Author Topic: Case Study: Time to get serious about FI (update)  (Read 5791 times)

zedpol

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Case Study: Time to get serious about FI (update)
« on: February 09, 2014, 11:14:13 AM »
Hi, all
 This is an 8 month update,  checking in more for keeping myself honest but would love some outside input on our spending. Our goal over the last 8 months has been to build up our cash reserves so we can buy a house.  No luck so far but we have been looking for a few months.  We continue to contribute the max amount to retirement savings although I haven't done IRA contributions yet. (on my to do list for today)

 Things I've identified to improve.

1)we can do better on food spending.  We have improved from before but this is still a little bit high
2) Our pet spending seems kind of high,  I think we can improve that by 40 dollars
3) Our child is expensive,  not sure if we can improve that
 


Hi All,  Would love some input from everyone.  My wife and I are both busy professionals.  I work about 60 hours a week and she works about 40 hours a week.  My job is not flexible all at, hers is.  We both enjoy our jobs but don't think we can keep up this pace forever so we have started to get serious about our goals for FI so we can take our foot off the gas pedal.  A couple of quick things to help put our numbers in perspective.

1) We have more income than time.  We are occasionally choosing time over money so that our path to FI is enjoyable along the way
2) we live in an incredibly expensive part of California.  Unfortunately it comes with the jobs and family
3) We have one child, one dog and another child planned in 1 year

Okay now for the numbers
I have updated numbers,  everything that is in bold is new

Net income:
Me 33: Just finished all my medical training.  Income last year 65k. This year 290k 300k for a net monthly income of ~14k
wife 34: Has one year left of medical training.  Income last year 68k. Income next year ~70k 94k. In 2 years should earn ~140k.  Net montly income of 3.5k

Combined monthly net income: ~ 17.5k 21k
Quick note,  september was our 5 year anniversary so entertainment is a bit higher than normal
Current monthly expenses:
Gas: 120 (I mostly ride my bike) 139.54
Car insurance: 125 125
car maintenance: 50 50
internet : 48 68, only way I can get this lower is to sign a contract but we will be moving soon so I'm stuck at 68
phones: 100 75 tried going with republic wireless but barely works at work. 
television: 8 0 No cable, netflix only
utilities: 200, Gas, eletric, water, garbage 251.16
Rent: 2000 (we are paying WAY below market rates) 2000
student loan: 419 (in a year will be ~ 850) 419,  wife was able to defer her's interest free for another two years
Life and disability insurance: ~204 188.46
restaurants: varies wildly. ~200 (this generally is date nights) 216
groceries: 700 (i know we need to do WAY better on this) 471.75+161.89 buying premade food
health: 200 183.26
Cleaning ladies: 130 130
renters insurance: 25
personal care: 50 275 bizarrely high this month, average is close to 75
clothing: ~70 80
pet: 100 80
Day care: 1400 cheapest in the area by a decent margin. 1400
Child's college fund: 600 600
Misc 400 (vacations, entertainment, travel) 400

Total monthly expenses: 7021 (i shudder at that number) 7338.36
Stuff i absolutely can't change: Rent, Day care, phone, internet, student loan payment. ~4k
which leaves about 3k for some help.

Assets
Cash: 73.3K 165.8k
Retirement accounts: 139k 162k
Lending club: 21k 23.9
Other investment accounts: 210K 224.5
Cars: 2001 toyota corolla 2006 toyota prius both with ~90k miles
Total assets: ~443k 576.2

Liabilities
me: 98k student loan debt @ 1.99% (I will continue to pay minimum payments on this) about the same
wife: 100k student loan debt @ 0% until she finishes training and then will be 2.98%.  Reasonable chance she gets some loan forgiveness for doing research in under researched areas. about the same

total liabilities 198k 195

Net worth is about 240k 381
We currently save about 60% of our take home pay.

Ok now our goals/issues:

1) Buy a starter home.  Estimated cost ~800k to 1.2 million.  Now before i get destroyed for calling that a starter home just look at houses in the palo alto, mountain view, redwood city area in california.  For us to buy something (3 bedrooms, 1200 square feet) in an area where we won't have to send our child to private school (30-40k a year here) I figure we will have to spend about a million.  Crazy and offensive,  yes.   The alternative is to continue renting.  Our current place is 800 square feet.  For us to rent the exact same thing we have right now we would have to spend about 3k a month.  To upgrade to a 3 bedroom we would spend 3.5k at a minimum.  More likely 4-4.5k.   

2) FI in 7 years or when I hit 40. 
   
Currently we max our retirements which means
 22k contributed by work, 17.5k by me to 401k,  11k in IRAs. so about
50.5k/year in tax advantaged accounts

save/invest ~10k a month, lets round down to 9k so
108k/year

So we are saving about  163k a year.

Here is how I see it.  If we buy a home I figure that is 200k in downpayment.  Our mortage costs + insurance + home improvement would probably go from 2k currently to about 6k so we would save 5k a month instead of 9k which would lower our yearly saving to 60k for a total of

110k a year with our current incomes.  I except our net incomes will go from ~17.5k a month to about 22-25k a month over the next 2 years.

 
Anyways, my wife and I have very modest needs despite some of those numbers.  We just happen to live in an incredibly expensive area and can't really move because of jobs and family. Now I'm feeling like I am rambling.  I would love some suggestions.

Thanks,
Z





« Last Edit: October 09, 2014, 11:19:24 AM by zedpol »

shuffler

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Re: Case Study: Time to get serious about FI
« Reply #1 on: February 09, 2014, 11:46:53 AM »
Me 33: Just finished all my medical training.  Income last year 65k. This year 290k for a net monthly income of ~14k
wife 34: Has one year left of medical training.  Income last year 68k. Income next year ~70k. In 2 years should earn ~140k.
From 1 year ago to two years from now, your income is going to triple.  That's a huge!
I would think that your approach should focus less on reducing your current expenses, and more on making sure that your lifestyle doesn't inflate along with your salaries.  If you can continue living a $130k lifestyle while making $430k, things are going to come out well.

For us to buy something (3 bedrooms, 1200 square feet) ... I figure we will have to spend about a million.
The alternative is to continue renting.
So this is lifestyle inflation.  That's not to say whether it's good or bad.  It's something that you couldn't have afforded on your old salaries, but can soon afford on your new ones.  Owning a home is typically an emotional/lifestyle choice, so you'll simply have to decide if it's worth it for you particularly.  Tripling your housing costs ($2k to $6k) is going to work against your agressive goal of being FI in 7 years, but that may be ok for you.

MsSindy

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Re: Case Study: Time to get serious about FI
« Reply #2 on: February 09, 2014, 11:56:33 AM »
If you want to retire in 7 years, can you really do that with your current savings rate, student loans, AND buying the house and having another kid?  Have you actually ran the numbers and figured out what you would need each year to live on with the larger expenses? (not saying you can't, just questioning if you actually ran the numbers).  Also, do you want to FI in the expensive area you're at now?  If you don't buy, could you get out earlier and live in a lower COLA?

zedpol

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Re: Case Study: Time to get serious about FI
« Reply #3 on: February 09, 2014, 03:20:29 PM »
If you want to retire in 7 years, can you really do that with your current savings rate, student loans, AND buying the house and having another kid?  Have you actually ran the numbers and figured out what you would need each year to live on with the larger expenses? (not saying you can't, just questioning if you actually ran the numbers).

I think so,  obviously everything can change but I figure if we stick to the current plan we would end up with somewhere around 2-2.5 million at the end of 7 years depending on how investments do. 

Also, do you want to FI in the expensive area you're at now?  If you don't buy, could you get out earlier and live in a lower COLA?

At the end of 7 years the current plan would be to cut back to half time and/or moving.




greenmimama

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Re: Case Study: Time to get serious about FI
« Reply #4 on: February 09, 2014, 03:43:30 PM »
When do you plan to buy the house?

What if you mad e asacrifice of staying where you are for another 12mo more than what you were planning, then you could have a larger down payment, significantly larger and gives you more time to find a bargain, I'm not talking a $200k house like I could buy here, just maybe something for 900k, instead of 1.1m make sense? We looked for awhile and finally found an incredible home for almost half price, even after we had to fix what they stripped out before they were foreclosed on. Just another thing to think about.

I had friends that lived in Monterey bay, the housing is crazy, I get where you are coming from.

letro

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Re: Case Study: Time to get serious about FI
« Reply #5 on: February 09, 2014, 04:09:16 PM »
If you are going into private practice figure 12 hours/day 7 days a week.  Husband of OBGYN for 30 years,  experience tells me more hours as you progress in medicine not less.  Residency is easy compared to practice many new challenges await you as a medical couple.  Good luck and do not drink the Dr. cool aid in the money department. 
Suggestion take 10 -20 interviews and get an education.  Do not limit your job search to one area.   The Dr. interviews are a wild experience most doctors never try.  You will be amazed at the various opportunities if you open up your interview options.  We had the married women OBGYN in 1990 experience.  My wife was getting offers 2X, 3X, 4X the male residences in the program.
« Last Edit: February 09, 2014, 04:19:37 PM by letro »

zedpol

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Re: Case Study: Time to get serious about FI
« Reply #6 on: February 09, 2014, 07:28:19 PM »
When do you plan to buy the house?

What if you mad e asacrifice of staying where you are for another 12mo more than what you were planning, then you could have a larger down payment, significantly larger and gives you more time to find a bargain, I'm not talking a $200k house like I could buy here, just maybe something for 900k, instead of 1.1m make sense? We looked for awhile and finally found an incredible home for almost half price, even after we had to fix what they stripped out before they were foreclosed on.

Thanks for the comments.  We were thinking about buying 6 months ago but decided to wait for the very reasons you are talking about and at the time things were going for 20-30% above asking price.  Stuff has cooled down some.  Hopefully it stays that way.  Our only big reason to move is when the next child comes as this place is already pretty cramped.  Ideally we would be nicely moved in when the next child comes. 

ysette9

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Re: Case Study: Time to get serious about FI
« Reply #7 on: February 23, 2014, 10:40:02 AM »
Zedpol - I am very interested in your case study because it mirrors our own situation pretty closely. We are engineers instead of in medicine so our salaries aren't up to what you are/will be, but we are very comfortable in that department and we also live on the peninsula. I can't say that we've got it figured out and clearly it is a work in progress for you too, but I'll share some of my own thoughts and happily hear what you have to say.

We are currently renting in Menlo Park for a low-low price of $2300/month. This is for a house[/i] with a yard, but it is in a part of Menlo Park that has bad schools, so it isn't a long-term solution. Nevertheless, it is allowing us to save a good portion of our income. We too are looking to buy in the $1M+ range eventually. I have done exactly the same thought process as you in that we could buy something cheaper only to tack on the expense of private schools. After a couple of years of that (faster if you have more than one kid) it makes much more sense to just buy the more expensive house in a neighborhood with good public schools.

Here is my plan: for multiple reason I am looking at only houses with a granny unit or a duplex, triplex, two houses on one lot. Those are harder to find, for sure, but it is possible in Mountain View and occasionally Menlo Park. (RWC has an abundance of such units, but go back to the bad schools problem). I have run some rough numbers and it looks possible to buy a place in the $1.2 0 1.3M range that could bring in $2000-$3000/month rental income. My plan is to do something like this to allow us to continue saving aggressively and/or pay down the mortgage quickly once we do buy.

Will it be easy? I expect not. It also requires a larger down payment and larger cash reserve. It also means you need to be okay with being landlords or paying for a property management agency, and sharing your lot with tenants. In my mind though it offers some significant advantages in reaching FI earlier and will provide an income stream at FI that is indexed to inflation.

The other option we both have is to suck it up and continue taking advantage of the excellent rentals we are in to save save save. You just have so many more options with a pile of cash in the bank. Good luck and I look forward to hearing your thoughts and what you end up doing.

4alpacas

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Re: Case Study: Time to get serious about FI
« Reply #8 on: February 23, 2014, 02:11:24 PM »
I look forward to your updates!

SwordGuy

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Re: Case Study: Time to get serious about FI
« Reply #9 on: February 23, 2014, 02:25:14 PM »
If you want to be FI in 7 years, skip the house.  The kids will be young enough they can share a bedroom for the next five to 7 years. 

Hell, if they are the same gender, they could share indefinitely.

I would hold off on the house and pile up your money.  When the kids are ready to start school, or if you find "one hell of a deal" from someone's foreclosure in the interim, go for a house. 

Once you're FI you might decide to move to a lower cost area and the house would just be a nuisance.


zedpol

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Re: Case Study: Time to get serious about FI (update)
« Reply #10 on: October 09, 2014, 11:20:21 AM »
I've done an 8 month update, would love input.
thanks,
z

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Re: Case Study: Time to get serious about FI (update)
« Reply #11 on: October 09, 2014, 12:26:28 PM »
60% savings rate is awesome, but it's obviously due to the great income and not hardcore frugality. You have a few things in your expenses that are fluff like cleaning ladies and personal care, but your biggest issues are rent and daycare which you can't change much without moving to a LOCL area.

A few notes:
-Great job not paying extra on SL debts at 1.99%. Impressive your debts are each < $100K for doctors. I've heard much worse.
-I wouldn't be counting child's college fund as an expense, it's savings. I also am not currently savings specifically for my kids college tuition, but that's another story.
-I wouldn't be in such a rush to buy a house, but I don't know your whole story so take that for what it's worth. If you are paying below market value for rent and can continue that it might be much cheaper than the expenses of buying a home. Freeing up extra cash for investing will get you to FI sooner. Mortgage principal is also savings, but it locks up capital into a non-income producing asset.

Read these if you haven't (and full disclosure, I'm a homeowner, but in a LCOL area):
http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/
http://jlcollinsnh.com/2012/02/23/rent-v-owning-your-home-opportunity-cost-and-running-some-numbers/
http://financialmentor.com/financial-advice/pay-off-mortgage-early-or-invest/7478
http://forum.mrmoneymustache.com/ask-a-mustachian/let's-settle-this-with-a-vote-invest-or-payoff-debts/msg349246/#msg349246
http://forum.mrmoneymustache.com/investor-alley/paying-off-mortgage-early-how-bad-is-it-for-your-fi-date/

Krnten

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Re: Case Study: Time to get serious about FI (update)
« Reply #12 on: October 09, 2014, 03:28:06 PM »
I also would not buy until absolutely necessary for school reasons.  I'm not even sure I count a mediocre elementary school as a reason to move since a "good" k-2 or so education seems to me less important than the grades after that.  My daughter's only 18 months though, so what do I know.

We also live on a high income in a "bad" neighborhood with terrible schools.  I am holding on as long as I can persuade my husband.  It has been such a boon to us financially to live here.  Everything else seems like you're doing well to me!