with her friends, but she says I can 'opt out' and not have to feel guilty.

I'm guessing you are a foreign worker?  To know whether opting into SS is your best option (most of us don't have that option) you can calculate your 35 highest earning years.  Since you are already 27 and are aiming for FI this may include quite a bit of zeros - and you wouldn't recieve payouts until age 67.  When reaching ER before age 40 you can effectively ignore SS because the size of your stach is independent of future SS payouts (because your stach must persist for 27++ years).
All of which means.... no, I probably would not opt into SS in your case.
I'm a state worker with 9 years of non-zeroes according to mySSA. Only 1 year of that has substantial income. I prefer reaching FI pre-retirement age but I'd like to continue working until retirement age. Does anyone of that change your advice?

Yeah - don't buy a house right now.  It's not a very good investment and as young and mobile as you are right now you will very likely do better not buying a home until much later.  Maybe never.
This is really hard for to accept, but I think that as long as I live where I am, I am seeing less value in home ownership. If rentals swing upwards or home values plummet in a couple years (unlikely) that changes the math. I'm not mobile because I expect to be with my SO for some time and she has roots here. So as usual, I'll have to revisit this but now starting from an initial position of 'I want to making rent continue to work for me', rather than 'Gosh, if only I could reach the point where home ownership can be had'.

PLEASE do not hold cash (or cash-equivalent) inside your IRA.  That's what taxable accounts are for.  You would really be giving your future self the shaft investing your IRA in a money market account and then withdrawing those contributions to pay for a home later.
You're totally right. I love the idea of home ownership. My dream is to have a small bungalow with an amazing auto and woodworking shop. There's no reason I can't find that through rentals, even if it doesn't feel "mine". I can also scratch the itch of home ownership duties in over ways. For example, I'm in the middle of a deck rebuild project for a friend.

« Last Edit: October 22, 2015, 10:52:26 PM by JZinCO »

JZinCO

  • Pencil Stache
  • ****
  • Posts: 701
Re: Case study- Make it more better
« Reply #5 on: October 22, 2015, 10:49:20 PM »
Nereo,
On the whole restaurant thing. I hem and haw when I make purchases, but I currently don't budget myself.  I just look at my cash flow monthly ("Less than 1K? check.").
I think I will switch towards automating where each dollar goes. So each month, $X goes into my checking account (and $Y to other accounts). I wouldn't need to worry about this purchase or that purchase, just the evolving balance in my account. Since my consumer spending isn't that high, each time I want to pitch a fit in my head about a purchase, I could just look at the balance and know the world's going to be okay.
« Last Edit: October 22, 2015, 10:53:05 PM by JZinCO »