Author Topic: Reader Case Study: Am I a big fat liar?  (Read 15930 times)

BlueHouse

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Reader Case Study: Am I a big fat liar?
« on: March 17, 2014, 08:43:36 AM »
Question:  Will I be able to retire early on my current path, or do I have to make drastic changes? 

Iíve always thought I was frugal.  After reading many posts over the past few weeks, I realize I just like to pass judgement about what others spend their money on.  Iíve been spending a lot of money, and I have all the usual excuses.  Am I just a big fat liar?  Or is there some part of me that really is frugal?  After reading so many different POVs, I need a reality check.  Will I be able to retire early on my current path, or do I have to make drastic changes? 

Background: 

Me: mid-40s, single, no kids, no pets.  Risk-averse. 
Throughout my working career, Iíve earned higher than average salaries.  Mainly 50-80k when I lived in less expensive areas and 100K + since I moved to current area (not right away, but after changing careers and establishing myself in the career).  I worked hard and have always been prepared for any opportunity.  5 years ago a tremendous opportunity appeared and I branched out on my own to chase it.  My view was ďIíll make good money for as long as this lasts, and then Iíll go get a jobĒ. Well, it lasted longer than expected and pays better than I ever imagined for myself.   The problem? Itís not sustainable.  There was a hole in the market and Iím exploiting it.  Eventually it will end.  Meanwhile, lifestyle creep has happened.  I think when my current extraordinary opportunity ends I can ďget a jobĒ in the $125 - 140k range (average to high in this area).   That level of income would not sustain my last two yearsí spending averages.  I think the last two years spending are an anomaly, but thatís where I canít tell whether or not Iím just a big fat liar. 

Now for my excuses:   When I moved into my current house, I budgeted to buy all new furniture.  Iím almost done with major expenditures for the house.  This year I think Iíll spend another $15,000-18,000 (Painting, Fence, furniture, lighting).  Once I have the house completed, I won't spend much money on the ďHome thingsĒ category and will divert that money into investments.  That seemed like a valid plan to me, and would still seem acceptable to most ďnormal people", but when you take into account how fearful I am about losing my contract, and seeing what is possible after reading the forums, I realize I probably need a few face punches.  My strategy sounds oddly similar to the strategies of people who use credit cards too oftenÖĒI want to buy stuff NOW instead of laterĒ.  The difference is that my income is currently enough to support that.  Am I deluding myself?  Am I just a spendypants consumer?  Do I need to change my ways immediately, or can I finish up my last 15-18k in wanted but unneeded spending and then start doubling up on my saving next year? 

Oh one more thing:  I donít want to sell this house.  I love this house. I love that my commute is only 10 minutes.  I love that I have a home office.  I love that I can have friends and family come and stay with me - and they do regularly.  I love that I live in a walkable, desirable, urban area with a lot of other people with similar interests.   I love that I want to get off the couch and go outside and do fun things.  I love that there are hundreds of things to do in my city every weekend.  My life is 100X better since moving here. The suburbs were killing me.  Please keep the ďsell the house and move someplace more affordableĒ as the LAST option.  I will give up my privacy and take in a boarder if I have to before I give up this house.    Iíve also thought that if I get this house paid off, it would provide a good source of income when I get older and can no longer handle stairs.  (current rent for my house in my neighborhood is 4 - 4.5k /month).  I think I could live off that in retirement!   

Iím looking for some ideas on how to get to financial independence before age 60 (I know thatís not early, but with my debt load, thatís the earliest that Iíve been able to make the numbers work out).  All advice appreciated.  Thank you very much for your time and thoughtful consideration of my case.

Here are my monthly figures: 

Income:    24,821
-------
   Salary    13,000
   Company Distributions    10,083
   Rental Income    1,600
   Interest & Dividends    138
   
Total Expenses:    22,978
Subtotal Mandatory Expenses:    14,778
-------
   Tax    7,500
   Primary Residence PITI    3,500
   Primary Residence HOA    95
   Utilities (Gas, Electric, Water, Sewer, Landline)    283
   Rental Condo PITI    1,550
   Rental Condo HOA    320
   Rental Condo Expenses    30
   401K    1,500
   
Subtotal Discretionary / Savings    4,000
   Additional Principal to Primary Residence    1,000
   Savings / Investments    3,000
   
Subtotal Discretionary Expenses:    4,200
   Professional Fees    117
   Medical    133
   Car    250
   Groceries    425
   Clothing    300
   Gifts    450
   Recreation/Entertainment/Eating Out/Hobbies    475
   Home things (furniture, etc)    1,500
   Cash and uncategorized items    550
   
   
Assets:
   Primary Residence    850,000
   Rental Condo    300,000
   
   Retirement Funds    450,000
   Investment Funds    150,000
   Cash    220,000
   
Liabilities:   Mortgage
   Primary Residence Fixed  @3.875    (585,000)
   Rental Condo ARM currently at 2.5%    (225,000)
   
Fringe from business:   
   Company match/contribution to 401K    2,667
   Mobile phone     140
   Gas & tolls    100


Prairie Stash

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Re: Reader Case Study: Am I a big fat liar?
« Reply #1 on: March 17, 2014, 09:12:26 AM »
The condo is weird. Why do you have it?

You spend $1900/month to receive $1600. Before repairs or vacancies you're guaranteed down $3600 this year. Can you sell it?

Second, that's a lot of cash.  Please explain why you can't drop 90% of that into investments, your mortgage or some other useful endeavor. At the very least, what is your interest rate on the cash? I'm guessing you honestly think you'll be facing unemployment any day now and you're prepping for it. I'll let you explain though.

If you're truly need $220K cash, the furniture and house upgrades is a little excessive. You can't claim to be facing imminent problems and then rationally justify spending $15K on wants.  Is the paint poor? Is there a falling down fence? Are you sleeping on the floor? Are you changing light bulbs or fixtures?



nereo

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Re: Reader Case Study: Am I a big fat liar?
« Reply #2 on: March 17, 2014, 09:24:05 AM »
Ok... it sounds like you know that you're spending more than you can sustain, but I don't know that makes you a big fat liar.  A large chunk of the US population doesn't save anything at all.
FWIW, you have good rates on your home and mortage, but as you indicated they cost a lot.  Good news; you are putting a lot into equity every month, and it seems your rental property is covering the taxes, HOA and interest plus *almost* all of the principle.  Bad; you've still got >$800k to pay off both homes.
Furniture budge as you mentioned is insane of that persists.  I hope you have your home completely or almost furnished by now?  Have you looked on Craigslist?  there is a huge amount of HQ furniture there.

Groceries and Gifts are very high for a single person.
Going-out + hobbies is an odd category, unless you consider going out to be your hobby.  What exactly are you spending this money on? 
Clothing is also on the high side for MMMers
What are you spending $550 in cash on since you already have food/clothes/going out and hobbies listed.  That's $6500/year!

bottom line; you're saving a reasonable amount of money and building equity, but your risk is that the good times will end and you will suddenly find yourself unable to keep spending this way.  So if you really want to live mustachian do yourself a favor and target those categories listed above. You already have >$800k in savings.  But you can't be FI/FIRE with those spending categories and mortgages that large. 
The ball is entirely in your court, my friend. 

Gimesalot

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Re: Reader Case Study: Am I a big fat liar?
« Reply #3 on: March 17, 2014, 09:30:25 AM »
Given your current housing and discretionary expenses, you spend about $8k a month. If you get rid of the professional fee and the housing, you still spend almost $78k a year.  That means you need about, $2MM, to sustain that lifestyle.  You have about $1MM now.  I am not counting the condo, because it is not an asset if you have to pay at least $300 dollars a month in expenses. 

So, save $1MM in 20 years, and you can retire.  You are already saving more than that.  If you cut your expenses, you could retire now.

BlueHouse

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Re: Reader Case Study: Am I a big fat liar?
« Reply #4 on: March 17, 2014, 09:43:07 AM »
The condo is weird. Why do you have it?

You spend $1900/month to receive $1600. Before repairs or vacancies you're guaranteed down $3600 this year. Can you sell it?

I kept the condo because it was worth $100K less than what I paid when I signed the contract for my new house.  It's regained ~60K in value in the two years that I lost $6k, so I think that's been worth it so far.  In 2018 there will be a new metro station 3 blocks away, so I think the value will continue to increase (I hope to get back at least what I put into it).  There is a big emotional component to not wanting to walk away from money that I paid into it, but I think for now it's worth holding. 


Second, that's a lot of cash.  Please explain why you can't drop 90% of that into investments, your mortgage or some other useful endeavor. At the very least, what is your interest rate on the cash? I'm guessing you honestly think you'll be facing unemployment any day now and you're prepping for it. I'll let you explain though.

You're right on the cash.  I did want a fairly large emergency fund, but this got out of hand.  I keep thinking we're at the top of the market, but I've thought that for the past year, and now I'm kicking myself.  I started transferring 10k per month, but I keep getting sucked into market-timing.  I guess I should just pick a number between 1-30 and move a little bit each month.  Or maybe a big chunk all at once.  Or maybe ladder some CDs?  Not really sure what I want to do with it.  So to answer your question of why -- I guess it's just inertia.  I'll get on that today. 
I don't think unemployment is this week or even this month.  It's possible that my contract doesn't get renewed and if that's the case, it would happen in May.  I think the odds of that are 50/50. 

If you're truly need $220K cash, the furniture and house upgrades is a little excessive. You can't claim to be facing imminent problems and then rationally justify spending $15K on wants.  Is the paint poor? Is there a falling down fence? Are you sleeping on the floor? Are you changing light bulbs or fixtures?

The furniture and house upgrades are definitely wants and not needs.  If I had lost my job, I wouldn't do it and wouldn't need it.  My goal was to finish everything to a state of "being done".  But having said all of that, I think I will at least wait until May to see if my contract is renewed before I commit to painting or the fence project. 
As far as "being done", I really do find that place and I'm not one of those people who perpetually redecorates.  But I don't want to live in a place that feels like I'm not finished.   I feel like I've lived in that place for the past 20 years and now that I have my permanent home, I just want to be finished with it.  I know I spend more than I have to, but I don't particularly like all the shopping/buying/choosing aspects and just want it done and over with.   

bacchi

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Re: Reader Case Study: Am I a big fat liar?
« Reply #5 on: March 17, 2014, 10:02:57 AM »
Are the gifts to friends/family or does it include charity? Can you exchange time instead of money? Take a relative/friend to brunch instead of buying them a gift.

Definitely delay finishing your home decor until next year's contract is inked.

Why is the car so high when your commute is so short? Is it insurance or do you drive a lot on the weekends? If it's mainly insurance, you may want to consider getting a less expensive car. (You are biking to work, right?)

It sounds like your house is a good size in a desirable area. Consider Airbnb. You can make some money and meet some cool people.

Bottom line: If your contract isn't renewed (maybe this year, maybe next year), you'll be forced to make some serious changes. Start now and you won't be in panic mode.

MsSindy

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Re: Reader Case Study: Am I a big fat liar?
« Reply #6 on: March 17, 2014, 10:06:26 AM »
Even with the housing costs aside, yes, you're spendy.  :)   You justify it because you make good money, don't carry cc debt, have a good chunk saved, and so it is easy to look at others and say, "I am not like them".  But if you take your income out of the picture and just look at your expenses, they are quite high for a one-person household.  You have a lot of expenditures that are discretionary and could be cut down (see nereo's feedback).  The question is do you want to?  Is it worth it to you for peace of mind?  or early retirement?  Only you can answer that question.

I am in much the same situation you are - my house costs a lot, but for various reasons, it's where we've decided to stay for now.  This is non-negotiable for my DH.  However, we've agreed in other areas to cut way back so that we could reach ER.  You just need to decide what you're willing to do for ER.....and then just do it.  It's not complicated.

BlueHouse

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Re: Reader Case Study: Am I a big fat liar?
« Reply #7 on: March 17, 2014, 10:07:55 AM »
Furniture budge as you mentioned is insane of that persists.  I hope you have your home completely or almost furnished by now?  Have you looked on Craigslist?  there is a huge amount of HQ furniture there.
Furniture is almost done.  It will be done this year and then no more furniture for minimum 20 years (or never).  I look on Craigslist from time to time but admit I'm not efficient.   


Groceries and Gifts are very high for a single person.
Going-out + hobbies is an odd category, unless you consider going out to be your hobby.  What exactly are you spending this money on? 
Clothing is also on the high side for MMMers
What are you spending $550 in cash on since you already have food/clothes/going out and hobbies listed.  That's $6500/year!

I've lumped a lot of things together.  Going out includes concerts, theater subscriptions, art supplies , etc.  Pretty much anything enjoyable that is not work. 

Gifts included helping out some family members this year.  I paid $2800 to help my out-of-work brother and I don't think I'll every see the money again, so I call it a gift.  I also pay for a few of my mom's monthly bills and I pay for someone to clean her house once per month.  I think last year was high because of the brother part, but as my mom gets older, I'm not sure it will go back down.   I would like to help make her life easier as she ages.  I don't give a lot of "presents" in the traditional sense.

Groceries - I know!  it's crazy for one person.  I was in an accident last year and had my groceries delivered for a few months and that is expensive, but I kept doing it because it's actually helping me to learn how to plan meals better and eat healthier.  I don't think I'll continue that beyond another 6 months, but for now it's really helpful as a training aid.  I also like to use farmer's markets even though they're expensive. 

I don't shop for clothes a lot, but I do seem to spend an awful lot of money on clothing.  I've been reading some of the posts about capsule wardrobes and project 33 and I think that would be a good option for me.  I've been losing weight so I'm trying to use the clothes I already have in those other sizes, plus a few quality pieces for work.  My wardrobe certainly doesn't look like I've spent that much money on it.

Cash - no excuse there.  I don't track it very well.  If I want to manage it better, I'm going to have to start tracking it.  In order to track it better, I'll have to charge it and categorize the transactions.  I have felt like using cash makes me keep it in line more than using plastic, but I guess that's not really working out for me.   


The ball is entirely in your court, my friend.

Thanks so much for your comments.  Definitely some places for me to start and I know I need to shake some sense into myself!

MDM

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Re: Reader Case Study: Am I a big fat liar?
« Reply #8 on: March 17, 2014, 10:13:33 AM »
Yep, rental situation seems odd - unless that $1600 is your net rental income?

Are your state taxes that high?  Couldn't see how to get to $7500 total tax otherwise (unless rental income is net positive).

Why spoil the landscape with a fence?  I know, there are fence people and non-fence people and we're the latter....

Introduce yourself to the folks at Vanguard or other good index fund providers, and get that $220K plus $5K/mo cash doing something.  Probably best to stay away from "insurance product" investments (e.g., variable index annuities).

And as others have observed, the math is the math on FI.  You certainly have the ability to get there - how fast is up to you.  Good luck!

CategoryMonthly amt.CommentsAnnual
Salary/Wages$23,083 $276,996
Pretax Health Ins.$0 $0
Pretax Vision/Dental Ins.$0 $0
Health FSA$0 $0
FICA base salary/wages$23,083 $276,996
401(k)$1,458 $17,500
Income subject to IRS tax$21,625 $259,496
ESPP$0 $0
Paycheck deposit$21,625 $259,496
Other income (int., div., etc.)$138 $1,656
Rental income$1,600 ? Gross or Net ?$19,200
Rental real expenses$1,900 =1550+320+30$22,800
Rental depreciation expense$833 ??$10,000
Rental taxable income($1,133) ($13,600)
Federal Adj. Gross Inc.$20,629 $247,552
Federal tax$4,789 2014 rates, stand. ded., 1 exemption$57,466
State tax$1,712 ? Adjusted to match $7500 total ?$20,547
Soc. Sec.$605 $7,254
Medicare$392 $4,709
Total taxes$7,498 Matches OP$89,976
Add Health care reimb.$0 $0
Income before other expenses  $13,965 $167,576
Monthly Expenses:
Mortgage$2,750 $33,000
HOA$95 $1,140
Property Tax$550 $6,600
Home/Rent Insurance$200 $2,400
Car Insurance $0
Clothing$300 $3,600
Donations/Gifts$450 $5,400
Fuel/Public Transport$250 $3,000
Gas and Electric$283 $3,396
Groceries$425 $5,100
Household; Maintenance$1,500 $18,000
Medical$133 $1,596
Medical Ins. $0
Miscellaneous$550 $6,600
Phone $0
Sports/Recreation$475 $5,700
Work/Professional fees$117 $1,404
Total Expense$8,078 $96,936
Available to invest$5,887 $70,640
Additional Mortgage Principal$1,000 $12,000
Other$4,887 $58,640
« Last Edit: March 17, 2014, 10:20:11 AM by MDM »

Prairie Stash

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Re: Reader Case Study: Am I a big fat liar?
« Reply #9 on: March 17, 2014, 10:14:58 AM »
Thank you for the additional info. You have an interesting case study.

So if I read right your down $40k on the condo. You'll drop another $15-18K over the next 5 years, depending on rent or condo fee increases.  Then you'll pay a realtor 5% (adjust for your area) to sell your condo - potentially another $20k.  You're also assuming the place won't need repairs or be vacant, unknown costs $$$.  At the end you're hoping the place will go up only $40K, after spending $35-38K (maybe more if renters move)?  Obviously you're hoping the condo will be worth at least $400k, or its a purely emotional problem. I'm not saying it's a bad gamble, but I don't consider it a conservative risk-averse maneuver. 

I've never lived in a city with metro stations. Someone else would need to tell me if that's a reasonable jump for subway access. Personally I can't see myself paying $50k more for a condo just because I can walk a few blocks less to a subway. What are current condos going for near stations, i.e. what's the price differential between yours and an ideally located condo?

I would definitely wait till May for any big purchases.  2-3 months is no time at all. 

Lot's of people here are excellent at making cash work for you.  Feel free to post a scenario of moving your cash, you'll get good advice.  The first part is, what's the goal of the money?  Retirement or living on next year?


lackofstache

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Re: Reader Case Study: Am I a big fat liar?
« Reply #10 on: March 17, 2014, 10:17:31 AM »
I'd say the condo is a fairly large risk, especially at a guranteed loss of $300/mo. I'd sell now & invest the $ you get. It may shoot up in price over the next 4 years, but you could have that money invested and making you more money w/o the monthly bill. Beyond that, keep your house if you want, but cut back on spending in the ways others have mentioned.

BlueHouse

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Re: Reader Case Study: Am I a big fat liar?
« Reply #11 on: March 17, 2014, 10:18:30 AM »
Definitely delay finishing your home decor until next year's contract is inked.
I will do this.  For sure! 

Why is the car so high when your commute is so short? Is it insurance or do you drive a lot on the weekends? If it's mainly insurance, you may want to consider getting a less expensive car. (You are biking to work, right?)
I don't drive much.  Car is high because there was an accident this year.  It caused my car insurance, medical, and home repairs to be higher than normal.  I also got new tires and they were expensive!   Car Insurance has $1000 deductible.  I'll look into dropping collision on it now because it's a 2006 car, collision may not be worth it. 

It sounds like your house is a good size in a desirable area. Consider Airbnb. You can make some money and meet some cool people.
I hadn't considered Airbnb.  is it safe for a single chick?  Thanks for the suggestion, I'll look into that.

Bottom line: If your contract isn't renewed (maybe this year, maybe next year), you'll be forced to make some serious changes. Start now and you won't be in panic mode.
I think this sums it up.  I need to prepare for it in practice rather than just in my head.  Thanks bacchi!

T-Rex

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Re: Reader Case Study: Am I a big fat liar?
« Reply #12 on: March 17, 2014, 10:22:50 AM »
Well, I know nothing about real estate.

However, $425 in groceries for a single person with no kids seems really excessive, as does $450 in gifts every month.

BlueHouse

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Re: Reader Case Study: Am I a big fat liar?
« Reply #13 on: March 17, 2014, 10:23:35 AM »
yes, you're spendy.  :)

I guess I am.  I don't think I always was, and I don't want to be as spendy as I've become.  I've packed my lunch almost every day for 20 years.  I re-use tea-bags.  And then I drop a thou without batting an eye.  I didn't even realize it was happening.  Thanks :)

Psychstache

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Re: Reader Case Study: Am I a big fat liar?
« Reply #14 on: March 17, 2014, 10:35:14 AM »
The condo is weird. Why do you have it?

You spend $1900/month to receive $1600. Before repairs or vacancies you're guaranteed down $3600 this year. Can you sell it?

I kept the condo because it was worth $100K less than what I paid when I signed the contract for my new house.  It's regained ~60K in value in the two years that I lost $6k, so I think that's been worth it so far.  In 2018 there will be a new metro station 3 blocks away, so I think the value will continue to increase (I hope to get back at least what I put into it).  There is a big emotional component to not wanting to walk away from money that I paid into it, but I think for now it's worth holding. 

I still wouldn't hold onto it because you are forgoing additional opportunities for the hope of breaking even on sunken costs.

As an example, if you had sold the condo 2 years ago (~240K value at the time) and invested it in VTSAX, you would have roughly 350Kish in liquid cash instead of 300K in equity in a negative cash flow condo that cost you 6K over the same time frame. You do admit it is an emotional decision, which is excellent self-awareness, but don't forget the lost opportunities along the way for the sake of 'not losing money' on the condo.

BlueHouse

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Re: Reader Case Study: Am I a big fat liar?
« Reply #15 on: March 17, 2014, 10:41:01 AM »
Yep, rental situation seems odd - unless that $1600 is your net rental income?
$1600 is gross.  I have a perfect tenant so I haven't raised rent. 

Are your state taxes that high?
DC tax rates are 8.5%.

Why spoil the landscape with a fence?  I know, there are fence people and non-fence people and we're the latter....
I could definitely skip this.  It's a small ornamental iron fence.  Everyone has to have either none or this kind.  Neighbors started the process on this and asked if I wanted a reduced rate by doing it at the same time they do it so I jumped in.  We're able to get it at about 1/3 less than the going rate.  This is the type of thing that I would NEVER do on my own because I don't see the payback, but if everyone around me does it, then my yard looks stupid as the only one without a fence.  They look pretty, but looking down the road, it is just one more thing to have to maintain.  (although it would help keep my bushes alive - with everyone getting fences, I'll have the only "dog accessible" bushes and I've already had to replace my bushes twice).  So far, this has been pushed back on the builder, but they've assured me this year is the last time they'll exchange them.  hmmm.  The only thing I've invested so far on this is a few hundred dollars for a permit and a full day of my time at the permit office.  Maybe I should skip this and see if I want to revisit it in 5 years. 

Great analysis and insight.  Thank you, MDM!

Argyle

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Re: Reader Case Study: Am I a big fat liar?
« Reply #16 on: March 17, 2014, 10:41:26 AM »
I would not recommend AirBnB for a single woman.  I know many have had great experiences with it.  But all you need is one bad experience.  And the bad experiences are out there.  I've had them.  Steer clear.

BlueHouse

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Re: Reader Case Study: Am I a big fat liar?
« Reply #17 on: March 17, 2014, 11:04:07 AM »
So if I read right your down $40k on the condo. You'll drop another $15-18K over the next 5 years, depending on rent or condo fee increases.  Then you'll pay a realtor 5% (adjust for your area) to sell your condo - potentially another $20k.  You're also assuming the place won't need repairs or be vacant, unknown costs $$$.  At the end you're hoping the place will go up only $40K, after spending $35-38K (maybe more if renters move)?  Obviously you're hoping the condo will be worth at least $400k, or its a purely emotional problem. I'm not saying it's a bad gamble, but I don't consider it a conservative risk-averse maneuver. 
Ugh, I hate even thinking about it.  Looking at the numbers, I think most would say to dump it.  But people who see it in person say keep it,mostly because of the metro aspect I think.  I'm really not sure what to do.  A part of me kept thinking that if I lose my contract AND also couldn't find a good job, then I could move back there and rent my house out.  That's my worst-case scenario.  And the longer I'm away from that place, the more I realize it really was killing me to live out there.  People who visit there love it because it's in a town center.  Lots of restaurants, a concert every friday night, ice skating, etc.  But no one to do those things with.  I was so socially isolated that I was dying!  There are a lot of reasons why people tell me I should "never sell".  I'm grandfathered in to being able to rent my unit (new owners cannot rent until there are fewer than 35% rentals); the metro is coming; additional development in the town center with new apartments starting at $2500. But my building is now considered "older" at 8 years old.  And I have a small one-bedroom with one parking spot.  Out there in the suburbs, parking seems to be more valuable than anything else. 

BlueHouse

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Re: Reader Case Study: Am I a big fat liar?
« Reply #18 on: March 17, 2014, 11:11:00 AM »
I still wouldn't hold onto it because you are forgoing additional opportunities for the hope of breaking even on sunken costs.

As an example, if you had sold the condo 2 years ago (~240K value at the time) and invested it in VTSAX, you would have roughly 350Kish in liquid cash instead of 300K in equity in a negative cash flow condo that cost you 6K over the same time frame. You do admit it is an emotional decision, which is excellent self-awareness, but don't forget the lost opportunities along the way for the sake of 'not losing money' on the condo.

I'm not sure your example would work in my situation.  You may be forgetting that I had/have a significant mortgage on that property.  If I had sold the condo when it was underwater, I would have had to bring money to the table to get rid of the property.  That would have reduced the amount of the downpayment on my current house by $50-80K.  ($50K-60K out of pocket to the mortgage at least.  I don't remember what the real sales prices were for those condos...just that I didn't want to "lose" it).  So I don't think I would have $240K to invest because that wasn't my money.  Or am I missing something?

BlueHouse

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Re: Reader Case Study: Am I a big fat liar?
« Reply #19 on: March 17, 2014, 11:25:15 AM »
However, $425 in groceries for a single person with no kids seems really excessive

My current method of buying is expensive, and I admit I like the convenience of buying pre-chopped vegetables and pre-washed spinach.  Now that I'm back on my feet, I think I probably have to start washing my own salad. 

There are however other considerations, not just for groceries, but for much of my shopping.  I know MMM fans are big on the costco savings, but I really try to limit buying at the big box stores.  I love my neighborhood because it has many mom & pop stores.  It's what makes my neighborhood desirable and walkable.  If I want these stores to survive (and therefore, my investment in this property/lifestyle), then I have to shop there.  I have to knowingly pay more money to these shopkeepers to keep them in business.  I know that doesn't help my monthly expenditures, but does "buying locally" count for anything in the world of MMM?  There is a big farmer's market within walking distance of my house, and I really like to buy vegetables from the people who pulled them out of the ground. 

aj_yooper

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Re: Reader Case Study: Am I a big fat liar?
« Reply #20 on: March 17, 2014, 11:38:04 AM »
Question:  Will I be able to retire early on my current path, or do I have to make drastic changes? 

Iíve always thought I was frugal.  After reading many posts over the past few weeks, I realize I just like to pass judgement about what others spend their money on.  Iíve been spending a lot of money, and I have all the usual excuses.  Am I just a big fat liar?  Or is there some part of me that really is frugal?  After reading so many different POVs, I need a reality check.  Will I be able to retire early on my current path, or do I have to make drastic changes? 





You are not frugal, you are in a spending whirlwind, you are not planning for the future, you are not trimming your losses when you should.  If you are correct, your contract will not be renewed forever, but you are acting that way.  What up?  You could retire soon if your expenses got to a reasonable level.  Is that what you want?  Or, do you want to continue deceiving yourself?


smalllife

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Re: Reader Case Study: Am I a big fat liar?
« Reply #21 on: March 17, 2014, 11:40:44 AM »
There are however other considerations, not just for groceries, but for much of my shopping.  I know MMM fans are big on the costco savings, but I really try to limit buying at the big box stores.  I love my neighborhood because it has many mom & pop stores.  It's what makes my neighborhood desirable and walkable.  If I want these stores to survive (and therefore, my investment in this property/lifestyle), then I have to shop there.  I have to knowingly pay more money to these shopkeepers to keep them in business.  I know that doesn't help my monthly expenditures, but does "buying locally" count for anything in the world of MMM?  There is a big farmer's market within walking distance of my house, and I really like to buy vegetables from the people who pulled them out of the ground.

Buying local is it's own value, which may or may not be the case for all MMMers.  I too follow this line of thinking where it makes sense, although groceries are probably the least local of my purchases.  Personally I think it is worth the money and you have other places to cut, but perhaps you could buy directly from the farmers or look into a CSA and see if that would save you money?  MMM is about spending according to your values while recognizing the choices that you make - if it is a choice you are aware of and it speaks to your values, then go for it.

lexie2000

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Re: Reader Case Study: Am I a big fat liar?
« Reply #22 on: March 17, 2014, 11:59:48 AM »
Question:  Will I be able to retire early on my current path, or do I have to make drastic changes? 

Iíve always thought I was frugal.  After reading many posts over the past few weeks, I realize I just like to pass judgement about what others spend their money on.  Iíve been spending a lot of money, and I have all the usual excuses.  Am I just a big fat liar?  Or is there some part of me that really is frugal?  After reading so many different POVs, I need a reality check.  Will I be able to retire early on my current path, or do I have to make drastic changes? 





You are not frugal, you are in a spending whirlwind, you are not planning for the future, you are not trimming your losses when you should.  If you are correct, your contract will not be renewed forever, but you are acting that way.  What up?  You could retire soon if your expenses got to a reasonable level.  Is that what you want?  Or, do you want to continue deceiving yourself?

I don't think I've ever heard someone say, "I'm an overspender who prefers to live beyond my means." Most people prefer to think of themselves as frugal, and most people are frugal about one or two things and can point to those as justification.

Frugality is relative.  Compared to our neighbors I'm pretty sure we would be considered frugal; compared to others, I'm sure we are a couple of spendypants.

Psychstache

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Re: Reader Case Study: Am I a big fat liar?
« Reply #23 on: March 17, 2014, 12:04:01 PM »
I still wouldn't hold onto it because you are forgoing additional opportunities for the hope of breaking even on sunken costs.

As an example, if you had sold the condo 2 years ago (~240K value at the time) and invested it in VTSAX, you would have roughly 350Kish in liquid cash instead of 300K in equity in a negative cash flow condo that cost you 6K over the same time frame. You do admit it is an emotional decision, which is excellent self-awareness, but don't forget the lost opportunities along the way for the sake of 'not losing money' on the condo.

I'm not sure your example would work in my situation.  You may be forgetting that I had/have a significant mortgage on that property.  If I had sold the condo when it was underwater, I would have had to bring money to the table to get rid of the property.  That would have reduced the amount of the downpayment on my current house by $50-80K.  ($50K-60K out of pocket to the mortgage at least.  I don't remember what the real sales prices were for those condos...just that I didn't want to "lose" it).  So I don't think I would have $240K to invest because that wasn't my money.  Or am I missing something?

Ah, I misread. I jumped to the assumption that the 300k listed in assets was your equity, not the total value excluding the mortgage. my bad.

Still, at this point with 75k in equity you should be able to get out of it and get a little something back. Even if you were gonna break even I would get rid of it. It also depends on when your ARM is going to reset next. I would hate for the rates to go up and make it even more cash flow negative.

aj_yooper

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Re: Reader Case Study: Am I a big fat liar?
« Reply #24 on: March 17, 2014, 12:06:12 PM »
Savings per month are $4,000 out of $24,000 gross income.  Frugal, really?  Relative to Donald Trump or Michael Jordan?

Psychstache

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Re: Reader Case Study: Am I a big fat liar?
« Reply #25 on: March 17, 2014, 12:08:41 PM »
Savings per month are $4,000 out of $24,000 gross income.  Frugal, really?  Relative to Donald Trump or Michael Jordan?

There's also the equity from the regular mortgage payments plus 1500 for the 401k, so really pretty good by average american standards.

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Re: Reader Case Study: Am I a big fat liar?
« Reply #26 on: March 17, 2014, 12:37:35 PM »
Regarding the rental property.
I glanced over figures in my original post and have since read a lot of the criticisms about whether you should hold onto the property.  Currently you are paying ~$300 more for the property than you are taking in, but I think there's a few more pieces needed to really understand what is going on here.
1) when does the ARM reset & what is the term?
2) what's your monthly payments (divided up interest & principle)
3) when's the last time you increased rent and what are similar apartments renting for in the neighborhood?
4) do your figures include maintenance costs?

I made some rough calculations and I'm guessing you're paying ~$725/month towards principle, and the rest of the $1900 goes towards interest, taxes and HOAs. At a minimum I want to see rental income to be >20% of what you are paying in interest, HOAs, and maintenance.  You pass that test, but just barely.  If you think you would get tens-of-thousands from its sale it's hard to make the economical argument for keeping it; it's either an expense that costs you ~$3,500 a year, or a nice chunk of cash that pads your savings accounts.  Again, consider raising the rent to cover the costs. If that is possible at least it may become debt-neutral and you can better justify holding onto it until it's either paid off or until you can sell it for a better price.

A metro station coming into the area may help, but you're betting on hope there.  Sometimes things don't pan out that way (i.e. some developer might build a mega-condo, or crime may make the area less valuable).

BlueHouse

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Re: Reader Case Study: Am I a big fat liar?
« Reply #27 on: March 17, 2014, 12:44:47 PM »
Savings per month are $4,000 out of $24,000 gross income.  Frugal, really?  Relative to Donald Trump or Michael Jordan?
Good point AJ.  Facepunch accepted. 


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Re: Reader Case Study: Am I a big fat liar?
« Reply #28 on: March 17, 2014, 01:15:15 PM »
Condo makes no sense , spending is out of control but you control both. FI is based on your decisions. Sooner you make the changes sooner you can be FI.

BlueHouse

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Re: Reader Case Study: Am I a big fat liar?
« Reply #29 on: March 17, 2014, 01:18:34 PM »
Regarding the rental property.
I glanced over figures in my original post and have since read a lot of the criticisms about whether you should hold onto the property.  Currently you are paying ~$300 more for the property than you are taking in, but I think there's a few more pieces needed to really understand what is going on here.
1) when does the ARM reset & what is the term?
2) what's your monthly payments (divided up interest & principle)
3) when's the last time you increased rent and what are similar apartments renting for in the neighborhood?
4) do your figures include maintenance costs?

I made some rough calculations and I'm guessing you're paying ~$725/month towards principle, and the rest of the $1900 goes towards interest, taxes and HOAs. At a minimum I want to see rental income to be >20% of what you are paying in interest, HOAs, and maintenance.  You pass that test, but just barely.  If you think you would get tens-of-thousands from its sale it's hard to make the economical argument for keeping it; it's either an expense that costs you ~$3,500 a year, or a nice chunk of cash that pads your savings accounts.  Again, consider raising the rent to cover the costs. If that is possible at least it may become debt-neutral and you can better justify holding onto it until it's either paid off or until you can sell it for a better price.

A metro station coming into the area may help, but you're betting on hope there.  Sometimes things don't pan out that way (i.e. some developer might build a mega-condo, or crime may make the area less valuable).

1.  ARM is currently 2.875% .  I had it on a 5 year ARM, but it's been resetting lower and lower each year, and not knowing whether I will sell or keep has kept me from locking in on a low fixed.  Plus, as a rental, my rate would be higher than the rate for a principal residence.  It resets annually in June.
2. Principal:  $694; Interest:  573; Escrow:  $262; HOA:  321. 
3.  Never increased.  I'm on a month-to-month agreement with the only tenant I've ever had and he's perfect - probably not worth rocking the boat for an extra $50/month.  Comps in the same building run from $1400/month - $1650/month.  Mine went for the highest price 2 years ago because it was in excellent condition, clean, hardwood floors and granite countertops.  appliances are standard generic kind. 
4.  I budgeted 360/year for maintenance, but in reality I've only paid $125/year for a plumber to inspect all the water hoses and to verify that nothing is leaking (required annually by the HOA).  I think I've been really lucky so far.  Those places were rather cheaply built, so I have to assume something will go bad sooner rather than later.  I read one time that Post Properties sells off their buildings at age 7 because that's when things start to break and they're not in the business of "maintaining" properties.  If I want out, this is the right time to do something about it.   
I thought as an independent consultant with only one customer, having a different source of income (rent) would mean reducing risk, but I think this is actually riskier because so many other things can happen that I cannot control.  I'm not particularly handy either, so I can't do repairs myself (and in my condo, they now require an "outside" source to document no leaks, etc).  I think that it's quite a lot of risk for only $1600/ month (-300 after expenses). 
I really do think though that it will increase in value $40-$50k by 2018 because of the growth in the area and the location.  This area is dead in the middle of government contracting in Virginia.  It's extremely desirable, and in fact, if I were to lose my current contract, the odds are that a future contract would be located there. 

Do I wait it out?  If the current tenant were to leave, I think I would jump at the chance to sell.  But right now, I feel like my risk is contained and the upside is there.  Does that make sense? 

Thegoblinchief

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Re: Reader Case Study: Am I a big fat liar?
« Reply #30 on: March 17, 2014, 02:02:11 PM »
Increase the rent. Talk to the existing tenant and say "hey, these are the market rates, I need to have you pay X" and raise the rent a small amount over time. Month to month should carry a premium over longer leases, not a discount.

If you don't want to raise rent, cut your losses now.

Get spending under control. Food is insane, but it's everything else that's worse.

nereo

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Re: Reader Case Study: Am I a big fat liar?
« Reply #31 on: March 17, 2014, 02:04:01 PM »

1.  ARM is currently 2.875% .  I had it on a 5 year ARM, but it's been resetting lower and lower each year, and not knowing whether I will sell or keep has kept me from locking in on a low fixed.  Plus, as a rental, my rate would be higher than the rate for a principal residence.  It resets annually in June.
2. Principal:  $694; Interest:  573; Escrow:  $262; HOA:  321. 
3.  Never increased.  I'm on a month-to-month agreement with the only tenant I've ever had and he's perfect - probably not worth rocking the boat for an extra $50/month.  Comps in the same building run from $1400/month - $1650/month.  Mine went for the highest price 2 years ago because it was in excellent condition, clean, hardwood floors and granite countertops.  appliances are standard generic kind. 
4.  I budgeted 360/year for maintenance, but in reality I've only paid $125/year for a plumber to inspect all the water hoses and to verify that nothing is leaking (required annually by the HOA).  I think I've been really lucky so far.  Those places were rather cheaply built, so I have to assume something will go bad sooner rather than later.  I read one time that Post Properties sells off their buildings at age 7 because that's when things start to break and they're not in the business of "maintaining" properties.  If I want out, this is the right time to do something about it.   
I thought as an independent consultant with only one customer, having a different source of income (rent) would mean reducing risk, but I think this is actually riskier because so many other things can happen that I cannot control.  I'm not particularly handy either, so I can't do repairs myself (and in my condo, they now require an "outside" source to document no leaks, etc).  I think that it's quite a lot of risk for only $1600/ month (-300 after expenses). 
I really do think though that it will increase in value $40-$50k by 2018 because of the growth in the area and the location.  This area is dead in the middle of government contracting in Virginia.  It's extremely desirable, and in fact, if I were to lose my current contract, the odds are that a future contract would be located there. 

Do I wait it out?  If the current tenant were to leave, I think I would jump at the chance to sell.  But right now, I feel like my risk is contained and the upside is there.  Does that make sense?
BlueHouse:  Risk should not be confused with hope.  There are two sides to every risk equation: the amount that you could gain (or loose) with a particular transaction, and the amount that you could gain (or loose) if you DON'T do a particular transaction.  In most cases people focus on the former, rarely consider the latter, and often poorly estimate both.
In your case, let's first look at what happens if you wait to sell the property for ~5 years (2019, after completion of the Metro.  I'm guessing you are in Tyson's somewhere?)
a) IF you don't increase your rent you will spend $18,000 more than your rental brings in
b) You will reduce your principle by about $42,000 (equity, sans selling price).
----->, you will net $24,000 before any increases the price of your home.
Inflation will eat away at your gains - let's estimate 2%/year.  In 5 years that's a change of 10%. 
I cannot remember the current estimate of your rental, but I believe it's about $350,000.  Assuming that -
To combat inflation alone, you will need to sell your rental for $385,000 to maintain your 'gain' of $24k.
assuming a sale in 5 years at $400,000, you will net about $36,600 in real dollars in five years.

In the above assessment, the only 'certainties' you can count on is that you will pay down more principle than you loose with your current renters.  In truth, the likelihood that your ARM will increase is much greater than it staying at the present level or going lower (its very hard to go DOWN from 2.85%).  If your ARM went up to 4% you'd be losing an additional ~$150/month.
The risk above is 1) your ARM will go up, negating a lot of the gains, and/or 2) the house will not increase in value to the $400k you are hoping for, and/or 3) there will be a major expense that will cost thousands to fix.  under any of these scenarios you will net much less than the $36,600 that you are hoping for.
you have so many years left on your mortgage (24+?) that you can't even play the "what happens once it is paid-off in full". 

SECOND part of risk assessment: what happens if you don't follow this path and choose a different path?  In this case, it's selling now.
a) if you sold your apartment this year, could you walk away with more than the 'best-case' scenerio of $36,600?  Include realtor's fees (~5%) and closing costs.
The nice part of this scenario is that it involves fewer uncertainties.  If you sell you won't be hit by an unexpected expense, nor will you be at the will of the local real-estate market, or rising ARMs.  It's also a trade-off in time. 

You've mentioned that you don't want to (or don't think you can) raise the rent.  If that is the case than there seems to be a very strong economic case for selling the property, especially if you can sell it for a profit (I'd say any profit at this point).
Your desire to sell it for more than you bought it for is called "Price Anchoring".  It's dangerous in investing.  Make your decisions based on what the reality is now, and what you expect it to be in the future. Forget about what you paid for it - that's immaterial.  If the property was making you $1/month but you could not sell it for more than it was worth I'd tell you to keep it.  If it was making you $500/month but you could sell it for $150,000k profit, I'd tell you to sell. Now is what matters.

I don't mean to sound harsh, and I've made some broad generalizations in my equations.  Just trying to help.
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Re: Reader Case Study: Am I a big fat liar?
« Reply #32 on: March 17, 2014, 02:31:31 PM »
If depreciation is included, and is ~$10K/yr ($270K value over 27 year straight line depreciation), then you are ever so slightly cash flow positive on the rental.  Yes, you apparently lose $300/mo. excluding taxes, but you recoup 0.33*$833=$374/mo. from the IRS due to the rental loss, for an overall gain of $74/mo.

The IRS isn't all sweetness and light, however, as they will get that depreciation back when you sell the rental.  See http://homeguides.sfgate.com/calculate-capital-gains-tax-rental-property-7333.html and http://www.realestate.com/advice/how-to-avoid-capital-gains-tax-while-renting-out-your-house/.

Prairie Stash

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Re: Reader Case Study: Am I a big fat liar?
« Reply #33 on: March 17, 2014, 03:39:23 PM »
Question:  Will I be able to retire early on my current path, or do I have to make drastic changes? 


Me: mid-40s, single, no kids, no pets.  Risk-averse. 
 Meanwhile, lifestyle creep has happened.

My strategy sounds oddly similar to the strategies of people who use credit cards too oftenÖĒI want to buy stuff NOW instead of laterĒ.  The difference is that my income is currently enough to support that.

Iíve also thought that if I get this house paid off, it would provide a good source of income when I get older and can no longer handle stairs.  (current rent for my house in my neighborhood is 4 - 4.5k /month).  I think I could live off that in retirement!   

Iím looking for some ideas on how to get to financial independence before age 60 (I know thatís not early, but with my debt load, thatís the earliest that Iíve been able to make the numbers work out).  All advice appreciated.  Thank you very much for your time and thoughtful consideration of my case.

Answering your other questions. You have self identified as enjoying lifestyle creep.  No Frugal awards for that. If you spend $15K this year on furniture, you're not allowed to judge others anymore on frugality. I judge frugality on multiyear spans, a single year of small budgets isn't enough. I'm not frugal myself, not yet.

You can't afford it, you're justifying your wants.  You claim to have high debt (no early retirement) then also claim to be able to afford anything you want (high income). It's exactly the same attitude a spendypants has. I've used that argument several times to justify anything from vacations to alcohol.

60 isn't a frugal goal.  That's a normal goal for average people.  I always hear people say they want to retire at 60-65 at work, it's not hard to accomplish.  I personally believe you are capable of retiring in 10 years or less, if that's what you wanted.

Get over your attachment to property (it's just a pile of lumber and drywall).  The idea of renting out an $850K house for $4500/month is ludicrous.  Every last one of your eggs in one basket...There's a reason people diversify. My plan would say sell and invest if you ever move out (although I would move now and retire by 55, but that's me).

You seem like a person who can handle criticism well, I respect you for that. I hope you keep your open attitude, this is meant to help you see differing viewpoints.

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Re: Reader Case Study: Am I a big fat liar?
« Reply #34 on: March 17, 2014, 04:24:12 PM »
I completely understand how you got into the situation you're in, and if it weren't for your contract situation, things wouldn't feel so precarious for you. Being self-employed, there are no unemployment payments for you if this job goes away. My advice is:

1. Find a way to save at least 50% of your income -- for the rest of your working life.
2. Consider getting a roommate if your job goes away, fast.
3. Maybe...start living off that 200+K by moving some of it into your checking account every month. Take all your current income and invest in Vanguard funds every single month - you'll be dollar cost averaging your way in while maintaining your large E-fund, which isn't TOO bad considering how risky your job seems to be.

If your contract is renewed, is it for just one year, or multiple years? If mulitple years, you can make some really substantial dents in your savings and paying down mortgages in the next few years.

As far as your rental, I see why you're keeping it. It seems to be break-even at this point, so I don't think that's your biggest concern. Just getting your daily expenses under control is a big first step. 
 

nereo

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Re: Reader Case Study: Am I a big fat liar?
« Reply #35 on: March 17, 2014, 04:55:31 PM »

3. Maybe...start living off that 200+K by moving some of it into your checking account every month. Take all your current income and invest in Vanguard funds every single month - you'll be dollar cost averaging your way in while maintaining your large E-fund, which isn't TOO bad considering how risky your job seems to be.

As far as your rental, I see why you're keeping it. It seems to be break-even at this point, so I don't think that's your biggest concern. Just getting your daily expenses under control is a big first step. 
 
Dollar-cost-averaging is a great strategy.  For the vast majority of people, trying the market is a horrible strategy.
Leveraging the spending-side of the equation will be your quickest path to FI/FIRE. 

Economically, a great place to put most of that $220k in cash would be into an investment fund.  BUT, in your OP you mentioned staying where you lived as a very high priority.  That money could make a serious dent in your primary mortgage. That would be a strategy more for your emotional well-being, but you'd get an automatic 3.875% return on investment.  Not great but not horrible. Certainly better than loosing money via inflation every year.

I agree that the rental isn't your biggest concern right now; given your overall expenses paying $300 more than you take in (especially after considering how you are gaining equity each month) makes that far less important than other categories, like the furniture and food+going out. 

Reston Town Center is a lovely area - Metro was supposed to arrive in Tysons in 2008.  Then 2012.  Now 2017, they promise!

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Re: Reader Case Study: Am I a big fat liar?
« Reply #36 on: March 17, 2014, 05:09:55 PM »
Now for my excuses:   When I moved into my current house, I budgeted to buy all new furniture.  Iím almost done with major expenditures for the house.  This year I think Iíll spend another $15,000-18,000 (Painting, Fence, furniture, lighting).  Once I have the house completed, I won't spend much money on the ďHome thingsĒ category and will divert that money into investments.  That seemed like a valid plan to me, and would still seem acceptable to most ďnormal people", but when you take into account how fearful I am about losing my contract, and seeing what is possible after reading the forums, I realize I probably need a few face punches.  My strategy sounds oddly similar to the strategies of people who use credit cards too oftenÖĒI want to buy stuff NOW instead of laterĒ.  The difference is that my income is currently enough to support that.  Am I deluding myself?  Am I just a spendypants consumer?  Do I need to change my ways immediately, or can I finish up my last 15-18k in wanted but unneeded spending and then start doubling up on my saving next year? 

You are absolutely a spendypants consumer.  Bolded above is the exact thinking that consumers have and what has caused your very high spending.  15k is A LOT of money to spend on wants, no matter the justification.  And they are definitely wants.  The furniture is probably the worst item on the list.  New furniture is very expensive and very unnecessary.  I understand you want your house to feel lived in, but there are plenty of other options to find nice furniture.  Let someone else pay retail price for it.  I could probably go through your whole list there with similar comments, but I'll stop at one.  And lastly, your justification that you will spend it once and it will be done sounds like a very slippery slope to be using to justify purchases.  That line of reasoning can work all the way up to a vacation home in the Bahamas... Everyone else is talking about delaying the purchases.  I don't think that is the right answer.  The purchases should all be carefully scrutinized to see if they are necessary and/or if there's a better way to get what you want (buy used, do the painting yourself, etc).  But as you well know, you're only robbing your own potential retirement funds to purchase these things.  So it's not all that bad in the end.

(Note: I waited until I decided that you could handle the face-punching to post.  You passed my test, hopefully I didn't misread you.)

Economically, a great place to put most of that $220k in cash would be into an investment fund.  BUT, in your OP you mentioned staying where you lived as a very high priority.  That money could make a serious dent in your primary mortgage. That would be a strategy more for your emotional well-being, but you'd get an automatic 3.875% return on investment.  Not great but not horrible. Certainly better than loosing money via inflation every year.

I agree that something should be done with some of that money, but I think diversity is the name of the game here.  Save some for the emergency fund to give you peace of mind that you could handle a job loss.  Some should be invested in index funds.  It's also a good idea to put some toward your mortgage, but I'd think about putting that chunk of it toward your rental mortgage.  That mortgage is an ARM, so it's much riskier than your primary mortgage.  It has a lower rate now, but that won't last for long.  Or you could even put some towards both mortgages if you wanted to.

BlueHouse

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Re: Reader Case Study: Am I a big fat liar?
« Reply #37 on: March 17, 2014, 07:44:27 PM »
I really appreciate all the comments and like the different perspectives.  Please forgive the length of my response while I try to address inquiries.

If depreciation is included, and is ~$10K/yr ($270K value over 27 year straight line depreciation), then you are ever so slightly cash flow positive on the rental.  Yes, you apparently lose $300/mo. excluding taxes, but you recoup 0.33*$833=$374/mo. from the IRS due to the rental loss, for an overall gain of $74/mo.
To be honest, Iím having a hard time figuring out whether there is a tax advantage or not.  The monthly negative cash flow is obvious.  The yearly consequence is buried in a lot of tax chicanery that I didnít quite follow last year. 

You have self identified as enjoying lifestyle creep.  No Frugal awards for that. If you spend $15K this year on furniture, you're not allowed to judge others anymore on frugality. I judge frugality on multiyear spans, a single year of small budgets isn't enough.
I deserve that.  Judging on the multiyear spans, in 2010 and 2011 my savings rate was 54% and 60%, so I know Iím capable of much better.  Iíd like to get back to that level.   

The idea of renting out an $850K house for $4500/month is ludicrous.  Every last one of your eggs in one basket...There's a reason people diversify.
I think I am diversified, but please offer thoughts.  Some people would say I should only have one strategy, but Iím trying to fill up 4 baskets simultaneously.
I currently put $1600/month in a Schwab Index.  This account represents ONLY payments that I have received in rent and is held separately to help me identify the difference between paying off mortgage early vs. investing.  I understand the logic for investing vs. paying off, but resisted it emotionally.  This is my way to deal with irrational behavior.   My intent was to let that grow and then pay down the mortgage on that investment.  But as I experience the reality, Iím satisfied leaving it there.   Each month that passes, I see more reason to keep it invested rather than paying it off.  That attitude may change when the ARM increases.  The point is, that account is earmarked and correlated to that property.  Loan managers told me I didnít need the money from a rental to afford both properties, and I wanted to be sure they were right.  This is my version of hedging bets. 
I max out my $401k, and my company matches up to the corporate limit.  Those funds are invested now in Index funds.  Last year I switched the company 401k plan to a more expensive option that allowed me better investing choices including Vanguard, Schwab, Fidelity, and other index funds.  Previously, every 401k plan I was ever a part of didnít offer index funds.  I made poor choices and panicked, losing money at bad times.  Iíve learned a lot in the past few years and now, thanks to having a solo-401k and counting the employer portion, Iíve stashed more in my 401k in the past 5 years than I did in the previous 18.  That part makes me sick to my stomach for wasted time, but also proud that I am now on track for success.
I put additional funds into a non-tax advantaged account at Vanguard.  I think if I reduce my spending, I can increase this amount to $50 or $60k per year.  That would get me to FI quickly.  (this is dependent on keeping my current contract for another 8 years). 
I put $1k additional to my primary residence mortgage.  Again, Iím hedging my bets.  Iím just thinking that if I fail to do #1,2,3 above, then at the very least Iíll get the house paid off 10 years early (by age 64) so I wonít have to work forever. 


You seem like a person who can handle criticism well, I respect you for that. I hope you keep your open attitude
Thanks Prairie.  I know a lot of younger people on this board look at higher incomes and are disgusted by spending like mine.  I hope they understand how envious I am of young people who have their whole lives ahead of them and the power to grow small amounts into fortunes by the time they are my age.  Iím sick about how much time Iíve wasted and how Iíve thrown away so many opportunities without even realizing it.  I also think about how weighed down I am because of my love for this house and all the material items that go inside of it.  Iím just so glad Iím learning about ďearlyĒ retirement before Iím in my 70ís and comments from well-meaning MMMíers will only help me get there faster. 

1. Find a way to save at least 50% of your income -- for the rest of your working life.
2. Consider getting a roommate if your job goes away, fast.
3. Maybe...start living off that 200+K by moving some of it into your checking account every month. Take all your current income and invest in Vanguard funds every single month - you'll be dollar cost averaging your way in while maintaining your large E-fund, which isn't TOO bad considering how risky your job seems to be.
Great advice SunshineGirl.  #1 is going to have to be my priority.  Today was definitely a wake-up call for me and I think I can make some changes starting today.  Thank you! 

If your contract is renewed, is it for just one year, or multiple years? If mulitple years, you can make some really substantial dents in your savings and paying down mortgages in the next few years.
I get renewed one year at a time, and every year about this time my stomach has been in knots.  This year is a little worse than previous years. Part of that may be due to the financial conditions in my industry.  But I think part of my nervousness also stems from deeper insight into my finances and comparisons to Mustachians.  The analysis into my spending scares the crap out of me.   

Economically, a great place to put most of that $220k in cash would be into an investment fund.  BUT, in your OP you mentioned staying where you lived as a very high priority.  That money could make a serious dent in your primary mortgage. That would be a strategy more for your emotional well-being, but you'd get an automatic 3.875% return on investment.  Not great but not horrible. Certainly better than loosing money via inflation every year.
My after-tax investments are building up to the point where (if contract is renewed indefinitely), I could pay off one or both mortgages in 8 years.  That was a goal a year ago, but if I get and stay on track, in 8 years I may realize the folly of paying off a 30 year 3.8% mortgage and think better of it.  Not only that, but thatís the only money I have thatís not my ďold-man moneyĒ.  So Iíd still have to work to live. 


Reston Town Center is a lovely area - Metro was supposed to arrive in Tysons in 2008.  Then 2012.  Now 2017, they promise!
Did I miss something?  Iím still reading July 2014 for Tysons.  Reston is 2017/2018.  No one can be that far behind, can they?  If I am wrong on this, then my strategy is completely flawed. 



(Note: I waited until I decided that you could handle the face-punching to post.  You passed my test, hopefully I didn't misread you.)

Ha.  No, I can take it and I know I deserve it.   I promise to improve. 

Some should be invested in index funds.  It's also a good idea to put some toward your mortgage, but I'd think about putting that chunk of it toward your rental mortgage.  That mortgage is an ARM, so it's much riskier than your primary mortgage.  It has a lower rate now, but that won't last for long.  Or you could even put some towards both mortgages if you wanted to.

I must have done a poor job of describing my assets.  90% of my retirement and investment funds are in currently in Index funds.  I originally was directing the extra principal payments of to the rental because of the ARM, thinking of the snowball strategy, but the longer Iím away from it, the more I think that is an investment that I may not want to hold on to.  The HOA fees there are beyond my control and that bugs me to no end.  If I had to ďwalk awayĒ from an investment, the condo would be dropped.  So if something does happen with my job situation, I donít want my cash tied up in it. 

I have a lot to think about tonight to start turning these ideas into practices.  You all will be glad to know I've just dropped my Satellite radio subscription for $208/year.  Not much, but at least it's a step in the right direction and I'm turning off the desire to "auto-renew" things that have just been a part of my life for the past 5 years. 

MDM

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Re: Reader Case Study: Am I a big fat liar?
« Reply #38 on: March 17, 2014, 08:17:00 PM »
I really appreciate all the comments and like the different perspectives.  Please forgive the length of my response while I try to address inquiries.

If depreciation is included, and is ~$10K/yr ($270K value over 27 year straight line depreciation), then you are ever so slightly cash flow positive on the rental.  Yes, you apparently lose $300/mo. excluding taxes, but you recoup 0.33*$833=$374/mo. from the IRS due to the rental loss, for an overall gain of $74/mo.
To be honest, Iím having a hard time figuring out whether there is a tax advantage or not.  The monthly negative cash flow is obvious.  The yearly consequence is buried in a lot of tax chicanery that I didnít quite follow last year. 

Reston Town Center is a lovely area - Metro was supposed to arrive in Tysons in 2008.  Then 2012.  Now 2017, they promise!
Did I miss something?  Iím still reading July 2014 for Tysons.  Reston is 2017/2018.  No one can be that far behind, can they?  If I am wrong on this, then my strategy is completely flawed. 

I have a lot to think about tonight to start turning these ideas into practices.  You all will be glad to know I've just dropped my Satellite radio subscription for $208/year.  Not much, but at least it's a step in the right direction and I'm turning off the desire to "auto-renew" things that have just been a part of my life for the past 5 years.

BlueHouse,

Well done so far.  It's easy to throw suggestions at people - takes somewhat longer to digest and act on them.  But it appears you have started the digestion and action, so...keep it up!

Reading between the lines (and assuming "complexity" was meant instead of "chicanery"), I'm guessing that someone else did your taxes for you.  If so, two suggestions:
  • Do your own taxes.  Even TurboTax Premium will cost much less than a CPA, and you will know more when done.
  • Understand your depreciation situation.  This can have a significant impact on any sale of your rental, depending on how long you have held it as a rental.

BlueHouse

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Re: Reader Case Study: Am I a big fat liar?
« Reply #39 on: March 17, 2014, 09:31:52 PM »
Reading between the lines (and assuming "complexity" was meant instead of "chicanery"), I'm guessing that someone else did your taxes for you.  If so, two suggestions:
  • Do your own taxes.  Even TurboTax Premium will cost much less than a CPA, and you will know more when done.
  • Understand your depreciation situation.  This can have a significant impact on any sale of your rental, depending on how long you have held it as a rental.
I meant what I wrote.  I have since fired CPA #1 and refiled taxes for the period that CPA #1 filed.  I was uneasy with the explanations given in a few areas and took it to another CPA for review.  CPA #2 also couldn't make heads or tails out my areas of concern and re-filed both my business and personal returns.  There will be a reckoning.  With the corrections and amendments, it's difficult to unravel and so is more complex than usual.   I do plan to get TurboTax and try to see if I can come up with the same values that CPA #2 did, and once I can do it, then I'll feel confident filing myself again.  I've actually only used a CPA for the past 3 years.  The TurboTax software for an S-Corp is pretty weak (help topics simply restate the question).  I'm comfortable with my personal return, but I need the K-1 created by the S-Corp to be accurate in order to file my personal return, and I had problems with that in the past.  I also wanted someone else to do my first year as a landlord.  How anti-mustachian would it be to buy TT for business and personal as a practice exercise and to prepare for next year?  TT for business is an extra $150.   I want to use the CPA's work as a template for how to file. 
So after writing this whole explanation, I feel as if every sentence is just a way to say "yeah, but...", so there I am again, making excuses for not doing my own taxes. 
Agree in theory will all things you have said.  I just have to put it into practice.  No more excuses!

T-Rex

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Re: Reader Case Study: Am I a big fat liar?
« Reply #40 on: March 17, 2014, 10:24:45 PM »
However, $425 in groceries for a single person with no kids seems really excessive

My current method of buying is expensive, and I admit I like the convenience of buying pre-chopped vegetables and pre-washed spinach.  Now that I'm back on my feet, I think I probably have to start washing my own salad. 

There are however other considerations, not just for groceries, but for much of my shopping.  I know MMM fans are big on the costco savings, but I really try to limit buying at the big box stores.  I love my neighborhood because it has many mom & pop stores.  It's what makes my neighborhood desirable and walkable.  If I want these stores to survive (and therefore, my investment in this property/lifestyle), then I have to shop there.  I have to knowingly pay more money to these shopkeepers to keep them in business.  I know that doesn't help my monthly expenditures, but does "buying locally" count for anything in the world of MMM?  There is a big farmer's market within walking distance of my house, and I really like to buy vegetables from the people who pulled them out of the ground.

When I was single, I didn't have Costco membership and didn't spend that much on groceries. If you learn how to prep and cook meals, and buy a few frequently used things in bigger quantities (doesn't have to be Costco sized) you will save a lot. Farmer's markets can be good, but savings are canceled out if you buy the super marked up tiny serving of homemade stuff.

MDM

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Re: Reader Case Study: Am I a big fat liar?
« Reply #41 on: March 17, 2014, 10:34:30 PM »
I meant what I wrote.  I have since fired CPA #1 and refiled taxes for the period that CPA #1 filed.  ...  The TurboTax software for an S-Corp is pretty weak (help topics simply restate the question).  I'm comfortable with my personal return, but I need the K-1 created by the S-Corp to be accurate in order to file my personal return, and I had problems with that in the past.
That being the case, I admire your choice of words.  And with no S-Corp experience I defer to others who do.  More than met the eye in your OP - good luck.   

Quote
How anti-mustachian would it be to buy TT for business and personal as a practice exercise and to prepare for next year?  TT for business is an extra $150.   I want to use the CPA's work as a template for how to file. 
Not at all, as MMM uses it (see ~3/4 down the page).

BlueHouse

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Re: Reader Case Study: Am I a big fat liar?
« Reply #42 on: March 17, 2014, 11:09:27 PM »
When I was single, I didn't have Costco membership and didn't spend that much on groceries. If you learn how to prep and cook meals, and buy a few frequently used things in bigger quantities (doesn't have to be Costco sized) you will save a lot. Farmer's markets can be good, but savings are canceled out if you buy the super marked up tiny serving of homemade stuff.

See below for this week's shopping. (sorry about formatting) I'll cut out the pre-chopped and pre-washed.  I explained above why I'm sticking with overpriced delivery (and tipping) for a few more months.  I will end this practice in 3-5 months (summertime).  My berry habit is adding up too, but not sure I should change that.   


Order Details
Item   Size   
Qty
Item Price*
Total Price*
Produce Stand
Apples McIntosh   3 LB BAG  1     3.99
Avocados Hass   4 CT BAG   1     3.99
Blackberries   12 OZ PKG   1    2.99
Celery Sticks Cut Giant   16 OZ PKG  1   2.99
Giant Salsa Verde Fresh   16 OZ TUB     1   3.99
Lemons   2 LB BAG   1   2.99
Mushrooms White Whole Giant   8 OZ PKG   1  1.00
Nature's Promise Organic Salad Baby Romaine   7 OZ PKG   1   3.99
Nature's Promise Salad Baby Spinach Organic   16 OZ PKG    1   6.99
Onions White   1 EA   1    .75
Peppers Serrano   4 OZ PKG   1  1.89
Raspberries Red   1/2 DRY PNT   1    2.99
Sweet Potatoes   1 EA     2  .75    1.50
Meat & Seafood
Empire Kosher Chicken Breasts Boneless Skinless Fresh   APX 1.5 LB     1  11.98
Nature's Promise Naturals Chicken Thighs Boneless Skinless   APX 1.5 LB      1  6.73
Dairy
Fage Total 0% Greek Yogurt Strained Plain Non Fat All Natural   6 OZ CUP  2   1.00    2.00
Giant Evaporated Milk with Vitamin D   5 OZ CAN   1     .79
Giant Milk Fat Free   16 OZ CTN     1    .99
Thai Kitchen Coconut Milk Lite All Natural   13.6 OZ CAN   1   2.99
Frozen Foods
Giant SteamReady Green Beans Cut All Natural   12 OZ BAG      1    1.00
Grains, Pasta & Side Dishes
Eden Organic Quinoa Whole Grain   16 OZ BAG      1    7.29
Soups & Canned Goods
Goya Garbanzos Beans Chick Peas Low Sodium   15.5 OZ CAN   2   1.09   2.18
Nature's Promise Organics Apple Sauce Unsweetened   25 OZ JAR   1   2.99    2.99
Pacific Natural Foods Roasted Pepper Soup Low Sodium Organic   32 OZ CTN  1   4.19   4.19
Sauces, Spices & Seasonings
McCormick Pepper Red Crushed   1.5 OZ BTL   1    2.99
Laundry, Paper & Cleaning
Cascade Complete All in 1 Dishwasher Detergent ActionPacs Fresh   16 CT PKG     1   4.49
Kleenex Facial Tissues 2-Ply Assorted Colors & Designs   80 CT BOX      1   1.99
Kleenex Facial Tissues with Lotion, Aloe & Vitamin E 3-Ply Assorted Colors   75 CT BOX   1    1.99
    
Subtotal:   $94.65
Delivery Fee:   $8.95
Fuel Surcharge:   $0.84
Driver Tip:   $5.00
Tax:   $1.08
Total:   $110.52


*edited for formatting
« Last Edit: March 17, 2014, 11:20:09 PM by BlueHouse »

sol

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Re: Reader Case Study: Am I a big fat liar?
« Reply #43 on: March 17, 2014, 11:36:51 PM »
Let me cut through all the crap for you. 

If I'm reading this right, you make $300,000/year and you spend $275,000/year.  By yourself.

You have $820,000 saved up, equal to approximately 3 years of current expenses.  And you want to retire in ~15 years.

These numbers disqualify you from wearing a "mustachian" nametag for several reasons, sorry.  At your current savings rate you will not even be able to retire at a very normal 60-something retirement age. 

Your savings rate is abysmal because your spending rate is stupid. You've made it look like you, as a single person, need to spend 10 times what the MMM family spends for three people.  You do not.  Your expenses are out of control and until you fix that, you will not be able to retire, early or otherwise. 

Sorry.

Get your monthly expenditures under 50% of your monthly income, like approximately half of the people on this forum, and you'd at least have a vague claim on not being a big fat liar, though we'd all still call you a ridiculous spender for blowing through 150k/year all by your lonesome self.

All this business about condos and furniture is just confusing details.  You are spending too much, even relative to your astronomically high income, to have any hope of an early retirement.
« Last Edit: March 17, 2014, 11:42:38 PM by sol »

MDM

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Re: Reader Case Study: Am I a big fat liar?
« Reply #44 on: March 18, 2014, 07:26:01 AM »
If I'm reading this right, you make $300,000/year and you spend $275,000/year.  By yourself.

...

Get your monthly expenditures under 50% of your monthly income, like approximately half of the people on this forum, and you'd at least have a vague claim on not being a big fat liar....

While the OP does have room to improve, it appears she need only cut 0.8% to get out of big fat liarhood:
Income277
Taxes-90
Net Income187
Spending (not counting mort. prin.)95
Spending/Net Inc.50.8%

NeverWasACornflakeGirl

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Re: Reader Case Study: Am I a big fat liar?
« Reply #45 on: March 18, 2014, 08:40:49 AM »
Just wanted to chime in to say how refreshing it is to read a case study and responses that are so open to both self-criticism and critique from the community.  You've got a great attitude, and I'm sure you'll meet whatever goal you set your mind to!

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Re: Reader Case Study: Am I a big fat liar?
« Reply #46 on: March 18, 2014, 09:29:50 AM »
yes, you're spendy.  :)

I guess I am.  I don't think I always was, and I don't want to be as spendy as I've become.  I've packed my lunch almost every day for 20 years.  I re-use tea-bags.  And then I drop a thou without batting an eye.  I didn't even realize it was happening.  Thanks :)

There you go, now you are getting the gyst of it. I think you are confused because on paper you are in fact much better off than a whole lot of people. So compared to all the folks who have saved nothing, wow, wouldn't they rather be in your shoes? Of course they would.

The fact of the matter is you have done this not by being all that frugal, but by making a crapload of money. There is absolutely nothing wrong with that approach when you end up having a high net worth as a result. When I first found MMM I was in a similar position, though not nearly to the earning and spending extremes you've adopted. On the one hand I was patting myself on the back for being in a great position to retire comfortably at the "normal" age, on the other hand I was bleeding cash on all sorts of luxuries that were affordable but not necessarily wise.

That is who you've become, and more to the point you realize (and good for you) your income will change in the not too distant future.  Your high income has papered over some very questionable spending habits.

As conservatives like to say in politics, you don't have a revenue problem, you have a spending problem. It's really just as simple as that. Get all that frivolous spending under control that you've quite likely deluded yourself into thinking you "deserve" because of your career success, and the problem solves itself.

sol

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Re: Reader Case Study: Am I a big fat liar?
« Reply #47 on: March 18, 2014, 09:54:44 AM »
While the OP does have room to improve, it appears she need only cut 0.8% to get out of big fat liarhood:

How are you arriving at that number?  I'm seeing 60% of net income going to "mandatory expenses" that don't even include food, clothing, cars, or insurance, which will never go to zero.  That also assumes that rental stays occupied.

She's spending more on the categories of "gifts, home things, and cash" than the MMM family of three spends in an entire year on everything.  Talk about a leaky budget.

BlueHouse

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Re: Reader Case Study: Am I a big fat liar?
« Reply #48 on: March 18, 2014, 10:53:43 AM »
Just wanted to chime in to say how refreshing it is to read a case study and responses that are so open to both self-criticism and critique from the community.  You've got a great attitude, and I'm sure you'll meet whatever goal you set your mind to!
Thank you so much NeverWas.  It's embarrassing to air my dirty laundry and it's hard getting called on the carpet for it, but it's much needed.  I keep wanting to explain, but I've done that for the past two years, so I'm really trying hard to just bite my fingers so I can learn something from all the comments.   I cannot tell you how much I want to scream "but wait, there's a valid reason for that!"  And that's the whole reason for my thread - I'm lying to myself and I want to stop it.  I want to make FI my priority

I also want to say that this forum has just the right mix of face-punches and encouragement.  Both really are needed to keep things moving forward. 

So thank you for recognizing that this is hard and thanks to all the others for helping me open my eyes.  I'm definitely not there yet, but I think I'm starting to wake up to reality. 








MDM

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Re: Reader Case Study: Am I a big fat liar?
« Reply #49 on: March 18, 2014, 11:12:31 AM »
While the OP does have room to improve, it appears she need only cut 0.8% to get out of big fat liarhood:

How are you arriving at that number?  I'm seeing 60% of net income going to "mandatory expenses" that don't even include food, clothing, cars, or insurance, which will never go to zero.  That also assumes that rental stays occupied.

She's spending more on the categories of "gifts, home things, and cash" than the MMM family of three spends in an entire year on everything.  Talk about a leaky budget.
Good question.  Yes, I ignored the rental (both income and expense) because
 - that is approximately cash flow neutral so we can ignore it
 - if she sells it, we have to ignore it
But you are correct that if it becomes unoccupied it will not be cash flow neutral.

As for "mandatory expenses", she lists
Tax7,500
Primary Residence PITI3,500
Primary Residence HOA95
Utilities (Gas, Electric, Water, Sewer, Landline)283
Rental Condo PITI1,550
Rental Condo HOA320
Rental Condo Expenses30
401K1,500
--------------
Subtotal Mandatory Expenses14,778
A few are highlighted as they don't fall into what many here would consider "expenses".

A little more explanation for the numbers I used (all value in $K)
Income was from the OP (not counting rental)                                                           277
Taxes were from the OP (and match very well to what I calculated independently)   -90
Net Income is subtracting Taxes from Income                                                            187
Spending was everything in reply #8 from Mortgage (minus prin.) thru Work fees      95
Spending/Net Inc. is 95/187 =   50.8%