Hi everyone, after hanging out here for a while, I thought it might our turn to walk around in our financial underwear and face the face-punches. Due to some recent and upcoming life changes, it seemed like a good time to re-assess. Thanks in advance.
Synopsis: High income, high savings rates, high housing costs, kinda expensive tastes; kiddo on the way and we need to improve cash-flow.
Income (monthly): ~$16,000- Gross: ~$20,000
- Take-home: ~$12,000
About $3600 of difference between gross and take-home is optional savings (401k, HSA, stock purchase plan, etc.), rest is mainly taxes with small amounts towards health plans, charity, transit passes, etc.
Current expenses (monthly): ~$5500 Total ~$4500 Total- Mortgage: $3500 (roughly $1800 principal, $1200 interest, $500 taxes and insurance)- Mortgage: $2400 (roughly $700 principal, $1100 interest, $600 taxes and insurance)
- Health: $400 (higher than normal due to pregnancy)
- Travel: $400 (averaged over the last 6 months, we were conciously cutting down :) )
- Home renovation & maintenence: $300 (we budget this, but thankfully have had no issues and yet to spend any)
- Groceries: $350 (we try to stay under $300, but have had trouble meeting our goal)
- Transportation: $150 (slightly over our planned budget, usually due to gas for weekend trips)
- Restaurants: $150 (more the occasional very expensive meal, as opposed to multiple small ones, also includes bars, beer and wine)
- Utilities: $80
- Internet: $60
- Pets: $75 (normal monthly spending is less, but recently had one time adoption costs)
- Misc: $125 (furnishings, cleaning supplies, bike and baby stuff, gardening supplies, etc)
Assets: ~$1,060,000 Total- Home: $520,000 (purchase price)
- Equities: $365,000
- Bonds: $85,000
- Cash: $90,000 (Holding much more cash than normal for couple of reasons alluded to below.)
Liabilities: ~$410,000Mortgage on primary residence
3.375% 15 year fixed 3.25% 7 year ARM
Current net worth: ~$650,000Currently 53% equities, 27% cash & fixed income, 20% home equity
Asset allocation plan calls for 60/20/20 split on equities, fixed income, real estate
Expected ER expenses:Hopefully non-housing budget will stay the same with child related expenses taking place of pregnancy related health costs. With paid off house (or relocation to lower COL area) that puts annual expenses at
~$25,000FIRE Goal: $1,000,000 invested assets and paid off primary residence. Ideally we'd like to reach that in five years
The amount seems higher than needed, but we tend to be conservative, want to account for un-forseen expenses, and at least one of us will probably be working for a few years anyways for non-financial reasons.
Specific Questions/Concerns: 1) Is the FIRE goal feasible in five years and will it require moving to a lower COL area or is staying put an option (or even trading up)?
2) Housing costs are obviously high, but we do like our current living situation, and it'd be hard to get lower in this area, at least without giving up our life of luxury :) However, when we purchased we chose a fifteen year fixed mortgage as the best choice at the time, shortly afterwards we found out we were expecting. Assuming that we might soon go to half our income (or less) temporarily or permanently, there is going to be a cash-flow problem.
Potential solutions:
i) Leave mortgage as is, count on income and cash buffer (if needed) to meet monthly expenses during mat/pat leave.
Pros: Doesn't involve doing anything. Keeps low fixed interest rate.
Cons: Just a stop-gap, doesn't solve cashflow problem. Using cash buffer will eat into capital that could be invested.
ii) Re-finance to a thirty year fixed.
Pros: The payments will be affordable, might be nice having relatively cheap credit for long time.
Cons: Interest rate will be higher than now, also for credit reasons we may not get best 30 year rate possible.
There might be fees to re-finance. iii) Re-finance to a five or seven year ARM
<-- Edit, this is what we went with Pros: The payments will be very affordable, interest rate might be lower than now.
There's a decent chance we may move around that time (or pay off mortgage to coincide with FIRE).
Cons: Fees associated with re-financing, having a five or seven year clock over our head.
iv) Recast current mortgage using cash buffer and other savings
Pros: No fees with our lender, keeps low interest rate and longish fixed term
Cons: Eats up a lot of capital, I don't think we have enough in cash to significantly reduce monthly payment. 3) Our asset allocation is currently off kilter. Part of that was due to pulling out cash for our house purchases, the unused portion stayed as a buffer given the new home and child on the way. We had also talked about dipping our toes into real-estate investing, for which I thought having some cash on hand might be handy, but this hasn't got off the ground yet (and may not ever at this rate :) ).
4) We presumably won't be DINKs much longer (four such sweet words), after mat/pat leave, do we stay dual income and eat the associated child-care costs and headaches, or go down to one (or possibly two partially reduced) incomes. This is probably more personal than financial, but I'm finding writing all this down cathartic, and any input would be great.
5) Where can we cut and what can we improve?
Updates/Clarifications:1) Asset allocation: We had chose a 60/40 equities/fixed income split when we were in the position of
possibly saving for a downpayment. After the home purchase, that naturally became 60/20/20. I think it is time to re-visit this as we are probably paying more on mortgage interest than the return on the bonds, but we are somewhat risk adverse and will have a non-zero bond holdings.
2) The effective mortgage interest rate after tax deduction(s) becomes between ~2.2% - 2.4% depending on our final tax bracket, and whether state is included (need to double check when we file taxes next year). Given that, we probably aren't in a hurry to prepay the mortgage or re-cast, as others have mentioned, even on one income, cash-flow might not be as bad as I thought. Refinancing to 30 year or ARM might still be option, depending on rates and fees.
3) Groceries needs more investigation to see where the money is going.
4) Rates were good, we were offered a no cost refinance into an ARM on terms that work well with us and we decided to go with it. Just waiting for everything to be confirmed. Frees up $1100/month in cash flow.