Case Study: Trying to balance non-investment goals with FIRE

[celticmyst08]

Hi all,

My husband and I (31 and 24, respectively) have happily hopped aboard the FIRE train and are looking forward to the journey (and the end result!). However, we have a few hiccups that make us question investing every extra penny right now. First of all, the details:

Income:
Gross salary/wages	$7,600
Net:	$6,319	This is our after-tax income ($5,806) with 401k/HSA contributions and insurance premium added back in

Expenses:
Rent/WSG:	$1,010
Phone:	$90
Internet:	$66
Electricity:	$55
Insurance (auto + renter's):	$82
Health/medical:	$316	$50 premium for me (pre-tax). $203 premium for DH. He has no plan provided through work and it would have cost us $550/month to add him to mine.
Student loan:	$128	$4500 remaining @ 2%
Groceries:	$250
Restaurants/coffee/alcohol:	$250	I know this could be lower. DH works from home and likes to get out of the house. We are working on lowering this!
Fuel/transportation:	$125
Car repairs/maintenance:	$71	This just builds up until we need it for something.
Household/laundry/pets:	$85
Hair/toiletries/clothes:	$50
Entertainment:	$50
Gifts/birthdays/Christmas:	$20
Allowance:	$200	$100 pp to do whatever (electronics tinkering, books, non-essential clothes, etc)
Total:	$2,848

Saving/Investing
HSA	$200	My employer contributes $75/month.
401(k)	$263	This is 10% of my income. My employer matches 4%. DH's employer does not offer any retirement plans. :(
Roth IRAs:	$917
Emergency fund:	$1,000
Tuition:	$1,100
Total:	$3,480

Liabilities:
Student loan:	$4,500

Assets:
Roth IRAs:	$9,770	We plan to switch to tIRAs
401(k):	$8,815
HSA:	$550	I just started it this year and won't be able to invest it without a large fee until the balance is over $5,000
Emergency fund:	$6,901	Goal is $10,000, roughly 4-5 months of expenses
General savings:	$4,371	Tuition & savings for new car, since mine is getting near 200k miles
Total:	$30,407

Specific Questions:
I am planning to go back to school to finish my degree, starting this summer with a couple classes and then full time in the fall. The program should take me 2 years to finish. The tuition + books will cost about $17.5k/year. I completed the FAFSA and the only federal aid I qualify for is the unsubsidized Stafford Loan @ 4.66% interest up to $12.5k per year. I have not received my official aid letter from the school, so this isn't guaranteed. If I do in fact qualify for this loan, should we take it (or part of it) and invest the money that we would have paid towards tuition? I really really don't want to go into any more debt, but I'm not sure what the right decision is here. The interest rate isn't amazing but it's not horrible either.

My other question is, how should we prioritize saving for a down payment? We'd like to buy a house eventually, and probably stay in the Northwest. The median home price in our town is $300k, but prices vary wildly depending on the area. Should we start saving for this after the e-fund is done? We'll have that extra $1000/month to throw at something. We could almost be maxing out my 401k with that, though. Even though we're not spending 55% of our net income, only 20% is being invested. It frustrates me that we could be investing all 55% if it weren't for these pesky things like tuition and a down payment.

I'm just curious how other folks here balanced their FIRE goals with other savings goals that aren't being invested. Let me know if there's any info missing and I'll try to add it. Also, any other advice about how we could improve is appreciated!

Edit: I do plan to continue to work as much as possible while going to school. I chose an online program (reputable state school, not University of Phoenix) for exactly this reason. It's entirely possible I will have to lower my working hours, though, depending on my class load. However, my husband is expecting a significant raise that would offset any lost income from me working less.

[midweststache]

It looks like your E-Fund will be fully funded by May; is there a reason you can't re-allocate that $1,000 to your tuition costs after you fund it?

I like the security of an E-Fund, and since it sounds like your spouse is self-employed(?) that security may be very important, particularly while you're in school full-time.

It's hard to work with your numbers, since you don't indicate if you'll continue working while you go back to school full-time and, if not, how that will effect your income/savings rate. If your numbers don't change, I would:
1. Fully fund the EF (this is negotiable, but it sounds like you want the security).
2. Save for tuition (and only take out as much in loans as you need).
3. Finish school as quickly as possible.
4. Pay off any outstanding loans.
5. Aggressively save for your down payment.

I would pay for school rather than take out loans and invest your savings, as your investments don't have a guaranteed ROR.

[celticmyst08]

It looks like your E-Fund will be fully funded by May; is there a reason you can't re-allocate that $1,000 to your tuition costs after you fund it?

I like the security of an E-Fund, and since it sounds like your spouse is self-employed(?) that security may be very important, particularly while you're in school full-time.

It's hard to work with your numbers, since you don't indicate if you'll continue working while you go back to school full-time and, if not, how that will effect your income/savings rate. If your numbers don't change, I would:
1. Fully fund the EF (this is negotiable, but it sounds like you want the security).
2. Save for tuition (and only take out as much in loans as you need).
3. Finish school as quickly as possible.
4. Pay off any outstanding loans.
5. Aggressively save for your down payment.

I would pay for school rather than take out loans and invest your savings, as your investments don't have a guaranteed ROR.

Yes, that extra $1000 could go towards buffering up the tuition fund. We'd get to the point where we'd have enough of a surplus to cover the remainder of the entire tuition cost, at which point we could divert that to the down payment fund.

Oops, I thought I included my work plans. Yes, I do plan to keep working, full time if possible. My husband is not self employed but work for a very small company whose financial status is somewhat shaky. The security of the e-fund is important to us given that fact and that I'll be in school.

I'm leaning towards paying for school rather than the loans. Thanks for the input!

I'll add this all to the post too.

[mxt0133]

I just want to add that there are significant tax breaks for going to school.  If it is for your first undergraduate degree then you can qualify up to $2500 of credits, that means your taxes will go down by $2500 and up to $1000 can be refunded.

http://www.irs.gov/uac/American-Opportunity-Tax-Credit:-Questions-and-Answers

http://www.irs.gov/publications/p970/ch03.html

[MDM]

You could pay cash for school and avoid the debt.  You could also take the loans and avoid depleting your savings.  I'd probably opt for the flexibility the latter provides.  Reason: one can pay off the debt at any time if one has the cash, but one can't manufacture cash with quite the same ease. 

One question about the OP:
- How do you get from $7,600 to $6,319?  Many (most?) people hand wave through this part of the cash flow, but there are often significant opportunities here.

[celticmyst08]

- How do you get from $7,600 to $6,319?  Many (most?) people hand wave through this part of the cash flow, but there are often significant opportunities here.

I used the spreadsheet linked in the "How To Make A Case Study" topic. It calculated out our estimated taxes (which I compared to last year's and were pretty much dead on) and our after tax income was $5,806. I then added back in the $50 insurance, $263 401k contribution, and $200 HSA contribution, since that is money that is still "ours" but is being allocated to things straight from the paycheck. If we weren't making those tax advantaged payments, according to the aforementioned spreadsheet, our net pay would be $6,223.

This spreadsheet is also how I decided we should change to tIRAs. It would give us a net pay of $6,456 (again, adding back in all our pre-tax and tax-deductible payments), so an extra $137/month.

Does that make sense? I might be totally understanding this wrong, too...but I think it works.

Edit: I just saw that it was you who linked the spreadsheet in the first place, so I guess you're the perfect person to tell me if I'm doing it wrong! :)

[MDM]

I used the spreadsheet linked in the "How To Make A Case Study" topic. It calculated out our estimated taxes (which I compared to last year's and were pretty much dead on) and our after tax income was $5,806. I then added back in the $50 insurance, $263 401k contribution, and $200 HSA contribution, since that is money that is still "ours" but is being allocated to things straight from the paycheck. If we weren't making those tax advantaged payments, according to the aforementioned spreadsheet, our net pay would be $6,223.

This spreadsheet is also how I decided we should change to tIRAs. It would give us a net pay of $6,456 (again, adding back in all our pre-tax and tax-deductible payments), so an extra $137/month.

Does that make sense? I might be totally understanding this wrong, too...but I think it works.

Edit: I just saw that it was you who linked the spreadsheet in the first place, so I guess you're the perfect person to tell me if I'm doing it wrong! :)

LOL!  No, you're not doing it wrong at all.  It's not how I'd arrive at a definition of "net" (which is why I asked), but that's irrelevant.

What is very relevant is that you are analyzing your situation well, so congratulations, keep up the good work and best wishes!

[celticmyst08]

LOL!  No, you're not doing it wrong at all.  It's not how I'd arrive at a definition of "net" (which is why I asked), but that's irrelevant.

What is very relevant is that you are analyzing your situation well, so congratulations, keep up the good work and best wishes!

Thanks! Yeah, I get that it's kind of a round-about way of calculating net, but as long as it works... :)

Also, I just discovered that your spreadsheet already had it calculated that way as after-tax income, so I didn't even need to jump through all those hoops to get that number. Go figure, lol.

[rocketman48097]

OK, I am 38, wife is 37.

I feel like we have gone through lots of this stuff, although we seem much more frugal than you two at our younger ages.  Going back to school will severely slow your FIRE goals.  You really need to determine if missing out on two years of earnings, along with student loan debt, and having to pay it off, will obtain a salary high enough to:

1.  Postpone two full years of money added and compounded
2.  On an after tax basis (the more you make, the higher they take), the extra schooling will quickly pay for the debt, which sounds awful given the unsubsidized nature of it. 

Also, can your husband just run at lunch?  Skip the coffee at starbucks or where ever he is going.  Many of your other expenses looked high to me too, keep reading old MMM articles and get rid of your recurring monthly expenses one by one.

If your goal is to reach FIRE the fastest, you are setting yourself up on the wrong path.  Suck it up on the expenses, go pre tax always until it hurts until you are retired, and  buy a small cheap house as you can, but only if you plan on living there a very long time (realtor costs will destroy this transaction if you want to buy a different one). 

[celticmyst08]

OK, I am 38, wife is 37.

I feel like we have gone through lots of this stuff, although we seem much more frugal than you two at our younger ages.  Going back to school will severely slow your FIRE goals.  You really need to determine if missing out on two years of earnings, along with student loan debt, and having to pay it off, will obtain a salary high enough to:

1.  Postpone two full years of money added and compounded
2.  On an after tax basis (the more you make, the higher they take), the extra schooling will quickly pay for the debt, which sounds awful given the unsubsidized nature of it. 

Also, can your husband just run at lunch?  Skip the coffee at starbucks or where ever he is going.  Many of your other expenses looked high to me too, keep reading old MMM articles and get rid of your recurring monthly expenses one by one.

If your goal is to reach FIRE the fastest, you are setting yourself up on the wrong path.  Suck it up on the expenses, go pre tax always until it hurts until you are retired, and  buy a small cheap house as you can, but only if you plan on living there a very long time (realtor costs will destroy this transaction if you want to buy a different one).

In terms of my schooling, believe me, I've been back and forth for the past year on whether I should finish the degree or not. =/ I have tried to find a better paying job but have hit dead ends due to my lack of a degree, even though I have work experience. The degree seems to be the missing piece for me to qualify for jobs that start out at a salary of $50k+, compared to my current ~$30k.

Also as a note, I won't be missing out on two years of earnings, as I plan to continue to work (hence the online classes). Perhaps I won't be working full time, but I'd estimate only a loss of ~25% of my pay per year, assuming I go to 30 hours/week instead of 40. I'm determined to work as much as possible without going crazy.

I agree with you that we are not being as frugal as we could. We've identified areas we want to cut back in but our goal is to reach FIRE while maintaining a quality of life we enjoy. We enjoy our jobs enough that we're not desperate to escape and if it takes us a few years longer to retire because we spent money on experiences during our working years, we're okay with that.

And we certainly plan to buy a small house for as little as possible and only if we plan to live there for at least 5-7 years (that seems to be the magic number from what I've read).

Thanks again for your comments!

[MDM]

Also, I just discovered that your spreadsheet already had it calculated that way as after-tax income, so I didn't even need to jump through all those hoops to get that number. Go figure, lol.

Ah, yes - you must live in a state with no income tax.  Good to know it all adds and subtracts to the same numbers.

[rocketman48097]

I am truly trying to help you.  5-7 years is not long enough to break even on a house IF you sell it.  If you plan on renting it out on your departure, without paying huge closing costs, that is another story, I will allow you to buy the house.

I agree that at your income you probably need to do something to increase it, not sure what that is but school might be it.  I was able to go to college on public welfare (pell grants, state grants, SEOG grants, subsidized loans) so I didn't worry much about funding it. 

Also, renter's insurance?  I never once had this, why bother?  You are only making the insurance company rich.  Also, increase your deductibles, drop full coverage, keep your cars forever.  I am not even scratching the surface, but you get the picture. 

[celticmyst08]

I am truly trying to help you.  5-7 years is not long enough to break even on a house IF you sell it.  If you plan on renting it out on your departure, without paying huge closing costs, that is another story, I will allow you to buy the house.

I agree that at your income you probably need to do something to increase it, not sure what that is but school might be it.  I was able to go to college on public welfare (pell grants, state grants, SEOG grants, subsidized loans) so I didn't worry much about funding it. 

Also, renter's insurance?  I never once had this, why bother?  You are only making the insurance company rich.  Also, increase your deductibles, drop full coverage, keep your cars forever.  I am not even scratching the surface, but you get the picture.

That's good to know on the house costs. I was just going by what I'd read. Ideally we would be there longer than 5-7 years, but we'll see. At this point all the rent vs buy calculators strongly lean towards renting, at least in this area with the current prices.

Sadly I don't qualify for any public assistance for tuition. I'm applying to every scholarship I can find, even the little $50-100 ones, so I expect to get a little bit from those. I was very lucky to do my first 3 years of undergrad (2008-2011) without any student loans since I had an $8000/year merit based scholarship from my ACT/SAT scores, worked as much as I could, and got 35% tuition discount since my dad was university faculty. (The one student loan we have left is DH's.)

As for renter's insurance, it's <$10/month and we are required to have it by our landlord (and incidentally, the rent we're paying is an insanely good deal for a 1BD in this area). Most of the other apartments we looked at also required it. Must be a local thing, because it definitely wasn't a requirement in the places I lived before moving out here. We pretty much do have the bare bones auto insurance, liability only, no comp/collision. I've looked at switching but we get quoted higher prices at every other place. And I plan to drive the car until it dies. But yes, I do get the picture. The numbers above are averages from the last few months of 2014 after we got married, so we've trimmed the fat a bit since, and plan to keep doing so.

Ah, yes - you must live in a state with no income tax.  Good to know it all adds and subtracts to the same numbers.

Indeed we do! (Washington)