Casy Study: Young & Low Income

[farmGirl14]

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[gimp]

Not terrible! You guys are managing it.

Okay, so, advice. First thing that jumps out at me: electricity. Why so high?

Phone - is that for one person, or two? 60 a month isn't terrible for two. You can do better with Republic Wireless or Ting, but definitely not terrible.

Lunches - why are they separate from food and household? Eating out? Can you do it less?

Food and household - what do you buy apart from groceries?

Finally, the big one. Mortgage at 6%. What will refinancing look like? What will it cost? If you pay down mortgage hard, now, you're getting a guaranteed 6% return - pretty damn good, though perhaps not as good as a roth ira. But, why a roth ira? Wouldn't a traditional ira make more sense for you given your income?

[Frankies Girl]

Your car insurance seems high if it's for 2 vehicles with the state minimum coverages (would think that the car with no engine isn't being covered - since it's not running). That's 1200 a year! If you're carrying full coverage, you might want to consider dropping comprehensive if you have it since your vehicles are all 6+ years old... but definitely need to shop around.

And really high gasoline expenses... no chance to carpool, ride a bike, combine trips - something?

Your mortgage rate is really high, definitely should get a refinance quote. Watch out for the closing costs or points stuff, but there's got to be a better deal out there.

I know that tithing is a touchy subject, but $270 a month seems really high to me considering how much you actually are bringing in. Is there any way you could do volunteer work for your church/community instead of actual cash as a compromise, or even lower your amount?


The big thing is that you're making a very small amount of money. But you're young and not doing badly and hopefully can earn more in the coming years and if you're staying out of debt, (excepting the loan and loc which hopefully will be gone very soon!) you are already ahead of most of your age group...

[La Bibliotecaria Feroz]

Your energy costs do seem high, but I guess that may be a Midwestern thing--gross sticky hot so you need the AC, then cold in the winter. Still, worth looking to  Lunches jump out at me, too--that makes really $360 a month for food and household, which seems like more than two people really need to spend.

My husband and I are able to get by with only $20 a month on phones by using Airvoice and supplementing with Google Voice for those long, chatty calls made from home. Might be something to consider.

[TheSimpleLife]

Mortgage Payoff vs.  ROTH IRA vs. Traditional IRA

Finally, the big one. Mortgage at 6%. What will refinancing look like? What will it cost? If you pay down mortgage hard, now, you're getting a guaranteed 6% return - pretty damn good, though perhaps not as good as a roth ira. But, why a roth ira? Wouldn't a traditional ira make more sense for you given your income?

To address the bold portion above, no, a traditional IRA would be the last option I would advise when choosing between mortgage pay down, ROTH, or traditional.

Here are probably how the numbers look:

Total Gross Income = $42,000
Standard Deduction = $12,400
Personal Exemptions = $7,900
Taxable Income = $21,700
Rough federal tax due = $2,400

So, that is only 5.7% effective tax rate for federal income tax.  Also, they will be eligible for a 20% saver's credit for contributing to a ROTH.  Assuming they max it out for one person, that is another $240 off their federal income tax.  That incredibly low effective tax rate is pretty hard to pass up when considering ROTH vs traditional.

I would strongly consider mortgage pay down though.  At 6% and with such a small balance, the transaction fees involved with a REFI might not be worth it.  Cheapest all in costs I've been able to locate lately have been $1,500+.  I'm not convinced that 3% of total REFI amount in fees is a good decision. 

I will address expenses and income in next post, but with a little bit of hustle they should be able to continue contributing to ROTH (or other retirement plan) while paying off the mortgage ASAP.

[TheSimpleLife]

Cobalt engine broke in March, bought Neon from family to replace. Currently using our $500 a month savings to pay it down quickly. Cobalt is getting new engine as we speak. (Money on LOC.) Within next few weeks I will sell the Cobalt and am expecting to get $3,500. I will use that money to pay off the LOC, Neon, and put the extra in our EF. We don't normally carry debt, and this is very short term. So try not to focus on that for our budget!

After this car mess is taken care of we will get our EF up to $4,500 which is 3 months expenses.

Thoughts, suggestions, ideas?

Yeah, I agree it is no use worrying about those small debt amounts.  I do have another suggestion/questions about the above portion of your post..

Have you considered selling the 1994 Jeep?  Not sure of condition or what you could get out of it, but I guarantee a Cobalt and Neon would cost way less in gas/repairs, etc than a 1994 Jeep and Neon.  That monthly savings could really add up!

Also, not seeing where you get $1500 in monthly expenses for the 3 month emergency fund of $4,500?  Looks like roughly $1,700/month when you remove the tithing portion.

Also, at basically $42,000 year in income between the two of you, you are working the equivalent of 2 $10/hr jobs at 40 hours a week.  IMHO, it makes no sense to have 3 months of emergency funds saved up as you should be able to easily replace those wages even if you live in a town of 1,000 people.  I think you could put that extra $1,500 to work in a much better way that sitting in a low yield savings account.  I know everyone's comfort level is different with EFs, but seems a little overkill to me.

Will be replying back to expenses and income separately...

[TheSimpleLife]

Income:

$2,700 After Tax

ETA: I am one internship away from finishing an AS degree in Web Design. I paid cash for all of the school, so no debt there!

IMHO, your income is your biggest opportunity for improvement!  To help your fellow mustachians, what does your husband do for a living?  Are you both working full-time at the moment, or have you been part-time while finishing your degree?  Regardless of degrees, education, current situation, you guys are in a great position to double your income or more with a little bit of hustle.

Can you share more about your area and strategy to make money with your AS in web design?  These would be my recommendations:

1.  Learn the ins and outs of designing and creating websites on the Wordpress platform.  The genesis framework and most of the elegant themes are very in demand right now.

2.  Squarespace is a little more DIY, but would be a great platform to build cheaper websites that would still allow you to make great margin.

3.  Do your best to learn about online marketing.  There is a lot of money to be made providing those services as a complement to your web design abilities.  Read up on inbound marketing, content marketing, SEO, etc. moz.com is a great place to start if you're new to all that.

4.  Depending on where you live, working in house as a web designer probably won't pay near as good as going out on your own.  I would suggest getting a job in industry that provides a better income than you currently make, but start building websites on the side to increase income and get the feel for running your own gig.  Much better long term potential IMO.

Expenses:

Housing Expenses

Mortgage: $500 (Includes insurance & taxes & $30 additional principle)
Propane: $100
Trash: $20
Water: $50
Electricity: $200 (Average)

Other

Car Insurance: $100
Phone: $60
Food & Household: $300 (Go over a little usually)
Car Fuel: $300
Lunches $60
Tithes: $270
Savings: $500 (ish)

Suggestions on expenses:

1.  Utilities at $370/month combined seems very high.  Do you live in an older, drafty house by chance?  See this post from MMM for help in this area.  http://www.mrmoneymustache.com/2013/10/15/when-energy-saving-becomes-an-emergency/

2.  Is your car insurance the state minimum and liability only?  Ours is a little above the state minimum, liability only on a mid 2000s sedan, we're both 28, and only pay $27/month.  I think you could save at least $25 a month if you shop around.

3.  Phone = $60/month.  Is that for two cell phones?  One cell phone?  House phone?  We have Republic Wireless and it works fine even though the Sprint coverage around here isn't the best.  Total for our 2 phones is $23/month including tax.

4.  Car Fuel - from my other post, I imagine you could save a good chunk of fuel money each month if you sold the Jeep and kept the two smaller, more fuel efficient cars.  Any opportunity for you two to ride together?  What about splitting expenses with a co-worker to commute together?

5.  Food and household + lunches = $360 (probably closer to $400 considering you put that you usually go over a little bit).  Weird stuff comes up for misc items around the house, but if you become really focused I'm sure you could cut this total by $50 or so each month (more if you want it bad enough).


Overall, you guys are in great shape because you're young, already live cheaply, and sound like your on the same page financially.  IMHO it is much more advantageous to focus on increasing income as your expenses are already pretty good by mustachian standards.

Best to you guys as you continue to move towards FI!

[skunkfunk]

Gasoline is not something we can cut back on. It's the price to pay for living out in the country. The nearest store or gas station is 15 minutes away, and even then our Walmart is not a super Walmart. (No groceries) So you pretty much have to drive a long way to get anywhere, including our jobs.

15 minute drive? So what, a 45-60 minute bike ride? Could be worth getting some exercise every now and then. Are they 60 mph highways or back roads you have to drive on? You seem to be doing a good job on many things, but there is still a lot of fat you could cut with a little effort. Be a little more conservative with the thermostat, driving, food. Do you have fluorescent lighting, good insulation, use ceiling fans to keep the thermostat up higher, line dry clothing, ?

Might even consider electric supplemental space heating given the high propane costs. Or more clothes. http://www.mrmoneymustache.com/2013/02/01/the-oil-well-you-can-keep-in-your-pants/

[skunkfunk]

Gasoline is not something we can cut back on. It's the price to pay for living out in the country. The nearest store or gas station is 15 minutes away, and even then our Walmart is not a super Walmart. (No groceries) So you pretty much have to drive a long way to get anywhere, including our jobs.

15 minute drive? So what, a 45-60 minute bike ride? Could be worth getting some exercise every now and then. Are they 60 mph highways or back roads you have to drive on? You seem to be doing a good job on many things, but there is still a lot of fat you could cut with a little effort. Be a little more conservative with the thermostat, driving, food. Do you have fluorescent lighting, good insulation, use ceiling fans to keep the thermostat up higher, line dry clothing, ?

Might even consider electric supplemental space heating given the high propane costs. Or more clothes. http://www.mrmoneymustache.com/2013/02/01/the-oil-well-you-can-keep-in-your-pants/

I can not bike to work. It's 60 mph highways, with huge hills, and not safe.

As I said. We are conservative with the thermostat. We kept our house heat on 60 this winter, and used space heating. We only have a window AC in our bedroom set at 74. We have ceiling fans in all the major rooms, and we just remodeled the house so all brand new insulation.

We don't use a whole lot of energy, it's just expensive where we live.

This might be a perfect situation for some solar panels or other form of on-site power generation. Check if there are any subsidies for solar. You might be able to sell it back to the power company during peak hours for a nice amount per kwh.

[TheSimpleLife]

What would you suggest instead?

Sounds like the emergency fund is comforting to you.  I was just suggesting keeping a smaller emergency fund on hand, but if 3 months helps you sleep better at night, just leave it as is.

Bigger and more important question after reading your responses to me and everyone else:

How important is the current farm and house?  How important is staying in your current area?  Seems like you could achieve FI much faster if you sacrificed a few years of what you "want" with what could potentially be much more practical (moving closer to jobs, using less gas and energy, moving to a place with better employment opportunities, etc).

[skunkfunk]

What would you suggest instead?

Sounds like the emergency fund is comforting to you.  I was just suggesting keeping a smaller emergency fund on hand, but if 3 months helps you sleep better at night, just leave it as is.

Bigger and more important question after reading your responses to me and everyone else:

How important is the current farm and house?  How important is staying in your current area?  Seems like you could achieve FI much faster if you sacrificed a few years of what you "want" with what could potentially be much more practical (moving closer to jobs, using less gas and energy, moving to a place with better employment opportunities, etc).

Well I am open to suggestions, with what to do with savings besides just putting it back for an EF. I thought about just keeping about $2,000 in cash for emergencies and putting the rest towards our Roth IRA. Since we could get it back out if we absolutely had to, but at least it would be giving me compounding returns. I doubt we would actually have to use our EF, since as you said, we could get hired at any minimum wage job and stay afloat.

The house and farm is everything to us. We enjoy country life. And I really don't care about being wealthy, or having an awesome job. I'll gladly pay for gas and electric to continue the farm life.

I suggest a taxable Vanguard account. Keep a few $k buffer and put the rest in a few low-risk investments, or if you're brave, do S&P 500 index and such. You can get the money in 3-4 days if you need it, and reap the market gains in the meantime. You will be taxed when you sell, but that's not too bad compared to the potential rewards.

[skunkfunk]

What would you suggest instead?

Sounds like the emergency fund is comforting to you.  I was just suggesting keeping a smaller emergency fund on hand, but if 3 months helps you sleep better at night, just leave it as is.

Bigger and more important question after reading your responses to me and everyone else:

How important is the current farm and house?  How important is staying in your current area?  Seems like you could achieve FI much faster if you sacrificed a few years of what you "want" with what could potentially be much more practical (moving closer to jobs, using less gas and energy, moving to a place with better employment opportunities, etc).

Well I am open to suggestions, with what to do with savings besides just putting it back for an EF. I thought about just keeping about $2,000 in cash for emergencies and putting the rest towards our Roth IRA. Since we could get it back out if we absolutely had to, but at least it would be giving me compounding returns. I doubt we would actually have to use our EF, since as you said, we could get hired at any minimum wage job and stay afloat.

The house and farm is everything to us. We enjoy country life. And I really don't care about being wealthy, or having an awesome job. I'll gladly pay for gas and electric to continue the farm life.

I suggest a taxable Vanguard account. Keep a few $k buffer and put the rest in a few low-risk investments, or if you're brave, do S&P 500 index and such. You can get the money in 3-4 days if you need it, and reap the market gains in the meantime. You will be taxed when you sell, but that's not too bad compared to the potential rewards.

Why is this recommended over putting it in my Vanguard Roth IRA? Where the gains are tax free.

Once it's in an IRA, you have to jump through hoops to get it out. For a Roth, for instance, any contributions cannot be removed for 5 years without big penalties, and the gains are untouchable until retirement age without penalties (I think there are ways to get it out, but the point is that it isn't suitable for an emergency fund.)

[Frankies Girl]

Why is this recommended over putting it in my Vanguard Roth IRA? Where the gains are tax free.

Once it's in an IRA, you have to jump through hoops to get it out. For a Roth, for instance, any contributions cannot be removed for 5 years without big penalties, and the gains are untouchable until retirement age without penalties (I think there are ways to get it out, but the point is that it isn't suitable for an emergency fund.)

This is incorrect. An investor can withdraw his or her contributions to a Roth IRA at any time without tax or penalty. But, that is not the same case for any earnings or interest that you have earned on your Roth IRA investment. In order to withdraw your earnings from a Roth IRA tax and penalty free, not only must you be over 59 ½ years-old but your initial contributions must also have been made to your Roth IRA five years before the date when you start withdrawing funds.

Stick with the Roth if you want to invest for now, as it is the best way to have your money working and earning tax deferred if you have extra to use.

[Red Beard]

I would continue focusing on maxing out a Roth account for each you and your husband. Do you currently have any credit cards? If not, I would suggest opening one or two which would reduce your dependency on the EF- allowing you to put it into the Roth accounts in a low fee index fund or dividend growth stock. That way, if an emergency occurs you can use your credit to bridge the any gaps and withdraw from the Roth if necessary.

The other thing that comes through in reading through the thread - and this is just an observation and totally not meant to offend - is that perhaps you're not quite fully bought into the FI mindset yet. For each of the suggestions so far there has been a reason why you can't make the adjustment or want to do something differently. There is nothing at all wrong with this, but at the end of the day you might have to choose what is more important to you; a jeep/new truck, large remodeled farm house in the country, job where you work from home, lunches out, etc; or financial independence and the freedom to retire early.

[skunkfunk]

Why is this recommended over putting it in my Vanguard Roth IRA? Where the gains are tax free.

Once it's in an IRA, you have to jump through hoops to get it out. For a Roth, for instance, any contributions cannot be removed for 5 years without big penalties, and the gains are untouchable until retirement age without penalties (I think there are ways to get it out, but the point is that it isn't suitable for an emergency fund.)

This is incorrect. An investor can withdraw his or her contributions to a Roth IRA at any time without tax or penalty. But, that is not the same case for any earnings or interest that you have earned on your Roth IRA investment. In order to withdraw your earnings from a Roth IRA tax and penalty free, not only must you be over 59 ½ years-old but your initial contributions must also have been made to your Roth IRA five years before the date when you start withdrawing funds.

Stick with the Roth if you want to invest for now, as it is the best way to have your money working and earning tax deferred if you have extra to use.

Hmm. According to irs, you are correct. Perhaps I'll have to change mine over. Is it as quick as a taxable account to get a distribution? I know I'll have to leave some of it taxable as I can't put more than $5500 in a year.

Edit: Does anyone know where I got 5 years from? Pretty sure I read that one here somewhere.

Edit Edit: One thing I have done with the emergency fund that I would not have been able to do with a Roth IRA is withdraw the earnings to pay down debt. If I did that with a Roth IRA the accessible portion of the IRA would get smaller, limiting its size as an emergency fund. This shouldn't be a huge deal, however, as the contributions would soon grow beyond 6 months expenses.

[Frankies Girl]

Why is this recommended over putting it in my Vanguard Roth IRA? Where the gains are tax free.

Once it's in an IRA, you have to jump through hoops to get it out. For a Roth, for instance, any contributions cannot be removed for 5 years without big penalties, and the gains are untouchable until retirement age without penalties (I think there are ways to get it out, but the point is that it isn't suitable for an emergency fund.)

This is incorrect. An investor can withdraw his or her contributions to a Roth IRA at any time without tax or penalty. But, that is not the same case for any earnings or interest that you have earned on your Roth IRA investment. In order to withdraw your earnings from a Roth IRA tax and penalty free, not only must you be over 59 ½ years-old but your initial contributions must also have been made to your Roth IRA five years before the date when you start withdrawing funds.

Stick with the Roth if you want to invest for now, as it is the best way to have your money working and earning tax deferred if you have extra to use.

Hmm. According to irs, you are correct. Perhaps I'll have to change mine over. Is it as quick as a taxable account to get a distribution? I know I'll have to leave some of it taxable as I can't put more than $5500 in a year.

Edit: Does anyone know where I got 5 years from? Pretty sure I read that one here somewhere.

Edit Edit: One thing I have done with the emergency fund that I would not have been able to do with a Roth IRA is withdraw the earnings to pay down debt. If I did that with a Roth IRA the accessible portion of the IRA would get smaller, limiting its size as an emergency fund. This shouldn't be a huge deal, however, as the contributions would soon grow beyond 6 months expenses.

Yeah, Roths can sound confusing at first... basically, the 5 year rule applies to the earnings/interest. So say you open and funded a Roth in 2014. The clock starts as of January 1, 2014 as far as the IRS is concerned. So 5 years from that date, as long as you were at least 59.5, you'd be able to pull out earnings/interest with no penalty/tax. But you'd be able to pull out those contributions at any time... just can't touch the earnings/interest until you meet the 5 year/59.5 conditions.

So it does make sense to sock away the max each year, for each person, to get it working tax deferred, and knowing that in an emergency, you can always pull out the contribution amounts (requiring you to sell off investments at possibly inopportune times if needed quickly, but hey, that would be the definition of "emergency" right?).

http://www.rothira.com/ for more info.

Now if you are living pretty close to the bone, or have debt, I wouldn't lock up all of my ready cash into a Roth as it would take a few days to sell off and transfer, and it would be silly to do that several times a year for things like a car breakdown or the furnace blowing up... but if you have a comfortable emergency fund and other means of coming up with a few thousand without tapping into a Roth (I'd probably think of it as a last resort type of emergency fund), rolling extra cash into the Roth can act as a backup emergency fund as well.



And OP - I wouldn't worry about MMM not being "the right place" - you're looking for ideas on maximizing your savings/investment potential with the intention of FI down the road. You're not talking about living it up on the Riviera. Even if you shoot down every one of the ideas that are thrown out here right now, it's still going to get you thinking about "what if" scenarios that might become possible later down the road. Trust me, there are plenty of us on here that don't bike to work for instance. ;)

I would put in whatever amount you feel comfortable with in your cash emergency fund (finding the best possible interest rate in a savings account?) and then whatever extra you have, throw into your Roths. As you start building up your earnings, you can start saving for the other things that you've got on your list. It's all about the amount of time just as much as the amounts - investing for FI is playing the long game, and you've got youth on your side, so sock away what you can afford, and get it working for you!

[skunkfunk]

And your right about the last part. I am a part of many other Personal Finance blogs/forums but I have skimmed MMM only a little. I didn't realize how set all of you guys on the early retirement mindset. I'm all for financial independence, but I also want to live comfortably and enjoy life.

That doesn't mean I need new cars, or I want a mansion. But I also don't want to bike 30 miles to work everyday to save $3.

So yes. I would rather retire later, and work from home, eat lunch out, and buy a truck.

Your case study would seem a good fit for www.reddit.com/r/personalfinance

They will give much less early-retirement-oriented advice there, although I feel like you probably got what you need here anyway.

Whatever you do don't go to early retirement extreme. The latest post there is on not having hot water at home. Nothing wrong with it, but I'm too weak for that.

[prefrontalfinance]

The other thing that comes through in reading through the thread - and this is just an observation and totally not meant to offend - is that perhaps you're not quite fully bought into the FI mindset yet. For each of the suggestions so far there has been a reason why you can't make the adjustment or want to do something differently. There is nothing at all wrong with this, but at the end of the day you might have to choose what is more important to you; a jeep/new truck, large remodeled farm house in the country, job where you work from home, lunches out, etc; or financial independence and the freedom to retire early.

And your right about the last part. I am a part of many other Personal Finance blogs/forums but I have skimmed MMM only a little. I didn't realize how set all of you guys on the early retirement mindset. I'm all for financial independence, but I also want to live comfortably and enjoy life.

That doesn't mean I need new cars, or I want a mansion. But I also don't want to bike 30 miles to work everyday to save $3.

So yes. I would rather retire later, and work from home, eat lunch out, and buy a truck.

Perhaps MMM is not the place for me at this time?

Well, it would have helped if you had read a number of the articles before jumping into the community. You will find that in fact, it's not ALL about Financial Independence - MMM espouses a particular philosophy on lifestyle and spending beyond the financial implications. I think there is room in the community for people with a spectrum of mustachianism - but of course, the most prolific commenters/most likely to offer advice are usually the more dedicated subscribers to this philosophy.

Here is a great post (I'm pretty sure culled from another forum discussion) about the best MMM articles to get started, if you haven't read them yet:

http://simpleeconomist.com/the-best-of-mr-money-mustache/

As for the commuting question....

I did some math with with Dodge Neon (assuming 25 mpg (http://www.fueleconomy.gov/feg/bymodel/2004_Dodge_Neon.shtml) and using the current avg gas price in the US (http://www.eia.gov/petroleum/gasdiesel/) and this handy cents/mile calculator (http://www.nytimes.com/packages/html/business/20060510_LEONHARDT/cost_per_mile.html). I got an average $0.15 per mile.

Now, this puts a 30 mile commute at $4.5 - and this is a pretty big difference, 1.5 X your estimate per day. But that's just the gas costs. Assuming you travel at an avg speed of 45 m/hr, that's also 40 min of sedentary commuting per day, compared to active commuting, or even better once you work from home, no commuting. And those 40 min sitting in a car are 40 min you're not doing something else- opportunity cost.

You're only making 10/hr right now - you should value that 40 min pretty highly, esp. if each day you're only getting in 6 hrs of productivity per day from it. You're paying $4.50 gas + $6 (value of time) + non-monetized costs every day for a shift that only pays 60$.

Mustachianism is about carefully considering the true cost of things (money and non) we spend money on and the true value being derived (money and non). The fact of the matter is that living in the country is expensive in its own ways, like living in a large city is expensive in its own ways. It seems like you really value country living, and that's ok. But is *this* farm in *this* expensive area with *these* dangerous highways really going to be the best way to do that? And if so, how many more years of mandatory work are you willing to put in, vs complete freedom to work or not, to do that? If you do the math and discover that making your own lunches instead of buying lunch out every day could free you and your husband from 2 years of work-off-the-farm, would you do it? What if you did the math and found out that if you also slashed your gas bill, you could both leave 5 years earlier? Or he could live his job if you continued to work from home?