My Case study, who wants to help? Thank you!

[DenverStache]

Hello Everyone,

I apologize for the long post.  This is my first post to the MMM forum.  I found this blog about a month ago while sitting at my computer sick of my job on a Friday and decided to google retirement.  My mind was immediately opened to the MMM way and I have read each and every article.  It was if every article was written directly towards me.  The similarities between myself and MMM are insane (except I am nowhere near as bad ass).  I too live in Colorado, I am an electrical and computer engineer, and I currently own 2 rental properties (on accident, kind of).   I have made significant strides within the last month to work towards the MMM lifestyle and I know I have a long way to go.  I thought that if I posted my current situation on here, I can get a group of Mustachians to help me accomplish my goals and move toward FI and happiness. 
   Within the last month, I negotiated to work from home, my wife takes the bus for free to work, and I paid off both of our cars (although I will rightfully get punched in the face for my fleet).  I understand that I am a long way on my expenses portion and I will get that in control right away.  This first post is to introduce myself and see if I can get any help on the “larger” questions of my financial situation.  Also, this provides a snapshot that I hope to update over the years so everyone can see this plan in action.  So the goal is FI by 2020 or sooner, will you help me?

Below is my situation with a few key questions.  Please let me know your thoughts and I would be happy to answer any questions.  Thank you for your help and I will be sure to return the favor.

Income
Jane
Monthly Salary ~$5000
401K Contribution ~$500
Take Home = $3400

John
Monthly Salary $9773
401K Contribution $1368
Stock Purchase Plan $977
Insurance $27
Taxes $2056
Take Home $5344

Current Investments
Jane 401K 50K
John 401K 208K
Fidelity (Stache) 74K 

Rental Expense
#1 First Mortgage $1040 167K @4.5% (252K 2042)
#1 Second Mortgage $337 43K @8%
#1 HOA $49
#2 Mortgage $754 124K@ 4.5%
#2 HOA $180
Total Rental Expense = $2360

Rental Income
#1 Rent 1600
#2 Rent 850
Total Rental Income = $2450

Expenses - Bills
Mortgage $2112 373K @3.625% (426K 2042)
John Student $150 22K @1.875% (2026)
Jane Student $130 ?????
Appliances $250 4K @ 0% (2014)
Auto Insurance $200
Phone $125
Comcast $110
Water $150
Gas&Electric $100
Netflix $15
Expenses – Spending
Food & Dining $600
Auto $200
Personal Care $125
Shopping $100
Home $100
Health and Fitness $100
Travel $500
Misc $125

Key Questions:
1.)    What would be your plan of action to become FI in the shortest amount of time?
2.)   Do I already have too much in my 401K?  Should I reduce my 401K contribution and add to my stache?  What about the tax advantages?
http://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/

3.)   On rental #1, I have a 2nd mortgage of 43K @ 8%.  Would you use part of my current stache to pay that off due to the high interest rate? 
4.)   With a relatively large mortgage, I do not know how to account for this.  If I want to retire within 8 years, I will still be paying this high mortgage making it difficult to reach FI.  What do I do?

If you are still reading, I love you and thank you.  Below is my current plan line-by-line:

1.   Rental:  Use 43K of my 74K to pay off my rental 2nd mortgage.  This will allow me to cash flow around 400 a month and hopefully keep my rental finances separate from our personal finances.  I am doing this because I cannot guarantee 8% return on my money in the market.
2.   Student Loans:  The interest rates are so low I do not see a reason to pay these off earlier than I have to.  Also, they will be about done by the time I reach FI.
3.   Auto Insurance:  I just paid off my cars this month.  I will go shop insurance plans in January to reduce this expense.  http://www.mrmoneymustache.com/2011/06/02/insurance-a-tax-on-people-who-are-bad-at-math/

4.   Phone:  It will be difficult to convince my wife to go with a $10 plan.  My phone is paid through my company.  This is a tough one for us. http://www.mrmoneymustache.com/2012/10/11/our-new-10-00-per-month-iphone-plans/

5.   Comcast:   Cancelling TV.  How do I get inexpensive, but reliable internet.  I work from home so it is important that it is reliable and fast.  I do not have neighbors to share with.  http://www.mrmoneymustache.com/2011/05/06/mmm-challenge-cut-your-cash-leaking-umbilical-cord/

6.   Water:  I have tracked the last 12 months and will work to reduce this every month.  http://www.mrmoneymustache.com/2011/11/30/an-800-gift-from-me-to-you/

7.   Gas&Electric:  I plan to do a personal home energy audit and see if I can decrease this monthly bill.
8.   Netflix:  This is not too bad once I cancel cable.
9.   Food&Dining:  We are working on reducing this.  We used to eat out every weekend.  I am eliminating this.  http://www.mrmoneymustache.com/2012/03/29/killing-your-1000-grocery-bill/
10.   Auto:  I know that this is too high.  Now that I am working from home and my wife is taking the bus.  This should drop significantly.
11.   Personal Care:  I am having a hard time convincing my wife to cut my hair.  (Punch me in the face) I am that guy who currently goes to a Salon and gets a $60 haircut and my wife gets her hair cut every 3 months for ~$200!  http://www.mrmoneymustache.com/2011/05/30/get-rich-with-the-universal-mens-grooming-device/

12.   Shopping:  This is not a true $100/mo but every so often we will buy something.  I will work to limit this.
13.   Home:  We have a very old house (1926) that we just bought last year.  There are some updates we would like to do and just general maintenance.  Not sure if we can decrease this much.
14.   Health&Fitness: My wife has a yoga membership and she really enjoys it.  I think that this is a good expense and worthwhile.
15.   Travel:  This is our top priority as a couple.  We love traveling internationally.  I do not want to reduce this but would love to hear people’s opinions on traveling on a budget.  MMM does a lot of “road trips” but he does not provide much advise on international traveling.  Any ideas?


Thank you!

[Daley]

In regard to line 5, take a gander here for some guidance.

Also, you might not be able to talk the wife into a $10 a month phone plan, but there's scads of other options far cheaper for the actual services used if you crunch the numbers and shop around... if you're running GSM phones, start with Platinumtel. The superguide would be worth at least hitting the first dozen posts on as well in that regard.

The rest? I'll leave for others... good luck!

[Another Reader]

With regard to the rentals, they are cash flow negative once you factor in all expenses.  Why do you have them and would you consider selling them?

I have internet and the land-line phone through Comcast.  You can cancel the TV and keep the internet.

It appears you might be able to make do with one car.

You have some student loans that are going to be around for awhile and a little miscellaneous debt.  You are also putting a lot into your ESPP.  Are you getting a discount?  Are you keeping the stock or re-selling it?  That monthly purchase might be something to look at.

I would start by paying off the appliances, discussing one car with the wife, evaluating the place of the rentals in your FI plan, and taking a hard look at the ESPP.  If you really want to hit this hard, cut all the other expenses to the bone.

[Richard3]

To be FI your non-work income needs to be > your expenses.

Assuming a 3% real ROI this means you need to have 33x your annual expenses in income producing assets.

You have 332k in income producing assets. I'm ignoring the rentals since they seem to basically be cashflow neutral and I know very little about property.

My quick calculator.exe work says your monthly expenses are $5092. That's about $61k a year which means you will need about 2 million bucks to be FI (maybe less because of withdrawal rates etc). It says your monthly income is $11589 (take home + 401k and stock purchase). That's about $6497 a month in stash building. You're about 256 months  (21 years) away.

I'm being pessimistic because you're hopefully paying off principal on the mortgages which will help in future but I am gradually building up to the big point.

If you reduce expenses then the magic number reduces by 33x your reduction in expenses. Spend less and get free faster.


1.)    What would be your plan of action to become FI in the shortest amount of time?

Reduce my expenses as much as I can. Not to add to the stash (although that helps) but because low spending is the easiest way to be FI. Jacob at early retirement extreme offers a very aggressive version of this strategy.

2.)   Do I already have too much in my 401K?  Should I reduce my 401K contribution and add to my stache?  What about the tax advantages?
http://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/

No idea, probably not but I'm not American or a tax expert and nor do I want to be either of those things.

3.)   On rental #1, I have a 2nd mortgage of 43K @ 8%.  Would you use part of my current stache to pay that off due to the high interest rate?

Can you get 8% return anywhere else? If not, then pay it off. Same idea applies to all the debts (unless there are early repayment penalties or something).

4.)   With a relatively large mortgage, I do not know how to account for this.  If I want to retire within 8 years, I will still be paying this high mortgage making it difficult to reach FI.  What do I do?

Your mortgage is a housing expense. Therefore it's part of your monthly expenses. Account for it like that. You can be FI and have a mortgage - your investments just have to cover the mortgage payments. If you don't like paying so much for housing then move somewhere cheaper.



Your plan seems generally pretty solid (although I bet you can get a haircut for less than 60 bucks if you don't go to a Salon like some big wussypants and use a barber like a man).

When it comes to international travel, what I've done is negotiated remote work and now I just go live exciting places for a while - much cheaper than being a tourist (and you don't have to be FI to do it). I don't have a house any more though so this may not work for you.

The appliance debt is at 0% whatever you do don't pay this off early. You would basically be setting money on fire doing that rather than paying down the 8% mortgage (or even putting the money in the bank at 1%).

[happy]

Welcome!

You have a great joint  income, some assets and so FI should be possible, provided you can pull those expenses in.

Currently I calculated you are spending 60% of your take home pay....are you saving the rest? With your income it should be possible to reduce your expenses to below 50% without much pain at all. If you got really serious and very badass you could be done in next to no time.

Usually people go FI AFTER they've paid off their mortgage/debt, ie the only way to "account" for your $375K mortgage is to pay it off or sell and buy something cheaper. Or, if you can get a large enough stache, you can plan this as part of your post retirement expenses ie add 25k/year to your expenses when you are doing your retirement calculations. Sorry there's no way around this and the quicker you get rid of the mortgage the less interest you pay (although your interest rate is quite low).  If  you have good equity in either of your rentals, and it becomes clear when you've done the numbers that  getting rid of this mortgage is what is stopping you going FI, one option might be to sell one or both of the rentals to pay off the mortgage. But you need to realise then you are getting rid of potential income producing assets to pay off your primary residence which is actually a liability (something you spend money on) not an  income producing asset ie it might be  better  to live in a cheaper place and keep the rentals.

If you haven't already done so, plug some numbers into http://networthify.com/calculator/earlyretirement. This should tell you what savings rate you need to achieve to reach your goal of 8 years. In your case the numbers are a little more complex, since at some point the rentals will start to make more money when the mortgages are paid off. Make a plan for before  and after they start producing positive cash flow.

I can see lots of options for you, but I think what you need to clarify is: how much to you want to live on , both during accumulation and after FI? How low are you willing to drop your expenses? What are the no-go areas i.e. what would you not forgo for quids? And more to the point what are you willing to do to rid yourself of the $375k mortgage or are you willing to work longer to keep that house? When you FI what would you like your income streams to look like?  Ie do you want 2 rental incomes streams plus stock market, or all your eggs in one basket (not such a good idea). I'm not sure of your ages, and whether you have any potential income streams after a certain age. If you have income streams after 60 or 65, then you need to also plan for before and after this.

Finally its my experience and the experience of others around here, that once you start making adjustments to your lifestyle, it gets easier provided you commit to the mindset, and there are things that you are just not willing to give up at the beginning that, with the passing of time, become easy to stop. Go for the easy cuts first and keep at it.

[Hamster]

Some easy changes that don't take any sacrifice, but reduce the monthly expenses:
If you plan to keep the rental properties, I'd make paying off the 2nd mortgage at 8% a priority as it's a guaranteed 8% return by paying it off. I would use some 'stache' money and be done with it.

You list payoff dates in 2042. Did you just refinance all 3 mortgages? Thecrates are decent, but you should be able to bring them down further with a refi, even on rental properties. Get rate quotes and find out the break even date on the refis.

Depending on the current market value of the rentals, it may make more see to sell them. They are barely cash flow positive without vacancy or other expenses factored, so aren't really helping toward FI in the short term.

Can you reduce the $200/ mo car insurance by opting for a higher deductible? You have enough money put away that you can easily cover a $1000 deductible on the cars. Also see if it would save you to get a $5000 deductible on each of the properties.

[mushroom]

Re: travel - My husband and I love international travel too and recently came back from a year-long trip through 25 countries in Europe, Asia, and the South Pacific. If you'd like more details, our travel blog is http://purplmarsh.wordpress.com - we spent a total of about $36,000 (about $100 per day), including flights. I'm sure other people could have done it cheaper, but we liked to have private rooms with private bathrooms, drink alcohol, and go to expensive countries like Japan and Australia. In my most recent couple of posts on the blog I talked about some of our favorite rental apartments. You can save a lot of money by renting apartments cheaper than hotels and having a kitchen to cook in.

There are tons of tips out there regarding budget travel, but I think there's a lot of overlap with Mustachianism, and the first step involves a philosophical shift in mindset.

I loved the NY Times Frugal Traveler response to the question, "How do you define frugal traveler?" in an interview:


Not with a dollar figure. Lots of people write in to say something like “You’re not frugal! You spent $50 a day in X country? Last year I survived there for a month and spent just fourteen cents!” OK, but what did you do? Have a ham and cheese sandwich for breakfast, lunch and dinner and refuse to pay for a bus to get into the countryside or mountains? Not go to a wonderful little museum or invite a new local friend for a beer?

Frugal to me means, at the very least, avoiding spending on unnecessary comforts – nice hotels, fancy restaurants, organized excursions. It probably includes giving up some niceties you enjoy at home – a comfy mattress, organic produce, a car.

But at its very essence is the belief that spending less almost inevitably leads to experiencing more, and that the best travel experiences are built on avoiding just about everything the travel industry wants you to do.

Being Mustachian doesn't mean that you never go out and travel; if travel is important to you, go ahead and do it but just spend your money mindfully. What is it about international travel that you like? Think about ways that you can spend money on the aspects that are important to you. Maybe instead of automatically booking the tourist sightseeing bus, you should take the local transportation that everyone else does and meet some locals. We stayed in some 5 star hotels with free hotel points, but we liked a lot of the apartments we stayed in better, and I can't imagine ever spending actual money on a fancy hotel no matter how big our stache was.

You might like reading Rolf Pott's book Vagabonding. It's a classic among long-term budget travel-minded folks and talks about the philosophy behind that kind of travel and slowing down to have more meaningful experiences in a place rather than jumping around frantically trying to check off a bunch of things on a checklist in a week. And once you're FI and have the time for longer trips, it's amazing how much cheaper it becomes when you don't have to fly as much and don't have a mortgage or bills to pay back home at the same time.

If you're on board with the idea of budget travel, you can find a ton of info out there on how to do it. Lonely Planet has active forums on long-term and shoestring travel. There are tons of travel blogs out there. Do some searches on the MMM forum because I've seen some travel threads here before.

To get you started, some easy ones off the top of my head involve cutting down on your biggest expenses:

* destination: choosing the right place to go makes a huge difference. Some developing countries are 10x cheaper than other countries. Take a look at Timothy Leffel's World's Cheapest Destinations for ideas. Also, if you like the outdoors, generally camping and hiking tend to be great for the budget.

* transportation: get airline miles with things like credit card bonuses - this has saved us thousands of dollars (the flyertalk forums can be overwhelming with the amount of info it has, but I like blogs like The Points Guy and Million Mile Secrets to filter through some of it). There are tons of ridiculously cheap budget airlines in Europe, and Air Asia is the go-to budget airline in Asia - the best deals are when you book way ahead. Pack light - we only took carry on backpacks with us and we never had to pay any baggage fees, wait for our bags, or worry about them getting lost or stolen.

* accommodation: I already mentioned renting apartments, but free options include Couchsurfing and housesitting (you can check out the travel blog Neverending Voyage to read about how they've gotten some great housesitting gigs). And don't discount hostels out of hand - a lot have private rooms with private bathrooms and can be a great way to meet other travelers.

* food: buying food from the supermarket and occasionally cooking for yourself, especially in developed countries, can save you a ton of money. I think it's fascinating how different supermarkets are across the world. And I love the cheap street food in Asia.

[jrhampt]

I think you're on the right track with canceling the cable and taking a hard look at the car insurance.  As a former smartphone addict, I can say that t-mobile's $30 plan has worked for me, so you might be able to convince your wife to at least decrease her plan a bit further.  There are also some unlimited $45 plans that might work for her without going all the way down to $10/mo.  However, rather than thinking you have too much in your 401ks, I would be trying to get your wife to max out her 401k to reduce tax liability.  This is very important at your income level, and if you do your own taxes you can see the dramatic effect this will have on your taxes.

[DenverStache]

This is unbelievable.  What a great community and I really appreciate everyone taking time to post their thoughts.  Thank you. 

Thank you Another.  This is exactly what I am looking for.

With regard to the rentals, they are cash flow negative once you factor in all expenses.  Why do you have them and would you consider selling them?

I believe that I am cash flow positive by about $90 a month.  I know that this is laughable and I probably have lost money on this over the years that I have had it.  I have thought about selling it and this is the reason I have not.  Punch holes in this.
1.  They are both new homes with very little to no maintenance. 
2.  They are in very desirable places and stay on the market for less than a week when put on craigslist.
3.  With rental #2 we are charging about $100 less than market rent and will change that in June.
4.  Rental #2 is worth what we on it and Rental #1 I could make sell for profit but it has good cash flow.
5.  Due to the relatively low loans on these properties, I could pay them off quickly and have a good income from them.

What do you think?

I have internet and the land-line phone through Comcast.  You can cancel the TV and keep the internet.

I need to cancel the TV right away.  I have been holding on to it for the NFL and wanting to wait until after the Superbowl, but it is a little ridiculous to pay this much for a couple of games a week.  Also, I was talking to my brother-in-law and I believe you can get most games off of a digital antenna now.

It appears you might be able to make do with one car.

I agree with this.  Is it worth selling one of the cars even though it is paid off?  It will get us ~10K, but now the cost can be controlled by not driving as much.  I am hoping to have these cars forever.

You have some student loans that are going to be around for awhile and a little miscellaneous debt.

Our student loans have such low interest rate < 2%.  I do not think it is worth paying off.  What are your thoughts?

You are also putting a lot into your ESPP.  Are you getting a discount?  Are you keeping the stock or re-selling it?  That monthly purchase might be something to look at.

Yes, we get a 15% discount on our shares so I definitely think it is worth maxing out.  I got lucky and when I started with the company the stock prices was very low and has gone up ever since.  I have kept the stock except to pay for my wedding.  This IS my stache right now.  I realized that this was a bad idea and sold 51K (long term capital gains) this month.  I am trying decide to put that in my stache or pay off that 2nd mortgage.  This will make my rentals a better investment.  I still have 24k (short term cap gains) in my company stock, but plan to sell the lots as they become long term and put them in my stache.  What do you think?

I would start by paying off the appliances, discussing one car with the wife, evaluating the place of the rentals in your FI plan, and taking a hard look at the ESPP.  If you really want to hit this hard, cut all the other expenses to the bone.

Thank you so much for the advice!  Would you pay off the appliances at 0%?  I agree with the rentals and need to do a much better job on my expenses.  Thank you!

[DenverStache]

Thank you Richard3.  I really appreciate your analysis.

My quick calculator.exe work says your monthly expenses are $5092. That's about $61k a year which means you will need about 2 million bucks to be FI (maybe less because of withdrawal rates etc). It says your monthly income is $11589 (take home + 401k and stock purchase). That's about $6497 a month in stash building. You're about 256 months  (21 years) away.

This is the exact problem that I am having.  A big portion of my expenses is my $2100 mortgage.  I can reduce the remainder of my expenses easily and will be working diligently towards that.  However,  I would have to move to reduce this expense.  Is that what I should do?  21 years is not acceptable.  However, even with that mortgage I can save 60% of my income.  So why can I not be free in 7 years?

3.)   On rental #1, I have a 2nd mortgage of 43K @ 8%.  Would you use part of my current stache to pay that off due to the high interest rate?

Can you get 8% return anywhere else? If not, then pay it off. Same idea applies to all the debts (unless there are early repayment penalties or something).

Exactly what I was thinking.  Just wanted to check.  There are some tax benefits but I still think the correct thing to do is pay this off.  It is emotionally touch because my stache starts all over.

4.)   With a relatively large mortgage, I do not know how to account for this.  If I want to retire within 8 years, I will still be paying this high mortgage making it difficult to reach FI.  What do I do?

Your mortgage is a housing expense. Therefore it's part of your monthly expenses. Account for it like that. You can be FI and have a mortgage - your investments just have to cover the mortgage payments. If you don't like paying so much for housing then move somewhere cheaper.

Great point!  I just thought that MMM accounted for mortgages differently, i.e. the principal you pay every month is different than the interest.

Your plan seems generally pretty solid (although I bet you can get a haircut for less than 60 bucks if you don't go to a Salon like some big wussypants and use a barber like a man).

100% agree.  I needed that!  I really need to just do it myself.

When it comes to international travel, what I've done is negotiated remote work and now I just go live exciting places for a while - much cheaper than being a tourist (and you don't have to be FI to do it). I don't have a house any more though so this may not work for you.

This is a great idea that I have thought of.  Unfortunately, my wife could not do the same.  So the cost would be her entire salary.

[DenverStache]

Thank you Happy for a great response!

Usually people go FI AFTER they've paid off their mortgage/debt, ie the only way to "account" for your $375K mortgage is to pay it off or sell and buy something cheaper. Or, if you can get a large enough stache, you can plan this as part of your post retirement expenses ie add 25k/year to your expenses when you are doing your retirement calculations. Sorry there's no way around this and the quicker you get rid of the mortgage the less interest you pay (although your interest rate is quite low).  If  you have good equity in either of your rentals, and it becomes clear when you've done the numbers that  getting rid of this mortgage is what is stopping you going FI, one option might be to sell one or both of the rentals to pay off the mortgage. But you need to realise then you are getting rid of potential income producing assets to pay off your primary residence which is actually a liability (something you spend money on) not an  income producing asset ie it might be  better  to live in a cheaper place and keep the rentals.

If you haven't already done so, plug some numbers into http://networthify.com/calculator/earlyretirement. This should tell you what savings rate you need to achieve to reach your goal of 8 years. In your case the numbers are a little more complex, since at some point the rentals will start to make more money when the mortgages are paid off. Make a plan for before  and after they start producing positive cash flow.

This is what I was concerned about.  I have been thinking about utilizing my rentals to take care of my mortgage.  Here are my two thoughts.  The value of the two places together is close to my 373K primary residence so I could do as you suggest and sell the rentals at the correct time in order to pay a large portion of my mortgage off or I could use rental income to pay off the mortgages on the rentals as quickly as possible (higher interest rate anyway) and use my rental income to offset my personal mortgage.  What is your thoughts on these two strategies or should I just start looking for a new house?

I can see lots of options for you, but I think what you need to clarify is: how much to you want to live on , both during accumulation and after FI? How low are you willing to drop your expenses? What are the no-go areas i.e. what would you not forgo for quids? And more to the point what are you willing to do to rid yourself of the $375k mortgage or are you willing to work longer to keep that house? When you FI what would you like your income streams to look like?  Ie do you want 2 rental incomes streams plus stock market, or all your eggs in one basket (not such a good idea). I'm not sure of your ages, and whether you have any potential income streams after a certain age. If you have income streams after 60 or 65, then you need to also plan for before and after this.

This is one of the best, most clearly written statements I have read in a long time.  It really gets at the heart of the matter.  I struggle with these questions.  I have always thought that it would be good to keep the 2 rental properties for income streams and have the stock market.  I definitely will earn money in retirement and may even have a job like teaching (what I really want to do).  Right now I am looking for any "mistakes" that I am making.  All of my debt is very low interest rate; as in lower than expected returns on the stock market.  So my fundamental philosophy is to put everything extra in my stache.  It doesn't seem to make sense to pay down any of my mortgages or my student loans.  Now once my stache exceeds my "number"  than I will have to make decisions.  Is this the correct line of thinking?

Finally its my experience and the experience of others around here, that once you start making adjustments to your lifestyle, it gets easier provided you commit to the mindset, and there are things that you are just not willing to give up at the beginning that, with the passing of time, become easy to stop. Go for the easy cuts first and keep at it.

Thank you for the words of encouragement.  I appreciate it.

[DenverStache]

Thank you Hamster for the reply.  All great points.

If you plan to keep the rental properties, I'd make paying off the 2nd mortgage at 8% a priority as it's a guaranteed 8% return by paying it off. I would use some 'stache' money and be done with it.

My exact thoughts.  Thank you for the confirmation.

You list payoff dates in 2042. Did you just refinance all 3 mortgages? Thecrates are decent, but you should be able to bring them down further with a refi, even on rental properties. Get rate quotes and find out the break even date on the refis.

Yes, I just refinanced a couple of months ago.  These were the lowest rates I could find.  Nobody would refi the rentals except for the original banks who held the loans because we did not have 20% equity at the time.  I should have probably used my stache to get it to there but did not.  Now I do not think it would be worth refinancing again.  Do you?

Depending on the current market value of the rentals, it may make more see to sell them. They are barely cash flow positive without vacancy or other expenses factored, so aren't really helping toward FI in the short term.

I have thought about this.  They have never been vacant and have very low expenses.  But this will change as they age.

Can you reduce the $200/ mo car insurance by opting for a higher deductible? You have enough money put away that you can easily cover a $1000 deductible on the cars. Also see if it would save you to get a $5000 deductible on each of the properties.

I completely agree with this. Just paid off the cars a week ago and will be shopping insurance in January.

[DenverStache]

Thank you Mushroom!  I was hoping to find a fellow traveler on this forum.

Re: travel - My husband and I love international travel too and recently came back from a year-long trip through 25 countries in Europe, Asia, and the South Pacific. If you'd like more details, our travel blog is http://purplmarsh.wordpress.com - we spent a total of about $36,000 (about $100 per day), including flights. I'm sure other people could have done it cheaper, but we liked to have private rooms with private bathrooms, drink alcohol, and go to expensive countries like Japan and Australia. In my most recent couple of posts on the blog I talked about some of our favorite rental apartments. You can save a lot of money by renting apartments cheaper than hotels and having a kitchen to cook in.

There are tons of tips out there regarding budget travel, but I think there's a lot of overlap with Mustachianism, and the first step involves a philosophical shift in mindset.

I loved the NY Times Frugal Traveler response to the question, "How do you define frugal traveler?" in an interview:


Not with a dollar figure. Lots of people write in to say something like “You’re not frugal! You spent $50 a day in X country? Last year I survived there for a month and spent just fourteen cents!” OK, but what did you do? Have a ham and cheese sandwich for breakfast, lunch and dinner and refuse to pay for a bus to get into the countryside or mountains? Not go to a wonderful little museum or invite a new local friend for a beer?

Frugal to me means, at the very least, avoiding spending on unnecessary comforts – nice hotels, fancy restaurants, organized excursions. It probably includes giving up some niceties you enjoy at home – a comfy mattress, organic produce, a car.

But at its very essence is the belief that spending less almost inevitably leads to experiencing more, and that the best travel experiences are built on avoiding just about everything the travel industry wants you to do.

Being Mustachian doesn't mean that you never go out and travel; if travel is important to you, go ahead and do it but just spend your money mindfully. What is it about international travel that you like? Think about ways that you can spend money on the aspects that are important to you. Maybe instead of automatically booking the tourist sightseeing bus, you should take the local transportation that everyone else does and meet some locals. We stayed in some 5 star hotels with free hotel points, but we liked a lot of the apartments we stayed in better, and I can't imagine ever spending actual money on a fancy hotel no matter how big our stache was.

You might like reading Rolf Pott's book Vagabonding. It's a classic among long-term budget travel-minded folks and talks about the philosophy behind that kind of travel and slowing down to have more meaningful experiences in a place rather than jumping around frantically trying to check off a bunch of things on a checklist in a week. And once you're FI and have the time for longer trips, it's amazing how much cheaper it becomes when you don't have to fly as much and don't have a mortgage or bills to pay back home at the same time.

If you're on board with the idea of budget travel, you can find a ton of info out there on how to do it. Lonely Planet has active forums on long-term and shoestring travel. There are tons of travel blogs out there. Do some searches on the MMM forum because I've seen some travel threads here before.

To get you started, some easy ones off the top of my head involve cutting down on your biggest expenses:

* destination: choosing the right place to go makes a huge difference. Some developing countries are 10x cheaper than other countries. Take a look at Timothy Leffel's World's Cheapest Destinations for ideas. Also, if you like the outdoors, generally camping and hiking tend to be great for the budget.

* transportation: get airline miles with things like credit card bonuses - this has saved us thousands of dollars (the flyertalk forums can be overwhelming with the amount of info it has, but I like blogs like The Points Guy and Million Mile Secrets to filter through some of it). There are tons of ridiculously cheap budget airlines in Europe, and Air Asia is the go-to budget airline in Asia - the best deals are when you book way ahead. Pack light - we only took carry on backpacks with us and we never had to pay any baggage fees, wait for our bags, or worry about them getting lost or stolen.

* accommodation: I already mentioned renting apartments, but free options include Couchsurfing and housesitting (you can check out the travel blog Neverending Voyage to read about how they've gotten some great housesitting gigs). And don't discount hostels out of hand - a lot have private rooms with private bathrooms and can be a great way to meet other travelers.

* food: buying food from the supermarket and occasionally cooking for yourself, especially in developed countries, can save you a ton of money. I think it's fascinating how different supermarkets are across the world. And I love the cheap street food in Asia.

Great insights!  This is exactly what I was looking for.  We went to Thailand this year and paid for our flights via miles.  I will definitely check out the resources that you mention.  I agree with getting overloaded on the flyertalk forums so I will check out the blogs you mention.  I was a big spender and have always used miles to book my flights, but now that we are reducing expenses it seems that it will be difficult to reach the number of point required.  Any tips?  Also, we are planning our 2013 spending now and I want to put together a side pot for travel.  I am struggling to determine the amount I should set aside.  As I plan my next trip I will be sure to post on this forum and see if I can get some more help.  We are thinking about visiting Belize.  P.S. your blog looks awesome. 

[DenverStache]

Thank you Jrhampt!  The 401k is something I really want to discuss and figure out.

I think you're on the right track with canceling the cable and taking a hard look at the car insurance.  As a former smartphone addict, I can say that t-mobile's $30 plan has worked for me, so you might be able to convince your wife to at least decrease her plan a bit further.  There are also some unlimited $45 plans that might work for her without going all the way down to $10/mo.  However, rather than thinking you have too much in your 401ks, I would be trying to get your wife to max out her 401k to reduce tax liability.  This is very important at your income level, and if you do your own taxes you can see the dramatic effect this will have on your taxes.

I think this may be a good near term compromise on the cell phones.  I think she may feel much better with a known company like t-mobile.  As for the 401k.  I am debating the same thing.  We are 31 years old, so with our 250K in the 401k, but the time we are 65 that should be plenty to live on.  Also, we will definitely continue to contribute at least the company match, 5% and 4% respectively.  However, the tax benefits do intrigue me.  It would be great to grow the money pre-tax, especially at our income level.  However, I do not want to wait until I am 65 to retire.  I almost feel as thought my old money is set and now I just have to bridge the gap between 31 (my age now) and 65.  What are your thoughts?

[mushroom]

Cool, glad you found it helpful.

Oftentimes the big bonus miles come from signing up for new credit cards rather than from purchasing enough on your existing credit cards - last year and the year before there were some amazing deals, but you might have to bide your time until a really good deal comes along. Currently many of the deals seem to have pretty big minimum spend requirements.

I haven't actually been to Belize so you can take everything I'm going to say with a grain of salt, but from everything I've heard, Belize has sounded way overhyped and overpriced. But there may be ways to do it cheaper that I don't know about. I've spent a month in Mexico, a month in Guatemala, and two months in Costa Rica with some visits to Nicaragua and Panama, and I would say that Guatemala is one of the most underrated and amazing countries to visit in Central America. Volcanoes everywhere, including active ones where you can get up close to red lava flows (at least the last time I was there a couple years ago), the impressive Mayan ruins of Tikal, Lake Atitlan, Semuc Champey, Antigua, amazing food....and way cheaper than Belize. But a lot depends on why you want to go somewhere - if it's because of the snorkeling, I would consider Honduras or Mexico instead or I guess just a little farther over to Southeast Asia :P.

As far as figuring out how much to put aside, once you figure out where you're going to go and for how long, you can get a better sense of how much it will cost from Lonely Planet books and forums. Or you could do it the other way around and say you think a budget of $X is reasonable for a week-long trip or whatever and then plan accordingly to make it fit within that budget.

[Catbert]

Three minor thoughts...Is your Fidelity money in a money market or in stocks/mutual funds?  If it's invested now remember that you'll have to pay capital gains to get it out.  Doesn't mean you shouldn't do it to pay off the 8% second, but you need to be aware there is a tax hit.  Might make sense to do before 31 December (cap gains rates may go up next year). 

Regarding your company stock.  I'd certainly continue to buy since you get it at a discount.  However, I wouldn't keep more than 10% of your invest-able assets in any one stock.  (If you were older I'd advise no more than 4%.)  Even if it's a great company shit happens and you don't want to lose your  eggnest at the same time you lose your job.  Do as you've done before and wait until it's eligible for capital gains treatment.

I wouldn't worry about paying off your 0% appliance loans until 45-60 days before the interest rate jumps.  You want a bit of a time cushion because shit happens (have I already said that?).  You don't want to missing the deadline since many/most of these have a retroactive interest penalty if you go past the date.

 

[happy]

Thank you Happy for a great response!

Usually people go FI AFTER they've paid off their mortgage/debt, ie the only way to "account" for your $375K mortgage is to pay it off or sell and buy something cheaper. Or, if you can get a large enough stache, you can plan this as part of your post retirement expenses ie add 25k/year to your expenses when you are doing your retirement calculations. Sorry there's no way around this and the quicker you get rid of the mortgage the less interest you pay (although your interest rate is quite low).  If  you have good equity in either of your rentals, and it becomes clear when you've done the numbers that  getting rid of this mortgage is what is stopping you going FI, one option might be to sell one or both of the rentals to pay off the mortgage. But you need to realise then you are getting rid of potential income producing assets to pay off your primary residence which is actually a liability (something you spend money on) not an  income producing asset ie it might be  better  to live in a cheaper place and keep the rentals.

If you haven't already done so, plug some numbers into http://networthify.com/calculator/earlyretirement. This should tell you what savings rate you need to achieve to reach your goal of 8 years. In your case the numbers are a little more complex, since at some point the rentals will start to make more money when the mortgages are paid off. Make a plan for before  and after they start producing positive cash flow.

This is what I was concerned about.  I have been thinking about utilizing my rentals to take care of my mortgage.  Here are my two thoughts.  The value of the two places together is close to my 373K primary residence so I could do as you suggest and sell the rentals at the correct time in order to pay a large portion of my mortgage off or I could use rental income to pay off the mortgages on the rentals as quickly as possible (higher interest rate anyway) and use my rental income to offset my personal mortgage.  What is your thoughts on these two strategies or should I just start looking for a new house?

I can see lots of options for you, but I think what you need to clarify is: how much to you want to live on , both during accumulation and after FI? How low are you willing to drop your expenses? What are the no-go areas i.e. what would you not forgo for quids? And more to the point what are you willing to do to rid yourself of the $375k mortgage or are you willing to work longer to keep that house? When you FI what would you like your income streams to look like?  Ie do you want 2 rental incomes streams plus stock market, or all your eggs in one basket (not such a good idea). I'm not sure of your ages, and whether you have any potential income streams after a certain age. If you have income streams after 60 or 65, then you need to also plan for before and after this.

This is one of the best, most clearly written statements I have read in a long time.  It really gets at the heart of the matter.  I struggle with these questions.  I have always thought that it would be good to keep the 2 rental properties for income streams and have the stock market.  I definitely will earn money in retirement and may even have a job like teaching (what I really want to do).  Right now I am looking for any "mistakes" that I am making.  All of my debt is very low interest rate; as in lower than expected returns on the stock market.  So my fundamental philosophy is to put everything extra in my stache.  It doesn't seem to make sense to pay down any of my mortgages or my student loans.  Now once my stache exceeds my "number"  than I will have to make decisions.  Is this the correct line of thinking?

The answers to your questions come down to personal preferences I believe. I agree with the others: get rid of the 8% loan, thats a no brainer.

Whether or not you keep your primary residence, depends on how much you love it and what you are willing to give up to have it. If you can be just as happy in a cheaper place, then that is the better option:  MMM is all about reducing living expenses without reducing happiness, having realised that stuff does not bring lasting happiness. If you decide to sell your primary residence then don't forget to factor in moving/buying/selling costs.

If you really want to keep your primary residence then paying down the rental loans and using the rental income to pay your mortgage is also a legitimate strategy. At the end of the day debt is debt and income is income,  but if it helps you to think in terms of this offset thats fine (unless there are some tax advantages for so doing: I'm not from US). What I'm saying is less debt (wherever its from) means lower mortgage payments which means less expenses and more income left over, or, the ability to live on less.

RE mortgage vs stockmarket: ultimately another personal decision.http://www.mrmoneymustache.com/2012/02/24/pay-down-the-mortgage-or-invest-more-a-winwin-question/ The debt is 100% yours and and is 100% certain. The stock market POTENTIALLY will give you a higher return, but this is NOT 100% certain. IF the stock market yield was 100% certain then yes, its better to invest at a higher rate and keep those mortgages goes at a lower rate. Don't forget to take taxes on the investment earning into account (In Australia we would be paying 3o-45%).  So whilst the housing market keeps its value and the stockmarket is growing, investing  is the best strategy. It really depends on your faith in those markets, and your tolerance to risk. If the bottom falls out of the stock and housing market, you lose your job, become ill and unable to work: the DEBT is still there 100%.  Paying off the debt brings  peace of mind, and one no longer has to worry about being tied to servicing the debt.

You are carrying at least 730k  of debt - you didn't list Jane's student loan amount - given she's paying 130/month, may be thats another 100k? say 800k of debt. NONE of this debt is making you money. ALL of it is costing you something, and sooner or later it ALL has to be paid back. NO one else has said it yet so I will: your debt is an emergency, your hair is on fire and you have 800000 killer bees stinging you to deathhttp://www.mrmoneymustache.com/2012/04/18/news-flash-your-debt-is-an-emergency/.  I'm no accountant but figure out how long it will take for you to stache 800k.  If you stash $5200/month @7% (thats 60% of your take home) it will take 10 years to get 624,000k. http://jaw.iinet.net.au/stuff/interest.htmlKeep in mind, your debt will be slowly going down due to the payments. Since you want to FI in 8 years that would be just about 500k.  Run the amortization schedules on all your loans (and offset any estimated positive cashflow from the rentals): will they be paid off with 500k in 8 years?  I realise you also have 401k contributions and a stock purchase plan, which will be making you some stash in the mean time, but this is just stache for debt repayment, unless you can live off the rental income once the mortgages are repaid.  I suspect what all this points to is that 800k debt is making it hard for you to FI in 8 years, unless you keep "working" post FI at an alternate job you enjoy that will cover living expenses INCLUDING remaining loan repayments. In other words the difference between 7% and 3 or 4% over 8 years is not sufficient given the size of your debt and income. 

A radical plan would be sell everything, pay off all loans, rent a cheap place (or if the maths work, if you can buy for the same cost as the rent), and stash. In 8 years you would have that 500k. (= income of 20k at 4% SWDR). Once you have 500k, if you don't touch it, the compounding starts to be getting quite effective. Personally I couldn't do that (I'm an Aussie and we love our property)...but its one option. Try out a few of these  sorts of options  ( eg sell 1 rental, sell house, sell 2 rentals  or sell nothing and save like crazyetc) on paper and see which suits you the best. Also where is Jane in all of this?

[Richard3]

A big portion of my expenses is my $2100 mortgage.  I can reduce the remainder of my expenses easily and will be working diligently towards that.  However,  I would have to move to reduce this expense.  Is that what I should do?  21 years is not acceptable.  However, even with that mortgage I can save 60% of my income.  So why can I not be free in 7 years?

...
 I just thought that MMM accounted for mortgages differently, i.e. the principal you pay every month is different than the interest.

Whether or not you should move is a complicated and personal question. I'm not saying you can't be free in 7 years, just that your current expenses make it more difficult.

In terms of your net worth, you should account for principal and interest payments differently. The principal payments aren't really an expense but at the same time if you don't make those payments you pretty quickly stop having a place to live so they are definitely a cash outflow that needs to be covered (you're sort of pre-paying your rent for the rest of your life)

Exactly what I was thinking (paying off the mortgage).  Just wanted to check.  There are some tax benefits but I still think the correct thing to do is pay this off.  It is emotionally touch because my stache starts all over.

Your stash doesn't start over, it just moves from the stockmarket to rental property. As long as you still have enough liquid money to survive life's bumps, this isn't terrible.

When it comes to international travel, what I've done is negotiated remote work and now I just go live exciting places for a while - much cheaper than being a tourist (and you don't have to be FI to do it). I don't have a house any more though so this may not work for you.

This is a great idea that I have thought of.  Unfortunately, my wife could not do the same.  So the cost would be her entire salary.
[/quote]

It may still be a good thing - other countries can be a lot cheaper to live in.

The other thing is that I doubt it would be her entire salary. Even if she can't work in her field she could (presumably) get a TEFL certification - people love to learn English. There's always the option of doing tasks on Mechanical Turk or similar. Even if none of that is possible, she will have extra time which means you might be able to in-source tasks you currently pay for (like getting awesome meals), which is a saving.

[Hamster]

You list payoff dates in 2042. Did you just refinance all 3 mortgages? The rates are decent, but you should be able to bring them down further with a refi, even on rental properties. Get rate quotes and find out the break even date on the refis.

Yes, I just refinanced a couple of months ago.  These were the lowest rates I could find.  Nobody would refi the rentals except for the original banks who held the loans because we did not have 20% equity at the time.  I should have probably used my stache to get it to there but did not.  Now I do not think it would be worth refinancing again.  Do you?

Probably not worth it unless you have a Loan to Value ratio of 0.8 so that you can entertain other offers on rates (which aren't going to be that much better than what you've got now). I doubt it would make sense to put more money into them now unless you have a personal (emotional?) reason to do so. That said, the advice I'm giving is slightly different from what I am doing (based on personal/emotional reasons...) with our duplexes which cash flow nicely.

My wife particularly hates debt (even leveraged investment debt that makes us much more than it costs in interest) and is less risk tolerant than I am. Even though the long-term math would work out better to leverage our investments and buy more property, we compromised and decided to focus on paying off our rentals and primary residence before our kids reach college age, so we refinanced both of our duplexes from 30 year fixed to 15 year fixed (at 3.125%) and are paying them off no later than the next 10-12 years (mortgage prepayments covered by rental income). We paid a little more into principal on one of them at the time of refinancing to keep a healthy monthly cashflow from both of them. This puts us in a very low-risk situation that lets us sleep very comfortably at night. The tenants pay for our mortgages, and within 12 years, even if we saved nothing else, the rental income from the paid-off duplexes could cover all of our living expenses.

It makes me smile just to think about it.

[DenverStache]

Cool, glad you found it helpful.

Oftentimes the big bonus miles come from signing up for new credit cards rather than from purchasing enough on your existing credit cards - last year and the year before there were some amazing deals, but you might have to bide your time until a really good deal comes along. Currently many of the deals seem to have pretty big minimum spend requirements.

I haven't actually been to Belize so you can take everything I'm going to say with a grain of salt, but from everything I've heard, Belize has sounded way overhyped and overpriced. But there may be ways to do it cheaper that I don't know about. I've spent a month in Mexico, a month in Guatemala, and two months in Costa Rica with some visits to Nicaragua and Panama, and I would say that Guatemala is one of the most underrated and amazing countries to visit in Central America. Volcanoes everywhere, including active ones where you can get up close to red lava flows (at least the last time I was there a couple years ago), the impressive Mayan ruins of Tikal, Lake Atitlan, Semuc Champey, Antigua, amazing food....and way cheaper than Belize. But a lot depends on why you want to go somewhere - if it's because of the snorkeling, I would consider Honduras or Mexico instead or I guess just a little farther over to Southeast Asia :P.

As far as figuring out how much to put aside, once you figure out where you're going to go and for how long, you can get a better sense of how much it will cost from Lonely Planet books and forums. Or you could do it the other way around and say you think a budget of $X is reasonable for a week-long trip or whatever and then plan accordingly to make it fit within that budget.

Thank you for the feedback.  I have heard good things about Guatemala and I will look into that as a better destination.

[DenverStache]

I think you're on the right track with canceling the cable and taking a hard look at the car insurance.  As a former smartphone addict, I can say that t-mobile's $30 plan has worked for me, so you might be able to convince your wife to at least decrease her plan a bit further.  There are also some unlimited $45 plans that might work for her without going all the way down to $10/mo.  However, rather than thinking you have too much in your 401ks, I would be trying to get your wife to max out her 401k to reduce tax liability.  This is very important at your income level, and if you do your own taxes you can see the dramatic effect this will have on your taxes.

Hi jrhampt,  this is very interesting and I have thought about this too.  I agree that the tax advantages are tremendous; particularly at our income level.  I am concerned about having access to the money prior to 65.  I know that MMM had written about creating a 5 year pipeline, but I have not been able to find much on this method.  Do you have any experience with getting access to your 401k prior to 65?  Can you provide some advice?  I would like to start working diligently on my "young person" money and if I lowered my 401k contributions, that would help.  But as you suggest, I will be losing a good portion to taxes.  Any additional advice you can provide would be greatly appreciated.

[DenverStache]

Three minor thoughts...Is your Fidelity money in a money market or in stocks/mutual funds?  If it's invested now remember that you'll have to pay capital gains to get it out.  Doesn't mean you shouldn't do it to pay off the 8% second, but you need to be aware there is a tax hit.  Might make sense to do before 31 December (cap gains rates may go up next year). 

Regarding your company stock.  I'd certainly continue to buy since you get it at a discount.  However, I wouldn't keep more than 10% of your invest-able assets in any one stock.  (If you were older I'd advise no more than 4%.)  Even if it's a great company shit happens and you don't want to lose your  eggnest at the same time you lose your job.  Do as you've done before and wait until it's eligible for capital gains treatment.

I wouldn't worry about paying off your 0% appliance loans until 45-60 days before the interest rate jumps.  You want a bit of a time cushion because shit happens (have I already said that?).  You don't want to missing the deadline since many/most of these have a retroactive interest penalty if you go past the date.

Hi Maryw, thank you for your response.  My fidelity account is actually made up of my company stock entirely (horrible idea).  I got lucky and when I started with the company their stock price was very low and in the last ~5 year it has steadily risen.  However, I recognized that too much of my net worth was wrapped up in this stock, so I actually spent the last 4 weeks selling it off.  I figured I accomplish two things; first, I would reduce my exposure to this one company regardless and second, I can pay off that 8% second, which I think is a good idea.  The good news is that I only needed to sell all of my long term holdings.  I think that this is the "pipeline" that I will use going forward.  I will hold until it reaches long term and then sell and buy into my stache. 

As for the appliances we divided the amount due by 16 months (2 months prior to the end of the promo period) and will just pay it monthly over that time. 

Thank you for your input.  If you have any other thoughts I would be happy to listen.