Feedback on my budget...?

[i_am_the_slime]

I'm curious to get some feedback on my budget.  I am currently saving ~40% of gross so I am not necessarily looking to reduce expenses, just wondering if anyone thinks these are unreasonable.  I see some people are only spending $2k per month which makes me think I could do better.

Monthly Budget:

Net Income: 4100

Expenses
Mortgage (PITI)            700
Gas Heat                      100
Electricity                      100
Student Loan (@3%)   165
Car Insurance                65
Water                            50
Groceries                      400
Gas (auto)                    200
Car Fund                       100
Travel Fund                     50
Gift Fund                         75
Cell Phones (2)              140
Life Insurance                  35
Internet                           60
Medical                           100
Pets                                 50
His Fun                           100
Her Fun                          100

Total                               2590
Remaining                      1510

[rightstuff]

What pops at me first is your cell phone bill.  You should look for I.P. Daley's Cell Phone SuperGuide to see if you could cut it by 30% or more.

https://forum.mrmoneymustache.com/share-your-badassity/communications-tech-isps-voip-cell/

Another suggestion is throwing your 2 "Fun" funds, as well as Car/Travel/Gift funds at your Mortgage and/or student loans to reduce your debt burden sooner.  Once your debt is gone, you will have extra funds to save or use for Car/Travel/Gift/Fun type expenses.

The last of the easy ones is the importance of your Life Insurance policy.  There are lots of opinions out there on the need for it, in the end you have to decide.

Hope this helps.  Best of luck!

[i_am_the_slime]

Thanks for the feedback - it's about what I expected.  You've given me some things to think about.

The mortgage and student loan are both at 3% interest so I'm not in any hurry to pay them off.  I could pay the student loan ($12k) off now if I wanted to.  The mortgage ($112k) still has 29.5 years.  FWIW I'm 31 years old. 

[sleepyguy]

Yeesh 30yr mortgages are still available?  At least the amount isn't too bad.  Check if the bank as 'top-up' rules so you could do large sum payments if you have extra cash (bonus time).  Ours with our Canadian bank (BMO) allows decent top off every month as well as accelerated payments.

Grocery
Cell
Internet

Those are the 3 I see there could be reductions.  As a couple we avg about $40/mth cell bill, $40/mth internet and grocery is about $300... although Grocery depending on what your diet and taste is of course fluctuates.  We aren't a super picky couple.

Thanks for the feedback - it's about what I expected.  You've given me some things to think about.

The mortgage and student loan are both at 3% interest so I'm not in any hurry to pay them off.  I could pay the student loan ($12k) off now if I wanted to.  The mortgage ($112k) still has 29.5 years.  FWIW I'm 31 years old.

[tomsang]

Sleepyguy in the US you can get 30 year fixed loans. If he locked in his loan last year in the 3%+ range, he was the beneficiary of the governments desire to stimulate the economy.  So paying off this gift from the government would set him back in his quest for FI. He should not pay down his debt as this will hurt his FI date. He should take bonuses and excess cash and invest in the market through Vanguard.

On top of the ridiculous interest rates the government throws in tax benefits for student loans and mortgages.

Crazy, but true!

[daverobev]

Where in the US are you?

Cell phones seems high, but depends what you use it for. My wife is on a $60 + tax plan with unlimited minutes and she uses it; I'm on roughly $8 a month prepaid.

If not in the north, heat seems high (as natural gas is cheap right now). Depending on your house size I suppose!

Internet seems high - IMHO 7Mb DSL is fast enough.. and I used that to work remotely.

Groceries seems VERY high. Now, I work from home so I bake bread half the time (20c a loaf instead of $2.50 or whatever), and cook from ingredients + tinned tomatoes etc. We don't eat much meat either, and I grow stuff in the garden - I think our weekly shop lately has been $25!

Electric also seems high unless you have a/c

Medical, pets no idea!

[SunshineGirl]

Most excellent job on choosing a house whose PITI is less than 20% of your take-home pay. Very wise!

[willn]

Between groceries, student loan (Yes, pay it off now!!), phone, internet, utilities, I see you cutting back 400 without too much trouble here...

[tomsang]

Between groceries, student loan (Yes, pay it off now!!), phone, internet, utilities, I see you cutting back 400 without too much trouble here...

Emotions are strong, but logic says that free loans are a huge windfall for the Stache!  A 3% student loan, which probably qualifies for a $2,500 reduction in taxes is clearly below inflation and expected returns of the market.

If anyone wants to get a guaranteed 3% return, contact me, I will back it up with investments of 3x the loan amount.  I am joking, as I am not soliciting investment vehicles, but I find it comical that people who are not financially independent would use investment resources to paydown a sub 4% loan.  I can't get enough capital to take on all the nearly guaranteed 10-20% return investments available.

Debt is a financial tool.  For those that use it appropriately it can be the best asset that you have.         

[willn]

Between groceries, student loan (Yes, pay it off now!!), phone, internet, utilities, I see you cutting back 400 without too much trouble here...

Emotions are strong, but logic says that free loans are a huge windfall for the Stache!  A 3% student loan, which probably qualifies for a $2,500 reduction in taxes is clearly below inflation and expected returns of the market.

If anyone wants to get a guaranteed 3% return, contact me, I will back it up with investments of 3x the loan amount.  I am joking, as I am not soliciting investment vehicles, but I find it comical that people who are not financially independent would use investment resources to paydown a sub 4% loan.  I can't get enough capital to take on all the nearly guaranteed 10-20% return investments available.

Debt is a financial tool.  For those that use it appropriately it can be the best asset that you have.         

Sure, the math is clear except for risk.  My take is somewhat counter to the prevailing wisdom on this site, and is based on the following: 

-Debt increases risk (in my view more than the risk of lost opportunity)
-Freedom from debt has tangible benefits that aren't just financial but emotional and affect every aspect of life.  Job loss? Health event?  No payments, lower stress, more resilience to black swans.  More freedom to change jobs, downsize.
-They will rebuild investments so quickly that the math difference isn't material, especially when factoring risk.

This isn't exact science, its possible my way may cost someone a year.  If my philosophy means 9 years to FI instead of 8 because I paid down debt first, its worth it too me.  I do doubt it even would make that difference though. 

My view is informed by having lived through financial stressors including the Carter inflation, the savings and loan crisis, the dot com bust, the mortgage recession.  Among other lesser events.  It's not the same view I'd have held at 24.  Is it wiser? I think so, I concede there are mathematical arguments that may make it seem quaint. I've seen lots of math not hold up in past events so my skepticism remains. My view is also informed differently than some here--I don't hold FI as a fixed goal but a movable path.  If I never reach it I'm still fulfilled, my motivation in rushing towards it is less intense than many here.

Will

[tomsang]

Willn I understand your point to a degree, except I interpret it differently. 

If you are blowing money, then yes pay down debt, don't blow the money. If you are FI then why take any risks even if mathematically optimal. If you are fresh out of school, have great jobs, have costs under control, then rock the Stache!

If you are systematically investing the money, then I think you will be mathematically safer with debt at 3%.

You named off a few categories of risks. 
Job loss, health risk, black swan event, freedom to change jobs, etc.  I would rather have $350,000 in investments and a 30 year mortgage at 3.5% and a $1,123 monthly payment then a paid off $350,000 house and no investments. The flexibilities of investments is crazy.  Having all your eggs in one basket (house) is riskier.

The best thing that could happen to me is Carter like inflation.  Inflation is the greatest thing ever when you have a 30 year fixed rate loans. The stock market does great, your other investments rock, and your mortgage is fixed!  Rents go up on your rentals to reflect the infation, but the government and banks locked you in for 30 years. Glorious times for a financially independent person who has 30 year fixed rate loans as a hedge.

If you want to see how the market did during various presidents check out this old article. 
http://www.forbes.com/2004/07/21/cx_da_0721presidents.html

I am good with people paying off debt if they understand why, whether that is emotionally or financially.  I just push back, when I hear pay off debt as a mantra that debt is bad and needs to be killed.  I don't think that is always the case.  The rules of thumbs/wives tales, etc. that have been fairly accurate when mortgages were 8-20% worked very well.  When rates are below inflation and below projected inflation I don't think you can just go with it is safer with no debt.  If you believe this then make sure your Safe Withdrawal Rate is below 1% or based on life expectancy as you are saying that over the next 10-30 years we are going to have investment returns less than inflation and less than anything seen over the past few hundred years. Firecalc and all the models out there will not hold up. 

[i_am_the_slime]

You named off a few categories of risks. 
Job loss, health risk, black swan event, freedom to change jobs, etc.  I would rather have $350,000 in investments and a 30 year mortgage at 3.5% and a $1,123 monthly payment then a paid off $350,000 house and no investments. The flexibilities of investments is crazy.  Having all your eggs in one basket (house) is riskier.

I agree 1,000%.  One VERY large risk which willn is ignoring (or at least under estimating) is the risk of a lack of liquidity.  Liquidity is very important in all of the bad scenarios such as job loss, unexpected health care costs, etc.

For 3% I will certainly NOT be paying the debt off.  I would've taken out a 100 year loan at 3% if they would've let me.  It's a great inflation hedge.

Where in the US are you?

Cell phones seems high, but depends what you use it for. My wife is on a $60 + tax plan with unlimited minutes and she uses it; I'm on roughly $8 a month prepaid.

If not in the north, heat seems high (as natural gas is cheap right now). Depending on your house size I suppose!

Internet seems high - IMHO 7Mb DSL is fast enough.. and I used that to work remotely.

Groceries seems VERY high. Now, I work from home so I bake bread half the time (20c a loaf instead of $2.50 or whatever), and cook from ingredients + tinned tomatoes etc. We don't eat much meat either, and I grow stuff in the garden - I think our weekly shop lately has been $25!

Electric also seems high unless you have a/c

I'm in a metro area in the middle of NC.  In the winter my gas bill was usually $80-90 for a 1700 square foot house (which seems high?) and $10 for the summer with no usage.  My electric bill in the winter was $80 and $110 in the summer.  So the average for both utilities is probably closer to $150 per month. 

Groceries - I agree are a little high - it includes incidentals such as toilet paper, cleaning supplies, etc but the main reason is because we buy 95% organic from Whole Foods.  I guess I always thought we could "afford" it but I realize that is just trying to justify it.  We are vegan so we kind of HAVE to go to Whole Foods or Trader Joe's for some items but we could buy more from the regular store.  At least we never go out to dinner and always cook from scratch.  And I take leftovers to lunch every day.

Cell phones are without a doubt too expensive and this one really bothers me.  I need to crunch the numbers again.

Most excellent job on choosing a house whose PITI is less than 20% of your take-home pay. Very wise!

Thanks - I feel like this is by far the biggest factor in my financial "comfort" level.  I look at a lot of people's mortgage payments with dismay - I would be SUPER stressed!
 

[Mega]

Willn I understand your point to a degree, except I interpret it differently. 

If you are blowing money, then yes pay down debt, don't blow the money. If you are FI then why take any risks even if mathematically optimal. If you are fresh out of school, have great jobs, have costs under control, then rock the Stache!

If you are systematically investing the money, then I think you will be mathematically safer with debt at 3%.

You named off a few categories of risks. 
Job loss, health risk, black swan event, freedom to change jobs, etc.  I would rather have $350,000 in investments and a 30 year mortgage at 3.5% and a $1,123 monthly payment then a paid off $350,000 house and no investments. The flexibilities of investments is crazy.  Having all your eggs in one basket (house) is riskier.

The best thing that could happen to me is Carter like inflation.  Inflation is the greatest thing ever when you have a 30 year fixed rate loans. The stock market does great, your other investments rock, and your mortgage is fixed!  Rents go up on your rentals to reflect the infation, but the government and banks locked you in for 30 years. Glorious times for a financially independent person who has 30 year fixed rate loans as a hedge.

If you want to see how the market did during various presidents check out this old article. 
http://www.forbes.com/2004/07/21/cx_da_0721presidents.html

I am good with people paying off debt if they understand why, whether that is emotionally or financially.  I just push back, when I hear pay off debt as a mantra that debt is bad and needs to be killed.  I don't think that is always the case.  The rules of thumbs/wives tales, etc. that have been fairly accurate when mortgages were 8-20% worked very well.  When rates are below inflation and below projected inflation I don't think you can just go with it is safer with no debt.  If you believe this then make sure your Safe Withdrawal Rate is below 1% or based on life expectancy as you are saying that over the next 10-30 years we are going to have investment returns less than inflation and less than anything seen over the past few hundred years. Firecalc and all the models out there will not hold up.

Payback of the mortgage depends on the mortgages available and tax laws of the country you are in. In Canada there are no 30 year fixed mortgages and mortgage interest is not tax deductible. Interest rates reset every 5 years max. Not sure where where the OP is.

The same situation also applies to the student loan.

To the OP:
Your gas bill is very high compared to mine  ($800 per year in Canada in a house built in the 60s.). Did you lock in rates? A few hundred bucks of insulation might drop your heat and A/C costs.

Other than that, the budget looks like lifestyle choices. I am now putting my fun money to my FI stash.

I would also recommend calculating the savings rate on an after tax basis.

[daverobev]

Payback of the mortgage depends on the mortgages available and tax laws of the country you are in. In Canada there are no 30 year fixed mortgages and mortgage interest is not tax deductible. Interest rates reset every 5 years max. Not sure where where the OP is.

I agree with your general direction, but you *can* get longer than 5 year terms here. Scotia would've done us a 10 year term but at a higher rate (4.8% vs 3.5% IIRC). Whether it's worth it is debatable, but the point is that 5 years is not "it".

Generally I am finding everyone assumes you're in the US, which is another problem entirely!

[willn]

You named off a few categories of risks. 
Job loss, health risk, black swan event, freedom to change jobs, etc.  I would rather have $350,000 in investments and a 30 year mortgage at 3.5% and a $1,123 monthly payment then a paid off $350,000 house and no investments. The flexibilities of investments is crazy.  Having all your eggs in one basket (house) is riskier.

So if you have a 350,000 paid off house, you'd go borrow say, 280,000 in order to invest in the stock market?

If so I suggest you have a very high risk tolerance, or perhaps ignorance of history.
 
The problem as I see it with your strategy is you can't live inside your mutual fund.  Historically, the 'liquidity' of your investment got frozen for years several times in the last 30.  And the problem was that, during those drops, house prices also (usually) dropped.  You don't want to end up underwater on your house for years, during a period when your 'liquid' stock assets are down 30-50% also.  What happens if you lose your job then?  Your 280K nest egg is looking more like 150K, and your 350K house is looking more like 200K, and you're 80K in the hole on your mortgage.  And jobs just got scarce.  Oops!

The great thing about leverage is that it magnifies your gains.  Until the bad thing about leverage happens--it magnifies your losses...

And by the way we are a bit off topic from my response:  I don't recommend paying extra on your house until you are maxing your tax advantaged retirement accounts, and possibly more depending on the percentages.  The OP was talking about a student loan, not a mortgage, which is what I recommended she get rid of.

[tomsang]

willn-  The OP was talking about 3% debt.  He mentioned student loans and a mortgage.  I don't care what bucket you want to talk about, if people have 3% debt, I don't believe it is a priority to pay off early.  Student loans also get you a nice tax benefit, which you lose once they are paid off, but that is not why I would say to keep them.  It is purely the belief that I can get a significnantly higher return than 3% over a longer period of time.

The problem as I see it with your strategy is you can't live inside your mutual fund.  Historically, the 'liquidity' of your investment got frozen for years several times in the last 30.  And the problem was that, during those drops, house prices also (usually) dropped.  You don't want to end up underwater on your house for years, during a period when your 'liquid' stock assets are down 30-50% also.  What happens if you lose your job then?  Your 280K nest egg is looking more like 150K, and your 350K house is looking more like 200K, and you're 80K in the hole on your mortgage.  And jobs just got scarce.  Oops!

Can you provide examples and links of when investments in the Vanguard S&P and index funds have been shut down for years or for any significant amounts of time?  I have never seen or heard of this.

If in your example you have $150k in investments.  You still have a $150k of liquid assets vs. a $200k house that you can't tap. I don't know if you heard about this, but many people lived in their houses for a number of years without making a payment on their underwater house, then handed their keys back to the bank.  The banks can't touch your 401k or other protected assets so being underwater on a walkaway house helped many people's networth tremendously. Student loans are even easier to defer.  Typically when the world is coming to an end, the government provides deferments and other incentives around student loans.

So if you lost your job during this scenario, you would be much better off with $150k of liquid assets vs. a paid off house or a paid off student loan. You can live anywhere you want with $150k in investments vs. being stuck in a location with no jobs because you have a paid off house.  The flexibility give you the ability to move with your $150k of investments to where jobs or opportunities are.  Not so much with a paid off house or paid of student loan.

I am not opposed to paying down debt, but I think people need to understand that they are most likely taking on more risk and losing out on more opportunities by do this when your debt is at or below inflation.  If we were talking about 7% student loans. I would agree locking in yield would be fine.  At 3%, I just don't see it.     

[willn]

willn-  The OP was talking about 3% debt.  He mentioned student loans and a mortgage.  I don't care what bucket you want to talk about, if people have 3% debt, I don't believe it is a priority to pay off early.  Student loans also get you a nice tax benefit, which you lose once they are paid off, but that is not why I would say to keep them.  It is purely the belief that I can get a significnantly higher return than 3% over a longer period of time.

The problem as I see it with your strategy is you can't live inside your mutual fund.  Historically, the 'liquidity' of your investment got frozen for years several times in the last 30.  And the problem was that, during those drops, house prices also (usually) dropped.  You don't want to end up underwater on your house for years, during a period when your 'liquid' stock assets are down 30-50% also.  What happens if you lose your job then?  Your 280K nest egg is looking more like 150K, and your 350K house is looking more like 200K, and you're 80K in the hole on your mortgage.  And jobs just got scarce.  Oops!

Can you provide examples and links of when investments in the Vanguard S&P and index funds have been shut down for years or for any significant amounts of time?  I have never seen or heard of this.

If in your example you have $150k in investments.  You still have a $150k of liquid assets vs. a $200k house that you can't tap. I don't know if you heard about this, but many people lived in their houses for a number of years without making a payment on their underwater house, then handed their keys back to the bank.  The banks can't touch your 401k or other protected assets so being underwater on a walkaway house helped many people's networth tremendously. Student loans are even easier to defer.  Typically when the world is coming to an end, the government provides deferments and other incentives around student loans.

So if you lost your job during this scenario, you would be much better off with $150k of liquid assets vs. a paid off house or a paid off student loan. You can live anywhere you want with $150k in investments vs. being stuck in a location with no jobs because you have a paid off house.  The flexibility give you the ability to move with your $150k of investments to where jobs or opportunities are.  Not so much with a paid off house or paid of student loan.

I am not opposed to paying down debt, but I think people need to understand that they are most likely taking on more risk and losing out on more opportunities by do this when your debt is at or below inflation.  If we were talking about 7% student loans. I would agree locking in yield would be fine.  At 3%, I just don't see it.     

Sorry, frozen is totally the wrong word, just mean you lost half your investment. Your 'liquidity' just disappeared. 

I disagree that the risk of borrowing 280K against your 350K house is acceptable because you think you'll just be able to 'walk away' and leave the keys in the door. That sounds like a horrible experience!  I can't really take that idea to seriously, especially for someone who has a family to put them through that.  Those I've read or heard about that did go through it sure seem like they'll never put themselves in that position again.  Like I said, I think your risk tolerance is pretty massive.

And I also disagree regarding student loans.  They die with you, but that's the only way (aside from paying them off) that you get rid of them. They aren't bankrupt-able.  You might be able to defer them but fuck all we were talking about 12k in student loans.  I've dealt with student loan companies and personally I'd rather crawl through the Sahara with my eyes pinned open than have to call them and beg for a deferral.  Get the damn things out your life already.

And yes, I'd rather have a 200k paid for house with zero investments than 150k in the bank.  That's a 50k difference, and without having to scramble for a place to live that further diminishes my savings.  Some of which are undoubtedly in tax advantaged accounts that will be penalized for withdrawing.  (You know, the ones the bank can't touch even though you just fucked them on their loan?)