Author Topic: Reader Case Study - Continual Optimization  (Read 3377 times)

FrugalSpendthrift

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Reader Case Study - Continual Optimization
« on: May 20, 2014, 06:41:41 PM »
About us:  Age 35, Spouse 31, Baby 16 months and another baby on the way

Income Monthly
   Me - $11,160 Gross
   Spouse - $900 Gross
   Baby - $0
   Mileage Reimbursement - $150
   
After taxes, 401k max, 100% of spouse income to 403b, fully funding two roth ira’s,
Total net income is about $ 5,775

Current expenses:
Fixed Monthly Spending
  • Mortgage - 1,987 (Principal – 895, Interest – 567, Escrow – 525)
  • Cell Phone – 55
  • Internet – 45
  • Auto Insurance – 78
  • Crossfit - 120
Variable Monthly Spending Average
  • Groceries – 395
  • Restaurants & Bars – 90
  • Pets – 150
  • Electric & Natural Gas – 200
  • Fuel for vehicles – 220
  • Entertainment – 560
  • Home Improvement – 460
  • Dentist & Pharmacy – 88
  • Travel – 160
  • Clothing – 69
  • Target – 40
  • Cash - 400
Total:  $ 5,117

Expected ER expenses:  Don’t know yet.

Assets:
  • House - $ 176,000
  • 401k - $ 119,500
  • Roth 401k - $ 68,500
  • Roth IRA - $ 90,000
  • Spouse 403B - $ 7,500
  • Spouse Roth IRA - $ 59,000
  • Spouse Trad IRA - $ 35,700
  • Daughter’s 529 - $ 3,000
  • Brokerage - $ 15,000
  • Savings - $ 21,000
  • Checking - $ 5,000

Subtotals:
   Roth accounts – 217,500
   Tax Deferred – 162,700
   Current – 41,000
   Liquid Asset Total: $ 421,200

Liabilities:
  • Mortgage - $ 174,700, 3.875%, 13 years remaining
  • No other debt



Asset allocation is very simple, all of the retirement accounts are in a target 2045 index, and my brokerage account is an S&P 500 index.

Our spending has risen with our income and it peaked about two years ago.  At the time I had five vehicles and an auto racing habit.  When we discovered my wife was pregnant, I started making some changes.

Things I have done recently to optimize my finances:
  • Refinanced the mortgage from a 30 year to a 15 year
  • Got rid of three vehicles and two auto loans.  We still have a 2014 Jetta Wagon and 2013 Hyundai Elantra, owned free and clear.  Wife does home care nursing with a mileage reimbursement.  My commute is only 4 miles, but I occasionally have to drive for work.  I thought about trading down, but I'm fairly comfortable with this at the moment.
  • Lowered home insurance and had the bank lower my escrow payment
  • Lowered auto insurance
  • Rolled spouse's old 401k into Vanguard IRA
  • Changed 401k contributions from Roth back to Traditional
  • Adjusted tax withholding to minimize my refund
  • Consolidated my retirement investments into target funds
  • Analyzed my electric usage and cut it drastically
  • Started automatic contributions to a regular brokerage account

We have about 30% of each paycheck going to tax advantaged accounts and about 9% going to the brokerage account.  I’m looking to reduce some expenses and bump up my brokerage contribution.  Areas that need work are how I blow through cash and what I spend on entertainment.  Most of the entertainment category has been shooting sports lately, but I'm cutting back a little.  No cable TV.  Unfortunately my home improvement category keeps going up.  Last month I had to replace my washing machine and yesterday my range had a little electrical meltdown.  I'm currently looking for a replacement range.  I resisted buying a new lawn mower, found a local guy to fix it and bartered with him, so it wouldn't cost me anything.

Vague Question:
   What next?

Cyrano

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Re: Reader Case Study - Continual Optimization
« Reply #1 on: May 20, 2014, 07:02:27 PM »
The entertainment category is eyebrow raising. Are you really blowing 10% of your take-home pay out the barrel of a gun?

jpo

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Re: Reader Case Study - Continual Optimization
« Reply #2 on: May 20, 2014, 07:52:44 PM »
The entertainment category is eyebrow raising. Are you really blowing 10% of your take-home pay out the barrel of a gun?
Plus an additional $400/mo that disappears to "cash."

That's almost $1k/mo. Optimizing that is nothing to sneeze at. If I was in your shoes step 1 would be to list out where this $1k is really going each month.

FrugalSpendthrift

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Re: Reader Case Study - Continual Optimization
« Reply #3 on: May 20, 2014, 08:07:00 PM »
The entertainment category is eyebrow raising. Are you really blowing 10% of your take-home pay out the barrel of a gun?
5% and yes, that was my average for the last 6 months.  A lot of that was a membership fee and a stockpile, so the cost for the next few months will be minimal.

The entertainment category is eyebrow raising. Are you really blowing 10% of your take-home pay out the barrel of a gun?
Plus an additional $400/mo that disappears to "cash."

That's almost $1k/mo. Optimizing that is nothing to sneeze at. If I was in your shoes step 1 would be to list out where this $1k is really going each month.
I think I'm just going to stop pulling big sums from the ATM, so everything gets tracked in mint.  I have a feeling that when my wallet is full, the money flows out without as much concern.

St4n

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Re: Reader Case Study - Continual Optimization
« Reply #4 on: May 20, 2014, 08:51:46 PM »
When I stopped withdrawing cash, it worked a treat.  I used to take out $80 at a time (the bank had even saved this as my favourite withdrawal, so I could access this amount at the touch of a button!).  I'd spend it over the course of a week on pointless things like a coffee and/or bacon sandwich before work, maybe a beer or two afterwards.  It didn't take long to burn through $300+ in a month.

DW took maternity leave last October, then I discovered MMM in January and decided things had to change.  At first I dropped the amount to $20 each time I visited the ATM, as I liked to keep something on me 'just in case'.  This worked up to a point - I never did like parting with the last $20, so I spent it more slowly.  Trouble was I was still drawing around $100/month.  And for what?

I don't remember exactly when it dawned on me that there was no need to spend any money during the course of the working day, but at some point I became comfortable carrying no cash on me at all.  Hey, I live in a city of 4 million people - it's not like I wont be able to find an ATM if I need one!  Since then I've only taken out cash when I know I need to buy something (which is almost never) and if I keep going at the current level, I'll spend less in a year than I did in a month previously.

Basically, I'd recommend this as a super effective way of saving yourself a small fortune to add to your stash and take one not-so-small step towards FIRE.

FrugalSpendthrift

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Re: Reader Case Study - Continual Optimization
« Reply #5 on: May 21, 2014, 11:25:55 AM »
St4n, Thanks for sharing!  I actually just withdrew $20, instead of my usual $100 with your same logic, but I think I'll do exactly what you suggested, only withdraw money when I know I need to buy something, instead of carrying it just in case.

If you need any kind of appliance, the first place I would look is the FREE section of Craigslist.  It's amazing what people give away for nothing.

Entertainment spending is high, but you seem to already know that. 

As of 5 minutes ago, my local credit union is offering a 15 year at 3.125% (APR of 3.178%).  If you are planning living there for the extended future, you might explore a refi.  Ran the numbers and that would be monthly payment of 1219.07

Principal: 763
Interest 456

Suppose you could also find an attractive 12 year option....

http://www.bankrate.com/calculators/mortgages/loan-calculator.aspx

I just kind of assumed that I wouldn't be able to refinance with a traditional loan, because I have no equity.  I bought the house for $225k in 2009 and right know it might be worth around $175k, which is what I still owe on it.  I suppose I could pay it down to where I would have 20% equity, but it seems like a marginal gain to go from 3.875% interest to 3.125%.  I think I'd rather direct the money right into the market, then to paying down the mortgage any quicker.