Author Topic: Reader Case Study  (Read 4715 times)

Aphalite

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Reader Case Study
« on: October 30, 2014, 01:28:46 PM »
Hi all,

Since I've discovered the site/lifestyle we've began to make changes towards our goals, and I just wanted to get the community's opinion on what we could do better. Thank you all ahead of time for posting and helping, this community is definitely one of the most fantastic I've ever been a part of

Background:
I just turned 28 and my wife 27, we have been working in finance/accounting jobs for 4 and 3 years each, respectively, and we are trying for our first child

Monthly Income:
Me - $7,500, Wife - $5,625 = $13,125 total pre-tax
401K (Projected) - ($3,000) total
HSA - ($425)
Medical - ($400)
Taxes (Projected at 20%) - ($2,625)
Net - $6,675

I just started my new job 4 months ago so am not sure if there's any bonus potential, assumed to be $0. My wife received a 20% bonus last year (prorated as she started in May) - which we deposited straight into a Roth IRA for her

I will max my 401K this year, and we will be aiming to max both mine and hers next year, I have maxed my Roth IRA for the year, while we are waiting to see if she will receive a bonus this year (if not, we'll try to max hers from some other source)

Also currently maxing HSA - Company contributes 1,500, I'm responsible for other 5,100

Current expenses:
Mortgage - $1,732 ($230K 30 year 4.125%)
Groceries - $700
Eating Out - $600
Auto - $600 (One paid off 2001 CR-V, one new 2014 CR-V)
Gas - $300
Utilities - $250
TV/Internet - $110
Gym/Supplements - $40
Miscellaneous - $800 (Definitely overboard, this has been averaged over the whole year, includes such things such as a new $250 laptop, $600 of CPA license fees, video games, $2500 related to a trip to Asia, $1800 related a vacation in Vegas, lots of stuff from Amazon, and any entertainment)
Insurance - $50
Phone - $50
Total Expenses - $5,232

We just finished paying off student loans so have only had the excess for 2 months, so far this has gone to funding my Roth IRA for the year

Assets:
AMEX Savings - $5,900
Bank of America - $1,200
Capital One - $1,700
Total Liquid: $8,800

The BoA and Capital One accounts are used to pay bills and swept into investment accounts if we have more than $1k at the end of the month - thus far we haven't had enough to start a taxable account yet

My 401k - 40K
Wife 401k - 12K
My Roth IRA - 19K
Wife Roth IRA - 5.3K
My IRA (converted from pension) - 6.7K
HSA - 4.2K
Total Retirement: $87,200

All invested in index funds (95/5 split right now, will add more as we age)

Car - 2001 CRV, 2014 CRV, I would guess 4K and 24K, respectively

House: $298K from last refinance we did two months ago

Total Assets: $422,000

Liabilities:
Honda loan - $30,500
Mortgage - $230,000

Total Liabilities: $260,500

Specific Questions:

1) I know I need a lot of face punches in relation to monthly spending - first, groceries, we shop a lot of our meat/eggs from farmer's markets, so expenses are pretty high for groceries, the rest we get from Kroger. Any advice on cutting into this besides eating less meat and shopping at Costco? We pack our lunches, but I think because we include a protein with each meal, it inflates our grocery bill quite a lot.
2) Also need to cut out the eating out, and I anticipate that to fall as time goes especially once we have our child. But currently this is the only way we spend time with our friends (they are still in the go out to bars and concerts phase, which costs even more money) - any ideas here?
3) The auto bothers me, but baby steps - wife had a 51K BMW X3 when we first met (we met 3 years ago) and I convinced her to "downgrade" to a 30K Honda CRV. I'm trying to work on this but will probably wait another year before broaching the subject since she just switched a few months ago (she also has promised to drive this car until it explodes). Any advice?
4) Not much we can do about gas unless my wife gets another job. I live close enough to work that I can bike, she has to drive for 30-45 min each way (we live in Texas, where spending on highways outpaces that on education) - is her $70K a year salary justification for the gas/daycare fees we'll have to pay soon?
5) We are trying to get to FI by the time we're 40, I believe if we save $40K a year, we'll get there - anticipated retirement spending will be $60K a year (extravagant I know, but only to account for unknowns - kids, if we decide we want to slow travel, etc.). Is my evaluation possible?
6) We're canceling the TV after Christmas, as our families will be staying with us over the holidays and so we'll stick with the program until then
7) Any general advice for further optimizing our lives? I know we have a ways to go, but figured this would be a good starting point?

Thanks again to all who will deliver tips and some much needed face punches

Future Lazy

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Re: Reader Case Study
« Reply #1 on: October 30, 2014, 02:16:10 PM »
My recommendations:

1) Plan your meals, and research their cost. Two $6 bags of cereal, two $4 gallons of milk should be enough breakfast for all month, at a cost of $0.80 a day. Do the same with dinners, where the cost really builds up. For example, last week DH and I did: Green beans with sauteed mushrooms and pan seared chicken breasts. This was two large packs of fresh green beans ($4), three chicken breasts cut in half ($6) - 6 meals (two dinners, four "brown bag" lunches) at a total cost of $12, or $2 per meal. Also, btw, take leftovers for lunch.

2) Dang son what kind of eating out are you doing?! How many steak dinners do you have a month? Because, by my calculation, it's twelve. But, I think this has to do with social spending, so...   Invite your friends over, BYOB and play board games, party games or video games. Or, come up with fun and free outdoor activities everyone in the group likes to do. Taking a leadership role in your social group here will not only save you money, but also ease the pocketbooks for all of your friends.

3 & 4) $900*12 months = $10,800... Times 12 years based on your FIRE plan = $129,000, or the cost of two post FIRE years of spending/kids/slow travel. And that's just straight up math, without considering the costs of maintenance on the cars, car ins over time, etc, and also without putting it though a return on investment calculator to simulate what it would amount to if it was invested... If you calculate it with investment returns included you get $194,274 after 12 years.
http://www.bankrate.com/calculators/retirement/roi-calculator.aspx

Can the wife work from home, by any chance, even part of the week? Saving half on gas is $21,600 after 12 years, assuming gas prices don't go up (and, again, doesn't take investment proceeds into account..).

Also, if you can bike to work, why do you have two cars? It's just going to depreciate while it's sitting around. Sell one! Ideally, sell the newer one and keep the older one, but... Not everything is ideal.

5) Someone else might want to help with this more advanced question!

6) To be honest, that sounds like an excuse. If you really seriously don't need it (and you would be hard pressed to prove you need tv), then dump it. If your family really seriously can't all coexist in the same room without it, then borrow some movies or something at the time of the holidays to keep everyone sedated.

7) Yes. $1,700/mo sounds like a lot for a mortgage, and (since where I live, Denver, is somewhat similar in the housing dept to Texas cities,) I imagine that's a pretty big house you've got there. Extra bedrooms? I seriously recommend considering the power of room mates, at least for the next 9-12 months before having a kiddo, if not continuing afterwards. Here in Denver suburbs, you can get $500 for a spare bedroom in a not that great part of town - and still make your renter pay utilities.
http://affordanything.com/2014/09/02/how-i-earned-an-extra-40800-in-two-years/



For reference, I currently make 24k and live on about 12-15k a year in an equally expensive city, with luxuries like a smart phone, car and the extra money to donate to charity. I just live without the lifestyle mumbo jumbo you seem to be navigating with the cars and the spendthrift friends and such. Definitely wish you luck in getting it under control! Turning the magnifying glass on yourself is the first step to making it better. :3


FrugalSpendthrift

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Re: Reader Case Study
« Reply #2 on: October 30, 2014, 02:16:23 PM »
5) We are trying to get to FI by the time we're 40, I believe if we save $40K a year, we'll get there - anticipated retirement spending will be $60K a year (extravagant I know, but only to account for unknowns - kids, if we decide we want to slow travel, etc.). Is my evaluation possible?
What was your evaulation?

Running some quick numbers...  Starting with 87k, adding $40k/ year, with a 6% return, in 12 years you will end up with $890,275.  Assuming 4% swr, this would support $35k / year.

I'm not sure going from a used BMW to a new Honda is really a downgrade, but what's done is done.  What's the interest rate on the debt?

There must be some other expenses missing from your list, because you are showing a $1443 surplus, but you say you don't sweep anything into investment accounts.

The BoA and Capital One accounts are used to pay bills and swept into investment accounts if we have more than $1k at the end of the month - thus far we haven't had enough to start a taxable account yet
Why don't you try funding that account first, then anything that is left can be swept into your living expenses account.  You are paying yourself first with the 401k, do it with the Roth IRA and taxable brokerage account too.


Aphalite

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Re: Reader Case Study
« Reply #3 on: October 30, 2014, 02:24:03 PM »
5) We are trying to get to FI by the time we're 40, I believe if we save $40K a year, we'll get there - anticipated retirement spending will be $60K a year (extravagant I know, but only to account for unknowns - kids, if we decide we want to slow travel, etc.). Is my evaluation possible?
What was your evaulation?

Running some quick numbers...  Starting with 87k, adding $40k/ year, with a 6% return, in 12 years you will end up with $890,275.  Assuming 4% swr, this would support $35k / year.

I'm not sure going from a used BMW to a new Honda is really a downgrade, but what's done is done.  What's the interest rate on the debt?

There must be some other expenses missing from your list, because you are showing a $1443 surplus, but you say you don't sweep anything into investment accounts.

The BoA and Capital One accounts are used to pay bills and swept into investment accounts if we have more than $1k at the end of the month - thus far we haven't had enough to start a taxable account yet
Why don't you try funding that account first, then anything that is left can be swept into your living expenses account.  You are paying yourself first with the 401k, do it with the Roth IRA and taxable brokerage account too.

1) I used 10% returns and also assumed that we would sell the house for 300K - but I guess I didn't figure that we would still owe some on the house, maybe 150k?
2) interest is 1.9% on Honda debt, where the BMW loan was 5.5%
3) The surplus we just got recently, two months ago it was going towards student loans, for the past two months it's been going towards funding my Roth IRA - thanks for the advice on the order of the sweep!


so.mpls

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Re: Reader Case Study
« Reply #4 on: October 30, 2014, 02:28:03 PM »
Hi aphalite,

You're in a great position.  High dual income + no student loans = FI pretty quickly if you are able to make a few changes.  On your questions:

1. Meat with every meal (including lunch?) will definitely add up quickly, and honestly probably isn't all that good for you.  Plan meals ahead of time and focus on bringing down the cost of each meal. Avoid pre-packaged food if you're buying a lot of that. http://www.budgetbytes.com/ is a great resource for recipes.  There's also a few recipe threads on here with some good stuff.

2. I definitely feel your pain on this one.  My wife and I are a few years younger than you and have friends wanting to meet for drinks/dinner all the time.  A few things we've done to help with this are to a) try limit yourself to one or maybe two drinks at the bar; try to meet people for appetizers instead of a fancy diners; and if you're just meeting one or two couples, invite them over and cook for them instead.  We've gotten down to about $200 a month, which is still pretty high, but certainly better than $600.

3. Don't really know what to say about the car.  Idk how attached to it your wife is, but I feel like it's probably not a great idea to try to convince her to sell it when she's already 'downgraded'.  Maybe if you can get her on board with savings goals/early retirement, she'll realize on her own that it's sucking up a lot of money to perform pretty a basic need.

4. Get a bike!  You will not regret it.  You might even be able to get rid of your car eventually.

http://www.mrmoneymustache.com/2012/05/07/what-do-you-mean-you-dont-have-a-bike/

At 70k/year, your wife certainly makes enough to come out ahead on the cost of commuting/childcare.  Whether or not she's coming out far enough ahead to justify the amount of time she spends working is really up to her and you.  Does she like her job?

5. I'm not great with retirement calculations, but it seems you're falling quite a bit short of your goal.  If you have $170k in assets now (liquid+retirement+home equity) and assume a 7% return (higher than I'd count on), contributing $40k/year would only get you to 1.15M or so.  At 60k spending per year you'll need about 1.5M to retire.

If someone else could chime in who knows more about this than me, all the better.

6. That extra 2 months of cable money could be worth $270 when you retire ;)

7. Cars and food are the biggest things harming you, but overall you're in good shape if you want to be. 
« Last Edit: October 30, 2014, 02:33:34 PM by so.mpls »

Aphalite

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Re: Reader Case Study
« Reply #5 on: October 30, 2014, 02:28:30 PM »
My recommendations:

1) Plan your meals, and research their cost. Two $6 bags of cereal, two $4 gallons of milk should be enough breakfast for all month, at a cost of $0.80 a day. Do the same with dinners, where the cost really builds up. For example, last week DH and I did: Green beans with sauteed mushrooms and pan seared chicken breasts. This was two large packs of fresh green beans ($4), three chicken breasts cut in half ($6) - 6 meals (two dinners, four "brown bag" lunches) at a total cost of $12, or $2 per meal. Also, btw, take leftovers for lunch.

2) Dang son what kind of eating out are you doing?! How many steak dinners do you have a month? Because, by my calculation, it's twelve. But, I think this has to do with social spending, so...   Invite your friends over, BYOB and play board games, party games or video games. Or, come up with fun and free outdoor activities everyone in the group likes to do. Taking a leadership role in your social group here will not only save you money, but also ease the pocketbooks for all of your friends.

3 & 4) $900*12 months = $10,800... Times 12 years based on your FIRE plan = $129,000, or the cost of two post FIRE years of spending/kids/slow travel. And that's just straight up math, without considering the costs of maintenance on the cars, car ins over time, etc, and also without putting it though a return on investment calculator to simulate what it would amount to if it was invested... If you calculate it with investment returns included you get $194,274 after 12 years.
http://www.bankrate.com/calculators/retirement/roi-calculator.aspx

Can the wife work from home, by any chance, even part of the week? Saving half on gas is $21,600 after 12 years, assuming gas prices don't go up (and, again, doesn't take investment proceeds into account..).

Also, if you can bike to work, why do you have two cars? It's just going to depreciate while it's sitting around. Sell one! Ideally, sell the newer one and keep the older one, but... Not everything is ideal.

5) Someone else might want to help with this more advanced question!

6) To be honest, that sounds like an excuse. If you really seriously don't need it (and you would be hard pressed to prove you need tv), then dump it. If your family really seriously can't all coexist in the same room without it, then borrow some movies or something at the time of the holidays to keep everyone sedated.

7) Yes. $1,700/mo sounds like a lot for a mortgage, and (since where I live, Denver, is somewhat similar in the housing dept to Texas cities,) I imagine that's a pretty big house you've got there. Extra bedrooms? I seriously recommend considering the power of room mates, at least for the next 9-12 months before having a kiddo, if not continuing afterwards. Here in Denver suburbs, you can get $500 for a spare bedroom in a not that great part of town - and still make your renter pay utilities.
http://affordanything.com/2014/09/02/how-i-earned-an-extra-40800-in-two-years/



For reference, I currently make 24k and live on about 12-15k a year in an equally expensive city, with luxuries like a smart phone, car and the extra money to donate to charity. I just live without the lifestyle mumbo jumbo you seem to be navigating with the cars and the spendthrift friends and such. Definitely wish you luck in getting it under control! Turning the magnifying glass on yourself is the first step to making it better. :3

For 2), it's definitely social. Our friends all live downtown, and don't want to drive all the way up to the suburbs - they're all still in late 20s/single so more in the partying mindset

3) Haven't been able to convince my wife to drive an old beat up car yet, working on it!

7) It is definitely bigger than we need. We purchased it last year with the mindset that we are having kids soon - I'll look into if there's any interest in renting in my area - it's mostly families in surburbia, but you're right, you never know

Thanks for all the tips!

Aphalite

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Re: Reader Case Study
« Reply #6 on: October 30, 2014, 02:32:23 PM »
Hi aphalite,

You're in a great position.  High dual income + no student loans = FI pretty quickly if you are able to make a few changes.  On your questions:

1. Meat with every meal (including lunch?) will definitely add up quickly, and honestly probably isn't all that good for you.  Plan meals ahead of time and focus on bringing down the cost of each meal. Avoid pre-packaged food if you're buying a lot of that. http://www.budgetbytes.com/ is a great resource for recipes.  There's also a few recipe threads on here with some good stuff.

2. I definitely feel your pain on this one.  My wife and I are a few years younger than you and have friends wanting to meet for drinks/dinner all the time.  A few things we've done to help with this are to a) try limit yourself to one or maybe two drinks at the bar; try to meet people for appetizers instead of a fancy diners; and if you're just meeting one or two couples, invite them over and cook for them instead.  We've gotten down to about $200 a month, which is still pretty high, but certainly better than $600.

3. Don't really know what to say about the car.  Idk how attached to it your wife is, but I feel like it's probably not a great idea to try to convince her to sell it when she's already 'downgraded'.  Maybe if you can get her on board with savings goals/early retirement, she'll realize on her own that it's sucking up a lot of money to perform pretty a basic need.

4. Get a bike!  You will not regret it.  You might even be able to get rid of your car eventually.

http://www.mrmoneymustache.com/2012/05/07/what-do-you-mean-you-dont-have-a-bike/

At 70k/year, your wife certainly makes enough to come out ahead on the cost of commuting/childcare.  Whether or not she's coming out far enough ahead to justify the amount of time she spends working is really up to her and you.  Does she like her job?

5. I'm not great with retirement calculations, but it seems you're falling quite a bit short of your goal.  If you have $170k in assets now (liquid+retirement+home equity) and assume a 7% return (higher than I'd count on), contributing $40k/year would only get you to 1.15M or so.  At 60k spending per year you'll need about 1.5M to retire.

If someone else could chime in who knows more about this than me, all the better.

6. That extra 2 months of cable money could be worth $270 when you retire ;)

7. Cars and food are the biggest things harming you, but overall you're in good shape.

Thanks for the advice! Will definitely look into budgetbytes and start changing towards the "meet for appetizers" idea

MDM

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Re: Reader Case Study
« Reply #7 on: October 30, 2014, 07:50:49 PM »
Taking the numbers in the OP, your 2014 income (IRS+SS+Medicare; 0% Texas state) taxes will be ~$2,173/mo (see here for calc'n tool), or ~$450/mo lower than you are estimating.  That gives you an extra $5400/yr, so there's your wife's Roth IRA funds - go for it!

horsepoor

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Re: Reader Case Study
« Reply #8 on: October 30, 2014, 08:27:30 PM »

3) Haven't been able to convince my wife to drive an old beat up car yet, working on it!


She doesn't have to drive a beater, but a $15K used Prius would save a lot of money on her commute.  There's a vast array of cheaper options between brand-new $30K SUV and used up old beater.

Maybe look into buying a cowshare instead of getting individual steaks at the farmer's market or whatever.  Seems like this would be available in Texas.  We like our meat too, and got some fantastic lamb and beef from a local guy who's kids raise 4-H animals.  It's a fraction of the cost of going to the chi-chi downtown farmer's market and buying the certified organic strip steaks, and we get to specify how we want everything processed (steak thickness, stew meat vs. burger, etc). 

mozar

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Re: Reader Case Study
« Reply #9 on: October 30, 2014, 08:40:43 PM »
You can start pricing out day cares now. From what I have heard, it's better to have the day care near the job of the pick up/drop off parent.

Terrestrial

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Re: Reader Case Study
« Reply #10 on: October 30, 2014, 09:22:21 PM »
you already took the huge drive off the lot depreciation nut-punch from an unnecessary brand new car given you assess it's value at 24k and you still owe over 30 on it...i'd probably just keep it and make your wife drive it into the ground like she said she would. 

sure you could bail on it now and pony up 6k to cover the negative equity, and it would probably be worth it if you could buy a beater as a replacement or even better no car at all...but honestly your wife seems like she's not going to drive a beater, so any kind of 'acceptable' downgrade replacement to her will likely be what...15k?  After the check you'll write to sell the thing and paying for the new car I don't know if it's worth it to sell it.

Just take care of it well and make her drive it for the next 20 years...cr-v's are good cars and can last forever.  my sister is still driving the one she bought in high school, and i think it's a '94 or so.
« Last Edit: October 30, 2014, 09:30:15 PM by Terrestrial »

lakemom

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Re: Reader Case Study
« Reply #11 on: October 31, 2014, 06:36:28 AM »
Great job on maxing out the retirement savings plans.  So far so good.  If it was my life I would do the following....
a.  Reduce the food spending (going out + grocery) by HALF...my guess is there is a goodly amount of alcohol in there inflating your "food" budget. Save 650 per month
b.  Drop the TV and the travel and save another 6-700 per month
c.  Stop any post tax investing and use every cent to pay off that car.  With the $1400 per month you already have 'surplus' and the $1250 per month the above would save you, you can have it paid off within a year (1200+1400+600=3200,  30,000/3,000 = 10 months)
d.  Stop 'trying' for a baby until the car is paid off.
e.  Once car is paid off you can start a baby fund and start trying again for that baby.
f.  Car paid off....baby fund in place (5k ish for medical and gear) NOW start channeling an additional 3k per month into retirement accounts.

Catbert

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Re: Reader Case Study
« Reply #12 on: October 31, 2014, 01:31:43 PM »
Just I couple of tips I don't think anyone else has mentioned:

-Buy a $15 antenna.  I was amazed that we can get about 6 channels (4 major networks + a few random ones), not the mention a similar number of Spanish language ones.  Buy it now and see what you get.  Maybe you can cancel cable now.

-As someone who buys $7 a dz eggs from happy pastured chickens I feel your pain the expense of farmers' markets.  I go later in the market time or at closing.  I get organic, heirloom "sauce tomatoes" for $1 a pound (otherwise they sell for $3.50).  One organic stand sells "juicing bags" for $5 which have 4-5 lbs. of produce.  The juicing bags have random produce that's ugly or past its prime but still useable.  Or go just before closing and ask if they have anything to sell you that won't be sellable tomorrow.