Reader Case Study: Educate this Teacher

[MrMathMustache]

Hello all:

I'm looking for some advice on income/asset allocation so that I can continue to build a solid nest egg for retirement while also positioning myself to move into a nice single family or townhouse in perhaps 5 to 6 years. 

I made the mistake of purchasing a third floor walk-up, one-bedroom condo in 2006 that ended up blowing a hole in my net worth, but have managed to somewhat recover from that decision by saving 50-60% of net income since 2009, paying down a substantial part of the mortgage, and refinancing in 2011.    My place is fine, but I'd like to make just one more move to a home in which I'd be happy to retire.

I'm not terribly interested in ER as I absolutely love my job and only work 9 months per year anyway with incredibly manageable hours.  I'm 36 years old and single.

Income
Salary: $52,000
Sick Leave Buy Back: $1,680
Tutoring: $12,000 [average over past 5 years]
Total Income: $65,680

Expenses
Cable/Internet: $130
Utilities: $45
Mortgage/HELOC/Property Taxes: $643
HOA: $236
Insurance(Car/Condo): $124
Medical/Dental: $30
Food/Entertainment/Travel: $400 [average over past 5 years]
Total Expenses: $19,296 ($1608 monthly * 12)

Savings
403(b): $17,500
IRA: $5,500
FRS: $1,800 (3.5% pre-tax contribution by state law)
Total Savings: $24,800

*after taxes, I project that I'll have ~$4,000 spare cash going into checking/savings in 2014
______________________________________________________

Assets
Checking/Savings: $22,000
Taxable Investments: $83,000
Roth IRA: $72,000
Rollover IRA: $12,000
Traditional IRA: $11,600
403(b): $7,500
FRS (state investment plan): $62,000
Condo: $76,000 [according to Zillow; similar units have been selling for $85k-$90k this year]
Total Assets: $346,100

Liabilities
Mortgage: $72,500 [15-year, 3.875% note]
HELOC: $2,800 [5%]
Total Liabilities: $75,300

Total Net Worth: $270,800

[Rebecca Stapler]

Are you hanging on to the HELOC for a specific reason? Or have you just not sunk the nail into that coffin yet?

I know it can be rationalized with the market having higher returns, but you have $22k in savings, and I'm sure you're not making 5% off of that money. Instead of keeping a big cash emergency fund, I would pay off the HELOC and keep it open but the balance at $0. So, in the event of a true emergency, you can use the HELOC instead of keeping that cash on hand making nothing.

[MrMathMustache]

Are you hanging on to the HELOC for a specific reason? Or have you just not sunk the nail into that coffin yet?

I know it can be rationalized with the market having higher returns, but you have $22k in savings, and I'm sure you're not making 5% off of that money. Instead of keeping a big cash emergency fund, I would pay off the HELOC and keep it open but the balance at $0. So, in the event of a true emergency, you can use the HELOC instead of keeping that cash on hand making nothing.

I plan on transferring a substantial portion of that checking/savings balance into my taxable investment account later this month.  I keep the HELOC balance since it only costs me $140 per year (less whatever minute tax savings I get by itemizing) and I'd rather not throw any more money at the condo at this point.

[Exflyboy]

I had a more visceral reaction when I saw the word "HOA"... which immediately makes me want to slash my wrists..:)

Frank

[Hotstreak]

Your investments look great!  Finances appear to be in order.  Expenses are reasonable.  You're asking for advice on asset allocation for retirement, I would suggest reading up on some of the stock series, http://jlcollinsnh.com/stock-series/ is a good one.  You'll want low cost index funds and an appropriate mix of stocks/bonds based on your ability to tolerate short term loss.

For purchasing the new home in 5 years, how much do you want to spend?  With the $20,000 you plan to invest, plus $4,000 per year, plus cash from sale of the existing home (about $10,000 + additional pay down over 5 years), you could have, perhaps $60-70,000 available in that time?  Does that sound reasonable?  If that's enough to cover 20% down, renovations, moving expenses, loan/agent fees, and maintain an emergency fund, you're golden.  If it's more than that, invest taxable as you see fit, if it's not enough, you'll need another plan.  Details on home prices in the range you're looking at will help nail this down.  Best of luck!

[fields]

I really don't understand how someone your age has accumulated so much money!  Can you please, please tell me how you did it?

[warfreak2]

I really don't understand how someone your age has accumulated so much money!  Can you please, please tell me how you did it?

Presumably, by doing this:

Total Income: $65,680

Total Expenses: $19,296

[ch12]

I'm looking for some advice on income/asset allocation so that I can continue to build a solid nest egg for retirement while also positioning myself to move into a nice single family or townhouse in perhaps 5 to 6 years. 

I'm not terribly interested in ER as I absolutely love my job and only work 9 months per year anyway with incredibly manageable hours.  I'm 36 years old and single.

Expenses
Mortgage/HELOC/Property Taxes: $643
Total Expenses: $19,296 ($1608 monthly * 12)

Savings
403(b): $17,500
IRA: $5,500
FRS: $1,800 (3.5% pre-tax contribution by state law)
Total Savings: $24,800

*after taxes, I project that I'll have ~$4,000 spare cash going into checking/savings in 2014
______________________________________________________

Assets

Condo: $76,000 [according to Zillow; similar units have been selling for $85k-$90k this year]
Total Assets: $346,100

Liabilities
Mortgage: $72,500 [15-year, 3.875% note]
HELOC: $2,800 [5%]
Total Liabilities: $75,300

Total Net Worth: $270,800

You are doing a great job already with a solid net worth. I saw that in another post you said you spent a few years in finance.

The projections based on your current net worth and spending $19,296/year while socking away $24,800+$4,000 show that you could retire in 4.5 years. You are ready and able to pay for a home now.

http://networthify.com/calculator/earlyretirement?income=48096&initialBalance=270800&expenses=19296&annualPct=5&withdrawalRate=4

Remember that principal repayment diminishes your liabilities and builds up your equity (maybe, given the strange condition of the Florida housing market), so you should categorize your principal repayment as part of your savings. Your expenses might be even lower than you think. You can tweak the numbers over at networthify if you'd like to see that.

I'm currently in Sarasota, and there are plenty of good 2 bed/2 bath single family homes that are sub $200k. You haven't said whether or not you want to get hitched in the future, which might require a 2 bed/2 bath - if you plan to stay single, you can go smaller.

Even though you love your job, you should read this Mr. Money Mustache classic: http://www.mrmoneymustache.com/2011/04/30/weekend-edition-retire-in-your-mind-even-if-you-love-your-job/

[MrMathMustache]

I had a more visceral reaction when I saw the word "HOA"... which immediately makes me want to slash my wrists..:)

Frank

I hear you, but in south Florida, a significant portion of that goes to hurricane insurance.  Plus, I can't complain too much - our association managed to remain solvent throughout the cratering of the market down here without any special assessments.

[MrMathMustache]

Your investments look great!  Finances appear to be in order.  Expenses are reasonable.  You're asking for advice on asset allocation for retirement, I would suggest reading up on some of the stock series, http://jlcollinsnh.com/stock-series/ is a good one.  You'll want low cost index funds and an appropriate mix of stocks/bonds based on your ability to tolerate short term loss.

For purchasing the new home in 5 years, how much do you want to spend?  With the $20,000 you plan to invest, plus $4,000 per year, plus cash from sale of the existing home (about $10,000 + additional pay down over 5 years), you could have, perhaps $60-70,000 available in that time?  Does that sound reasonable?  If that's enough to cover 20% down, renovations, moving expenses, loan/agent fees, and maintain an emergency fund, you're golden.  If it's more than that, invest taxable as you see fit, if it's not enough, you'll need another plan.  Details on home prices in the range you're looking at will help nail this down.  Best of luck!

Thanks for the link.  My retirement accounts are pretty much all low cost ETFs; I only wish my 403(b) investment options were as cheap!

Good question about price range for a new home; I'm figuring something in the low 300's.  I'll need to do some more work on projections, but that $60-70k range sounds very doable.  I have a fairly high tolerance for risk, so I can throw more into that investment account and let it grow for a few years and see where I'm at, plus my current mortgage will only be $50k in 5 years' time.

[MrMathMustache]

I really don't understand how someone your age has accumulated so much money!  Can you please, please tell me how you did it?

Sure thing!

Keep a monthly income statement & balance sheet to moderate spending
I just use excel and have tracked both since January 2007.  I don't go into too much detail - I lump food, entertainment, and random purchases together under "miscellaneous".  Here's where it helps:  I just bought airline and concert tickets for a NYC show in November for $350, and just by recording that, it keeps me disciplined with my other spending for the rest of the month.

Income: make sure to maximize every opportunity to earn more while still having time to relax and socialize!

Florida teacher pay is comparatively low, but I teach an extra period to earn an extra $7k plus 2 additional sick days each year.  I always cash out my sick days to get an extra paycheck too (you're not eligible to do this until you build 30 days, so I'm not really in danger of leave without pay).

The biggest contributor is the private tutoring I do on the side.  I've been at my current school for 9 years, so I've built a good reputation in the community and get requests for math help all the time.  It certainly helps that I teach middle school but can tutor up through calculus, so the majority are former students of mine who want extra test preparation - it's fun to keep in touch with families over many years!

Expenses: be willing to spend on a few nice things but minimize extraneous purchases

When I was younger, I bought high quality, somewhat pricey furniture, suits, HDTV, etc.  Those items have lasted me years, more than 10 in some cases.  Once I got those "essentials" out of the way, I didn't feel the need to acquire much more beyond updating the wardrobe every so often.  I guess it helps to have simple tastes!

[MrMathMustache]

You are doing a great job already with a solid net worth. I saw that in another post you said you spent a few years in finance.

The projections based on your current net worth and spending $19,296/year while socking away $24,800+$4,000 show that you could retire in 4.5 years. You are ready and able to pay for a home now.

http://networthify.com/calculator/earlyretirement?income=48096&initialBalance=270800&expenses=19296&annualPct=5&withdrawalRate=4

Remember that principal repayment diminishes your liabilities and builds up your equity (maybe, given the strange condition of the Florida housing market), so you should categorize your principal repayment as part of your savings. Your expenses might be even lower than you think. You can tweak the numbers over at networthify if you'd like to see that.

I'm currently in Sarasota, and there are plenty of good 2 bed/2 bath single family homes that are sub $200k. You haven't said whether or not you want to get hitched in the future, which might require a 2 bed/2 bath - if you plan to stay single, you can go smaller.

Even though you love your job, you should read this Mr. Money Mustache classic: http://www.mrmoneymustache.com/2011/04/30/weekend-edition-retire-in-your-mind-even-if-you-love-your-job/

Great point about principle repayment - I hadn't considered that at all and it turns out that contributes another $4,320 to "savings." 

You're right that I could relocate now; my reluctance to do so is that I've gotten used to my current situation with its nice cash flow and I don't really have a burning desire to make a change at this very moment.  As long as I'm in position to make a move in the medium-term, I'll be satisfied.

I'm in the Fort Lauderdale market, so a nice 2BR/2BA in a good neighborhood is going to run me closer to $300k than $200k, unfortunately.

Thank you so much for the links and advice; it is much appreciated!

[Rebecca Stapler]

You are doing a great job already with a solid net worth. I saw that in another post you said you spent a few years in finance.

The projections based on your current net worth and spending $19,296/year while socking away $24,800+$4,000 show that you could retire in 4.5 years. You are ready and able to pay for a home now.

http://networthify.com/calculator/earlyretirement?income=48096&initialBalance=270800&expenses=19296&annualPct=5&withdrawalRate=4

Remember that principal repayment diminishes your liabilities and builds up your equity (maybe, given the strange condition of the Florida housing market), so you should categorize your principal repayment as part of your savings. Your expenses might be even lower than you think. You can tweak the numbers over at networthify if you'd like to see that.

I'm currently in Sarasota, and there are plenty of good 2 bed/2 bath single family homes that are sub $200k. You haven't said whether or not you want to get hitched in the future, which might require a 2 bed/2 bath - if you plan to stay single, you can go smaller.

Even though you love your job, you should read this Mr. Money Mustache classic: http://www.mrmoneymustache.com/2011/04/30/weekend-edition-retire-in-your-mind-even-if-you-love-your-job/

Great point about principle repayment - I hadn't considered that at all and it turns out that contributes another $4,320 to "savings." 

You're right that I could relocate now; my reluctance to do so is that I've gotten used to my current situation with its nice cash flow and I don't really have a burning desire to make a change at this very moment.  As long as I'm in position to make a move in the medium-term, I'll be satisfied.

I'm in the Fort Lauderdale market, so a nice 2BR/2BA in a good neighborhood is going to run me closer to $300k than $200k, unfortunately.

Thank you so much for the links and advice; it is much appreciated!

That was my point with suggesting you pay off the HELOC. Reducing your monthly payments on anything means you can put that money into savings and investments.

[MrMathMustache]

That was my point with suggesting you pay off the HELOC. Reducing your monthly payments on anything means you can put that money into savings and investments.

You're right of course - I'm just having a hard time pulling the trigger on it for some reason - probably because the $11-12 in interest I pay each month seems so insignificant.  But you've got me thinking about it and I'll probably come around to the idea.  Thanks!

[Zamboni]

^$11-12!  That's more than I pay for my phone service!  ;-)  Seriously, though, it's more than $100 per year in interest being flushed away to the bank that you could be investing instead.

You are doing a great job moving up your pre-tax savings with maxing your 403b recently and keeping expenses low and making some extra cash with your tutoring side hustle.  Can you get a better deal on TV/internet?  Do you really need cable, or can you get by with Netflix (only $8.95 per month) like I do?  Some people like cable for sports primarily, which is understandable.

You might already be beyond the advice it offers, but there's a great book called Millionaire Teacher that I would recommend to those who are interested.  Can't remember who pointed me to it (arebelspy, maybe?)

[MrMathMustache]

^$11-12!  That's more than I pay for my phone service!  ;-)  Seriously, though, it's more than $100 per year in interest being flushed away to the bank that you could be investing instead.

You are doing a great job moving up your pre-tax savings with maxing your 403b recently and keeping expenses low and making some extra cash with your tutoring side hustle.  Can you get a better deal on TV/internet?  Do you really need cable, or can you get by with Netflix (only $8.95 per month) like I do?  Some people like cable for sports primarily, which is understandable.

You might already be beyond the advice it offers, but there's a great book called Millionaire Teacher that I would recommend to those who are interested.  Can't remember who pointed me to it (arebelspy, maybe?)

I hear you on the cable/internet bill, but the only 3 channels I watch are HBO for Game of Thrones, ESPN for live sports, and CNBC for a chuckle, so the Hulu/Netflix option isn't really worth it for me.  Even though I'm currently locked in at $130/mo for another 18 months, I've been able to get the rate lowered to about $70/mo for a year a couple times in the past.  Comcast will definitely get a call from me in Dec. '15!

My library has that Millionaire Teacher book, so I'll be sure to check it out; thanks.

[mxt0133]

Game of Thrones is over so you can cancel HBO until it returns or you could just watch it at:  http://www.couchtuner.eu/watch-game-of-thrones-1-online/

[rmendpara]

Hello all:

I'm looking for some advice on income/asset allocation so that I can continue to build a solid nest egg for retirement while also positioning myself to move into a nice single family or townhouse in perhaps 5 to 6 years. 

I made the mistake of purchasing a third floor walk-up, one-bedroom condo in 2006 that ended up blowing a hole in my net worth, but have managed to somewhat recover from that decision by saving 50-60% of net income since 2009, paying down a substantial part of the mortgage, and refinancing in 2011.    My place is fine, but I'd like to make just one more move to a home in which I'd be happy to retire.

I'm not terribly interested in ER as I absolutely love my job and only work 9 months per year anyway with incredibly manageable hours.  I'm 36 years old and single.

Income
Salary: $52,000
Sick Leave Buy Back: $1,680
Tutoring: $12,000 [average over past 5 years]
Total Income: $65,680

Expenses
Cable/Internet: $130
Utilities: $45
Mortgage/HELOC/Property Taxes: $643
HOA: $236
Insurance(Car/Condo): $124
Medical/Dental: $30
Food/Entertainment/Travel: $400 [average over past 5 years]
Total Expenses: $19,296 ($1608 monthly * 12)

Savings
403(b): $17,500
IRA: $5,500
FRS: $1,800 (3.5% pre-tax contribution by state law)
Total Savings: $24,800

*after taxes, I project that I'll have ~$4,000 spare cash going into checking/savings in 2014
______________________________________________________

Assets
Checking/Savings: $22,000
Taxable Investments: $83,000
Roth IRA: $72,000
Rollover IRA: $12,000
Traditional IRA: $11,600
403(b): $7,500
FRS (state investment plan): $62,000
Condo: $76,000 [according to Zillow; similar units have been selling for $85k-$90k this year]
Total Assets: $346,100

Liabilities
Mortgage: $72,500 [15-year, 3.875% note]
HELOC: $2,800 [5%]
Total Liabilities: $75,300

Total Net Worth: $270,800

You don't need to cut any expenses. You make >$50k and spend <$25k. In the world of finance, we call that smart.

You should be teaching us!

I think a little indulging is perfectly fine. If you love your TV, then feel free to spend away. Find a nice painting you like? Buy it! The point it to make sure you stay aware of your budget at all times, so even if you go over, you know where you stand and won't go WAY over.

Keep the course, and your assets will start compounding very quickly in just a few years, so long as you continue to be frugal relative to your income, and keep working that side hustle! I love it!

If I could make a suggestion, it would be to finance your life with equity instead of debt. That is, from cash that you accumulate, rather than borrowing on a HELOC (or any other means, except for short periods of time). By paying off the $2,800 balance (which is chump change, to you...), you free up a bit of cash flow which you can either stockpile to rebuild your cash a bit, or funnel into investments. I know it's only $10/mo, but it's money that you don't need to borrow. Are you trying to make the bank rich? :)