Author Topic: Reader Case Study: How can I be like MMM when I grow up?  (Read 5508 times)

resipsaloquitur

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Reader Case Study: How can I be like MMM when I grow up?
« on: October 13, 2014, 09:14:43 AM »
Greetings Mustachian Muchachas/os!  I discovered this community last week and I just finished plowing through all of MMM's posts since the beginning of time.  I have loosely followed Dave Ramsey for a number of years until discovering that his methods lack badassitude, so I came looking for more.  I have had a number of setbacks that I'm digging out of (divorce, prolonged unemployment, a failed solo law firm), but I can finally see the light at the end of the tunnel.  It's time to start mainlining Mustachian badassity in high doses through an IV, so I come to you for your collective wisdom and insight.  Here are my details.  Sorry in advance for the poor formatting.  This is my first post. 

INCOME: I'm a 37-year-old lawyer, working for a government agency (I actually love my job).  I gross $70,000 per year, about $53,300 after taxes and non-taxable withdrawals (401(k), $52/month--this is the limit of employer match). 

MONTHLY EXPENSES:

Child Support    $1,400 (3 kids)

Rent          $600 (this is my half of the rent, my partner pays her half. She has no interest in mustachianism, but she also has no interest in interfering with my efforts). 

Electricity       $25

Gas          $40

Phone       $52 (this is an unlimited talk/data/text plan from Cricket)

Water/Sewage/Trash   $15

Internet/Cable    $35       

Grocery       $300 (I personally live on a lot less, but when the kiddos come it spikes)   

Gas & Oil       $50 (I bought a commuter bike a few weeks ago and I'm cycling to work several days a week.  I don't know if I have the badassity for consistent winter commuting, but I hope so.  The next few months will tell.  Also, this amount represents primarily the gas I use driving to see my kids at their mom's place 30 miles away a couple times a week.  Can't go much lower here I think.  As it is, I drive a 1998 Honda Civic, 215,000 miles, and it gets about 38 mpg on the freeway). 

Life Insurance   $40 (term life, $800,000.  I have read a lot of the opinions on here about this, but I don't think this is negotiable.  I will eliminate this expense as soon as I have sufficient net worth to provide for my children in the event of my death.  Since I have a negative net worth right now, that could be a while)

Hair Care       $20 (have to look decent for court.  Trying to talk my partner into cutting my hair, and she's thinking about it0

Piano Lessons   $60 (All three kids are in piano lessons, and the divorce decree requires me to pay half.  All things considered, this is not hugely expensive for what it is.

Bank personal loan   $242 (balance is $2,900, 6.5% interest rate.  I'm currrently tackling this, making extra payments.  As of next month, I will be paying at least $675 per month.  My current plan is to put all extra money here until it is paid off, then start building my Stash).

Student Loan   $304 (Interest rate is 3.24%, balance is $25,000)

Parent Time   $48 (this is the cost of feeding the kids on my weekly night with them)

Annual Expenses   $378 (auto insurance, Christmas/birthday presents, bar dues, etc.  This represents every non-monthly periodic expense, broken down into monthly savings.)

Dog food      $65

Work Coffee Club   $10

Entertainment    $8 (Netflix)

Monthly Income   $4,440
Total Expenses   $3,692


Expected ER expenses: This is where you guys come in.  I want to minimize this more than I have.  The biggest expense, of course, is child support.  That will start to phase out in 4 years, and will be completely gone in 10 years when my youngest turns 18.

Assets:    401(k) is fairly new, about $2,000. 
      Roth IRA has $4,500 (not currently contributing)
      $1,000 cash in money market account
      Non-contributory pension from government, value TBD when I'm ancient

QUESTIONS:

What can I do better? 

Are my debt payment vs. investment priorities correct?

Once I get my personal loan paid in a couple of months, what then? Attack student loans? 401(k)? Taxable investment account?

I really don't have many tax deductions (don't own a house, won't be able to afford one for a while), so my taxes tend to be infuriatingly high.  I'm considering beefing up my 401(k) at work so as to reduce my taxable income.  But the perfomance of that fund has been pretty crappy, and I'm worried about putting too much of my stash into an account I can't reach until years after I'm retired. 

Your turn.  Go. 

Chrissy

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Re: Reader Case Study: How can I be like MMM when I grow up?
« Reply #1 on: October 13, 2014, 10:01:10 AM »
None of your expenses seem that high to me.  Good job.  Phone could be lower, but isn't extravagant for the service.  Still, if you can get this down to $30, that's almost a 50% savings.

Why is feeding the kids counted twice?  Once in Groceries and once in Parent Time.

Explain about the 401k fund.  You say the fund is doing crappy.  Is there just one fund available???  Also, everything's been down recently, so you'd be hard-pressed to find something with good recent performance.  That's good for someone who's just started investing, because you're buying stocks on sale!  Even if the whole market takes a 50% dive, keep up the contributions; you'll be getting a deal.  What's the employer match?

Find out the value of the government pension.  You can't make plans if you don't understand the full picture.

Once the personal loan is paid, your next priority is a larger emergency fund.  I'd say one of at least $13,500 which is about 3 months of your expenses.  After that, invest in a traditional IRA instead of your ROTH, since you're trying to lower your tax hit.

Don't worry about the student loans.  Just keep making the minimum payment, unless it really bothers you.  The interest rate is so low, you're better off deploying the money elsewhere.

resipsaloquitur

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Re: Reader Case Study: How can I be like MMM when I grow up?
« Reply #2 on: October 13, 2014, 10:06:56 AM »
Thanks for the reply. 

Feeding the kids is counted twice because I have to feed them during my weekly visit, which usually involves buying them something cheap while I'm in their town.  I also feed them at home when they come for weekends, and that counts in my grocery bill. 

I don't know about the 401(k) funds available.  I plan to look into it this week.  I just don't know how to rebalance it, so I have left it alone so far.  The match is $54 per month, so that is what I have been contributing. 

mozar

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Re: Reader Case Study: How can I be like MMM when I grow up?
« Reply #3 on: October 13, 2014, 12:01:12 PM »
You should max your 401k (17.5k) that's probably all you can do for awhile. There are a couple of ways to access a 401k early, sepp and a roth ladder. Who is claiming the kids on taxes?
1400 for child support is not that bad. My parents decided that in lieu of alimony, my dad would pay my mom 2k a month in child support for ten years  (just me and her). In hindsight I wished he hadn't. A lower amount would've forced my mom to get a job, and not smoke pot all day. Anyways...

resipsaloquitur

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Re: Reader Case Study: How can I be like MMM when I grow up?
« Reply #4 on: October 13, 2014, 12:32:51 PM »
Update:  the pension cannot be valued without knowing total years of service and highest three years' salaries.  It is also unaccessible until age 62, and functions like an annuity, although a discounted lump sum payment is available.  If I continued working until age 62 at the same salary I earn now, it would be worth about $3,000 per month, unadjusted for inflation. 

Chrissy

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Re: Reader Case Study: How can I be like MMM when I grow up?
« Reply #5 on: October 13, 2014, 01:08:39 PM »
Update:  the pension cannot be valued without knowing total years of service and highest three years' salaries.  It is also unaccessible until age 62, and functions like an annuity, although a discounted lump sum payment is available.  If I continued working until age 62 at the same salary I earn now, it would be worth about $3,000 per month, unadjusted for inflation. 

Okay, well, that almost covers your current expenses, so, as long as those stay down, you might be able to retire at decent age.  Off the top of my head, I'd say around 55.

Can you claim the pension AND social security?

Is your $52/mo to your 401k fully matched by your employer?

La Bibliotecaria Feroz

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Re: Reader Case Study: How can I be like MMM when I grow up?
« Reply #6 on: October 13, 2014, 01:44:13 PM »
You might be able to shave a few bucks on your phone bill by switching to Ting, but that would depend on your usage. You could get a Google Voice account to use at home, and then you wouldn't be using minutes/texts at home.

You seem like you're doing pretty well, honestly. Things will get better as you knock out that personal loan, and it does seem to make sense to do a traditional IRA rather than a Roth.

Is dog food really that expensive???? People were talking in a different thread about saving month with Costco food, but not having a dog, I don't know much about it.

That $378 could, of course, be hiding waste, but it doesn't jump out at me as high. (You don't, for instance, have collision coverage on your car, I hope.)

And welcome! It took me a couple of months to read through every post, so you're off to a tearing start :).

resipsaloquitur

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Re: Reader Case Study: How can I be like MMM when I grow up?
« Reply #7 on: October 13, 2014, 04:57:26 PM »
Thanks frugalparagon. 

I don't think the $378 is hiding any waste.  I have very basic, shopped-around liability insurance that comes out to about $50/mo.  It includes bar dues, Christmas money for the kids, and a few other non-reduceable amounts. 

As for dog food, the $65 includes $50 for food and $15 for ear hair and nail maintenance at the groomer, both necessary for her health.  I've tried insourcing these but I can't get the hang of it. 

resipsaloquitur

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Re: Reader Case Study: How can I be like MMM when I grow up?
« Reply #8 on: October 16, 2014, 06:59:11 PM »
Sorry if topping is considered tacky round these parts (let me know if it is) but I would love some more input.

Exflyboy

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Re: Reader Case Study: How can I be like MMM when I grow up?
« Reply #9 on: October 16, 2014, 07:35:03 PM »
If it were me I'd stop the 401k contributions (unless its company matched) and then pay off the high interest rate loan off first, then the student loans

Then go back to the 401k max out.

Republic cell phone is $10 for unlimited talk and text but you have to buy their phone... This is on the Sprint network

Airvoice wireless will be $30 a month for unlimited talk and text but you can use any GSM phone.. cheapest are $13 from Walmart.. They use the AT&T network

Frank

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Re: Reader Case Study: How can I be like MMM when I grow up?
« Reply #10 on: October 16, 2014, 07:41:30 PM »
If you want to nitpick, I'd try to work on reducing:

Phone (several tips inb4me)

Groceries (hubby and I together spend $150/month, how much can you spend with kids only on weekends, and not all of them to boot? Cook more from scratch? there's lots of tips on how to save on groceries around the forum...)

Haircut (you're already working on this)

Parent time (maybe try to bring them some picknick-like foods you made yourself? This would also mean you can take them to eat anywhere, reduce waste, teach them something)

Le Barbu

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Re: Reader Case Study: How can I be like MMM when I grow up?
« Reply #11 on: October 16, 2014, 07:46:34 PM »
Payoff the personnal loan
Max your 401k to lower your taxes
Let alone EF, It´s idling cash
Keep up !

« Last Edit: October 16, 2014, 08:07:35 PM by Le Barbu »

MDM

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Re: Reader Case Study: How can I be like MMM when I grow up?
« Reply #12 on: October 16, 2014, 07:54:21 PM »
With only $2900 left on the personal loan, whatever you do won't have a significant effect one way or the other.

The student loan rate isn't too bad - it's a coin flip on the short term strategy of pay ahead on that loan vs. do more 401k.  Long term the 401k would be better, so I'd up the 401k to the max allowed.  Or the max you can afford.

With your current cash flow, that appears to be ~$13,000/yr.  Is that what you see also?

resipsaloquitur

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Re: Reader Case Study: How can I be like MMM when I grow up?
« Reply #13 on: October 17, 2014, 10:20:18 AM »
$13,000 seems generous at this point.  After I pay off the personal loan, I expect to have around $790 per month excess, which comes out to about $9,500 per year.  Or are you factoring in taxes saved from contributing to 401(k), or some other savings elsewhere?

Le Barbu

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Re: Reader Case Study: How can I be like MMM when I grow up?
« Reply #14 on: October 17, 2014, 11:03:00 AM »
You get some huge taxes return in your tax bracket. This should help a lot to increase the next year contribution. It's your BEST BET !

Just do it after your personal loan is repaid.

MDM

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Re: Reader Case Study: How can I be like MMM when I grow up?
« Reply #15 on: October 17, 2014, 12:48:38 PM »
$13,000 seems generous at this point.  After I pay off the personal loan, I expect to have around $790 per month excess, which comes out to about $9,500 per year.  Or are you factoring in taxes saved from contributing to 401(k), or some other savings elsewhere?
Yes, the $13K (or $12,9xx IIRC) included tax effects.  I used the Excel spreadsheet you can download from http://forum.mrmoneymustache.com/ask-a-mustachian/how-to-write-a-'case-study'-topic/msg274228/#msg274228.  That has been a useful tool for our own situation and various case studies here.  You could try it for your own "what if?" analyses.


resipsaloquitur

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Re: Reader Case Study: How can I be like MMM when I grow up?
« Reply #16 on: October 17, 2014, 01:24:27 PM »
That's excellent! Thanks!