Author Topic: Reader Case Study - First steps needed  (Read 4194 times)

biocmp

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Reader Case Study - First steps needed
« on: November 04, 2013, 09:07:00 PM »
11/4/13

Hello everyone, I'm a new poster and I'm interested in getting some opinions. My wife and I were married at the very tail end of last year and started saving as heavily as possible. I'm ready to finally take charge of our financial future and I believe I need some help to get started. We are 31 & 29, and up to this point, I've been a financial slob.


Income: Currently I work as a W2 hourly consultant, making $100/hr W2. My wife works in healthcare and she earns around $54k/year.

Current expenses: We are renters, paying around $900/month. We pay $2k/year for insurance (auto and renter's). We spend another $160/month for our phones, I believe I have another 6-10 months on my current contract. Not sure about my wife's. All of our school debt is paid off.

Expected ER expenses: Honest to God, I've been reading articles from MMM's blog but I'm not certain what these are.

Assets: I don't have a plan developed here. If cars count, my car is paid off with only 90k miles and I plan on driving it until it hits 200k assuming no major mechanical failure. My wife still owes 4k on her car.  We have 60k saved from this year alone, in the bank. I have another 10k in stocks. I have multiple 401k's that I haven't consolidated to this point, from 3 separate jobs. I have a Roth IRA that I started about 6 years ago, I don't believe I've put much in it since I started it. (this is how poorly I've managed my finances)

Liabilities: I don't believe we have any of these but if someone has any particular questions, please fire away.

Specific Question(s): In what order should I tackle my finances? I realize that we are in a good position in relation to our income but I've failed spectacularly over the years to pay attention to what I was doing. This is the first year we've made this kind of money. 4 years ago, I was making less than 1/4 of our my current hourly wage.

My goal is FI in by 40. I can't expect my current income to occur indefinitely, so I expect the market to contract in the next 2-5 years. We believe we'd like to own a coffee/pastry shop and that should be calculated into our savings, even if a small percentage. It helps to know that the dream isn't dead, it's just being grown slowly in a separate savings account, or some other investment option. We are living off of 35-40k currently but we know we can do better. 

If you have articles you think I should read first, please post them. If you think this is too vague, please tell me. I'd like to make this a continually referenced case study. My 401k and stock option purchases need to be decided in the next two weeks, so I'm also hoping to garner some information from the group about that as well.

The ultimate goal for us, along with our semi-retirement, is to have a little bit of land on the outskirts of town where we can keep a nice sized farm, be very involved in our (future) children's lives and live fully.

11/5/13

Thanks Dad and Marty, here are some followups:

I'm expected to work at minimum, 2000 hrs/year.  Depending on client need, there are some weeks where I must work 50-80 billable hours, and I'll likely take 2-4 weeks off over the course of the year. In the end, it's probably best to expect 2000 hrs on average.

Like most consulting, this is contract work so you are only guaranteed work as long as your current contract.

In regards to 401k's, I don't know how much is in them. To be honest, I haven't looked since I started them.

The pastry/coffee shop is more of a "idyllic dream" and I'd like to just keep it alive by stashing a very small percentage away. The dream will likely transform over the years, I simply want to keep it fueled. The bank account we have allows us to create up to 3 or 4 additional savings accounts to stash money away, I figured we'd create one for this purpose and move a small percentage over.

The pastry/coffee shop would run anywhere from $50k-150k, ultimately depending on commercial real estate prices near where we live, business connections in the city (there may be a coffee roasting conglomerate where local shops chip in for fresh beans, or we may have to purchase roasting equipment). We can do the renovations and we already have a small "picture portfolio" of some of our favorite places we've been in the past year.

The farm we are looking at is just above $300k.  We think we could talk it down because it's been on the market for quite some time.

We are in our current rental contract until the end of March, we've already begun looking. We're tracking a few properties with one in particular standing out. It has good infrastructure for light family farming and could support additional buildings if needed for side endeavors. There are a couple barns on it that look structurally sound although we haven't walked through them yet.

That 300k is just for the farm, it doesn't include the necessary equipment to keep up the place or renovate.

Yes, the farm and pastry shop is mutually exclusive. The pastry/coffee shop is likely a more long-term vision, the living situation should be taken care of first.

Given an average purchase price of homes with land in our area is $360,000 we should have $72k saved up for 20% down. Should this be the goal?

I'm going to have to call around to see where the 401ks live, sadly I don't even know who they are through much less the funds offered.

We'll max our 401ks out for 2013 (can we do that retroactively? eg - transfer a bulk amount to cover the difference between maxing out and the elective percentage we chose?)

The 60k was originally thought to be the minimum 20% down for a house but we have until January where that would be absolutely needed, which means we can take 15-20k off the top and put it in investments with our expected savings to make up the difference by the time we'd be submitting an offer on our home/farm.

Our insurance is through Farmer's.

We're paying somewhere around $70/month for a gym but I think we are going to cancel that. My work place offers a gym to me while I'm on site Mon - Thurs and my wife found a place down the street for $7-10/month.

Marty, I'm guessing you are saying we should pay it off? If so, we'll pay it off this week.  It's a VW Jetta and I'm wondering if my wife would be up for selling it and downsizing to something with better gas mileage, maybe a hybrid with a few more miles. We'll discuss that after the rest of the changes have been made :)  I don't want to push too hard.

We eat out far too often, but we've been cooking at home for the last couple months.

Ok. That should give a bit more info.

« Last Edit: November 05, 2013, 05:23:07 AM by biocmp »

dadof4

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Re: Reader Case Study - First steps needed
« Reply #1 on: November 04, 2013, 10:14:56 PM »
Welcome aboard!

Your post is missing a lot of details. We know your hourly rate, but not how many hours you work or expect to work in the future.
How much is in your 401ks? (and no, cars don't really count).
How much would a pastry shop cost?
How much would the farm cost? Do you expect to rent until you...er...buy the farm?
Is the farm and the pastry shop mutually exclusive?

As a first step, I'd check the 401ks. Especially check the fees and funds offered. If you're unhappy with any/all of them, roll them in to an IRA where you have more options. Make sure you're diversified, whether you keep them or roll them over.

If your income is high (which you seem to indicate), both you and your spouse should max your 401k contributions.

The 60k shouldn't be sitting in your checking account - losing real value. Invest them - the most popular choice here is in Vanguard index funds.

The insurance seems a bit high. Which insurance company are you using?

Your cell phone bill is high as you've figured out, get a cheaper plan as soon as your contract is up.

marty998

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Re: Reader Case Study - First steps needed
« Reply #2 on: November 05, 2013, 12:06:19 AM »
Err...$60k in the bank and $4k car loan, and you make $4k in a 40 hour week. We really shouldn't have to say....


biocmp

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Re: Reader Case Study - First steps needed
« Reply #3 on: November 05, 2013, 05:24:15 AM »
The updated info has been added to my original post under 11/5/13. I'll move to bullet points from here on out because it's starting to become a bit muddled. I may reformat tonight after work.

Since there haven't been any replies, I'm going to post my updates here as well.

Thanks Dad and Marty, here are some followups:

I'm expected to work at minimum, 2000 hrs/year.  Depending on client need, there are some weeks where I must work 50-80 billable hours, and I'll likely take 2-4 weeks off over the course of the year. In the end, it's probably best to expect 2000 hrs on average.

Like most consulting, this is contract work so you are only guaranteed work as long as your current contract.

In regards to 401k's, I don't know how much is in them. To be honest, I haven't looked since I started them.

The pastry/coffee shop is more of a "idyllic dream" and I'd like to just keep it alive by stashing a very small percentage away. The dream will likely transform over the years, I simply want to keep it fueled. The bank account we have allows us to create up to 3 or 4 additional savings accounts to stash money away, I figured we'd create one for this purpose and move a small percentage over.

The pastry/coffee shop would run anywhere from $50k-150k, ultimately depending on commercial real estate prices near where we live, business connections in the city (there may be a coffee roasting conglomerate where local shops chip in for fresh beans, or we may have to purchase roasting equipment). We can do the renovations and we already have a small "picture portfolio" of some of our favorite places we've been in the past year.

The farm we are looking at is just above $300k.  We think we could talk it down because it's been on the market for quite some time.

We are in our current rental contract until the end of March, we've already begun looking. We're tracking a few properties with one in particular standing out. It has good infrastructure for light family farming and could support additional buildings if needed for side endeavors. There are a couple barns on it that look structurally sound although we haven't walked through them yet.

That 300k is just for the farm, it doesn't include the necessary equipment to keep up the place or renovate.

Yes, the farm and pastry shop is mutually exclusive. The pastry/coffee shop is likely a more long-term vision, the living situation should be taken care of first.

Given an average purchase price of homes with land in our area is $360,000 we should have $72k saved up for 20% down. Should this be the goal?

I'm going to have to call around to see where the 401ks live, sadly I don't even know who they are through much less the funds offered.

We'll max our 401ks out for 2013 (can we do that retroactively? eg - transfer a bulk amount to cover the difference between maxing out and the elective percentage we chose?)

The 60k was originally thought to be the minimum 20% down for a house but we have until January where that would be absolutely needed, which means we can take 15-20k off the top and put it in investments with our expected savings to make up the difference by the time we'd be submitting an offer on our home/farm.

Our insurance is through Farmer's.

We're paying somewhere around $70/month for a gym but I think we are going to cancel that. My work place offers a gym to me while I'm on site Mon - Thurs and my wife found a place down the street for $7-10/month.

Marty, I'm guessing you are saying we should pay it off? If so, we'll pay it off this week.  It's a VW Jetta and I'm wondering if my wife would be up for selling it and downsizing to something with better gas mileage, maybe a hybrid with a few more miles. We'll discuss that after the rest of the changes have been made :)  I don't want to push too hard.

We eat out far too often, but we've been cooking at home for the last couple months.

Ok. That should give a bit more info.
« Last Edit: November 05, 2013, 11:13:14 AM by biocmp »

dadof4

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Re: Reader Case Study - First steps needed
« Reply #4 on: November 05, 2013, 11:28:48 AM »
Thanks for the update.

I'm going to have to call around to see where the 401ks live, sadly I don't even know who they are through much less the funds offered.

We'll max our 401ks out for 2013 (can we do that retroactively? eg - transfer a bulk amount to cover the difference between maxing out and the elective percentage we chose?)
The easiest way to "make up" the 401k for this year is to bump up the contribution percentage, it doesn't need to be spread out evenly. I was hired this time last year by my new company, and for November and December I stuck 75% of my income in 401ks (max allowed under my plan).  Some plans allow lump sum payments, but it shouldn't be necessary.

When reviewing your 401ks, check the plan fees. Some are free, some charge plan fees every year.
Also check the expense reports of the funds you've chosen. For some reason, I assumed they would all be the same since it's the same 401k plan. Did a recent review and found some of my funds had over 1% in annual expenses. Transferred them to Vanguard funds with under 0.15%.

The bank account we have allows us to create up to 3 or 4 additional savings accounts to stash money away, I figured we'd create one for this purpose and move a small percentage over.
Savings accounts are what your parents had when interest rates were sane. These days, savings accounts rarely return 1%, incurring real losses when inflation is factored in. Their only use is to hold money you'll need immediately (and even then, it's iffy). Your farm down payment is an example of acceptable use for a savings account.

For saving long term, you should be investing (this goes for the pastry shop money, as well as the bulk of your post-tax free income). If you want to add to it every month, the easiest and cheapest ways I know are betterment, sharebuilder or commission free ETFs.

Our insurance is through Farmer's.
We used to use Farmer's. For two cars, they charged us about $1500 a year. Switched to Esurance last year, and cut that in half, while actually improving the coverage.


Peony

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Re: Reader Case Study - First steps needed
« Reply #5 on: November 05, 2013, 11:44:28 AM »
I think it would be easier for people to make suggestions if you would itemize all your expenses in a simple format (just provide a number for each and every category), and do the same for your income, your debt and your savings/retirement. See other case study posts for the format. It makes it easier for people to see at a glance what looks off kilter. "We eat out too often" is too general. How many actual dollars are you spending on that every month? And how much are you spending at the grocery store? And so forth. On the positive side, you have a nice juicy income so I would think that if you get your expenses under control you should be able to reach FI pretty quickly! Congratulations on taking a concrete step (joining the MMM community) toward awareness and independence.

Lans Holman

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Re: Reader Case Study - First steps needed
« Reply #6 on: November 05, 2013, 11:54:34 AM »
"Expected ER Expenses" basically means how much would you need to live on each year whenever you stop working.  It's an important number because if you multiply it by 25 it gives you a good ballpark figure of how much you need to have saved before you can start thinking about retiring. 

It seems like the biggest challenge right now is that you just don't know where the money is going or where it is.  So I'd echo the advice that it's time to figure out what you're bringing in, what you're spending on, where the 401ks are, all that stuff. 

Eric

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Re: Reader Case Study - First steps needed
« Reply #7 on: November 05, 2013, 12:25:38 PM »
Your first step is to find and consolidate all of those old 401ks into one IRA account.

Your next step is to start tracking your spending.  I use a basic spreadsheet, lots of people like You Need A Budget or Mint.  Find what works best for you, but you HAVE to know where your money is going if you're going to optimize your spending and take charge of your finances.

After that, figure out your goals.  You're kind of all over the place here.  It's okay if your only goal for the moment is to save and invest as much as you can.

biocmp

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Re: Reader Case Study - First steps needed
« Reply #8 on: November 05, 2013, 02:12:25 PM »
Thanks to everyone for the replies. I'm updating my old mint account to reflect our account information. I'm going to use a separate business card for my expenses so we can get a realistic idea of where our money is going. I'm afraid of what we'll find.

I'll reply back with bullet points and more specifics after I take the first steps. And I'll try not to be "all over the place", I dream more than I execute and it's time to end that.

A dream is only as good as it's execution. I'll have more shortly.

Peony

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Re: Reader Case Study - First steps needed
« Reply #9 on: November 05, 2013, 02:36:04 PM »
Bon courage, biocmp. Even if things look horrible when you first shine a light on them, it's amazing how quickly they can improve with proper attention!