Author Topic: New here, motivated, help me get started!  (Read 5623 times)

tkaraszewski

  • 5 O'Clock Shadow
  • *
  • Posts: 83
  • Age: 38
  • Location: Corralitos, CA, USA
    • Project $30,000
New here, motivated, help me get started!
« on: September 04, 2012, 04:45:20 PM »
Hey everyone. I just found this site, and read through nearly every single article, and the whole idea, even though I'd heard of "financial independence" before, never really spoke to me until I read MMM's perspective on life. Now I feel I need to get started right away.

Here's my current situation:
We are my wife, my one year old daughter, and myself.
My take home pay is about $107k/year on a gross salary of about $150k. My wife stays home with our daughter. We may have a second child. We are both in our early thirties.

House:
I bought my house (in coastal California) last year, for $550k, with 3.5% down. The interest rate on the mortgage is 3.875%, but because of the FHA loan that we used, we are alo paying about $500/month in mortgage insurance. Balance on the loan is $530k. Current value of the house (per Zillow) is $599k. My total housing payment each month breaks down to roughly:
$800/mo principal
$1,700/mo interest
$500/mo mortgage insurance
$500/mo taxes
$100/mo homeowner's insurance

The total payment is $3635/month.

Cars:
2012 Chevy Volt. This is leased, and subsidized by work, so that from my perspective, the monthly payment is essentially free. I can't do much about it regardless, because I'm committed to pay for the lease until summer of 2014, at which point I can either buy the car or turn it in. This is the car I commute to work in.

2012 Subaru Outback. I (sigh) financed this car, but after reading nearly every single one of MMM's articles, I'm going to pay this off *RIGHT AWAY* - as soon as I get my next paycheck on the 15th. I currently owe $7,900 on it. This is the car my wife drives and the one with the car seat in it for my daughter.

2007 VW GTI. This is the car the Volt replaced. It's for sale. I don't owe any money on it or anything. Hopefully I can sell it for $9-10k.

1985 Chevy C20 pickup truck. This is really a tool more than a vehicle. Recently I've used it for things like: pulling tree stumps out of my front yard, picking up abale of straw, and hauling things (like tree stumps) to the dump. I paid $1800 for it and it gets driven a couple times a month.

Recurring Bills:
I think I'm actually pretty good in this category.
Cell phone: $80 (this is my wife's iphone plan. Work pays for mine).
Insurance: $259 (combined for all cars and a 20-year term life policy on myself, homeowner's is mentioned above in "house" section).
Electricity: $67 last month, which is typical. We don't have air conditioning (coastal California, see house price).
Internet: $60
Web Hosting: $20
Spotify: $10

I don't really keep good numbers on tracking spending in general. I may have missed some small things 9we have no cable TV or anything, though)

Food:
No idea. I transfer $250/week to my wife and she uses that for groceries, gas for the Subaru, things for the baby, etc. I don't have a breakdown.

Other Assets:
IRA: current value $56,000. I am not currently contributing to a 401k (my company offers one but it has no matching).
Cash on hand: $13,000.

Job/Commute:
I work in software, like MMM used to. I live sort of in the country/near the ocean, and commute into the Silicon Valley. Recently my office moved, and so my new commute is even longer than my old commute. It now stands at 52 miles each way, which takes an hour and twenty minutes or more (each way). Luckily I "only" have to do this three days a week. I telecommute the other two days. One thing that's worth mentioning is that my pre-tax salary is approximately $150k/year, but I also have approximately 15,000 shares of unvested pre-IPO stock in a company that I really do think could do quite well. It is absolutely reasonable that this stock might be worth $30/share in a couple years (or it could be worth nothing, or $100+/share). This stock vests for me over roughly the next 3.5 years.

Spending:
You'll wonder why my assets are so meager compared to my fairly low-seeming spending. It's because I've tended to spend rather than stash my leftover cash in the past. I've bought plenty of surfboards, fancy racing bicycles, expensive European vacations, brand new cars, etc. Usually (except on cars) I haven't borrowed money to pay for these things, which I always felt was "doing pretty good", but it means that my stash is correspondingly small now.

Goals:
I've thought about it a lot, and decided what I *don't* want to do is move closer to work. I'd rather quit my job and get one closer to home. My wife and I have chosen the place we want to live, and giving that up for a job seems backwards, especially with the goal of being a lot less reliant on my job at all in a few years. We have friends and family and are building ties here. But before I do anything like quit (and give up all that stock) I'm going to try and negotiate more time working from home first. There are other people working for us who are remote full-time, or 75% of the time. Hopefully I can get a similar deal, maybe only driving into the office once a week.

My short-to-mid-term goal isn't retirement exactly, but just the ability to have a lot more flexible work options. Maybe I could work three days a week, or full-time telecommute, or get a job here in town (where there are fewer jobs and they don't pay as well) and ride my bike and still get home by 5:30. I figure if we paid off the house, then the amount I'm spending every month would drop from something like $6000 to about $3000, which would open up lots of options. Because of this, and the ridiculous insurance I pay on the mortgage, I was thinking that my first goal (after paying off the car) would be to dump money into the house (both by over-paying the mortgage, and doing a couple improvements myself) to the point where I have 20% equity, and then, assuming interest rates are still low, refinance to get an even lower rate on a 15-year loan with no insurance required.

I could then keep dumping more money into the house, even faster without the mortgage insurance to pay, and especially if that stock ends up amounting to something (or I could re-evaluate if the new mortgage is cheap enough, and put the money somewhere else).

Once the mortgage is paid off, I could try and get a part-time position, or a closer job, or if full-time telecommuting works out, maybe just keep doing my current job from home for a while, and saving an extra $3600/month.

What do you think guys? Is this a reasonable plan? what would you do?

Thanks everyone, sorry the post was so long.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 27958
  • Age: -999
  • Location: Seattle, WA
Re: New here, motivated, help me get started!
« Reply #1 on: September 04, 2012, 04:50:02 PM »
Welcome!

Paying off the car, then paying down the house to where you can remove PMI sounds smart to me.

Then start investing all your spare employees dollars!
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.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Another Reader

  • Walrus Stache
  • *******
  • Posts: 5052
Re: New here, motivated, help me get started!
« Reply #2 on: September 04, 2012, 05:20:50 PM »
1. Sell the VW and pay off the Subaru.  I'm guessing the wife will not want to sell the Subaru and strap the baby into the VW.

2. The truck is paid for and is useful.  Park it.

3. Zillow is pretty worthless for determining market value.  Ask the agent that sold you the house for comparable sales and his/her idea of current market value.  Not sure where you are located for that purchase price, but values are up in most places.  You will want to pay down the mortgage and refinance ASAP, BUT

4. You have no idea whether this start up will be there in 3 years.  As you said, it's pre-IPO.  So, I would stash a lot of cash into savings and if you qualify into Roth IRA's.  You need a safety net.

5.  Once things settle down and you know where the company is going, if you can telecommute more, and if that second child is on the way, you can dump a lot of cash into the house and refinance.  FHA MI is onerous, and the best way to dump it is a conventional refinance.


tkaraszewski

  • 5 O'Clock Shadow
  • *
  • Posts: 83
  • Age: 38
  • Location: Corralitos, CA, USA
    • Project $30,000
Re: New here, motivated, help me get started!
« Reply #3 on: September 04, 2012, 07:28:52 PM »
My wife probably would not like getting rid of the Subaru and keeping the VW, especially since the VW is a two-door.

You're right about Zillow being mostly worthless, I just don't have any better indicator for the value of the house. If I were actually going to refinance into a standard loan, I'd have to get the place appraised, and I'd certainly do a bit of homework before then.

One reason I don't act like I'm working at your typical startup is because, although we're pre-IPO, I feel like we're almost guaranteed to succeed at this point, it's only a question of when, and how big we'll get. We have something like 200 employees, 34 million users, and $120 million in funding. Even if we do fail, we're big enough at this point that the ship would take long enough to sink that I'd have a lot of time to prepare. Still, keeping assets somewhere more liquid than the mortgage makes sense, but, if it weren't for the mortgage, that PMI payment alone would be bigger than any of my other expenses, which really makes me inclined to remove it since I see no benefit from it at all.


riskystartup

  • 5 O'Clock Shadow
  • *
  • Posts: 4
  • Location: Canada
  • Hi!
    • www.RiskyStartup.com
Re: New here, motivated, help me get started!
« Reply #4 on: September 04, 2012, 09:33:24 PM »
Start the budget/tracking of expenses to see what is really going on (your numbers make no sense).

Sell the toys you accumulated.

Sell the cars (buy one used cheap on gas car).

Sell the house (or rent it out if you can get tenant to cover your costs + mortgage until housing market improves).

Move into tiny condo closer to work (rent or own, does not matter).

Start maxing out 401K (for tax purposes) and cut your total outlay to maybe $30K.

When stocks vest in 3.5 years, you may have 500K there, about $300K in savings (from spending only 30K per year), something in 401 K and maybe paid-off condo. Sell the house, condo and cash in your stock and you may have 1M or more. At 4% withdrawal, you get 40K per year. BEST PART - you learned how to live off $30K per year!

Tell your work that you want to work exclusively from home or quit. Move to cheaper part of the US (or world) and be free! Spend more time with kids and wife, work when you want, if you want.

Another Reader

  • Walrus Stache
  • *******
  • Posts: 5052
Re: New here, motivated, help me get started!
« Reply #5 on: September 04, 2012, 09:59:44 PM »
This is Silicon Valley.  His small condo rent would be $2,000 a month.  A house 20 miles from his job would probably be closer to $3,000.

It all depends on how "Mustachian" you and your wife are willing to be to become FI.  I do agree you need to cut expenses and save/invest as much as possible.  You and your wife might want to put more thought into the $250 per week.  Getting rid of one car will cut your insurance and registration.

I would figure out the value of the house.  If it has gone up since you bought it, it might pay to throw money at it until you can refinance.  You will be in a much better position if you can do that.

gooki

  • Handlebar Stache
  • *****
  • Posts: 2379
  • Location: NZ
Re: New here, motivated, help me get started!
« Reply #6 on: September 05, 2012, 04:44:51 AM »
Welcome!

Paying off the car, then paying down the house to where you can remove PMI sounds smart to me.

Then start investing all your spare employees dollars!

Punch yourself in the face ;)

And then

Do the above...

And then...

Shop around for better priced insurance, $359 a month seems excessive, considering medical isn't included.
Look into different plans for your wife's cell phone. Aim to halve the cost at a minimum.
Web hosting at $20 a month could easily be $5. Unless your site is generating income.

But ultimately it's the house that keeping you down. You have to get past the PMI threshold ASAP. Even if that means making sacrifices, like not eating out for the next year. You didn't mention the finance rate on the Subaru. If its sub 3%, I'd hold off any additional payments until your mortgage is in a better situation.

PS knowing your mistakes is the first step. If you get a solid plan together and stick to it, you'll see improvements in no time.
« Last Edit: September 05, 2012, 04:49:19 AM by gooki »

AJ

  • Pencil Stache
  • ****
  • Posts: 906
  • Age: 36
  • Location: Oregon
Re: New here, motivated, help me get started!
« Reply #7 on: September 05, 2012, 08:53:58 AM »
You wouldn't happen to be Tyler K. from GRS, are you? Your last name is just so unique, and your situation so similar. Either way, welcome :)

tkaraszewski

  • 5 O'Clock Shadow
  • *
  • Posts: 83
  • Age: 38
  • Location: Corralitos, CA, USA
    • Project $30,000
Re: New here, motivated, help me get started!
« Reply #8 on: September 05, 2012, 11:06:56 AM »
Yes, I am the same Tyler from GRS. GRS has gotten boring since J.D. left, and lately it seems like the writing over there sounds a lot like people talking just to hear their own voices.

I'm not going to sell the house. The goal is not just to be financially independent, but to be financially independent *here* (and I will probably even continue working part-time after I don't need to anymore). Besides, the annual cost of a paid-off house is roughly the same (minus property tax differences, which are peculiar in California anyway, in a way that tends to benefit people who keep the same house for a long time) anywhere. With the cost of buying and selling houses in this area easily running close to $50,000 (6% commission for realtors, various fees, etc) selling this house only to buy another one like it in a few years seems like a losing proposition (I actually bought my house directly from the pervious owner, and saved a lot on those things). The house itself is probably a lot like MMM's house. It doesn't seem unreasonable that I could keep a house like this and retire early as well.

The fleet of cars is going to get downsized over time, especially if I can get full-time remote status. First step here is to get rid of the VW. We could consider replacing the Subaru with something else as well, but I'm not ready to get into that with my wife just yet (she's sort of skeptically on-board with going on fewer/cheaper vacations to help save money so I can spend less time working in the future. I'm not going to try and change everything right at once.) I'm also not going to reduce the $250/week that's transferred to her account right away, but I'm going to encourage her to save some of it. If we can get to the point where she's routinely building up a surplus each week, then we can lower the weekly amount and contribute the difference towards investments. She's willing to trim the grocery budget and do a better job of tracking where her spending is going. She's also excited about some crafty projects and things that will save money. She wanted a new (bigger) patio table for our deck, but then we found out our neighbor was giving away his old one. She wants to repaint his old table, which we got for free (maybe we'll do that project this weekend).

I should probably check on cheaper insurance. Or at least call up my current insurance agent and ask if there's anything he can do to lower rates. Once I pay off the Subaru I can increase the deductible on that, and as soon as the VW sells I can remove coverage for that. The truck only costs $17/month to insure.

The interest rate on the Subaru is 5.5%. I have enough cash on hand to pay it off right now, but I don't want to run my reserves so low that I could risk an overdraft, so I'll pay it off as soon as the next paycheck comes in (10 days from now).

I jut got a $1,000 check as a refund for the security deposit I paid for a lake house we rented earlier this summer and put it straight into my Schwab account. I'm not sure if I should just start investing with it, and pull from investments to pay down the house when I have enough to get under that PMI threshold, or if I should just dump it on the house straight away.

It seems that in general, people agree that getting out from under PMI is a good step.

I guess any sort of investment (in index funds, or the house, or whatever) is going to be better than what I've been doing so far. I doubt that if I pay down the house and get rid of that PMI payment, I'll feel bad about it even if it turns out I could have made slightly more on index funds or something.

Imagine this scenario:

House value goes up to $593,750 (seems feasible).
I pay down the principal to $475,000 (about $55,000 lower than the current balance).
I refinance from my 30-year 3.875% mortgage (which is going to cost me about $1.15million to pay off in full at the standard rate) into a 15-year loan with no PMI at 3.0% (assuming rates don't change much in the mean time). Now it will cost me $590k to pay off this loan in full (and I put $55k in already) which saves me half a million dollars and 15 years. The monthly payment on the 15-year loan ends up almost the same as the previous payment, too, with the lower interest rate and no PMI.

I think I've convinced myself here. I need to dump ~$60k into house and refinance it. This does make selling the Subaru more appealing, as I could probably extract $10k from that by switching to a different car, which is a big chunk of this first goal. Hmm.

gooki

  • Handlebar Stache
  • *****
  • Posts: 2379
  • Location: NZ
Re: New here, motivated, help me get started!
« Reply #9 on: September 05, 2012, 04:44:58 PM »
I think I've convinced myself here. I need to dump ~$60k into house and refinance it.

Good stuff, and if a bit of maths helps cement the idea.

PMI = $500 x 12 months = $6,000 per year.

$6,000 / $60,000 = 10%.

10% plus 3.875% mortgage interest = 13.875%

Essentially that $60,000 of your mortgage is costing you 13.875%  in interest per annum. The same rate as many credit cards.

galaxie

  • Bristles
  • ***
  • Posts: 370
Re: New here, motivated, help me get started!
« Reply #10 on: September 05, 2012, 05:51:21 PM »
I understand that your wife wants to have a car around for baby-carting, but could it be the truck?  Or alternatively, is the Subaru big enough to do most of the things you normally use the truck for?  You're not a plumber, you're a software engineer.  You might not need the truck as often as you think you do.  I am able to do almost all my homeowner-y things in a Prius, and when Whatever It Is doesn't fit, I borrow one from RelayRides or something.  You have money sitting in that truck, and if you sell it you can pay off the other car sooner and get going on the #1 goal, which is to pay down your house enough to refi.

p.s. -- I live near Boston, and houses in my neighborhood cost about as much as yours.  Having such a large amount of money committed to the house changes some of the MMM incentives, and makes all the other frugality things seem really small in comparison.  On the other hand, it's not hard to cheer yourself up with some math: "if I can reduce my expenses by $1000/month, I could be done paying off the house N years sooner!"  A graph might help you visualize what you're accomplishing when that debt = 0 point seems really far away.

I just did what you're talking about -- refinanced to a 15-year loan.  We didn't have an FHA loan before, because we borrowed a down payment from my in-laws and are paying that back as fast as possible.  It's a similar "dump as much money in there as you can" scenario.

I do bike to work, but my commute is much shorter (10 miles).  If you can swing working from home, that will make a big difference.  Your car insurance and gas spending will go down, and you'll have more time with the family. 

Another Reader

  • Walrus Stache
  • *******
  • Posts: 5052
Re: New here, motivated, help me get started!
« Reply #11 on: September 05, 2012, 08:08:45 PM »
In re-reading this thread, I think the most important thing is for you and your wife to sit down and establish your goals and priorities together.  It looks like you bought too much lifestyle early on rather than investing in income producing assets for the future.  A $30,000 Subaru Outback is a big impediment to FI, even with your income and stock prospects.  Rather than waiting until you had a good down payment, you moved ahead with buying a house and maxed out the financing, accepting those horrendous FHA MI payments to get the house. 

Before throwing money at anything, you and your wife need to agree about the level of frugality you will practice and how important FIRE is to both of you.  Some delayed gratification needs to be agreed on for you two to be successful.  If she does not buy into the the "Mustachian principles," you will be spinning your wheels with your proposed savings. 

If you can get her to agree to cut back and downsize lifestyle, it makes sense to move forward with paying off the car and the house.  As an example of agreeing on frugality is the $250 per week allowance for expenses.  It's not a matter of you cutting back her $250 a week, it's a matter of creating a budget together for all the things covered by that $250, and then agreeing where reductions can be made.

The reality is that you and your wife cannot afford your current lifestyle and to become FI quickly with your income and circumstances.  Some things must change for you two to accomplish FI.  Getting her to see the objective and agree to making the needed changes is where you should start.

tkaraszewski

  • 5 O'Clock Shadow
  • *
  • Posts: 83
  • Age: 38
  • Location: Corralitos, CA, USA
    • Project $30,000
Re: New here, motivated, help me get started!
« Reply #12 on: September 07, 2012, 10:49:29 AM »
I sold the VW, wrote the check to pay off the Subaru (I'll put it in the mail today), and cancelled the insurance on the VW (saving $79/month).

So that's a start.

tooqk4u22

  • Handlebar Stache
  • *****
  • Posts: 2196
Re: New here, motivated, help me get started!
« Reply #13 on: September 07, 2012, 11:09:10 AM »
I think I've convinced myself here. I need to dump ~$60k into house and refinance it.

Good stuff, and if a bit of maths helps cement the idea.

PMI = $500 x 12 months = $6,000 per year.

$6,000 / $60,000 = 10%.

10% plus 3.875% mortgage interest = 13.875%

Essentially that $60,000 of your mortgage is costing you 13.875%  in interest per annum. The same rate as many credit cards.

I have posted about this a couple of times and people who buy houses with PMI never think about the imputed rate either at the time of closing or when they have extra cash that can be used to pay down the loan to get rid of PMI. 

One note to about the math above is that is based on the assumption that the house is valued at the current estimate value and the an 80% loan on that amount (i.e. the $60k pay down) but inititially it should have been based on the diffence between the original loan and a loan basedon 80% of the purchase price. 

Purchase price - $550k
Original Loan - $530K
80% Loan - $440k
Net PMI Loan - $90k
PMI - $6k
Imputed Rate - 6.7% + 3.875% = 10.57% still horribly high and if people really thought about it this way they would likely do it. 


$_gone_amok

  • Stubble
  • **
  • Posts: 149
Re: New here, motivated, help me get started!
« Reply #14 on: September 07, 2012, 12:13:52 PM »
I can emphasis with your situation because we both live in the same area and work in the same field. 

I noticed that the real estate market in the area is picking up in the last few months. Many places are getting multiple offers in Mountain View and Sunnyvale. Assuming you live somewhere in the South Bay, you may not need to do much to refinance because I think your house will probably increase 10% in value by next summer.  Definitely refinance to get rid of the PMI.

Also, the 2012 Subaru Outback is a great car and I was tempted to buy it last year.  But at the end it is not a very mustachian vehicle.  If your wife agrees, perhaps you can sell the Subaru and the truck and trade for something cheaper and pocket  roughly $15K from the process?

Also, after FB's flopped IPO, I won't count on another IPO from the valley anytime soon until a company has show it could make money. So I would still save aggressively and not weight too heavily on the pre-IPO stocks.