Introduction and a Case Study

[Anagnorisis]

Hi Mustachians!  I'm emerging from the lurk to present a case study.

I'm 36, single, and living near Denver, CO.  I've spent the last year trying to make up for twenty years of poor financial decisions, and finally feel like I'm in a stable spot.  Since first visiting MMM I've lowered expenses by over $1K/mo, increased income by $20K and said goodbye to $25K in debt.  I can't thank MMM and everyone who participates here enough!
 
$55,000 Gross Salary
$12,000 Rental Income - I rent out two bedrooms in my house
- $9,900 401K - 18% company max, company matches 150% of first 6%
- $3,350 HSA - maxed
- $5,500 Traditional IRA - maxed
---------------------------
$48,250 AGI

-$2,964 Social Security Tax
-   $693 Medicare Tax
-   $910 CO State Tax
-$4,245 Federal Income Tax
---------------------------
$39,438 Net Income

- $6,756 Mortgage P&I - 3.5%, recent refi, 30 yr left, owe 125,500
- $1,704 Mortgage T&I - Insurance through Metlife, bundled with car
-    $414 Water - Arapahoe County
-    $165 Cell Phone - Republic
-    $480 Internet - Comcast
-    $828 Gas & Electric - Xcel Energy
-    $228 Trash - Lies Waste Systems
-    $744 Car Insurance - MetLife
-    $702 Public Transport - Amount includes an offset of $15 weekly for mileage reimbursement
-    $390 Dog Food - 11 year old Shepherd Husky mix
-    $400 Electronic Cigarette Supplies - Used to quit smoking a month ago, weaning off the nicotine, quitting this next month
- $1,800 Human Food
- $1,800 Everything else (gas, clothes, maintenance, copays, eating out, misc)
------------------------
- $17,131 Total Expenses

$22,967 Ideally Left For Taxable Investment Account

Assets:
 
  ~$2,000   Optimistic estimated resale value of a not so clean '97 4Runner with 250K miles.
  $100,000 Estimated home equity, no desire to pay the loan off early at 3.5%
  $1754      Checking
  $1000      HSA Savings - minimum balance allowed
  $396        HSA Investment - Vangaurd Small Cap Index
  $2,928     401k - Vanguard Small Cap Index
  $1,000     Vanguard Brokerage - Waiting to hit 3K to transfer to a taxable VTSMX account, will be soon
  $7,271     IRA - Vanguard, VTSMX

Liabilities:

  Just the mortgage.

Questions & Musings -

1) I think transportation is the last area I can significantly lower expenses in.

I currently drive two miles and then take a train train to work at the Denver airport grounds.  It would be 22 miles each way by car.  My contract is up in April and it's possible my employer moves me elsewhere within the city at that point.  I do work from home two days a week. 

Given the situation, relocation doesn't seem like a good option.  I'm seriously (foolishly?) considering dropping the car and getting an ebike for four season transport. This would involve using a stretch of Pena Blvd to get to work. Those who are familiar, please weigh in.  I have seen others bike it and it has wide shoulders, but... bad idea??   It wouldn't be safe during bad snow, but I could work from home those days or take the train in as a last resort.  I love the idea of biking again and not owning a car. I think 22 miles would be doable with the motor.

I'd drop about $2k/yr in expenses and get to pocket almost $800/yr in mileage reimbursement!  That would be huge!!

2)  I don't have an emergency fund.  I keep ~$2K-$3K in my checking, have my rental income, and could use a credit card in the short term for large unexpected expenses.  I'd pay it off by diverting additions to my taxable account.  I can't plan for everything, but is this too reckless?

3)  My goal is to have what I'd consider FU money in three years.  If I can keep up with my plan, I don't think $70K+ in the taxable fund is out of reach.  I wouldn't be rich, but 4% (~$3K/yr) plus my rental income would cover my basic expenses at that point (sans car).  Admittedly, there wouldn't be much cushion.  I don't plan to start living off of that income then, but I'd like to know that I could. Thoughts?

4)  Then maybe: Teach overseas?  Work only part time?  Join the circus? Sell my house? Continue down the same path until I can retire early?  Since I don't know exactly what I'm working for yet, I often fear I'm painting myself into a corner by maxing out all of the pre-tax investments.  Anyone care to offer perspective?

5)  When, if at all, would I want to start thinking about ROTH conversions?  Is there any accepted common wisdom regarding this that I've somehow missed on this site?

6)  Any other advice?

Thanks for reading and for any help!

[BTDretire]

I don't have anything to add except congratulations on getting to the point you are.
Looks like you have a handle on cutting expenses, saving and investing.
Now it's just enjoy the time until FI.
 Congrats again.
 And a bump for you!

[Crazycarl]

If you have that much left over, then why not put more into your 401k?
All of that pre-tax money would be even more of a boost, not to mention lower your AGI.

[boarder42]

sounds like his company has an 18% cap on 401k contributions so that would probably be why he isnt doing more there. 

as far as roll over / withdrawal strategy here is ours we max all tax deferred accounts and cant do trad IRA so do Roth ... and save taxable on top.

year 1-5 rollover from Trad IRA to Roth what we will need in 5 years - draw down on existing roth principal and taxable to fund current years expenses -
NOTE: there should be no tax on taxable account earnings as long as you stay in the 15% bracket and have LTCGs and QDs
Year 6+ rollover what will be needed in 5 years from Trad to Roth and use rollover from 5 years prior to fund current year. 

we will also be tax gain harvesting where possible up to the top of the 15% bracket. as well as tax loss harvesting to offset more taxes when possible.

[FIPurpose]

I was thinking that for the price of your car, I thought car insurance should be about half the price you're paying. What do you have covered on your insurance?

If you have a local transit pass, then I think the removal of you car would be minimal. You might look into ride sharing or how occasional renting would compare in costs. If you only need to go out of town 2-3 times a month, it can definitely be cheaper.

I personally do about the same in my checking account (2-3k), and I know what you mean. I've had the same thoughts about whether it's too reckless or not. I try to think about what things could happen that could throw me into financial ruin that would otherwise be covered by a $10k savings account. Medical and car is covered by my HSA and insurance. I guess if both my wife and I lost our jobs at the same time, and then both had major medical needs that exceeded our HSA and no money left for a mortgage payment? It would basically take the world crashing around me, and even then I don't think a few extra thousand (that I can just as easily borrow from my credit card) would save me from that.

About ROTH withdraw questions. My personal plan, and advice would be depending on the length of your out-of-country job or other future plans, move money to your ROTH as long as you don't have to pay taxes. So each year move over enough money to fill out an effective 0% tax bracket. I'm hoping to do Peace Corps with my wife next year (interviewing soon!), and I plan on moving about $150-250k of pretax money to ROTH. My reasons for doing so much are as below:

1. I think the future of ROTH conversions may be very limited or eliminated.
2. There is a future  (5-10 years from now?) I can see for myself running a business and earning much larger sums of money than I am today. I don't want to over inflate my Traditional account and then be forced into large sums of RMDs.
3. ROTH just feels better as a long-term account, and I feel better knowing a large number of my assets would be in a tax-free account.

Hope I had some good nuggets in there. Good luck.

[robartsd]

I'd be looking into bike + transit commute options at that distance. Can the bike ride on the train so that you'd secure it at work the same as you would if you rode all the way in? If the bike can't be taken with you on the train, a bike locker at the station would probably be essential - most racks at transit stations have too many bikes stolen from them to be worth risking locking up the bike in the open.

It sounds like you've chosen not to max your 401(k) in order to save more money in taxable (for the flexibility). In that case I'd at least consider increasing the 401(k) contributions by 5500 and changing the IRA contributions to Roth to increase the flexibility of your tax advantaged accounts while sheltering more money.

With about 22k in savings after your planned retirement savings, you don't have much need for an emergency fund. I'd personally keep one month's expenses in a bank account, and plan to cash flow any unexpected expenses that come up. The only reason for more of an emergency fund is to protect against loss of income while the market is down. If you lost your job, I'm almost certain that unemployment benefits combined with your roommates' rent would cover your regular expenses; however, I'd consider doing enough research to see if unemployment benefits would cover all of your expenses in case you lost your job and rental income at the same time. Still, the difference is probably low enough that siphoning a little off the taxable account to make it up wouldn't hurt you too badly.

Interesting that you have about 30% of your investments in a small cap index.

[ysette9]

I don't currently live in the Denver area but I have in the past and go there for work on a regular basis. The thought of riding a bike on Peņa Blvd scares the bejeesus out of me. Yes, it has shoulders, but people tend to drive as fast as they can on that road. In the winter it is so exposed to wind and blowing snow I would seriously rethinking that idea. Damn, you are one tough cookie to even consider it! Great job on getting your act together.

[boarder42]

I was thinking that for the price of your car, I thought car insurance should be about half the price you're paying. What do you have covered on your insurance?

If you have a local transit pass, then I think the removal of you car would be minimal. You might look into ride sharing or how occasional renting would compare in costs. If you only need to go out of town 2-3 times a month, it can definitely be cheaper.

I personally do about the same in my checking account (2-3k), and I know what you mean. I've had the same thoughts about whether it's too reckless or not. I try to think about what things could happen that could throw me into financial ruin that would otherwise be covered by a $10k savings account. Medical and car is covered by my HSA and insurance. I guess if both my wife and I lost our jobs at the same time, and then both had major medical needs that exceeded our HSA and no money left for a mortgage payment? It would basically take the world crashing around me, and even then I don't think a few extra thousand (that I can just as easily borrow from my credit card) would save me from that.

About ROTH withdraw questions. My personal plan, and advice would be depending on the length of your out-of-country job or other future plans, move money to your ROTH as long as you don't have to pay taxes. So each year move over enough money to fill out an effective 0% tax bracket. I'm hoping to do Peace Corps with my wife next year (interviewing soon!), and I plan on moving about $150-250k of pretax money to ROTH. My reasons for doing so much are as below:

1. I think the future of ROTH conversions may be very limited or eliminated.
2. There is a future  (5-10 years from now?) I can see for myself running a business and earning much larger sums of money than I am today. I don't want to over inflate my Traditional account and then be forced into large sums of RMDs.
3. ROTH just feels better as a long-term account, and I feel better knowing a large number of my assets would be in a tax-free account.

Hope I had some good nuggets in there. Good luck.

this is highly unlikely the reason roth conversion exist is b/c the govt can get their tax dollars now.  They are pushing to eliminate the backdoor roth loop hole but that will not affect pretax roth conversion on which one would pay taxes.

[Anagnorisis]

I don't have anything to add except congratulations on getting to the point you are.
Looks like you have a handle on cutting expenses, saving and investing.
Now it's just enjoy the time until FI.
Congrats again.

Thanks Qmavam!  I definitely need to work on enjoying the time more.  Aside from family, I've been a bit isolated while I fixed up my finances.  I've always thrown money at my boredom, so this is uncharted territory and I have a lot to learn about being social without spending gobs.

22 miles each way on an ebike on a busy multilane road without dedicated bike lanes (even for just part of it) scares me.  What is the road like just from your home to the train station? Could you use a normal bike for that bit and still take the train the rest of the way?  If all you are using the car for is mainly that 2 miles back and forth to the train station, then it seems like an awfully large expense. 

Yeah, it scares me too.  The road there is ideal.  It's flat with 30 mph limits.  I can use a bike lane most of the way to the station.  The train is $9 a day or $171 a month, which irks me, but I think bike --> train is the best commuting option.  Good idea.

Quitting smoking is a huge achievement, both healthwise and financial.  Good luck making that change permanent. 

Thanks! Tasting is pretty nice too.  The permanent part is the kicker for sure.  I dropped them for 4 years once, but picked them up again during a time of high stress.  I've been learning about healthier stress management lately and am optimistic.

If you have that much left over, then why not put more into your 401k?

sounds like his company has an 18% cap on 401k contributions so that would probably be why he isnt doing more there. 

Boarder42 nailed it.  They limit contributions to 18%.  Otherwise I'd most likely contribute the max amount. I researched why some companies limit contributions, and it has to do with balancing the 401k in regards to how much the higher earners are contributing vs. the lower earners.  Anyone else know more about this?

I was thinking that for the price of your car, I thought car insurance should be about half the price you're paying. What do you have covered on your insurance?

If you have a local transit pass, then I think the removal of you car would be minimal. You might look into ride sharing or how occasional renting would compare in costs. If you only need to go out of town 2-3 times a month, it can definitely be cheaper.

I only have collision, at state minimums.  I also have a "safe driver" class discount, auto withdrawal discount, no medical option, and the minimum for uninsured drivers.  I've shopped car insurance many places, and get similar quotes.  I can't nail down why it isn't cheaper, but have some guesses:

  1)  I made a claim a few years ago when my car was stolen and totaled. 
  2)  I haven't had a ticket in four years, but my finances weren't the only way I was irresponsible in my past.  I averaged a bit over one moving violation per year from ages 16 to 32.
  3)  I'm a single male (though I don't know if that affects rates in adulthood, or if insurers still quote higher rates for these reasons)

I'm leaning towards getting a bike and dropping the car and associated insurance.  Everywhere I go frequently is within 3-4 miles, and even the city center only takes 30 minutes by bike.  Maybe I'll convert it to an ebike later.  I mainly leave town with friends to hike, so wouldn't need to rent often.

I'd be looking into bike + transit commute options at that distance. Can the bike ride on the train so that you'd secure it at work the same as you would if you rode all the way in?
...
Interesting that you have about 30% of your investments in a small cap index.

Yes, I could bring the bike to work on the train.  The bike racks there are video monitored and covered.  This is absolutely what I'll do once I make the switch.

The small cap funds just seemed like the best choice given my options, solely because it had the lowest expense ratio. Also, Vanguard feels safe given all the love they receive here and elsewhere.  Though, I admit it wasn't the most informed decision and I'd love to hear opinions on this. I'll note the options, with the expense ratios, for the 401k below.  I'll also include the HSA options, which are more numerous. I don't have the expense ratio information on those funds at hand though.

401k -
EQUITY INCOME FUND - PRFDX - 0.66%
EQUITY INDEX TRUST CLASS C + 1 - XCT - 0.10%
GROWTH STOCK FUND + - PRGFX - 0.67%
INTERNATIONAL GROWTH & INCOME +Redemption fee: 2.00% - 90 days or less - TRIGX - 0.84%
MEDIA & TELECOMMUNICATIONS + - PRMTX - 0.79%
MID-CAP GROWTH FUND + - RPMGX - 0.77%
NEW HORIZONS FUND + - PRNHX - 0.79%
SCIENCE & TECHNOLOGY FUND + - PRSCX - 0.84%
SCOUT MID CAP - UMBMX - 1.04%
SPECTRUM GROWTH FUND + - PRSGX - 0.79%
VANGUARD SMALL CAP INDEX, ADM + - VSMAX - 0.08%

HSA -
MGIDX - Bond Fund | DODIX - Bond Fund | MWTRX - Bond Fund | VBLTX - Bond Fund | RRCTX - Large Blend | RFDTX - Large Blend | RFETX - Large Blend | RFFTX - Large Blend | RFGTX - Large Blend | VSCGX - Large Blend | VSMGX - Large Blend | VDAIX - Large Blend | VTMGX - Large Blend | VEMAX - Large Blend | NYVTX - Large Cap Stock Fund (Domestic) | SRVEX - Large Cap Stock Fund (Domestic) | SEEGX - Large Cap Stock Fund (Domestic) | DODFX - Large Cap Stock Fund (International) | TGVIX - Large Cap Stock Fund (International) | RFHTX - Large Growth | RFITX - Large Growth | RFKTX - Large Growth | SFLNX - Large Value | PARMX - Mid-Cap Blend | ARTSX - Small and Mid-Cap Stock Fund | OPMSX - Small and Mid-Cap Stock Fund | ACMVX - Small and Mid-Cap Stock Fund | VSMAX - Small Blend |

I don't currently live in the Denver area but I have in the past and go there for work on a regular basis. The thought of riding a bike on Peņa Blvd scares the bejeesus out of me. Yes, it has shoulders, but people tend to drive as fast as they can on that road. In the winter it is so exposed to wind and blowing snow I would seriously rethinking that idea. Damn, you are one tough cookie to even consider it! Great job on getting your act together.

Thanks!  Scares me too, I think that idea is out.  But the bike/transit pass is definitely in.  I'll find a bike and clean up the car this weekend.  I'm sure I'll grin, shake my head and wonder what the hell I was thinking with the longer bike commute from the comfort and safety of a heated train on nasty windy days.

Lastly, a big thanks to everyone for the Roth information.  I'll digest it and work on crystalizing my plan.