Author Topic: Math vs. emotion on the path to financial independence  (Read 11662 times)

SpendyMcSpend

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Math vs. emotion on the path to financial independence
« on: September 20, 2012, 12:52:06 PM »
Mathematically, I am better off paying off my 6.7% rate student loan as soon as possible.  I also need to save for a home down payment.  But I can't resist the lure of adding more money to my 401k.  I love seeing the numbers add up and it's easy for me to do.  I want to put 20% of my paychecks in there and watch it grow.  Sigh!

kisserofsinners

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Re: Math vs. emotion on the path to financial independence
« Reply #1 on: September 20, 2012, 01:35:34 PM »
I wouldn't get too uptight about the math. If you're moving in the same general direction, the little bits here and there are not going to kill you. You need to make the choices that are right for *you* and it's really hard to calculate that data. Make the math choice might leave bits that breed resentment and can derail the whole process as too "cold".

It's not just about math, life matters. :)

arebelspy

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Re: Math vs. emotion on the path to financial independence
« Reply #2 on: September 20, 2012, 06:00:31 PM »
Here's why (I think) you are doing that, psychologically.

When you add to the 401k and see the balance grow, it's much more satisfying than paying down a student loan and seeing that balance reduce.

So what ou should do is trick yourself to make the more mathematical approach more exciting.  Lucky for you, there's a really easy way to do this.  Track net worth!

Then you can send money to the student loans and see that net worth grow and grow.  Instead of looking just at the 401k balance and being excited with that growing, look at all of NW and get excited at that growing.  And then you get the benefit of it growing even FASTER (paying down the 6.7% loan) than it would be if you weren't paying that down.  Win-win!  :)
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SpendyMcSpend

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Re: Math vs. emotion on the path to financial independence
« Reply #3 on: September 21, 2012, 08:34:54 AM »
Wow this is an excellent idea.  Thank you!!  Besides cash savings and debt, do you also include 401k and other stuff in net worth?  *Off to google!

arebelspy

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Re: Math vs. emotion on the path to financial independence
« Reply #4 on: September 21, 2012, 09:05:50 AM »
Wow this is an excellent idea.  Thank you!!  Besides cash savings and debt, do you also include 401k and other stuff in net worth?  *Off to google!

Absolutely.  Everyone tracks a little differently (I personally don't count vehicles or household items or anything like that in net worth, some do.. I probably would if I had an offsetting liability associated with it, like a loan).  Some don't count their primary residence, but I'd argue you should in a net worth calculation (but not an invested assets calculation).

Here's a good place to start, IMO: http://www.mrmoneymustache.com/forum/mustachianism-around-the-web/mustachian-web-tools-networthiq/

Then when you pay down that loan, you'll get to watch the net worth grow (same as when you contribute to the 401k, but then you won't be paying 6.7% interest, so it'll grow faster!).

Later you may want to advance to some fancier excel stuff, but that's a simple way to start tracking Net Worth.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
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SpendyMcSpend

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Re: Math vs. emotion on the path to financial independence
« Reply #5 on: September 21, 2012, 09:21:28 AM »
I signed up about 10 minutes ago but haven't received an email yet to verify my account.  Checked my spam folder too.  HMM.

RoseRelish

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Re: Math vs. emotion on the path to financial independence
« Reply #6 on: September 21, 2012, 09:24:44 AM »
I'd agree with arebelspy about tracking net worth. It's really powerful to see the increase over time. I still get very excited to see my net worth break each subsequent $10k interval. The chart over time is very inspiring! I look at it when I'm starting to lose focus and/or get fatigued with saving/investing and I'm back to focused instantly. I should break the next $10k interval at the end of this month, if everything goes well.

twinge

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Re: Math vs. emotion on the path to financial independence
« Reply #7 on: September 21, 2012, 10:08:41 AM »
I'll third the notion of tracking net worth growth.

BUT, a couple of things:
1. It might not be the idea of growth that is motivating, but more the speculative fun of seeing the balance grow (hopefully) by different amounts , share prices etc.  With paying off a debt you basically know exactly how much you're going to benefit and to some that can be kind of boring.

2. Do you know it's mathematically better to pay off the student loan? Depending on your tax bracket, I'm not sure.  401k lowers your taxable income AND has potential for stock market gains.  Student loan interest is tax deductible.  I'm not convinced that the opposite tax advantages make a 6.75 rate all that hard to beat.  At least if you're in a high income bracket.

SpendyMcSpend

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Re: Math vs. emotion on the path to financial independence
« Reply #8 on: September 21, 2012, 10:11:20 AM »
I'll third the notion of tracking net worth growth.

BUT, a couple of things:
1. It might not be the idea of growth that is motivating, but more the speculative fun of seeing the balance grow (hopefully) by different amounts , share prices etc.  With paying off a debt you basically know exactly how much you're going to benefit and to some that can be kind of boring.

2. Do you know it's mathematically better to pay off the student loan? Depending on your tax bracket, I'm not sure.  401k lowers your taxable income AND has potential for stock market gains.  Student loan interest is tax deductible.  I'm not convinced that the opposite tax advantages make a 6.75 rate all that hard to beat.  At least if you're in a high income bracket.

#1 is a good point.  I kind of like the unexpectedness of watching my 401k grow (or decline!)

#2, I make between $85,000-105,000 per year.  I have student loan interest but I can't write it off because I make too much. 

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Re: Math vs. emotion on the path to financial independence
« Reply #9 on: September 21, 2012, 07:47:47 PM »
Tracking net worth has made me more motivated. Most of my stash is in a retirement fund (super fund), which in the past I completely ignored since I had no control over it. I have a mortgage which I'm making a lot of extra payments on, I can see it going down, but I am impatient! When I starting tracking networth I had a double effect... the mortgage going down and the super going up, makes a much bigger difference each month.

SpendyMcSpend

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Re: Math vs. emotion on the path to financial independence
« Reply #10 on: September 24, 2012, 02:39:28 PM »

SpendyMcSpend

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Re: Math vs. emotion on the path to financial independence
« Reply #11 on: September 24, 2012, 02:46:05 PM »
Debt payoff budget:
Gross salary                                         57,000
Gross income monthly                              4750
Federal taxes                                        (865)
Payroll taxes                                         (294)
State taxes                                            (306)
401 contribution                                   0
Take-home income                               3285
——–Saving——–
Down Payment                                   100
——–Housing——–
Rent                                                      1300
——–Utilities——–
Internet city                                         26
ConEd                                                   35
Electric                                             25
Storage                                                 74
Cable                                                46
——–Food——–
Restaurants                                          25
Grocery                                                 140
——–Transportation——–
Repairs & Tires                                   25
Car Insurance                                      75
License & Taxes                                 10
Gas & Oil                                          30
Metrocard                                            109
——–Clothing——–
Cleaning/Laundry                               25
Clothes                                                 50
——–Medical/Health——–
Dentist (Savings)                                30
Optometrist/Contacts                         25
——–Personal——–
Spending cash                                    40
Toiletries                                              10
Hair Care                                              30
CPA exams sinking fund                   50
Gifts (incl. Christmas)                        30
——–Recreation——–
Entertainment                                      20
Vacation                                               40
Spotify                                                  9.99
——–Debts——–
Student Loans Minimums                 460
Extra loan payments                           530.01

Total extra paid on student loan: $6360
401k end of 2012:  $73,000
Plus total saved in 401k in 2013: 0
Total 401k:  $73,000 + YTD earnings
Total owed on student loans $46,000
Down payment saved:  $1,200
Emergency fund:  $15,000


401k savings budget:
Gross salary                                         57,000
Gross income monthly                              4750
Federal taxes                                        (600)
Payroll taxes                                         (200)
State                                                      (200)
401k contribution                                 950
Take-home Income                              2800
——–Saving——–
Down Payment                                     90
——–Housing——–
Rent                                                       1300
——–Utilities——–
Internet city                                         26
ConEd                                                   35
Electric                                             25
Storage                                                 74
Cable                                                46
——–Food——–
Restaurants                                          25
Grocery                                                 130
——–Transportation——–
Repairs & Tires                                   25
Car Insurance                                      75
License & Taxes                                 10
Gas & Oil                                          30
Metrocard                                            109
——–Clothing——–
Cleaning/Laundry                               25
Clothes                                                 45
——–Medical/Health——–
Dentist (Savings)                                30
Optometrist/Contacts                         25
——–Personal——–
Spending cash                                    30
Toiletries                                              10
Hair Care                                              25
CPA exams sinking fund                   50
Gifts (incl. Christmas)                         30
——–Recreation——–
Entertainment                                      20
Vacation                                               40
Spotify                                                  9.99
——–Debts——–
Student Loans Minimums                 460.01
Extra loan payments          0


Total extra paid on student loan:  $0
401k end of 2012:  $73,000
Plus total saved in 401k in 2013:  $11,400
Total 401k:  $84,400 + YTD earnings
Total owed on student loans:  $50,500
Down payment saved:  $1,080
Emergency fund:  $15,000
« Last Edit: September 24, 2012, 02:48:48 PM by Meadow »

Another Reader

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Re: Math vs. emotion on the path to financial independence
« Reply #12 on: September 24, 2012, 03:52:26 PM »
I don't understand why you would give up the much higher paying job when you have this much debt.  Why not stick it out long enough to kill most of the student loans?  You are in no position to buy, so the small amount you want to save towards a down payment should go to the student loans.  Ditto with the vacation savings.  If you stayed in your current job and hit the student loans with every extra dollar, you could knock out the bulk of them in a couple of years.  How long to get that CPA?  Unless there was a clear payoff in the form of a CPA in the next couple of years, in your shoes, I would not drop my income and take on the risk of a new job until I had the debt monster beaten down.

Another Reader

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Re: Math vs. emotion on the path to financial independence
« Reply #13 on: September 24, 2012, 03:59:23 PM »
If you haven't given notice at your current job, try drawing up a hard core budget, using your current income and throwing every available dollar at your debt, and see where you would be.  Include your expected/likely bonus as a one-time payment on the debt in your calculations.  Rinse and repeat for 2014.  Two more years of paralegal drudgery will likely put you in a much better position to go after the CPA.

SpendyMcSpend

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Re: Math vs. emotion on the path to financial independence
« Reply #14 on: September 24, 2012, 03:59:38 PM »
I have to work in a new job for a year to get the CPA.  It has to be in auditing, consulting or tax and this is the highest paying job I'm qualified for in this field.  I can't wait any more because I am 30 and I want to have kids before 33 and be in a new career already.  Additionally there is age discrimination in the CPA jobs I want to get started in and most of them hire directly from school for entry-level jobs.

SpendyMcSpend

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Re: Math vs. emotion on the path to financial independence
« Reply #15 on: September 24, 2012, 04:00:47 PM »
Yes, if I pass all 4 tests in the next year I will be a CPA by January 2014.

Another Reader

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Re: Math vs. emotion on the path to financial independence
« Reply #16 on: September 24, 2012, 04:30:18 PM »
In your shoes, I would consider several things before I made this leap.

1.  Will I be able to pass all the CPA exams before January 2014?

2.  Will I be employable as a newly minted CPA at 31 if there is a lot of age discrimination?  What are the employment prospects in my chosen area?

3.  How much more money will I make as a CPA than I do as a paralegal?  How much will it cost me to get the designation?

4.  Will my CPA job allow me the time I will need to be a parent?  Or will I be working 60 to 70 hour weeks the first few years?

In your shoes, I would be extremely cautious about doing this unless I was absolutely sure the benefits outweighed the cost, and I was extremely confident I could achieve my goal in the time frame you describe.  In my view, you have too much debt and too little in savings at your age to make a professional detour that doesn't have an almost 100 percent chance of succeeding.

SpendyMcSpend

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Re: Math vs. emotion on the path to financial independence
« Reply #17 on: September 24, 2012, 04:39:56 PM »
I think you are being a little dramatic.  My debt is doable at $57,000 per year especially if $57,000 is the lowest I'll make.

Another Reader

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Re: Math vs. emotion on the path to financial independence
« Reply #18 on: September 24, 2012, 04:45:39 PM »
It's not just the debt.  It's the entire picture.  You have a lot of goals, all of which are good.  But they are not all doable on $57,000.  If your plan fails, what is your back-up plan? 

SpendyMcSpend

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Re: Math vs. emotion on the path to financial independence
« Reply #19 on: September 24, 2012, 04:51:39 PM »
My back-up plan is to go back to being a paralegal or into law firm business development, all of which will pay more than $75,000.  What do you mean by fails?  I don't plan on getting fired or quitting, so I will have an income.

Budget with $101,000 income from doing 10 hours of overtime a week at my current job.


--------Totals--------
|Budgeted| 8400
|Income|   8400
|Spent|    0
--------Incomes--------
Income                             8400
Federal tax                        1824
Payroll tax                        521
State tax                          542
--------Saving--------
Down Payment                       60
--------Housing--------
Rent                               1300
--------Utilities--------
Internet city                      26
ConEd                              35
Electric                         25
Storage                            74
Cable                            46
--------Food--------
Restaurants                        25
Grocery                            140
--------Transportation--------
Repairs & Tires                    25
Car Insurance                      75
License & Taxes                    10
Gas & Oil                  30
Metrocard                          109
--------Clothing--------
Cleaning/Laundry                   25
Clothes                            50
--------Medical/Health--------
Dentist (Savings)                  30
Doctor Bills                       0
Optometrist/Contacts               25
--------Personal--------
Spending cash                      40
Toiletries                         10
Hair Care                          30
CPA exams sinking fund             50
Gifts (incl. Christmas)            30
--------Recreation--------
Entertainment                      20
Vacation                           40
Spotify                            9.99
--------Debts--------
Student Loans Minimums             460.01
Extra student loan payments        2713

Total extra paid on student loans:  $32,556
Total 401k:  $73,000 plus earnings
Total emergency fund: $15,000


SpendyMcSpend

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Re: Math vs. emotion on the path to financial independence
« Reply #20 on: September 24, 2012, 04:54:00 PM »
$57,000 is twice the median per capita income in the US, isn't it?

AJ

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Re: Math vs. emotion on the path to financial independence
« Reply #21 on: September 24, 2012, 05:04:26 PM »
$57,000 is twice the median per capita income in the US, isn't it?

No, I don't think so. At least, not if you are only including people that are employed. The last stat I saw was $63k for an "average" household with 1.3 wage earners, but I can't find it again. Wikipedia only had info from 2005. The most recent I could find was this from 2010 listing $40k as the average per person for the full US: http://www.usatoday.com/news/nation/2011-03-23-state-income-table_N.htm

$57k is above average, though, for most areas of the US...which might have been your point...

Jamesqf

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Re: Math vs. emotion on the path to financial independence
« Reply #22 on: September 24, 2012, 05:05:23 PM »
What do you mean by fails?  I don't plan on getting fired or quitting, so I will have an income.

Very few people do plan on getting fired, or quitting unless they already have something better lined up.  But lots of people get laid off when business conditions change, their company goes belly-up, etc.

SpendyMcSpend

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Re: Math vs. emotion on the path to financial independence
« Reply #23 on: September 24, 2012, 05:06:49 PM »
What do you mean by fails?  I don't plan on getting fired or quitting, so I will have an income.

Very few people do plan on getting fired, or quitting unless they already have something better lined up.  But lots of people get laid off when business conditions change, their company goes belly-up, etc.

Right and I have a $15,000 emergency fund plus I live with my boyfriend and can easily reduce our rent to $600 a month if need be (not in a lease).  I am also highly employable in my field right now. 

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Re: Math vs. emotion on the path to financial independence
« Reply #24 on: September 24, 2012, 05:12:17 PM »
If you can get a job like the one you have now, you have a great back-up plan.  If it were possible to delay the CPA for two years, you would be done with the student loans.  Since that's risky for you because of the age discrimination issue, if you go for the CPA, and then go back to a paralegal job, you can still knock out the loans in less than two years.

At 6.7 percent, I would be all about knocking out those loans.  The ONLY exception would be a detour that practically guaranteed a much higher income.  An income that allowed me to achieve more of my goals at the end of the process.

twinge

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Re: Math vs. emotion on the path to financial independence
« Reply #25 on: September 25, 2012, 03:43:43 PM »
Well, with your new salary at least you might  be able to get a tax deduction for your student loan interest.  But the tax advantages of the 401k contributions will be less noticeable as well.  Looking at your budget AND your future plans, I think it's probably a good idea to try to knock out the student loans to open up cash flow.  If it were me, I would lessen the amount I had in emergency fund  and throw that at the loans (since you seem to think you're not too likely to experience an emergency, and for the next couple of years you could probably find low interest cc rates/personal loan rates in case there was a unlikely dire need), I would skip the down payment fund, and then I would divide the surplus between loans and 401k.

tomsang

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Re: Math vs. emotion on the path to financial independence
« Reply #26 on: September 25, 2012, 05:32:56 PM »
I think you should do a spreadsheet that shows your financial picture continuing on as a paralegal for 10 years with 10+ hours of overtime and one as a CPA where you will be working 20+ hours of overtime. If your goal is to retire early I am very confident that you will be better off as a paralegal. To drop your salary in half to go for the CPA doesn't make financial sense, so maybe it is for fullfillment.  I am a CPA and if you are working in a firm it only mathematically makes sense if you are going for Partner, which is 12-15 years out. Good luck with your choice.

Fuzz

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Re: Math vs. emotion on the path to financial independence
« Reply #27 on: September 27, 2012, 09:04:57 PM »
I think you're in great shape. The CPA credential has the potential for a huge payoff--if you land the "right" job with it. I'm not sure how the networking and hiring cycle works for folks earning the CPA credential, but with what you're saying about age discrimination, I'm guessing that it's like the legal market. Your first job sets the floor for your subsequent jobs and if you want to work in consulting (or biglaw) you need to start in consulting (or biglaw).

So I would suggest adding a time budget for making sure you're doing your job search in a smart way. Do you need to meet with 10-15 CPAs in the next 6 months to make sure you're well-positioned for the hiring market? Do you need to spend some extra time with a recruiter? Would a prep course help with exam scores (if those are relevant to hiring options)? I think maximizing the payoff of the CPA degree is probably more important than minimizing costs for long term economic security. Is there a showpiece project you could do at work that would take extra time but set you up to shine in a job interview? Go for the big win at work.

With that said, I'd ease up on the emergency fund. I know it's satisfying to have it, but if you put $10K to your loans, that would save you $670 a year in interest payments and even better, you wouldn't have the loan.

travelbug

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Re: Math vs. emotion on the path to financial independence
« Reply #28 on: September 27, 2012, 09:56:22 PM »
I have to work in a new job for a year to get the CPA.  It has to be in auditing, consulting or tax and this is the highest paying job I'm qualified for in this field.  I can't wait any more because I am 30 and I want to have kids before 33 and be in a new career already.  Additionally there is age discrimination in the CPA jobs I want to get started in and most of them hire directly from school for entry-level jobs.

Can I just add to the mix here...but if you want to have kids in the next three years, why would you study now? Why not just make as much as you can then study part time when you are in the midst of having children?
I am a mum and a career woman, so you can do it but it is expensive to work full-time and pay someone else to look after any children.

Good luck with whatever you decide

sibamor

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Re: Math vs. emotion on the path to financial independence
« Reply #29 on: September 28, 2012, 09:22:14 AM »


Source Material:
U.S. Census. Current Population Survey. Annual Social and Economic (ASEC) Supplement. HINC-01. Selected Characteristics of Households by Total Money Income in 2010. Accessed 13 September 2011.

U.S. Census. Current Population Survey. Annual Social and Economic (ASEC) Supplement. HINC-01. Selected Characteristics of Households by Total Money Income in 2009. Accessed 13 September 2011.


Nice graph. I bumped this data with a second source the US Census.
http://politicalcalculations.blogspot.com/2011/09/distribution-of-income-for-2010_14.html#.UGW-3tWwUuQ

http://www.census.gov/prod/2011pubs/p60-239.pdf

SpendyMcSpend

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Re: Math vs. emotion on the path to financial independence
« Reply #30 on: September 28, 2012, 11:29:06 AM »
That's household income.  My boyfriend makes $100k about. So with my 57,000 we'd be making $157,000 if we got married.

Per capita is probably half the household income right?


arebelspy

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Re: Math vs. emotion on the path to financial independence
« Reply #31 on: September 28, 2012, 12:13:46 PM »
That's household income.  My boyfriend makes $100k about. So with my 57,000 we'd be making $157,000 if we got married.

Per capita is probably half the household income right?

Not quite, as (IIRC) the average household has 1.3 workers.
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sibamor

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Re: Math vs. emotion on the path to financial independence
« Reply #32 on: September 29, 2012, 12:41:43 PM »
To Clarify Definition of Household according to the US Census Bureau

Source: U.S. Bureau of the Census, 2000 Census of Population, Profiles of General Demographic Characteristics. Updated every 10 years. http://factfinder.census.gov.

Definition:

A household includes all the persons who occupy a housing unit. A housing unit is a house, an apartment, a mobile home, a group of rooms, or a single room that is occupied (or if vacant, is intended for occupancy) as separate living quarters. Separate living quarters are those in which the occupants live and eat separately from any other persons in the building and which have direct access from the outside of the building or through a common hall. The occupants may be a single family, one person living alone, two or more families living together, or any other group of related or unrelated persons who share living arrangements. (People not living in households are classified as living in group quarters.)

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Quote
That's household income.  My boyfriend makes $100k about. So with my 57,000 we'd be making $157,000 if we got married.

Per capita is probably half the household income right?

Congratulations! Your a household.
« Last Edit: September 29, 2012, 12:44:50 PM by sibamor »