Author Topic: Reader Case Study  (Read 5560 times)

EastCoastBestCoast

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Reader Case Study
« on: March 23, 2016, 10:03:43 AM »
Topic Title: Case Study

Life Situation: 26m/25f, married filing jointly, no dependents (yet), NC, USA.

Gross Salary/Wages:  $7,725 (per month)

Him: $4,455
Her: $3,270

Pre-tax deductions:

401ks (both 10% contribution):
   Him: $444 (+5% match)
   Her: 327 (+3% match)

Pension: (mandatory ~6%)
   Him: $268

Medical:
   Him: $80
   Her: On parents family medical until 26 YOA then will enroll in employer health plan.

Other Ordinary Income:

His side hustle: ~$1,000 (10-99 taxes)
Her side hustle: ~$500  (10-99 taxes)

Qualified Dividends & Long Term Capital Gains: n/a

Rental Income, Actual Expenses, and Depreciation: n/a

Adjusted Gross Income: $6,606

Taxes: (Tax return this year was $2,200 after the taxes for side hustles were taken out.  I did not include the side hustles taxes because we do not pay them monthly.)

Him: $896
Her: $776

AGI Taxes:

=$4918 + $1,500 (side hustles) = $6,418 (take home)

Current expenses:

Rent/Mortgage: $0 (rent is currently compensated for living on site of current apartment complex, this perk is associated with primary job)
Energy: $80
Cell Phones: $100
Cable/Internet: $123 (apartment complex has a contract with a cable company for this rate, everyone living in the community has to pay this monthly)
Water: $40
Groceries: $300
Restaurants/Alcohol: $200
Fuel/Maintenance: $125
Car Payment: $189
Auto Insurance: $116
Auto Property Taxes: $40
His Personal: $50
Her Personal: $50
Vacations/Weddings: $200
Gifts/Christmas: $100
Life Insurance: $16
Everything Else: $200 (pet, home/personal supplies, dry cleaning, medical co-pays, work items, haircuts, clothes misc. etc.)

Total: $1,929 + Roth IRA Contributions ($920 to max) = $2,849

$6,418 (take home) - $2,849 (expenses) = $3,569 savings

Assets:

Cash: $28,000
His 401k: $35,000
Her 401k: Just set up last month
His Roth IRA: $7,000 (started 2015)
Her Roth IRA: $3,000 (started 2016)
2012 Toyota: ~$25,000 (paid off)
2016 Hyundai: ~$28,000

Liabilities:

Hyundai Auto Loan: $10,500 @1.8%

Net Worth:  ~$58,000

Specific Question(s):

We currently keep $3,000 in our checking account to send out for bills.  Majority of our monthly expenses are put on credit cards and paid off in full each month to churn those rewards.  That leaves us at $25,000 in savings right now.  The $3,000 in checking is what I consider to be our emergency fund (+withdrawing from IRAs if really needed, will probably increase cash emergency fund once we have a house).

Our primary goal right now is a down payment for a house.  We are looking at purchasing in the $200-250k range.  Our goal is 20% down payment plus more for renovations, furnishing, closing costs, etc.  The goal we are trying to get to is $60k.

We have $35k to go. At $3,500 savings/month we are 10 months away from our goal.  I have also considered selling my truck to buy a cheaper/fuel efficient car to put additional towards our down payment.

We should have our house down payment goal and be debt free in the next 13 months.  After that the focus will be primarily on retirement savings.  We currently max our Roths and will be aiming to max those 401ks next. 

This is our story, thank you for reading! Im sure I left some info out but I can answer any questions!  Please let me know what you think!
« Last Edit: March 23, 2016, 10:31:44 AM by EastCoastBestCoast »

lhamo

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Re: Reader Case Study
« Reply #1 on: March 23, 2016, 11:00:21 AM »
I realize buying a house is your primary goal right now, but if I were you I would max the Roths for both of you for both 2015 and 2016.  It will only delay your house purchase by a couple of months, and that money will grow tax free indefinitely.  If you don't use the annual Roth limit, you lose it forever. 

onlykelsey

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Re: Reader Case Study
« Reply #2 on: March 23, 2016, 11:02:53 AM »
I realize buying a house is your primary goal right now, but if I were you I would max the Roths for both of you for both 2015 and 2016.  It will only delay your house purchase by a couple of months, and that money will grow tax free indefinitely.  If you don't use the annual Roth limit, you lose it forever.

Agree!  You could look into employment plans for the self-employed for your side hustles, as well.  You're doing great on the house savings, but getting retirement money in the bank in your 20s is huge.

Your vacation/wedding spending seems sort of high if you're in "save money!" mode, but  I am also in the period of my life where everyone's getting married, so maybe there's not much to be done.

EastCoastBestCoast

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Re: Reader Case Study
« Reply #3 on: March 23, 2016, 11:22:21 AM »
I realize buying a house is your primary goal right now, but if I were you I would max the Roths for both of you for both 2015 and 2016.  It will only delay your house purchase by a couple of months, and that money will grow tax free indefinitely.  If you don't use the annual Roth limit, you lose it forever.

I agree with this 110%! I will get a lot of pushback from my wife about this because she is counting down the days of not living in a 1BR apartment.  I'll sit down with her and try to explain the long-term benefits of maxing her Roth for 2015.  Thank you for your post!

lhamo

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Re: Reader Case Study
« Reply #4 on: March 23, 2016, 11:26:23 AM »
Why does a young married couple with no kids need more than a 1br?  When we first got married, my DH and I lived in a 350 sq ft studio for a short time.  It was all we could afford at the time.  Later we moved up to a 1br and were amazed at how much space we had.  It's all about perspective....

ooeei

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Re: Reader Case Study
« Reply #5 on: March 23, 2016, 11:27:49 AM »
Why are you thinking of moving if you currently live in your own apartment rent free?  Do you get a stipend of some sort from work if you don't live in the apartments?

MDM

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Re: Reader Case Study
« Reply #6 on: March 23, 2016, 11:44:33 AM »
   Her: On parents family medical until 26 YOA then will enroll in employer health plan.

Quick question: is the parents' insurance an HDHP?  If so, their 25 year-old daughter with no other insurance coverage is eligible for her own HSA, to which she may contribute the family maximum.  See https://www.irs.gov/publications/p969/ar02.html#en_US_2015_publink1000204025.

jenn_ifer

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Re: Reader Case Study
« Reply #7 on: March 23, 2016, 11:47:01 AM »
I'd take advantage of living rent-free to first max out your IRAs, pay off the car, and build a bit more of an emergency fund before you start saving for the house. I would also put off buying the house as long as possible, even after you have the down payment saved, to take maximum financial advantage of the free rent perk.

EastCoastBestCoast

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Re: Reader Case Study
« Reply #8 on: March 23, 2016, 12:25:27 PM »
Why are you thinking of moving if you currently live in your own apartment rent free?  Do you get a stipend of some sort from work if you don't live in the apartments?

It is basically an apartment security gig.  I have lived at other apartment complexes and gotten a lot less for the same work (50% off).  We moved in the free rent place about 6 months ago.

I have to close the amenities (pool, clubhouse) on a nightly basis and am tied into an after hours callback number if a resident has an issue.  It doesn't sound like a lot but I have been doing it the past 4 years and it's really starting to get old, especially the callback part.

ooeei

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Re: Reader Case Study
« Reply #9 on: March 23, 2016, 12:41:09 PM »
Why are you thinking of moving if you currently live in your own apartment rent free?  Do you get a stipend of some sort from work if you don't live in the apartments?

It is basically an apartment security gig.  I have lived at other apartment complexes and gotten a lot less for the same work (50% off).  We moved in the free rent place about 6 months ago.

I have to close the amenities (pool, clubhouse) on a nightly basis and am tied into an after hours callback number if a resident has an issue.  It doesn't sound like a lot but I have been doing it the past 4 years and it's really starting to get old, especially the callback part.

Interesting.  I guess this work would stop when you move to a house then?  That changes things a bit, but it's still a great perk (depending what the apartment would normally cost).

The difference between free and a 250k house is just enormous.  That's around $1000/month total costs most likely, or 1/2 of your current overall expenses.

afuera

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Re: Reader Case Study
« Reply #10 on: March 24, 2016, 07:22:55 AM »
Replying to follow.  Our situation is very similar to yours except for the whole free rent thing ;)

Catbert

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Re: Reader Case Study
« Reply #11 on: March 24, 2016, 11:16:57 AM »
Another vote for maxing out 2015 and 2016 IRAs.  (Do her 2015 Roth today.)  Then pay off debt and save for a down payment.  I'd put off actually buying a house for as long as you can stand  your current apartment situation.  I know that after 4 years that may not be much longer.

I would not buy a 1 bedroom home as someone suggested.  With a child likely in your future you'll need more than 1 bedroom.  I advocate buying a house that you can stay in "forever" or at least a long time (7+ years).  The transaction costs of buying and selling really add up.

lhamo

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Re: Reader Case Study
« Reply #12 on: March 24, 2016, 05:51:45 PM »
I would not buy a 1 bedroom home as someone suggested.  With a child likely in your future you'll need more than 1 bedroom.  I advocate buying a house that you can stay in "forever" or at least a long time (7+ years).  The transaction costs of buying and selling really add up.

Sorry I wasn't clear -- I was not necessarily suggesting they buy a 1br.  I was suggesting they stay in their current housing situation just a few months longer in order to max their Roths.  Since the OP stated their partner was in a rush to get out of a 1br, and that was the reason for wanting to buy a house.  Moving up to something larger is certainly a fine goal for the long-term, especially if there are kids planned down the road, but it isn't necessary in the next 13 months.  Especially not with the free rent situation they have.   

marty998

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Re: Reader Case Study
« Reply #13 on: March 24, 2016, 06:18:06 PM »
I would not buy a 1 bedroom home as someone suggested.  With a child likely in your future you'll need more than 1 bedroom.  I advocate buying a house that you can stay in "forever" or at least a long time (7+ years).  The transaction costs of buying and selling really add up.

Sorry I wasn't clear -- I was not necessarily suggesting they buy a 1br.  I was suggesting they stay in their current housing situation just a few months longer in order to max their Roths.  Since the OP stated their partner was in a rush to get out of a 1br, and that was the reason for wanting to buy a house.  Moving up to something larger is certainly a fine goal for the long-term, especially if there are kids planned down the road, but it isn't necessary in the next 13 months.  Especially not with the free rent situation they have.   

Agree there's a lot of costs in changing houses...

+1 to buying your forever home early, and taking chunks out of the mortgage while you still have 2 full incomes.

MDM

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Re: Reader Case Study
« Reply #14 on: August 23, 2016, 07:07:38 PM »
His side hustle: ~$1,000 (10-99 taxes) $1500 This has increased this year
Adjusted Gross Income: $6,606  $6,308
Taxes: (Tax return this year was $2,200 after the taxes for side hustles were taken out.  I did not include the side hustles taxes because we do not pay them monthly.)

Current expenses:
Total: $2,063

$6,341 (take home) - $2,063 (expenses) - $920 (Roth IRAs to max) = $3,358

I moved my 401(k) contribution up to 20% but i'm still shy of the annual max.  I plan to bump it up to the annual max this January to max it out in 2017.

All of our Roth contributions are in Vanguard TRF 2055 (VFFVX).  Is this fine for now?  Should I be looking at moving to different funds?
The $1500 side hustle is per month, correct?

Just checking: the $6308 AGI is your "paycheck W-2 taxable" amount, correct?  In other words, it doesn't include the side hustle(s).

For the purposes of cash flow analysis, you should include both the side hustle income and the taxes you expect to pay on total income.  The amounts withheld from each paycheck or paid as estimated taxes should be the result of your analysis, not inputs to your calculations. 

With that much extra cash flow, why not maximize the 401k contributions for both of you?  You might want to make some of those contributions (the ones that save you only 15%) to a Roth 401k.

VFFVX is a perfectly reasonable choice now, and maybe for a very long time.  See this thread for some discussion about target date funds (it doesn't start that way but keep reading...).

MDM

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Re: Reader Case Study
« Reply #15 on: August 23, 2016, 08:15:32 PM »
Yes, the 1500 is monthly.  The $6308 is just the W-2 taxable.
Ok, that makes sense.

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I don't know how to calculate the 10-99 taxes monthly?  I'm assuming it is going to be 40% self-employment + 25% for our marginal tax bracket for a total of 65%.  Would that make the taxes on $1,500/mo...$975/mo?
That's a bit too pessimistic.  The self-employment tax for you will be 15.3% of 92.35% of your Schedule C net profit, and then your marginal tax rate will depend on how much you contribute to traditional 401k and/or IRA plans.  See https://www.irs.gov/pub/irs-pdf/f1040sse.pdf, or the 'Calculations' tab of the case study spreadsheet (CSS).

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We are saving for a house so i'm putting all the extra cash flow towards the down payment for that right now.
Ok, that's defensible.  Still worth considering filling up your tax-advantaged space first (it's use it or lose it each year), but your investment strategy should be a means and not an end.

Quote
Honestly, I still need to get my wife on board for ER.  She is all about FI but she isn't convinced that ER is possible, mostly due to not having knowledge of ER.  I'm hoping to make a presentation or something to show her soon to educate her and get her on board.
Having to pay for housing will definitely lengthen your time to FI - welcome to the real world ;) - but you might check the simplified "time to FI" graph in the CSS or one of the more sophisticated tools mentioned in https://www.bogleheads.org/forum/viewtopic.php?t=115839#p1686175.  Once you understand what you are seeing, you could share with your wife.