Author Topic: Reader Case Study – Comments or Suggestions  (Read 4864 times)

Hudstache

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Reader Case Study – Comments or Suggestions
« on: January 05, 2016, 12:06:58 PM »
I hope this isn't bad form for a newbie. Here goes!


Life Situation: IRS filing status – Married filing jointly (plus S-corp for dental practice), number & ages of dependents – 3 year old daughter and baby due in March, and anything else – living in Northern California, me (36, dentist) and my wife (35, dental hygienist)

Gross Salary/Wages: annual: S-corp approx $150k, wife approx $50-60k

Pre-tax deductions: none (face-punch)

Other Ordinary Income: none

Qualified Dividends & Long Term Capital Gains: none

Rental Income, Actual Expenses, and Depreciation: $1800/mo minus $250/mo property management, $1450/mo mortgage including property tax and HOA

Adjusted Gross Income: too much

Taxes: CPA estimates $80,000 between state and federal for 2015 (he's guessing we'll fall under AMT)

Current expenses: (monthly)
Property Tax   $685 (primary residence)
Mortgage Insurance   none
Home/Rent Insurance   $65
Beauty Shop   none
Bicycle Maintenance   none
Cable TV   none
Car Insurance   $388 (includes investment vehicles)
Car Maintenance, Registration, etc.   $500 (also includes investment vehicles – highly variable)
Charitable contributions   none
Child activities    $50
Childcare   $600
Christmas/Holidays   $250
Clothing/Shoes   $50
College costs   none
Computer (paper/software/etc.)   none
Credit card fees   none
Dental Insurance   none
Dentist    - free!
Dining (Pizza, Restaurant, etc.)   $600 (probably most difficult habit to break)
Donations/Gifts   none
Dry Cleaning   none
Electricity   $35
Emergency Fund   none
Entertainment   $40
Financial Fees   - none
Fuel/Public Transport   $230 (varies depending on wife's job locations)
Gas/Oil for heating   $150 (furnaces, water heater, drier, cooking)
Groceries   $600
Hair Care   $25
Home Alarm System   $55
Household; Maintenance   $175
Internet   $79
Landscaping/Yard work   $150
Life Insurance      none
Lunches   none
Medical (Doctor, Hospital, etc.)   $200 (copays for a few ER visits)
Medical Insurance   $675 (total for all family)
Medicine (OTC + Prescription)   none
Miscellaneous   
Parking/Tolls   none
Pets   $30
Phone (cell)   $160
Phone (landline)   none
Recycling/Trash   $45
School Tutition/Books/Etc.   none
Sports/Recreation   none
Subscriptions (paper/magazines/etc.)   none
Travel/Vacation   $850
Water/Sewer   $50
Wine/Beer/Tobacco   $100 (craft beer is taking a heavier toll on finances than I imagined)
Work/Professional fees   none

Non-mortgage Total: $6859

Expected ER expenses: significantly trimming the fat from the above numbers

Assets:
Primary home: ~$600k equity
Rental home: ~$75k equity
Dental practice: ~$250k equity
Car collection (purchased as investments): ~$325k

Liabilities: (brace for face punching)
Mortgage: $1850 (~$380k balance at 3.675%)
Rental Mortgage: $1450 (~$175k balance at 5.5%)
Fancy-pants luxury dentist car   $712 (~$25k loan balance at 3% interest)
Mazda 3 that wife really wants to keep   $420 (~$15k loan balance at 1% interest)

Current Monthly Total: $9841

Specific Question(s): For the past three years, I've been hating my job and it's finally taking a serious toll on my personal life.  I've thought about selling the practice many times over the years, but resolved to make the big decision this year.  As far as personal finances, I plan to sell the fancy dentist car, pay off the wife's Mazda, and trim the fat from my current budget (lower cell phone plan, cancel gardener, shop for lower car/home insurance, reduce restaurant meals, etc).  I plan to continue with a part time practice within a local skilled nursing facility (~$15k per year income).  My wife is very happy with her current work situation and plans to continue that at $50-60k per year.  I'm thinking that the proceeds from selling the dental practice would be put to good use paying off the rental mortgage, thereby yielding $1550/mo of relatively passive income.  I also have an offer to teach at the local dental school either one or two days a week ($8500 per year per day) but it involves a hefty commute (public transportation costs $18 round trip and can take 1.5-2 hours in traffic).  The car collection has outpaced the stock market during the 5 years I've been doing it, and I really enjoy that as a source of side income or investment, whatever you might call it.  I don't view the cars as status symbols and would have no problem selling off the collection if it's no longer making me money.  So that's about it.  Let the suggestions, comments, and likely face punches, begin!

rubybeth

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Re: Reader Case Study – Comments or Suggestions
« Reply #1 on: January 05, 2016, 12:13:50 PM »
Maybe other people will understand this better than I do, but how does a car collection make you money? Do you sell off a car every few months, and then live on that income? It's not liquid cash or investments that you can just sell today, if you needed the cash, right?

And it sounds like you know you are overspending in a lot of categories, but you don't list your income or how much in assets--cash assets meaning investments or savings in the form of dollars--that you have. What are you hoping to gain from this case study? Is it whether or not you should sell your practice? Or are you just looking for ways to cut spending because you already know you can retire early?

charis

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Re: Reader Case Study – Comments or Suggestions
« Reply #2 on: January 05, 2016, 12:25:00 PM »
What is an investment vehicle?

You are spending $2250/month just on cars and transport.

What is your net rental income? 1800/month?  or $100 (1800 minus expenses)?

Why are you spending over $10K/year on vacation?


AZDude

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Re: Reader Case Study – Comments or Suggestions
« Reply #3 on: January 05, 2016, 12:31:14 PM »
First, the low hanging fruit:

Landscaping: $150
Phone(cell): $160
Dining: $600
Christmas: $250
Alcohol: $100

Easily $1000 per month in savings.

You could also sell the dental practice and the car collection, and use the money to pay off your mortgage and the rental mortgage AND the Mazda3. That saves you $3720 per month.

Sell the luxury car, and now there is ~$5,500 in savings per month.

Now, you have $4400 per month in expenses, with ~$1,550 in passive income. Meaning you need to earn just under $3000 per month, after taxes. Easily done with your wife still working.

But wait, there is more. Now that you are unemployed, you can stay home with the kids, saving another $600 a month in childcare. Now, you and your wife only need to make about $2400 a month. That is like $40K a year, pre-tax. Even more, the extra costs associated with the car collection is like $700 a month. So you save that money too. Now we are $1,700 a month.

So in the next few months, trim your expenses. Stay at the practice until life settles down post-baby, then sell the practice and the car collection. Seriously, you have earned a break.



ohana

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Re: Reader Case Study – Comments or Suggestions
« Reply #4 on: January 05, 2016, 12:39:42 PM »
You're not happy -- and it's good you can make the decision to change!

I think you might want to do this in small steps.  Over the course of this year, you could significantly reduce your expenses, to see what's it's like to live with less income.  Keep the practice while you do this, and you'll have the bonus of more savings going into your freedom fund.  After a year or two, you can sell the practice and the income change won't be a big deal.

If you love the cars, why not make it a business?

BlueHouse

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Re: Reader Case Study – Comments or Suggestions
« Reply #5 on: January 05, 2016, 01:12:11 PM »
Maybe I missed something, but with an S-corp, I would reduce your salary to 70K and take the rest in shareholder distributions to avoid the payroll taxes on that portion.   
I would also start a 401k and contribute as much as possible into it.  And have the S-corp contribute as well.  If you can get your wife under your S-corp umbrella, you can double the benefits. 

Even if you sell the practice, keep the s-corp and 401k for when you teach and split the income in a similar manner. 

pbkmaine

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Re: Reader Case Study – Comments or Suggestions
« Reply #6 on: January 05, 2016, 01:15:55 PM »
My first thought here is to get a new CPA. $80k in taxes?

Hudstache

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Re: Reader Case Study – Comments or Suggestions
« Reply #7 on: January 05, 2016, 02:44:47 PM »
Wow! I wasn't expecting to get responses so quickly, so thanks to all! I'll try to get everyone's questions/comments answered.

Maybe other people will understand this better than I do, but how does a car collection make you money? Do you sell off a car every few months, and then live on that income? It's not liquid cash or investments that you can just sell today, if you needed the cash, right?

And it sounds like you know you are overspending in a lot of categories, but you don't list your income or how much in assets--cash assets meaning investments or savings in the form of dollars--that you have. What are you hoping to gain from this case study? Is it whether or not you should sell your practice? Or are you just looking for ways to cut spending because you already know you can retire early?

Perhaps “making me money” was a bad choice of wording for the car collection. The vehicles aren't an income stream, just an investment. They are able to be sold reasonably quickly if necessary - not too much different than real estate, but certainly less complicated of a sale.

My income was meant to be represented by the S-corp income. I had a strange and lackluster CPA since incorporating and he never explained the concept of putting myself on payroll and leveraging that amount to control payroll taxes. 2015 will be the first year that I do that thanks to my new CPA. As far as cash assets, there's not much. Our family savings tends to hover at around $15k and we have not done any traditional investing (ie stocks, 401k, IRA).

I've been rehashing all of this information for a month or so. With this case study I was mostly hoping to get a fresh perspective both as a sanity check and to check for anything I might be missing. I certainly haven't resolved that I'm able to retire early.

What is an investment vehicle?

You are spending $2250/month just on cars and transport.

What is your net rental income? 1800/month?  or $100 (1800 minus expenses)?

Why are you spending over $10K/year on vacation?

Investment vehicles in my case are those that have historically gained value and can be reasonably expected to continue doing so over the long run. Usually that means limited production hand built cars (in my case Ferraris and Lamborghinis). The $2250 per month figure does seem ridiculous, but it's also mixing the collector cars with the daily cars. It's certainly a big area for me to attack as far as personal car use. The old Italian cars do come with high maintenance costs, but I do most of the work on my own and didn't expect them to sit there and appreciate free of charge.

The rental income is $100 (1800 minus expenses).

The $850/mo vacation figure was a typo, but the actual number is still high at $650. Definitely a category worthy of scrutiny. There was a period where my wife and I would take an overnight trip once a month while my parents watched our daughter (even more expensive than face value considering the new baby on the way!), and two one-week vacations with lots of overspending.

First, the low hanging fruit:

Landscaping: $150
Phone(cell): $160
Dining: $600
Christmas: $250
Alcohol: $100

Easily $1000 per month in savings.

You could also sell the dental practice and the car collection, and use the money to pay off your mortgage and the rental mortgage AND the Mazda3. That saves you $3720 per month.

Sell the luxury car, and now there is ~$5,500 in savings per month.

Now, you have $4400 per month in expenses, with ~$1,550 in passive income. Meaning you need to earn just under $3000 per month, after taxes. Easily done with your wife still working.

But wait, there is more. Now that you are unemployed, you can stay home with the kids, saving another $600 a month in childcare. Now, you and your wife only need to make about $2400 a month. That is like $40K a year, pre-tax. Even more, the extra costs associated with the car collection is like $700 a month. So you save that money too. Now we are $1,700 a month.

So in the next few months, trim your expenses. Stay at the practice until life settles down post-baby, then sell the practice and the car collection. Seriously, you have earned a break.

Yes, lots of waste there! Without the job, I'll have time to keep up the landscaping, do more home cooking, and more home brewing (and probably a lot less drinking, ha!).

This makes good sense. There is the age old debate of paying off a mortgage vs investing, and I don't know the answer to that, especially with what I consider to be a good interest rate (3.675%). I'd also be freaked out not having much of a stash to stick into investments. I'd have to see how paying off the house would save vs investing the money and covering the spread.

You're not happy -- and it's good you can make the decision to change!

I think you might want to do this in small steps.  Over the course of this year, you could significantly reduce your expenses, to see what's it's like to live with less income.  Keep the practice while you do this, and you'll have the bonus of more savings going into your freedom fund.  After a year or two, you can sell the practice and the income change won't be a big deal.

If you love the cars, why not make it a business?

Thanks for the encouragement! As long as the car market keeps up at a reasonable pace, I'd like to keep doing it as a business.

Maybe I missed something, but with an S-corp, I would reduce your salary to 70K and take the rest in shareholder distributions to avoid the payroll taxes on that portion.   
I would also start a 401k and contribute as much as possible into it.  And have the S-corp contribute as well.  If you can get your wife under your S-corp umbrella, you can double the benefits. 

Even if you sell the practice, keep the s-corp and 401k for when you teach and split the income in a similar manner.

I got a new accountant this year (see above comment) and restructured my distributions similar to your suggestion. I will be keeping the S-corp in order to run the mobile practice (at the nursing facility) and with my wife being a hygienist it will be easy to set her up as an employee, etc. Good idea!

Travis

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Re: Reader Case Study – Comments or Suggestions
« Reply #8 on: January 05, 2016, 03:12:46 PM »
What is the appreciation rate on your car collection?  Is it competitive with stock market rates of return?  If your collection barely keeps up with inflation, then it might not be worth holding onto if liquidating them could earn you better returns somewhere else.  I know nothing about classic cars, but it's worth running the numbers to be sure.

Hudstache

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Re: Reader Case Study – Comments or Suggestions
« Reply #9 on: January 05, 2016, 04:42:15 PM »
What is the appreciation rate on your car collection?  Is it competitive with stock market rates of return?  If your collection barely keeps up with inflation, then it might not be worth holding onto if liquidating them could earn you better returns somewhere else.  I know nothing about classic cars, but it's worth running the numbers to be sure.

That would definitely be my criteria for deciding to keep or sell the cars. So far I've had good results (and lots of luck). The first car I bought as an investment cost $95k and sold for $355k in just over four years. I'll never do that well again, but the four cars I've purchased in the last year are now valued at $65k more than I paid, combined (around 25% appreciation). Of course that ignores the maintenance, insurance, tax, and registration costs, but it's still a good gig at that rate. I suppose that's why I would be reluctant to sell the cars to pay off my primary mortgage (or another investment for that matter) unless the car market went flat.

mozar

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Re: Reader Case Study – Comments or Suggestions
« Reply #10 on: January 05, 2016, 08:56:27 PM »
Quote
Of course that ignores the maintenance, insurance, tax, and registration costs

Well, it's time to stop ignoring that.

BlueHouse

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Re: Reader Case Study – Comments or Suggestions
« Reply #11 on: January 06, 2016, 07:36:27 AM »
Quote
The first car I bought as an investment cost $95k and sold for $355k in just over four years. I'll never do that well again, but the four cars I've purchased in the last year are now valued at $65k more than I paid, combined (around 25% appreciation). Of course that ignores the maintenance, insurance, tax, and registration costs, but it's still a good gig at that rate. I suppose that's why I would be reluctant to sell the cars to pay off my primary mortgage (or another investment for that matter) unless the car market went flat.

How is this an investment if you buy and don't sell?  Do you have a strategy for when to sell or just waiting until the car market goes down so you can sell at a loss?  I truly don't understand.  Do you have ANY money in traditional investments that are easier to liquidate?  Do you have ANY money in retirement accounts?  I'm sorry if I missed it, but I didn't see it in your posting and I didn't find it an easy format to read so I may have just skimmed a bit. 

dleavitt

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Re: Reader Case Study – Comments or Suggestions
« Reply #12 on: January 06, 2016, 07:43:32 AM »
Does the $150k from your practice include the flow-through income, or is it just wages?

I agree that step one should be trimming expenses, and that seems to be pretty well covered.  However, I didn't see anything about your long term goals.  In fact, it almost sounds like you want to Retire Early without first having Financial Independence.  Fortunately it looks like you should be able to get there if that is what you are going for:

1. Sell your $1 million home and buy something smaller.  You don't list your location, but judging by the numbers you gave for your rental finding a reasonable home for $250-300k shouldn't be out of the question, and you could likely go even cheaper.  You will end up paying LT Capital Gains on $100k, so say 20k in taxes on the high end.  Approximate net cash: $280k

2.  Sell the cars, since you won't have a place to store them at your new, smaller home.  $325 in proceeds, but won't know the net without selling costs and basis.  Say $200k net cash.  We are now up to $480k.

3. Sell fancy-pants dentist car, buy a bicycle, payoff other car note.  I'll be optimistic and say you should even have a little left over to put towards a beater.

So now you own a home and car free and clear, have a cash-flowing rental property, and around $480k after taxes to start your 'Stache.  With your wife's income and your side work, I'd think you are well on the path to financial independence.

EDIT: Forgot about the sale of the practice, probably close to $200k net!  $680k 'Stache in a year or two!
« Last Edit: January 06, 2016, 08:50:14 AM by dleavitt »

Free_at_50

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Re: Reader Case Study – Comments or Suggestions
« Reply #13 on: January 06, 2016, 08:24:51 AM »
Funny, you are a perfect example of what I just posted about on the class of 2015 thread!  Someone who has the ability to FIRE or at least be FI very quickly if they really wanted to be!  I also had a very good income as well as a scattered ensemble of assets that I thought were investments only to realize they were actually weighing me down and really impeding my ability to FIRE (land, a vacation condo, etc).  In a little over 4 years I was able to fully align my situation with my true values.  I retired from my corporate job last month.  I don't see any reason you can't make it happen in a fraction of the time it took me as several posters have already laid out for you...  Good luck!

Hudstache

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Re: Reader Case Study – Comments or Suggestions
« Reply #14 on: January 06, 2016, 08:48:36 AM »

How is this an investment if you buy and don't sell?  Do you have a strategy for when to sell or just waiting until the car market goes down so you can sell at a loss?  I truly don't understand.  Do you have ANY money in traditional investments that are easier to liquidate?  Do you have ANY money in retirement accounts?  I'm sorry if I missed it, but I didn't see it in your posting and I didn't find it an easy format to read so I may have just skimmed a bit.


The format for these case studies is like playing 52-card pickup with financial data, so I can see where a lot of this is getting lost in translation. I don't have any traditional investments, and I'm not proud of that. As far as the cars, I can't see where the confusion is coming from. They will all eventually be sold. I'm treating it like just about any other material investment (imagine real estate if that's easier to relate). I keep a close eye on the market and when I'm either satisfied with my gain, or the market has plateaued, I sell the car and keep the profit or reinvest. They are reasonably easy to cash out. The $355k car I mentioned earlier found a buyer within a week. He sent someone out to inspect it, wired the money, and a truck showed up that weekend to haul it off to the East Coast.

Hudstache

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Re: Reader Case Study – Comments or Suggestions
« Reply #15 on: January 06, 2016, 09:08:27 AM »
Does the $150k from your practice include the flow-through income, or is it just wages?

The $150k is all proceeds to me from the practice. Sorry that wasn't very clear in my initial post. Your assessment is essentially correct in that I want to "retire" before being financially independent. I see it more as a change of pace than retirement, but the goal would still be FI.

I could certainly downsize my home to some degree, but small homes in Sonoma and Marin County, CA still cost $500-750k. Our rental is my wife's old house in CO, hence the lower price.

The fancy pants dentist car is on the chopping block as we speak. It's completely redundant since I already have a beater car that's paid for.

I hope that didn't sound like I'm picking apart your ideas. I was just trying to give more specific information as it related to your points. I'll definitely be incorporating your suggestions into my plans.

Hudstache

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Re: Reader Case Study – Comments or Suggestions
« Reply #16 on: January 06, 2016, 09:10:21 AM »
Funny, you are a perfect example of what I just posted about on the class of 2015 thread!  Someone who has the ability to FIRE or at least be FI very quickly if they really wanted to be!  I also had a very good income as well as a scattered ensemble of assets that I thought were investments only to realize they were actually weighing me down and really impeding my ability to FIRE (land, a vacation condo, etc).  In a little over 4 years I was able to fully align my situation with my true values.  I retired from my corporate job last month.  I don't see any reason you can't make it happen in a fraction of the time it took me as several posters have already laid out for you...  Good luck!

Thanks for the encouragement! I'll head over to your thread today and get all the details. Congrats on your retirement!

dleavitt

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Re: Reader Case Study – Comments or Suggestions
« Reply #17 on: January 06, 2016, 09:41:56 AM »
Does the $150k from your practice include the flow-through income, or is it just wages?

The $150k is all proceeds to me from the practice. Sorry that wasn't very clear in my initial post. Your assessment is essentially correct in that I want to "retire" before being financially independent. I see it more as a change of pace than retirement, but the goal would still be FI.

I could certainly downsize my home to some degree, but small homes in Sonoma and Marin County, CA still cost $500-750k. Our rental is my wife's old house in CO, hence the lower price.

The fancy pants dentist car is on the chopping block as we speak. It's completely redundant since I already have a beater car that's paid for.

I hope that didn't sound like I'm picking apart your ideas. I was just trying to give more specific information as it related to your points. I'll definitely be incorporating your suggestions into my plans.

No not at all!  I assumed the rental was in the same area, and indicative of local pricing.  That's obviously not the case.  I'm assuming you guys are wanting to stay in the same area?

ooeei

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Re: Reader Case Study – Comments or Suggestions
« Reply #18 on: January 06, 2016, 10:50:32 AM »

Current expenses: (YEARLY)
Car Insurance   $4656 (includes investment vehicles)
Car Maintenance, Registration, etc.   $6000 (also includes investment vehicles – highly variable)
Fuel/Public Transport   $2760 (varies depending on wife's job locations)
Cars total: $13,416 

Dining (Pizza, Restaurant, etc.)   $7200 (probably most difficult habit to break)
Groceries   $7200
Wine/Beer/Tobacco   $1200 (craft beer is taking a heavier toll on finances than I imagined)
Food/alcohol total: $15,600

Household; Maintenance   $2100
Landscaping/Yard work   $1800
Paying other people to take care of your house total: $3900

Travel/Vacation   $7800 
Christmas/Holidays   $3000
Gifts/Vacations Total: $10,800

There are some yearly costs of the expenses that jumped out at me.  even if we take food out of the mix, that's $29,400 you're spending annually on car maintenance, home maintenance, and trips/gifts. That doesn't include the purchase price of anything, taxes on the house, utilities costs, etc. You could almost buy and throw away two new Mazda 3s per year with that.  Now if you multiply that all by 10 years of compounding at 5% you get...... just under $400,000. 

This post may help you with putting some of these expenses into perspective.
http://www.mrmoneymustache.com/2011/04/15/getting-started-3-eliminate-short-termitis-the-bankruptcy-disease/

If you really have the car collection as an investment, it's important to take costs into account.  If you buy something for $50k and sell it 5 years later for $75k it looks like you made a 50% return.  Actually, if you spent $1k per year maintaining it, inflation at 3% per year puts your total cost at ~$63k not including your time.  That car that looked like a great deal actually got you a bit under 4% per year.  You could also factor in the cost of buying a bigger garage and house, your time and tools to maintain it, and security system that is part of the costs and the return goes even lower. Something to think about.

BlueHouse

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Re: Reader Case Study – Comments or Suggestions
« Reply #19 on: January 06, 2016, 12:29:33 PM »

How is this an investment if you buy and don't sell?  Do you have a strategy for when to sell or just waiting until the car market goes down so you can sell at a loss?  I truly don't understand.  Do you have ANY money in traditional investments that are easier to liquidate?  Do you have ANY money in retirement accounts?  I'm sorry if I missed it, but I didn't see it in your posting and I didn't find it an easy format to read so I may have just skimmed a bit.


The format for these case studies is like playing 52-card pickup with financial data, so I can see where a lot of this is getting lost in translation. I don't have any traditional investments, and I'm not proud of that. As far as the cars, I can't see where the confusion is coming from. They will all eventually be sold. I'm treating it like just about any other material investment (imagine real estate if that's easier to relate). I keep a close eye on the market and when I'm either satisfied with my gain, or the market has plateaued, I sell the car and keep the profit or reinvest. They are reasonably easy to cash out. The $355k car I mentioned earlier found a buyer within a week. He sent someone out to inspect it, wired the money, and a truck showed up that weekend to haul it off to the East Coast.
Thanks for the response.  I just wasn't quite getting it before.  I thought the cars had plateaued and you were keeping them because you like to own them.  I think you need to be careful with waiting for the actual plateau if the expenses for keeping/maintaining outweigh the eventual growth.  I'm in just such a situation now with a rental condo that people on this forum told me to sell 1.5 years ago.  It has regained a lot of its value, but the sweet spot for selling was probably 6 months ago.  And because I was too lazy to do anything about it, it has cost over $5K in the past 6 months in fees and repairs.

Good luck with your plans.  As others have said, please try to maintain a lower cost of living before making any drastic changes to your income or your business.  I am in a similar situation with a high income, but I haven't yet succeeded in reducing my expenses enough to really make a life-changing difference.  It is harder than it sounds.