Updates in red.
I'm hoping you all can inspect my details and provide some insight. In particular I'm hoping this could spawn some discussion for Mustachians-at-heart who just don't have the high earnings that make early retirement possible.
Financial details below. Other information: Married, age 27/26, my wife is a stay-at-home-mom to our 2 year old and 4 month old sons.
Income:
- $40,000 salary, $32,000 net after taxes*, health contributions ($2,106 per year, $81 per biweekly paycheck), and 401k (6% with 3% match - this maximizes the match, anything over isn't matched).
- I am starting a new job in a few weeks that presents much better growth opportunity for me, compared to where I was for the past four years. But, I have looked back on our last five tax returns and our living expenses always seem to inflate to whatever our income is. Obviously going from renting newlyweds finishing school with one car to a two-car family of four with a house and a commute changes the math, but the point is I want to make sure I don't eat any increases in salary with lazy expenditure inflation.
- Approximately 5% bonus, paid in September. We don't "live" on this but use it for once-a-year expenses like our birthdays/Christmas sinking fund, life insurance annual premiums ($400 between us, 25 year term, enough for a 3% withdrawal to replace my income, and enough for me to handle child care if something happened to her), and short-term savings goals: beef up our emergency savings to 3 months of expenses (right now it is about 1.5 months), replacement minivan once our 175k-mile one dies, and finishing putting gutters on our house.
- My wife worked part-time as a daycare/preschool worker until our second son was born in July: that brought in about $5,000. Our older son was in the nursery portion at no cost to us. This was a federal grant-funded program and the agency did not get the contract renewed, plus we had our second son. I'm conservatively not estimating any extra income from her for 2014: finding something that nets anything after child care is too daunting (we don't live near free grandparent babysitting). She will see about summer care and will look for day care center employment next fall when our oldest is starts preschool a few days a week.
- We are on track for about $4,000 in a tax "refund" for 2013; this includes the refundable child tax credit and the earned income tax credit, plus all our withholding back. We don't have an income tax liability and are approaching a negative tax rate when considering payroll taxes. This goes in the savings categories I mentioned above - we don't "live" on it.
Current expenses:
Housing:
- Mortgage: Total payment of $767 a month (principal and interest is $538, PMI $60, homeowners insurance $42, property taxes $142).** The balance is about $117k; the home is worth about $135k. We purchased a year ago with a mortgage of $120k (30 years at 3.5% fixed).
- Utilities: About $215 a month. We are on budget plans for electricity ($60) and gas heat ($70). Water runs about $90 every three months, so I set aside $30 a month. Internet is $36. Trash and recycling is $54 quarterly ($18 per month) - my municipality does not provide trash service, so it's a private company.
- Total Annual (Monthly) Housing: $11,784 ($982)
Auto:
- Insurance: $106 a month. We have just liability*** on the van (it's worth about $1,000), but collision and comprehensive on my car for about $200 more a year ($750 deductible), because it's worth a bit more (about $3,000) and totaling it would wipe us out. $200 a year buys us 11.25 years ($3,000 - $750 / $200) until break-even, and I've had a handful of close calls every year. It's only a matter of time until there is an actual impact.
- Gas: We budget $140 every two weeks. My weekly commute is 200 miles of my 240 mile range, so a fill-up a week at $40 per time. The van's range is 300 miles and we usually can go more than two weeks on one tank at $60 a fill-up.
- Maintenance: We use the "windfall money" from bonus and tax refund to pre-fund a sinking fund for this, about $500. Oil changes and scheduled maintenance. More if we expect tire replacement, but that shouldn't be the case for 2014.
- Registrations: $100 each, once a year. Again, pre-funded with windfall money.
- Total Annual (Monthly) Auto: $5,612 ($468)
Personal:
- $300 every two weeks for food. Groceries, eating out (full restaurants rare due to our kids' ages, but more take-out).
- $50 a week for other things: non-food items at the grocery store (e.g. toilet paper), Kindle books, small buys.
- My iPhone is provided by my employer. My wife is on her parents' family plan and we pay them $180 a year ($15/month).
- Total Annual (Monthly) Personal: $10,400 ($866)
Other:
- About $4,500 a year in charitable giving. After food and shelter, this is our first priority. We are willing to do what it takes to still succeed with the other 90% of our income.
Assets:
- $13,000 in 401k (TRRMX, fully-vested)
- No other non-taxable investments (yet)
- About $18k in home equity
- $3,000 emergency fund (in our checking account that earns 3% monthly)
- Cars are worth $4,000 together
Liabilities:
- Mortgage: $117k balance, 1 year into 30 year fixed at 3.5%
Specific Question(s):
- Obvious areas for optimization: home utilities, driving, and eating. The biggest bang for our buck is eating, followed by driving and finally utilities. I know we eat out (take-out) too much. It's the classic "convenient vs optimal" issue. We just need to buckle down.
- My commute is 20 miles each way. Right now that can't change: we live where we live and I am starting a new job where I'm starting a new job. But, if I can work one day a week from home, that cuts my commuting miles by 20%. My wife and I need to talk about trying to drive the van less. On utilities, I have to do some investigation on how much to spend optimizing versus how much benefit we get (break-even analysis), etc.
- How can we further optimize our expenses? In our situation, even little cuts will feel like a pay raise.
- What are some income options for a stay-at-home-mom of a toddler and an infant? She has maybe an hour-and-a-half window a day where our two year old is napping and the 4-month old might also be napping: but he could also be feeding or needing to be held. Otherwise her attention is held by both kids.
- We use YNAB and I'm thinking that when we come in under-budget on bi-weekly basis that I would move the available balance for that period into a category for "saving/investing" and then get that into my Vanguard account (I'm switching jobs in two weeks and will move my 401k to an IRA S&P Index fund there).
- We are paying $60 a month for PMI and I hate it. We need to get our loan balance to about $100k before I can request it end. Are my next $17k extra dollars best spent paying down the mortgage?
* I have nothing withheld for federal income tax, but do need to withhold some for state income taxes. And then obviously the obligatory FICA/Social Security payroll taxes.
** We purchased a year ago because a) I broke the $40k threshold in a salary raise, b) our son was starting to walk and our apartment was not conducive to that, c) we were paying $600 in rent for a two-bedroom, rented from a friend's parents, which was below market rate (compared to $538 for principal and interest on a mortgage of $120k at an unprecedented 3.5% 30 year fixed rate), and d) my parents wanted to help us with a down payment via my late grandfather's estate.
*** Our state is no-fault and has unlimited lifetime medical benefits. The bare minimum coverage is still $600 a year, $350 of which is the catastrophic claims premium. There is legislative debate to cap the lifetime benefit, but for now this is our reality.