Reader Case Study - About to hose out my fiery hair!

[MrsG]

Hi everyone. First time posting and I'm just going to rip the band aid off put it all out there to Mustachians. My husband and I are 29 years old and I just started reading MMM last week. Turns out, my hair was on fire. I was doing everything all wrong (student loan debt, leased cars, expensive clothing, expensive apt, vacations, a wedding, fancy jewelry). So gross. Beat myself up all weekend. I know 100% that I want ER. And I want it bad.

With my first self inflicted MMM face punch, I put almost all my cash savings (left $1,300 in for emergencies) + one entire paycheck towards my $19,200 student loan. The remaining balance is now $5,400 and will be wiped out by Dec. 12th! Woohoo! I am now ready to initiate Mustacian principles without delay. However, I have only been reading and researching about investing for the past 4 days. In fact, I took a sick day today just so I could learn more and type up this case study!

Unfortunately we live in a high-price Santa Monica apartment at $2150 per month (one of the most expensive neighborhoods in the country). My husband recently started his own firm and works from home. He will never ever have a steady paycheck because he is 100% commision based. I have worked my way up in advertising as a copywriter over the past 4 years and now make 100k. We have one leased car (just got rid of the other leased vehicle when lease matured last week) and husband works from home and I work 6 miles away. I have thought about commuting via bike but some of the roads are treacherous in LA.

GOAL: We’d ultimately like to buy a house back in Chicago where we are both from and both be retired by 35, or 40 at the absolute latest.

HH Income: 100k Salary + Freelance work (ranges from 25k-50k) from Headhunter Husband

Total: 125k+

Current Bare Bones Expenses:
Rent: $2150
Car Lease: $145
Car Insurance: $70
Gas: $80
Groceries: 400
Cable None: $0
Power and Water: $40
Internet + Landline (For Home Biz): $75
Netflix +Hulu: $15
Blog and Web Hosting: $20
Pet Care: $20
Total: $3015

Assets:
Savings In BofA Account: 10k
401k= (7% contributions) $6k
Total: $16k

Specific Question(s):

So what do I do first after Dec. 12th when I am debt free? I was thinking about:
•Opening 2 Vanguard Roth IRAs– one for me and one for my DH and making max contributions using a bonus from the hubs before 2014 runs out. (Good idea?)
•Opening a joint Vanguard IRA and contributing all savings from there
•Max out 401k contributions? (not sure about this?)
•Opening a savings account from Ally Bank at 1% interest and dumping our Emergency funds of 10k in there.

Are these good ideas? What am I missing?

[Gone Fishing]

Other than the rent, your expenses look pretty good.  You are probably paying quite a bit in taxes on your income.  401(k) and a Traditional IRA would probably help out quite a bit.  If you are planning on early retirement read the articles linked in my signature below.  For ER types, tax deferred savings generally make more sense vs a ROTH.  However, if you are planning on buying a house at some point, you will probably need to look at a ROTH or taxable investments for your down payment.

[frugalnacho]

No such thing as a joint IRA.   The I is for individual. 

+1 to the above poster. 

[yoga mama]

First of all, congratulations!  It doesn't sound to me like you've been doing "everything" wrong at all!  First, I would say make sure your husband is 100% on board as well.  There are lots of posts here about that.  My 2 cents:

-Max out your pre-tax retirement accounts this year - 2014 is drawing to a close and some organizations might be nearing the contribution deadline for December 2014 already.  I don't know what type of accounts each of you have access to, depending on employer (non profit, etc) or being self employed.  Sorry for being vague but this is a realm I am not an expert in.  But you are in a high tax bracket and your time is limited for doing that stuff this tax year.

-Living situation - when your lease is up, can you move closer to work, since hubby is working from home?  What are the penalties for leaving your apartment earlier if the move is feasible, and would it make sense to break your lease now?

-Car - If you move closer to work, could you break your lease and turn the car back in?  I don't know how leasing works but if it is cheaper in the long run, sometimes its worth eating the fees.  If it isn't cheaper, and you move closer to work, would it be feasible to just garage it somewhere rather than driving it and minimize gas expense?

-Biking - I would say seriously consider the bike commute.  I believe you when you say the roads are not conducive to safe cycling, but it is more than worth thinking about route options.  I'm a recent convert to mustachianism myself and commuting by bike is my favorite part of the whole experience by far.  I'm about 7 miles away and it takes me around 40 minutes to give you an idea of timing.  You can't use the weather as an excuse ;)

-Side hustle - Not that you need it, but in the interest of constant optimization, do you guys have any other marketable skills or interests?  This is also a great idea for putting yourself in the position of working at something you enjoy during retirement. 

-Plan - Definitely sit down with your husband and define your goals and a plan to achieve those goals.  You have a good start:
1. Buy home in Chicago in 6 years (How much will you have to spend?)
2. Retire in 6 years (What is your annual spending? Income during retirement? How much do you need invested to get your 4% withdrawal rate, or will you have rental properties, etc?)
3. Children? (in 6 years? or sooner, and if so, will you lose one income?)

You are in a great place to get answers, and my final piece of advice is to question every single line in your budget.  Weigh the benefits/drawbacks of early termination of car lease, apt lease, etc.  Welcome!

[Future Lazy]

I don't really wanna burst your timeline bubble at all, but assuming a 4% withdrawal rate against your current spending, you're looking at needing somewhere around $900,000 or more invested for early retirement, which means that retiring around 40+ is a lot more likely with your saving/spending ratio.
http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/
http://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/

That's 900k outside of the down payment/paying in cash outright for a house or anything you might save for/spend on kids, if you're planning to have any.

To cut your current spending further, try finding a way to abandon the car to eliminate that $3540/year expense, and getting your food spending down 25-50% to the tune of $1200/yr wouldn't hurt. I don't see healthcare expenses or car repair expenses listed in your budget; Don't forget that non-monthly spending is still money that doesn't get saved. 

If the DH can powerhouse his independent income to be another 75k/yr more than it is, and dump all of that into investments, you could reach the ~900k that much faster. Of course, your spending after retirement might be less than 3k, meaning needing less than 900k, depending on what you see in your future house-to-be and what the market is like when you buy...

[MrsG]

Thanks so much for all the advice. What an amazing forum! Your lengthy and honest replies are golden. I am going to be looking into starting the Roth IRA ASAP.

This is probably obvious.... but does anyone know how to get the untaxed paycheck money into an IRA? I can see how it would be east to transfer over my cash money that's already been taxed into a Roth IRA, but how does a personal IRA work?

[mozar]

You can open an IRA at Vanguard online. Then there is a place to click buy shares. I haven't done it yet though.

[BooksAreNerdy]

You contribute after tax dollars to the traditional IRA and the. Deduct it from your AGI on hour taxes.

[frompa]

Don't be held back by what you don't about IRA's etc..  Call Vanguard and they'll walk you through it - no question is too stupid, and their customer service is pretty damn good.  Also, by and large you have until april 15 of 2015 to make your 2014 contributions to your IRA, so don't feel too freaked by time pressure, though the sooner you do these things, the better.  Congrats on getting off your ass and moving ahead. 

[Misstachian]

You may know this already, I can't tell, but I believe you are limited to $5500 in all IRAs in a year (per person). I'm not an expert so if I'm wrong I hope someone else will jump in, but it's my understanding that you can't max a Roth and a traditional, you need to pick one or split your $5500 between them however you choose. Since that limit is low for mustachians, people often look to 401ks to reduce taxes, while using Roths for saving money you may need to access/some tax free money at retirement.

Please jump in if I've misstated something! There are lots of articles describing the differences if you google.

[RelaxedGal]

Misstachian is right, you can contribute $5,500 per person to an IRA in 2014. 

Roth IRA is money that has already been taxed.
Traditional IRA is (hopefully) before tax, which really means you put after tax money in and then claim the tax deduction when you file.  However there is an income limit for the deduction, and I think you're over it so you probably want a Roth.

If you want to reduce your taxes (and I highly recommend that, as if/when you retire early you'll have a lower income and be in a lower marginal tax rate) but are above the Traditional IRA deduction limit, instead increase your traditional 401k contributions.  There are downsides to this (available funds, investment fees) but strictly from a tax side the traditional 401k may be your best bet. 

For your Husband you'll want to look into a solo 401k or a SEP IRA, but those are beyond my experience.  I just know Joe at Retire By 40 has a solo 401k and packs it to the gills.

[surfhb]

You're paying too much for rent. 

I live in Huntington Beach and I pay $1400 for a 2 bedroom.

Unfortunately the whole MMM thing of living and biking close to your job doesn't really fly here in LA.  Maybe look in Torrance or Lakewood?   Other than that you're doing great

Read the boglehead wiki and the J Collins stuff on investing.    It's VERY, VERY easy to manage your own investments

[mm1970]

I don't live in LA, but I do unfortunately drive there sometimes.  I cannot judge the bikeability - I know that I have biked to work here (Santa Barbara/Goleta) on surface streets, that seem treacherous sometimes - but I've found certain routes that are better than others.

That said, a quick google search tells me that your rent isn't bad for Santa Monica.  However, you are still driving 6 miles.  If you can't bike, or aren't willing to try biking, then I'd recommend keeping your eye out for a cheaper apartment - as someone above said, you are most likely going to be moving out of Santa Monica in that case.

[MrsG]

Thanks everyone. I frickin love this forum!

RelaxedGal, great to know about claiming the deduction when I file my taxes.

We are going to work on yoga mama's tip of "Side Hustle" and just get that passive income going since we're stuck until we move.

[Gone Fishing]

What interest rate are you paying on the student loan?

[MrsG]

Hey So Close, 

I had 6 loan:

3 subsidized at 5.35%

3 unsubsidized at 6.550%

[Gone Fishing]

Hey So Close, 

I had 6 loan:

3 subsidized at 5.35%

3 unsubsidized at 6.550%

If your have some decent investment choices (low fee index funds), you may want to hold off paying off the last bit and see if you still have time to jack up your 401(k) contribution to the max % for December.  Might help quite a bit on your taxes.  You can still fund a 2014 IRA up until April 15th, so you have some time there.