Author Topic: Case Study: Younger mustachian, advice for before (and after) getting married  (Read 4701 times)

Milkshake

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Hello everyone! I found MMM about 3 months ago after realizing that I couldn't wrap my mind around working for the next half century or more. I was raised pretty frugally, but my parents always preached that you can only retire once your dividends and interest pay for your full year's expenses.

I am 23, engaged, getting married in a year, and we are both engineers. She is finishing her masters, and I have started work about 6 months ago. I won't include her salary in my case study, because she doesn't have one right now.

Gross Salary: $67,000

Pre-tax Deductions (yearly):
401K-$3350 (employer matches 5%)
HSA-$250
H,V,D-$985

Taxes fed and state (est.): $18,000 (doesn't include investment taxes, I'm not certain how to calculate them)

Investments:
Fidelity 401k (Vanguard 2060)-$1700
Vanguard Roth IRA (VTSMX)-$3100
Vanguard taxable (VTSMX)-$3100

Current monthly expenses:
Rent-$675
Car Ins-$133
Car loan-$465 (Ouch. I know.)
Food and Dining-$265 (This includes restaurants, where I generally pay for the fiancee)
Gas, Electric, Water-$50
Internet-$73 (Ungodly expensive internet through Mediacom. Only ISP in town that isn't dial up, but I have a long distance relationship right now, so I can't give it up-I need skype and such.)
Travelling-$208 (I don't spend this every month, but we want to have a $2500/yr budget for this.)
Misc.-$200

TOTAL-$2069 (~$25,000/yr)

I have a 4 month emergency fund saved in just regular checking and savings.

I paid off my student loans (6.8% interest!) in May, after a month of reading MMM (thank you to everyone on here for that!)

My car is a brand new 2016 Honda CR-V (I'm a monster). It has 1.99% for 72 mo (66 left). I'm making more than that on my Vanguard accounts, so I'm only paying the monthly payments for now. I'm not interested in getting rid of it for a while, I really like it and I get 32 mpg, and AWD in the winter.

My next steps:
1) 9 month emergency fund
2) Get $10k in taxable, so I can switch to VTSAX
3) Add my last $2500 to my Roth for the year
4) Put as much in 401k as possible

My questions:
Are these the right next steps?
Should I skip the VTSAX and focus more on my 401k?
Is 9 months too much for an emergency fund? I might be leaving my job soon, if she gets a job somewhere else that we can both find work. I like the idea of having 9 months at my fingertips.
Should I be investing in a tIRA instead of a Roth? I can only get a partial deduction with my current salary I think (might be wrong).
Should I be saving for a wedding more than I am? Hoping to keep the total budget at ~$15k, and that would include contributions from family (so it might end up costing me significantly less than that).

After getting married, I'm assuming $40k/yr expenses, and hoping for combined ~$130k gross income. So we would be putting away nearly 70% of our income, resulting in freedom from economic slavery in just 8.5 years from next year. (Did I do that right?)

The biggest question is: Did I miss anything glaringly obvious?

Sorry if these are repetitive/stupid. I just want reassurance that I'm on the right track, as I have gotten complete disbelief and skepticism from friends and family (I'm not telling anyone else until it happens). SO is on board though, even if she likes to shop a little more than me.

Thanks for your help!!

afuera

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Welcome to the forums Milkshake!  I'm only a year older than you and my hubby and I are both engineers as well.  You are starting off in a good spot and I wish I had limited myself to only spending $15K on our wedding ( I still cringe when I think about how much we spent...).
The biggest thing I notice is the CR-V.  We bought a 1 year old Mercedes a few months before I finished college and it cost us about 7K in depreciation and 1K in interest payments before we finally wised up and sold it.  We are so much happier with our 2007 Highlander we found on craigslist than we ever were with the Mercedes and it was 1/3 of the price. Just trying to offer a little advice from someone who has been there, tried to justify the cost (i'll drive it forever, its new so no big breakdowns, blah blah etc.), and hoping you can realize it sooner than we did.

Bracken_Joy

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The big thing that jumps out at me is that you're investing in taxable space before filling up your tax advantaged space. Before a taxable account, you should be filling your 401(k) and an IRA. Here is the classic investing order we tend to espouse around here:

Quote
WHAT
0. Establish an emergency fund to your satisfaction
1. Contribute to 401k up to any company match
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.(note: today is 1.55%, so 6.55% for this step)
3. Max HSA
4. Max Roth or Traditional IRA based on income level
5. Max 401k (if 401k fees are lower than available in an IRA, swap #4 and #5)
6. Fund mega backdoor Roth if applicable
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield. (note: today is 1.55%, so 4.55% for this step)
8. Invest in a taxable account with any extra.

WHY
0. Give yourself at least enough buffer to avoid worries about bouncing checks
1. Company match rates are likely the highest percent return you can get on your money
2. When the guaranteed return is this high, take it.
3. HSA funds are totally tax free when used for medical expenses, making the HSA better than either traditional or Roth IRAs.
4. Rule of thumb: trad if current marginal rate is 25% or higher; Roth if 10% or lower; flip a coin in between
5. See #4 for choice of traditional or Roth for 401k
6. Applicability depends on the rules for the specific 401k
7. Again, take the risk-free return if high enough
8. Because earnings, even if taxed, are beneficial

If you're worried, "how will I get money before 60, I want to retire EARLY, not at 60!" fear not, we've got links for you:
http://www.gocurrycracker.com/cash-flow-management-early-retirement/
http://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/
http://www.madfientist.com/how-to-access-retirement-funds-early/
http://www.madfientist.com/retire-even-earlier/

And for good measure, this is HIGHLY recommended. I know it's long. It took me 4 months to get around to reading it. And then I kicked myself. Don't be me. Don't kick yourself:
http://jlcollinsnh.com/category/stock-investing-series/

nereo

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1)  Are these the right steps? 
What you are doing is fine - some might do things slightly differently (see below) but there's nothing about your strategy I can find fault with.  Your vehicle is obviously absurd for someone just starting out their FI journey, and you'd be better off selling it and buying something for <$10k.

2) Should I skip the [taxable] and focus more on my 401(k)?
I would say almost certainly yes.  It will lower your tax bill and you'll come out ahead in the end.  You already have (and are increasing) your E-fund, so to me the 401(k) is a no brainer.  The only exception would be if you have particualrly horrible, high-fee options in your 401(k) or if you needed to make a very large purchase in the near future (like a downpayment on a home in an expensive area).

3) Is 9 months too much for an E-fund?
This gets at personal preference and individual circumstances.  It's more than I would like to have, but for the moment you have some debt, not a huge amount of savings and your fiancee does not have a job.  So 9 months sounds fine to me.  Once you both are employed and have you fewer expenses and more savings you might decide to pare down your e-fund to 3-6 months.

4) Should I invest in a tIRA vs a ROTH?
At your salary almost always "yes".  Read this and this for more info.

5) Should I be saving more [than $15k] for our wedding? 
Personal prefernce bro.  We recently got married (a little over a year ago) and had an awesome wedding for about $7k, which included food, booze, the reception hall and the ceremony.  My sister got married 8 years ago and I know she spend >>$20k (not sure the exact amount).  Others around here have gotten married for under $500.  In the end you will be just as married regardless of what kind of wedding you have, so do what feels right to you and your fiancee, but beware the perpetual monster that is the wedding industry.  Lots of threads here about how to keep costs low while throwing a meaningful ceremony and a kickass reception/dinner.


(and the big question): Did I miss anything glaringly obvious?
Yes.  You haven't mentioned how your future spouse feels about this.  If she is on board you should have smooth sailing.  If the two of you have different goals regarding money it's going to get choppy. 

(edited for clarity and formatting)
« Last Edit: July 26, 2016, 08:43:53 AM by nereo »

Milkshake

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Thanks for the quick responses!

I'll plan on talking to HR asap to increase my 401k and HSA. I can't afford to max them both out, but more is always better. I'll also look more seriously into the car situation, but no promises there. I think I'll probably aim for an 8 month emergency fund.

Also, she is on board for the most part, and she really likes the sound of retiring early. Especially after I convinced her that $40k still gives us plenty of luxury :)

nereo

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Thanks for the quick responses!

I'll plan on talking to HR asap to increase my 401k and HSA. I can't afford to max them both out, but more is always better. I'll also look more seriously into the car situation, but no promises there. I think I'll probably aim for an 8 month emergency fund.

Also, she is on board for the most part, and she really likes the sound of retiring early. Especially after I convinced her that $40k still gives us plenty of luxury :)

Max out the HSA first, then bump up your contributions to your 401(k).  You might be surprised how much you can afford to increase, given how much less you will pay in taxes at the end of the year. 

$40k can afford you a ton of luxury, especially if you aren't making debt payments. The trick is to appreciate what you have instead of always wanting something a bit more expensive, a bit more exclusive, a bit nicer.  You can always spend more, but it doesn't mean it'll make you happier.

MDM

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Max out the HSA first, then bump up your contributions to your 401(k).  You might be surprised how much you can afford to increase, given how much less you will pay in taxes at the end of the year. 
$40k can afford you a ton of luxury, especially if you aren't making debt payments. The trick is to appreciate what you have instead of always wanting something a bit more expensive, a bit more exclusive, a bit nicer.  You can always spend more, but it doesn't mean it'll make you happier.
+1 to all that.

If your 401k investment fees are low, and you have a Roth 401k option, consider:
- max HSA ($3350)
- ~$16K into the t401k (in other words, until you drop to a 15% marginal savings rate)
- the remaining $2K into a Roth 401k and then $5500 into a Roth IRA.

Assuming state taxes are ~5%, that still leaves you with ~$27K/yr, or $2K more than the $25K number you listed.  See the case study spreadsheet if you want to check these numbers.

Good luck, and best wishes for the marriage!

Catbert

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I think 9 month e-fund is too much for someone in your situation.  You are young, presumably healthy, no dependents, don't own a home and probably would be able to get another job if you lost your current one.  But you're the one who needs to sleep at night.

Remember that a 9 month e-fund is what you spend in 9 months, not what you earn. 

JJsfr

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You financed a new car and will be paying half your annual salary over the term of the loan? How does your SO feel about you spending more on a car than your wedding? You didn't say where you live, but AWD is nearly useless without decent winter tires.

Sell the shiny toy and buy something you should actually be driving.

okits

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OP:
Quote
After getting married, I'm assuming $40k/yr expenses, and hoping for combined ~$130k gross income. So we would be putting away nearly 70% of our income, resulting in freedom from economic slavery in just 8.5 years from next year. (Did I do that right?)

If you're going to pay (est.) $35k in taxes on $130k in gross income, you're saving $55k (42% gross, 58% net).  In ER, make sure your estimated spend amount ($40k) includes any taxes, medical insurance, and health benefits that are currently paid by your employer.  A 58% savings rate gives you around 13 years until ER, according to the Shockingly Simple Math post.

Even if your plans to FIRE are being met with disbelief and skepticism, keep on keeping on.  You and future-DW may love your jobs and never want to quit, but there will likely be a time in the future where you're glad you have all that accumulated wealth (makes quite a difference in your stress level and range of options if a health or employment crisis arises).

For your wedding, spend mindfully but have the celebration you want (and can afford).  DH and I spent about 1/3 of the local average (still a lot, compared to the Mustachians that do it for under $1k, etc.) and in hindsight we wish we had gone a bit bigger (invited a few more people, more time with the photographer, etc.) You're only going to do this once, and while you are young time stands still for no one (our wedding marked the beginning of my FIL's very sad health decline.  We may have an anniversary bash someday, but he certainly won't be able to attend, let alone give a speech).

I think you and future-DW are doing great*, thinking about and taking action on this when you're fresh out of school.  I can only lament how much further ahead I'd be if I hadn't been half-assing it all those years.

* Except for the car.  The horror.

mskyle

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Talk to your fiancee about money! Really talk! Everyone has really different assumptions about how money will be spent at different stages of life, and especially when we're young we tend to assume that our way is the only way. Also, if you guys are currently long-distance it's easier to ignore those little differences.

It sounds like both of you are living frugally right now, but how frugally do you want to live once your fiancee is done with grad school? A lot of people feel that finishing school and getting married represents "growing up" and requires a different lifestyle than the single student lifestyle.

Where do you guys stand on kids - whether you have them at all, how many, when you want to have them? Will one or both of you want to postpone retirement in order to have kids (or would you want to postpone kids until early retirement)?

You will not be able to meet your financial goals and have a happy marriage if you and your wife aren't in agreement (and can't compromise) on the big stuff. It's easy to assume that because you love someone and get along with them, they agree with you about the big stuff. But it's 100% worth it to get it out in the open and make sure you really understand where each other are coming from, even if it requires barf-inducingly awkward conversations.

zolotiyeruki

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In your situation, I recommend maxing out the tax-deferred accounts (401k, traditional IRA, HSA) first, since your marginal tax rate is a lot higher now than it will be when you withdraw the money (assuming tax rates don't change).  Once you're married, it won't change a whole lot--double the income, and tax brackets scale similarly.  You definitely want to cut down your taxable income both before and after marriage, and given your spending levels, it should be pretty easy to get down into the 15% bracket.  $130k - $40k = $90k for taxes and retirement savings.  $47k in 401k (if it has low fees) and traditional IRA contributions, plus $20k in deductions and exemptions will get you down to $63k in taxable income.  The federal income tax on that will be somewhere in the $9k range, leaving you with another $14k for saving.  Personally, I'd put that in a taxable investment account (VTSAX or similar).  That way it's available for emergencies or down payments or whatever without penalty, and will eventually help you bridge the gap years when you retire.

JJsfr

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Seriously, none of this tax optimization matters right now compared to the giant vacuum of your new car.

Milkshake

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I have looked up the out-of-the-lot depreciation of my car, and I guess my car's still worth about $4k under the value of the loan right now. Is it worth it to eat the difference, or would it be better to wait until I'm at least at break even?

And we've discussed money quite a bit. I know I'm more frugal than she is, but she is willing to try it out. Just last weekend she said we each need to get rid of ten things that we can live without. I will definitely sit down with her again to make sure we're on the same page.

Also, we have talked about kids, and neither of us wants them until our early 30's (maybe after retirement?) or possibly not at all, so we'll see how that goes and adjust as needed. Mustachians are flexible, right?

I appreciate all the feedback! It has given me a lot to consider, and points I hadn't thought of.

nereo

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I have looked up the out-of-the-lot depreciation of my car, and I guess my car's still worth about $4k under the value of the loan right now. Is it worth it to eat the difference, or would it be better to wait until I'm at least at break even?


It is worth it to eat the difference and sell the car today.  You can think of the purchase of your car as a "sunk cost," and realize that it will continue to depreciate fairly rapidly over the next 3 years before depreciation starts to tail off.  That means that every month that you hold onto the car its worth less as a resale and you've lost money.

There are two schools of thought here:
1) hold onto it until the wheels fall of (while maintaining it so it lasts a long time).  By doing this your average annual cost of ownership will go down.  It can be thought of as "an expensive lesson".  Unfortunately, this strategy still means you'll pay both a LOT more over the next few years and more overall compared to buying vehicles that are older. 

2) sell it now, absorb the costs outright (including paying to get out of the 'underwater loan') and realizing that you will break even from this in ~2 years. Doing this is painful at the start but the economically superior option.

Its your life - do what makes you happy, but owning that car will cost you thousands more every year than buying something that's circa 2010 and has 60,000-85,000 miles on it.

Milkshake

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That's good to know. I'm going to try to calculate exactly how much more it will cost me, so that I can look at all the dollars as a real number. That'll help me decide I think.

I'm sure this has been answered before, but is it worth keeping the car for 100k miles, then selling it, before any real maintenance starts? Is the higher taxes, insurance, and registration worth the relatively low maintenance cost, and not having to worry if a sneaky used car salesman/craigslister screwed me over?

Bracken_Joy

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Some people swear by selling at ~119k miles, because 120k is the "magic number" for some cars. But the thing is, it can vary a TON depending on what type of car you have. The best thing you can do is learn to do your own basic maintenance and maintain a car well across it's lifespan you have it. Look at that user booklet, with those recommended checks and tune ups, and do all those you can, and get them done in a timely fashion otherwise.

I don't have a rec on the car thing. You have the liquidity that holding onto the car and paying the loan won't sink you (it's an OBVIOUS call to action if someone needs to eat the cost to free up the monthly cash flow to pay down debt). In your case, the mistake has been made, and you *will* lose out on this car, one way or another. I would have to see the math, like you, to have an opinion on which is clearly better.

Milkshake

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I haven't done the math on the car yet, but from the investment side, I can max out my HSA and still contribute 15% to my 401k (up from 5%). According to the case study spreadsheet, that puts me in a lower tax bracket and takes a year off of my working time, just in tax savings!

JJsfr

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I have looked up the out-of-the-lot depreciation of my car, and I guess my car's still worth about $4k under the value of the loan right now. Is it worth it to eat the difference, or would it be better to wait until I'm at least at break even?


It is worth it to eat the difference and sell the car today.  You can think of the purchase of your car as a "sunk cost," and realize that it will continue to depreciate fairly rapidly over the next 3 years before depreciation starts to tail off.  That means that every month that you hold onto the car its worth less as a resale and you've lost money.

To put numbers to it. Let's say you financed 35k but can sell for 28k. You're out 7k no matter what.

You buy a used car for 6k. You're out another 6k.

If you keep the car you have now you're out 35k and will have to pay that off and then make another 35k to get to your magic number.

However, if you sell and get a used one, you're out only 13k. In this scenario by not keeping the new car that's 30k extra in your life you don't have to make to meet your number (56k-26k)
« Last Edit: July 27, 2016, 09:02:04 AM by JJsfr »

Milkshake

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I have looked up the out-of-the-lot depreciation of my car, and I guess my car's still worth about $4k under the value of the loan right now. Is it worth it to eat the difference, or would it be better to wait until I'm at least at break even?


It is worth it to eat the difference and sell the car today.  You can think of the purchase of your car as a "sunk cost," and realize that it will continue to depreciate fairly rapidly over the next 3 years before depreciation starts to tail off.  That means that every month that you hold onto the car its worth less as a resale and you've lost money.

To put numbers to it. Let's say you financed 35k but can sell for 28k. You're out 7k no matter what.

You buy a used car for 6k. You're out another 6k.

If you keep the car you have now you're out 35k and will have to pay that off and then make another 35k to get to your magic number.

However, if you sell and get a used one, you're out only 13k. In this scenario by not keeping the new car that's 30k extra in your life you don't have to make to meet your number (56k-26k)

Ok, so using my numbers:
31.5k for the loan
Currently at 28k
KBB estimates my car is worth 24k
KBB estimates 9k for a Scion tC 2010, 80k miles (similar car to MMM's I think, but newer)
We'll assume 8k for conservatism's sake

Sell my car, and I'm out 15.5k (8k+7.5k)
Keep my car and I'm out 31.5k

Less repairs and worry about how the previous owner treated it, for the price of 16k (31.5k-15.5k).
In other words, I could buy 2 more used cars with the savings. Feel free to check/comment on my math here.

I guess I should sit down with my fiancee...

nereo

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Ok, so using my numbers:
31.5k for the loan
Currently at 28k
KBB estimates my car is worth 24k
KBB estimates 9k for a Scion tC 2010, 80k miles (similar car to MMM's I think, but newer)
We'll assume 8k for conservatism's sake

Sell my car, and I'm out 15.5k (8k+7.5k)
Keep my car and I'm out 31.5k

Less repairs and worry about how the previous owner treated it, for the price of 16k (31.5k-15.5k).
In other words, I could buy 2 more used cars with the savings. Feel free to check/comment on my math here.


Your ballpark numbers seem on target.  If you want to get a bit more nuanced, you could include the expected sale price/trade-in value of the 2010 Scion in 4 years (rough estimate of $5,000 per KBB) vs the 2016 CR-V (rough estimate $12k per KBB).  Fuel economy is fairly similar, though the Scion edges out slightly if you drive mostly highway miles.  Tires on the scion will be a few hundred cheaper too, and your insurance will probably be $10-20 less per month (worth a 10 minute phone call to check).

Regarding repairs/worry - my opinion is that this is largely an irrational fear. Any good mechanic can get a decent idea of how a vehicle was treated and if there has been any major damage (including checking the computer codes).  If damage is hard to spot, it's because the pervious owner(s) did a decent job with repairs - which is what you want. Buying used has one major advantage in that you can look up the history of that vehicle to see how problem-prone it's been for tens of thousands of other people; something you can't know with your 2016 vehicle right now.

Quote
I guess I should sit down with my fiancee...
I strongly support that statement.  her input is far more important than a bunch of strangers' on the internet.

Basenji

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Just a note to say you are doing great. Keep it up! The MMM post below always inspires me linking what you save to how quickly you can be free from money worries (see graph "Working years vs. Savings rate"). Might be a good thing to read and discuss with your fiancee.
http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/

ETA: even if you keep the car, note that the exercise of checking the math on expenses is how you prevent future mistakes.
« Last Edit: July 29, 2016, 06:11:32 PM by Basenji »