Author Topic: Case Study: Young Couple starting out  (Read 6097 times)

marcela

  • Pencil Stache
  • ****
  • Posts: 685
Case Study: Young Couple starting out
« on: June 08, 2015, 10:10:40 AM »
Life Situation:
Married, no kids. Husband is full-time vet student. We're both 27.

Gross Salary/Wages: $55,000 per year (Just got a promotion, had been making 38k. Last year we had an additional $6,000 in income through various odds and ends)

Current Monthly Expenses based on averaging over the past year:
Rent + Utilities: $275 (Includes rent/pet rent/cable/internet/electricity/water/sewer.)
Cell Phones: -$80 (My company pays for my cell phone based on what the average employee pays. Since my husband and I have MUCH cheaper plans, we make money off this)
Insurance: $200 (health/vision/dental)
Health-related: $103 (I have a condition that leads to expensive care)
Giving: $122 (I can't wait until my friends are all done getting married)
Travel: $117
Entertainment: $55
Auto Insurance: $41.88 (I pay $500/yr)
Auto Related: $115 (this includes gas/tolls/parking/maintenance.)
Groceries: $278 (includes household expenses/food/toiletries/dog food)
Dining:  $119 (We're working on it...)
Misc: $247 (haircuts/school supplies/books/clothing)
TOTAL MONTHLY EXPENSES: $1,592.88


Retirement Savings
Mandatory work 403(b) contribution:  $126.44/monthly
Employer contribution to 403(b): $324.10/monthly
Roth IRA: $500/monthly
Current Retirement Savings: $14,000
VTSAX: $ 10,000
Savings: $15,000
TOTAL ASSETS:  $39,000

TOTAL LIABILITIES: $0

Specific Question(s):
We had been averaging around $700/ month that would be left over after expenses, the number will go up significantly now that I got my new job (38% raise FTW!). Most of that money had just been getting thrown in savings, but we recently opened a Vanguard acct and stuck 10k of the savings in there. How should we be dividing up our net income now with the three goals below in mind?

Here are our three family goals listed in order of when we would like them to happen:
1. Have a good savings cushion for having a baby (probably within 2-3 years)
2. Buy a house (3+ years out.)
3. Financial independence

Thanks for reading through all that! I appreciate the help!



seattlecyclone

  • Magnum Stache
  • ******
  • Posts: 4912
  • Age: 34
  • Location: Seattle, WA
    • My blog
Re: Case Study: Young Couple starting out
« Reply #1 on: June 08, 2015, 10:22:32 AM »
Specific Question(s):
We had been averaging around $700/ month that would be left over after expenses, the number will go up significantly now that I got my new job (38% raise FTW!). Most of that money had just been getting thrown in savings, but we recently opened a Vanguard acct and stuck 10k of the savings in there. How should we be dividing up our net income now with the three goals below in mind?

You're doing pretty great overall. Your rent is very low and your other categories are all in the realm of reasonableness.

As to the extra money each month, I would recommend putting it in your 403(b). Don't worry too much about building up taxable savings for a house or a child quite yet; you should have plenty of income available for those things once your husband has finished vet school and starts earning some money. You can only make $18k of 403(b) contributions per year. Don't waste that opportunity for tax-deferred saving now when you'll have more than enough to max out the retirement account and do after-tax saving later.

meg_shannon

  • Stubble
  • **
  • Posts: 168
Re: Case Study: Young Couple starting out
« Reply #2 on: June 08, 2015, 10:43:18 AM »
How is he paying for vet school? I'm assuming scholarships, grants, or parental funding, since assets to cover the schooling and/or loans are not listed.

MDM

  • Walrus Stache
  • *******
  • Posts: 9552
Re: Case Study: Young Couple starting out
« Reply #3 on: June 08, 2015, 11:54:21 AM »
TOTAL MONTHLY EXPENSES: $1,592.88

How should we be dividing up our net income now with the three goals below in mind?
FWIW, the total of the expenses listed is $1752.88.  Don't know where the extra $160 comes in.

You are in the 15% marginal federal bracket now (plus whatever state & local add).  Rule of thumb would be that this is "low" so everything should go into Roth accounts. 

There is an interesting cutoff in the federal tax code, however, that will drop your particular federal taxes to $0 if you can keep your AGI to $36,000.00 or less.

With a $55K income, putting $18K into a traditional 403b and $1K into a traditional IRA would do it (and you could still put $10K into Roth IRAs).  You would only save 15% for most of this, but the marginal savings on the last few thousand are >30%, giving you ~20% overall tax savings.  This puts you smack in the middle of the "rules of thumb" that suggest using traditional for 25% or higher, and Roth for 15% or lower.

Just tossing this out for your consideration.  You can use the case study spreadsheet, https://turbotax.intuit.com/tax-tools/calculators/taxcaster/, or other software to evaluate this and other what-if? scenarios.

marcela

  • Pencil Stache
  • ****
  • Posts: 685
Re: Case Study: Young Couple starting out
« Reply #4 on: June 08, 2015, 12:55:15 PM »
I'm not a fan of the miscellaneous category, but your expenses are pretty well optimized.  Once the vet student becomes a vet professional, you'll be well on your way to FI as long as you don't inflate your lifestyle too much.

My advice on the house is, don't buy unless you know you want to be there long term. Moving is expensive.  Second, the more expensive house is that you buy, the greater the chances are that you can lose money on it.  So I am personally a fan of small, inexpensive houses.  All things being equal, what is the walkscore for your area?   

Kids: make sure you look at how much daycare will cost... are you comfortable with the school district in your location? 

Sorry, I probably gave you more questions than answers :)

That's ok, sometimes half the battle is figuring out which questions to ask. :) Where we live right now our walk score is 28 which is dismal. Luckily we carpool since I work near where he has class and we don't do much in the way of driving about. On one hand having such a crappy walkscore helps us save money since we're too lazy to drive anywhere where it could be an issue! When I worked downtown, I ended up spending way more on little coffee trips or buying things since I was near shops all the time. Now that going to Publix involves a pretty decent time commitment, we're more likely to make do with whatever we have in the fridge/pantry.
I like small houses too. The trouble is that my husband grew up with a big home with a big yard and he thinks we would need that too. We recently toured some new construction homes as a cheap date and the house he liked the most and thought would be appropriate for us as a first home cost $500,000!!! This might be one of our battles coming up.
Daycare here is pretty pricey and from what I hear the school system is not the best. I'm not sure we would hang around here too long post-baby. It all depends on job situation.  My insurance is amazing right now so we are likely going to hang around for another year once the kiddo is born and keep renting our current place.

marcela

  • Pencil Stache
  • ****
  • Posts: 685
Re: Case Study: Young Couple starting out
« Reply #5 on: June 08, 2015, 01:11:04 PM »
TOTAL MONTHLY EXPENSES: $1,592.88

How should we be dividing up our net income now with the three goals below in mind?
FWIW, the total of the expenses listed is $1752.88.  Don't know where the extra $160 comes in.

I checked it again and I think what happened is that you saw my NEG$80/month cell phone bill as an expense. We actually make money on it so that clears up the $160/month.

[/quote]You are in the 15% marginal federal bracket now (plus whatever state & local add).  Rule of thumb would be that this is "low" so everything should go into Roth accounts. 

There is an interesting cutoff in the federal tax code, however, that will drop your particular federal taxes to $0 if you can keep your AGI to $36,000.00 or less.

With a $55K income, putting $18K into a traditional 403b and $1K into a traditional IRA would do it (and you could still put $10K into Roth IRAs).  You would only save 15% for most of this, but the marginal savings on the last few thousand are >30%, giving you ~20% overall tax savings.  This puts you smack in the middle of the "rules of thumb" that suggest using traditional for 25% or higher, and Roth for 15% or lower.

Just tossing this out for your consideration.  You can use the case study spreadsheet, https://turbotax.intuit.com/tax-tools/calculators/taxcaster/, or other software to evaluate this and other what-if? scenarios.
[/quote]

I'll admit I didn't quite understand all of what you are saying, but I can follow directions! My only concern is tying all that money up into accounts that cannot be touched for another 40/50 years. You wouldn't suggest adding more to the Vanguard account so we have easier access to funds when needed?

marcela

  • Pencil Stache
  • ****
  • Posts: 685
Re: Case Study: Young Couple starting out
« Reply #6 on: June 08, 2015, 01:12:52 PM »
How is he paying for vet school? I'm assuming scholarships, grants, or parental funding, since assets to cover the schooling and/or loans are not listed.

Correct, neither of us has had to take out any student loans throughout our educational career. The only expenses associated with his schooling are rolled into the MISC category.

marcela

  • Pencil Stache
  • ****
  • Posts: 685
Re: Case Study: Young Couple starting out
« Reply #7 on: June 08, 2015, 01:29:35 PM »
Specific Question(s):
We had been averaging around $700/ month that would be left over after expenses, the number will go up significantly now that I got my new job (38% raise FTW!). Most of that money had just been getting thrown in savings, but we recently opened a Vanguard acct and stuck 10k of the savings in there. How should we be dividing up our net income now with the three goals below in mind?

You're doing pretty great overall. Your rent is very low and your other categories are all in the realm of reasonableness.

As to the extra money each month, I would recommend putting it in your 403(b). Don't worry too much about building up taxable savings for a house or a child quite yet; you should have plenty of income available for those things once your husband has finished vet school and starts earning some money. You can only make $18k of 403(b) contributions per year. Don't waste that opportunity for tax-deferred saving now when you'll have more than enough to max out the retirement account and do after-tax saving later.

Thank you, I read about people here who are WAY more frugal than us and I end up losing sight of how well we are doing. We're working on lowering the eating out expenses, but it's been tough since he's on rotations and my work involves a lot of travel/long hours.
My concern with putting all the excess into retirement is that we're hoping to have a kiddo mid to late 2017, so there wouldn't be much of his income that will have had a chance to come in yet at the point. I have a health condition that makes it so we would want to have a kid sooner rather than later and we've already been putting it off due to the school commitments. I've seen estimates that you should have ~$10,000 saved for baby and I fear that I may face complications that require a longer leave due to family history so I figured we would want to have around $15,000 saved.

MDM

  • Walrus Stache
  • *******
  • Posts: 9552
Re: Case Study: Young Couple starting out
« Reply #8 on: June 08, 2015, 01:42:34 PM »
I checked it again and I think what happened is that you saw my NEG$80/month cell phone bill as an expense. We actually make money on it so that clears up the $160/month.
Yes, that's it exactly - good for you!

Quote
I'll admit I didn't quite understand all of what you are saying, but I can follow directions! My only concern is tying all that money up into accounts that cannot be touched for another 40/50 years. You wouldn't suggest adding more to the Vanguard account so we have easier access to funds when needed?
The money being "untouchable" is somewhat true, but also somewhat myth.  See https://seattlecyclone.com/accessing-your-retirement-accounts-early-yes-you-can/.

The main reason to put the Vanguard account last is that with either a traditional or Roth account you get some tax savings.  The choice between traditional and Roth should be based on your expected marginal rate at withdrawal vs. marginal rate today.

If your 403b account fees are ridiculously high, however, that could negate the tax advantage.  What fees do you have?

Have you tried either of those tax calculators?  A couple of things
  - to the extent your gross earnings for 2015 will be much less than $55K due to raise being recent, it will be easier for you to get your AGI < $36K.
  - that $36K is a hard cutoff.  Having an AGI of $36,001 will increase your federal tax by ~$740.

MDM

  • Walrus Stache
  • *******
  • Posts: 9552
Re: Case Study: Young Couple starting out
« Reply #9 on: June 08, 2015, 01:49:23 PM »
I've seen estimates that you should have ~$10,000 saved for baby and I fear that I may face complications that require a longer leave due to family history so I figured we would want to have around $15,000 saved.
Saved for what?

There will be delivery costs - your insurance co., hospital and doctor should be able to give you reasonable estimates of your out-of-pocket cost for that.

Beyond that, your cash outlays should be minimal.  Babies don't eat that much.  Diapers will cost some, and disposables are pricey but not $10K pricey.  Same thing with clothes: you may spend some, but that $10K number still seems high unless I'm forgetting something from our experience.

Reduction of income - as opposed to extra cost - is a different issue, but you should be able to estimate that well for yourself and not rely on generic estimates.

starbuck

  • Bristles
  • ***
  • Posts: 360
  • Age: 34
  • Location: Small Town Connecticut
Re: Case Study: Young Couple starting out
« Reply #10 on: June 08, 2015, 02:10:57 PM »
I've seen estimates that you should have ~$10,000 saved for baby and I fear that I may face complications that require a longer leave due to family history so I figured we would want to have around $15,000 saved.
Saved for what?

There will be delivery costs - your insurance co., hospital and doctor should be able to give you reasonable estimates of your out-of-pocket cost for that.

Beyond that, your cash outlays should be minimal.  Babies don't eat that much.  Diapers will cost some, and disposables are pricey but not $10K pricey.  Same thing with clothes: you may spend some, but that $10K number still seems high unless I'm forgetting something from our experience.

Reduction of income - as opposed to extra cost - is a different issue, but you should be able to estimate that well for yourself and not rely on generic estimates.

Are you saving up for an unpaid maternity leave? In that case it'd be your expenses x number of months, not some BabyCenter savings target. I totally thought the same as you, but then realized MY insurance charges me a $175 copay for having a baby, everything (normal) included, and at least half of our parental leave is paid, so I invested the baby money instead. :) Also, if you're going to have an unpaid maternity leave, look into things like short term disability coverage to help replace some of your income.

Echoing MDM that as a mustachian, the baby itself doesn't cost much. There are lots of good threads here on mustachian baby prepping, when you're at that stage. Don't let saving up for the baby delay the actual baby. It took us an entire year to conceive, and then you still have another 9 months of incubating! (Others hit jackpot within the first month of trying, so your YBabyMMV but you never know by how much until you start...)

So now you can move right on to goals 2 and 3!

cripzychiken

  • Stubble
  • **
  • Posts: 194
  • Location: Central Florida
Re: Case Study: Young Couple starting out
« Reply #11 on: June 08, 2015, 03:38:21 PM »
I'd break out the MISC into School and MISC.  $250/month is a lot, but if it is $200 for school and $50 for other, that is actually pretty darn good.  Chances are it's probably closer to 150/100, which is still good.  But it might help identify if there is a spending issue there with non-school spending.

Baby costs: only thing worth spending money on for new is the car seat.  Everything else used is fine.  Crib (just get a cover/plastic bag for the mattress), stroller (find one that you can use with the car seat), clothes, toys, bottles, etc.  All of those are fine once they are cleaned (boiled if possible, washed for clothes, wiped down with bleach for toys/furniture).  Only reason I say get a new car seat is you never know if a used one was in a wreck and could have some damage.  Also, look for thrift stores with large baby sections, they are great places to go shopping.  I get mad now if I have to spend more than $1-2 on an outfit.  Total spent on baby 'set-up' was about $600 (of which $400 was gifts from family) and probably another $200 worth of borrowed items (from families in-between kids).  Talk to 2-3 moms with a 1+ yr old about what stuff you need and what is just crap they try to sell you (wipes warmer).

Baby savings: call insurance and get them to give you a rough out of pocket quote then do 1.5x that (since you have a history of family issues).  After that, just look at what the worst case would be with you out of work.  Don't forget that you'd only need to cover from when you plan to have the baby (mid 2017) until when hubby can start working - you are living off one salary right now, don't change that.  If he starts working before baby, then the rest just goes to house fund.

house: no buying a house until you know you are staying here for 5 years.  So wait until hubby is out of school and working.  Then you can look into the house.  Also get a starter house first.  Convince him that a smaller house will let you save more to get the dream house in 10 years.  By then he should see that the big yard isn't as important as the people who fill it.  Plus you will know what truly matters to you as a couple (location, schools, near work, near family/friends, etc) rather than just guessing what you want (size, bathrooms, yard, finishes, etc)

My only concern is tying all that money up into accounts that cannot be touched for another 40/50 years. You wouldn't suggest adding more to the Vanguard account so we have easier access to funds when needed?

In the IRAs, you only tie up your earnings until 59.5, you can withdraw the money you deposited at any time.  So if you deposit $10k and it is now worth $13k, you can pull out the $10k without penalty. The $3k would be subject to tax and penalty (if you took that out before 59.5).  It took me a long time to realize this, but helped me see how people can FIRE with only retirement savings. 



marcela

  • Pencil Stache
  • ****
  • Posts: 685
Re: Case Study: Young Couple starting out
« Reply #12 on: June 09, 2015, 01:17:48 PM »
Thanks everyone. I'm beginning to rethink my savings goal for baby. My workplace allows you to request up to six weeks of advance leave that you will have to pay back within 3 years. The rest is made up of whatever leave you already have accumulated. I've already begun focusing on accumulating hours for my leave.
Also Holy moly! It turns out my insurance covers everything for a normal pregnancy and delivery for under $300!! This is incredible to me. I think I would be ok in budgeting maybe $1,000 for any extra sort of things that could turn up to bring up my cost (c-section, NICU stays etc), but this is so much less than the horror stories I've been hearing from friends and relatives about their hospital bills.
My mother had to go on total bedrest at month five so that would really stretch our budget if I was unable to keep working until right before birth. The timing works out that my husband will have at least 3 months to find a position, but it does put the pressure on a bit.
I agree that we should not be buying anything any time soon, but my husband has bought in hook line and sinker the whole American Dream, you aren't an adult until you own a house blahblahblah. Hopefully I can get him turned around on that.

SomedayStache

  • Pencil Stache
  • ****
  • Posts: 761
  • Live Long and Prosper
Re: Case Study: Young Couple starting out
« Reply #13 on: June 09, 2015, 01:48:16 PM »
Don't forget that you can always withdraw your contributions to a Roth IRA.  If it's a choice between saving an emergency/baby fund or funding your retirement accounts - you might think about using the Roth principle as part of your emergency fund.  Then if you don't need to touch it you have built up your retirement - and if you sadly do have a need for those funds they are available to you without penalty.

marcela

  • Pencil Stache
  • ****
  • Posts: 685
Re: Case Study: Young Couple starting out
« Reply #14 on: June 10, 2015, 06:36:23 AM »
Don't forget that you can always withdraw your contributions to a Roth IRA.  If it's a choice between saving an emergency/baby fund or funding your retirement accounts - you might think about using the Roth principle as part of your emergency fund.  Then if you don't need to touch it you have built up your retirement - and if you sadly do have a need for those funds they are available to you without penalty.

That's a good idea. Thanks!

ShoulderThingThatGoesUp

  • Magnum Stache
  • ******
  • Posts: 3057
  • Location: Emmaus, PA
Re: Case Study: Young Couple starting out
« Reply #15 on: June 10, 2015, 07:02:48 AM »
The medical part of having a baby is really not that expensive. You can also double-insure the baby him/herself if you and your husband each have insurance through work when the birth happens. We paid $800 out of pocket for inducement, uncomplicated birth at term, then a week of NICU with tests on tests and a specialist visit.

asiljoy

  • Bristles
  • ***
  • Posts: 406
Re: Case Study: Young Couple starting out
« Reply #16 on: June 10, 2015, 07:44:40 AM »
The medical part of having a baby is really not that expensive. You can also double-insure the baby him/herself if you and your husband each have insurance through work when the birth happens. We paid $800 out of pocket for inducement, uncomplicated birth at term, then a week of NICU with tests on tests and a specialist visit.

This REALLY REALLY depends on your insurance and what hospital you go to. We had ok insurance, covered all of the prenatal stuff at no cost to us. However, we (and we knew this going in) ended up paying 2,000-ish for vaginal delivery with epidural, but no complications, 2,000-ish dollars for the hospital stay, and 1,000 ish for after delivery care(lactation consults/etc). Part of that was insurance, and part of that the hospital we ended up going to while super nice/comfortable, was also one of the more expensive in the city.