Reader Case Study - How to adjust to be FIRE in 15 years

[gReed Smith]

Life Situation: I am married with one baby on the way and another in the future plans.  I am a lawyer at a mid-sized firm in a mid-sized city in the Midwest (I am also of average height and weight).  We will be adjusting to one income after the birth of our first child in late August.  I'm concerned this will throw off my career plans, which involve giving up the 55 hr/wk grind in my mid 40s.  I am rapidly approaching 30 right around the time the baby comes.

Gross Salary/Wages: $120,000

Pre-tax deductions: 401k - $18,000
                             FSA   - $1,500
                             INS   - $6,144
                             PARK - $1,680

Other Ordinary Income: Only about $200 from bank account interest; except that I get a bonus around Christmas time which has been as low as $1,000 and as high as $30,000.  I anticipate about $20,000 this year, but it is entirely at the discretion/whim of our managing partner.

Adjusted Gross Income: $92,676

Current expenses (for one income):
                     Income           $73,212.00   $6,101.00 (after taxes and other withholding)
                     Restaurants   $3,000.00      $250.00 (I kind of hope that the hassle of taking a baby to a restaurant helps tame this)
                     Car           $3,475.00           $289.58 (commute in 2004 Mazda6 station wagon - 15 mile round trip)
                     Parking     $1,680.00           $140.00 (cheapest lease in town by far)
         Student Loans           $13,800.00   $1,150.00 (could divert up to $500/month elsewhere)
Mortgage Pmnt and Int   $12,936.00   $1,078.00
        PMI & Escrow Fluff     $2,556.00          $213.00
Taxes and Insurance          $5,700.00          $475.00
                     Groceries   $6,600.00           $550.00 (lumps in some other things like pet expenses and diapers - I hope)
                      Utilities   $5,232.00           $436.00  ($80 phone; $78 internet; $100 electric; $100 gas; $48 water; $30 trash
                      Charity   $500.00           $41.67
                    Shopping   $4,200.00           $350.00
               Car Payment   $0.00           $0.00
                         Dues   $0.00           $0.00
                    Services           $500.00           $41.67 (vet bills for 2 cats and two dogs; may not actually be this much)
                Home Improv   $2,000.00      $166.67
             Major Purchase   $2,000.00           $166.67
                      ROTH IRA   $0.00           $0.00
                  Insurance   $2,600.00           $216.67
                     Vacation   $2,500.00           $208.33
                     Savings   $10,900.00   $908.33
                     Extra           $3,921.00           $326.75 (surplus/discretionary... not extra spending)

Total Mortgage = $1,766/month
Total Debt payments = $1,150/month
Total other     = $2,857/month
Discretionary =  $326/month

Assets: ROTH IRA - $47,000
            401k        - $90,000
            Taxable    - $24,000 (in savings account as an emergency fund)

I have a three-fund portfolio with Vanguard, as you may see described in the Bogleheads website.

Liabilities: Student loans (goal is to nix these in 7 more years; total current payment is $1,150 monthly):
                                     $36,000  @ variable 2.57%  currently paying $253/month
                                     $17,000  @ fixed     5.5%    currently paying $261/month ($143 required and $118 extra)
                                     $13,000  @ variable 2.87%  currently paying $461/month ($85 required and $376 extra; in default due to co-debtor bankruptcy; trying to fully pay off before co-debtor stay expires so I don't get sued)
                                     $1000     @ fixed     3.66%  currently paying $25/month
                                     $18,000  @ fixed    3.66%  currently paying $150/month

Ideally, I would like to squeeze about $3,600 more out of this budget to put in my ROTH.  The "extra" line at the bottom theoretically covers it, but every month it seems like there is some $200 BS thing that falls in my lap.  So what is the low-hanging fruit that you would pick?  What radical changes would you make to push me closer to being able to retire in 15 years?  I think I need about $1 million, and I need to get rid of my debt before then.  Also, what steps should I take to help prevent a baby girl from busting the budget?  I have $5k set aside already to defray whatever she's going to throw my way.

Feel free to offer any other comments.

[matchewed]

Is this your anticipated one income breakdown?

Low hanging fruit -
Restaurants, define "shopping" and determine what is necessary, define "extra" and determine what is necessary, define "services" and determine what is necessary. 550/month for groceries is silly high for even three people.

Bonuses should just be invested per your Investment Policy Statement.

Rather than squeeze out more for Roth put it in a traditional IRA and save some taxes.

Radical changes would be moving closer to work and ditching the car or getting a beater for errands.

As for planning for a FIRE attempt in 15 years you need to draft a budget that you will spend in FIRE. Then you need 25X that in various assets (retirement and non-retirement funds). That is only a rule of thumb, read a bit more about these things and you'll start to get the hang of that rule of thumb.

[expectopatronum]

That's not bad!

But, the easy stuff:

• Restaurants @$250/mo. Take it to once or twice a month going out at a cushy $150, then see if you can further slice it. Yes, the baby is going to make going out a PITA but this category also absorbs take-out and delivery, so don't let those creep up in its place.
• Groceries: I'm kind of thinking that in the Midwest, you should be able to do $300/mo for two...(?) I've never tried to feed a pregnant lady though, so I may be wrong, but I'm sure you can get well below $550/mo.
• Shopping: reduce your intake of Random Crap to only what is necessary, maybe $75/mo including clothes. Read some MMM articles on consumerism. Read The Life Changing Magic of Tidying Up for an interesting perspective on Stuff. (You'll realize you probably have way too much.) Cut back on material gifts where possible; offer an experience instead. This year we cooked dinner for my mom, for example, instead of a Mother's Day gift. Is your home functional? Don't buy any more home furnishings. Clothing: two people on a budget of $600/yr is what MMM has budgeted before... Is this possible with a fancy pants job? Look back at last month and see what you bought and if you really "needed" it and if you needed to buy it new, if you did. Explore eBay and Goodwill for cheap clothing options.
• Home improv: is your current house live able? What are you doing that costs $170/mo or do you live in a really old house and are fixing it up? Does this include non-essential furnishings (IMO,  anything besides bed, couch, table, chairs)?
• What services are $40/mo?
• Why are utilities $400+/mo?!? Is this electricity? Can you slice this in half? Replace lightbulbs, adjust to living in a wider range of temps, switch providers? Look at your usage and what you are paying for it. Usually the problem is usage.
• that extra category. Boy. What kind of expenses is this - emergency, or  annual recurring that you forget?
• Mortgage: what size house do you live in? Downsizing to a place near the office can help cut back on utilities, shopping, gas, home maint (depending), property tax, etc.

The above is easily $1000/mo, not even including the possibilities of relocating and their impact on your other categories. Honestly, I'd take a hard look at the house costs and location, and cut back spending on each category. Try becoming a one car family once you're within bike range. [/list]

[Jeremy E.]

Reduce your monthly restaurant budget.
Why do you need $289/month to commute? Only reason I can think is if you are saving up for a new car or putting emergency money aside for maintenance? Because gas should cost less than $100/month and insurance should cost less than $50/month unless you have a bad record.
Check to see if you can get cheaper Mortgage insurance and cheaper car insurance.
Since your wife is going to be a full time mom, she can learn new ways to save money and reduce your grocery budget drastically! Rice and beans are good money saving food, and there are lots of ways to mix them into meals.
Utilities $436 per month!?!?!?!? I have no idea how anyone could pay more than $200/month for utilities, this is ridiculous and you need to fix it. Electricity should average to $50 or less, Water/Sewer/Garbage shouldn’t be too much, for me it’s $25/month, and Gas shouldn’t be too much either.
$350/month for shopping could be reduced, if you reduce this amount in half you will be able to retire 8 months sooner, but if it’s worth it to you then so be it.
Services? I’m not sure what this is, but maybe your wife can do it now that she has more free time.
$2,000 on Home Improvement every year? What is this for? Without it you could retire 7 months earlier.
$2,000 on Major Purchase every year? What is this for? Without it you could retire 7 months earlier.
Try to reduce all insurances you have.
How much equity is in your house? A lot of people will open up a HELOC and use that for an emergency fund. That way they can invest all of that money in the stock market and get some nice returns hopefully.
I would pay off that 5.5% loan as well as the one that you could get sued from ASAP. If you can open a HELOC for an emergency fund, consider throwing your savings at these 2 loans, also I would put the “extra” money into them as well as slow down investing until they get paid off.
I agree with previous poster that a traditional IRA would be better than a Roth IRA for you since you are in a higher tax bracket now than you will be when you retire.

[iamlindoro]

I'll ask the question:  Is going single-income negotiable?  I get the innate desire/feeling of responsibility to have one parent "there" for the child.  I'm just wondering how the calculus changes if your wife takes maternity, goes back to work, and you both buckle down for a few years.  Maybe not even for the full 15, perhaps just for a couple.  I know that for me and my SO, going back to work is a necessity because we see it as a short tradeoff of daytime hours with the little one for most of their late childhood and adolescence together 24/7. 

[gReed Smith]

Thanks for the replies.  Couple clarifications: services is mostly vet bills for our two dogs and two cats. We won't be getting rid of those guys. The extra line is actually surplus money, not miscellaneous spending, although it often gets spent on unbudgeted expenses.  Car is all of my gas and maintenance costs for the year, I only pointed out my car and commute because it is the daily expense.

Home improvement - I do a lot of landscaping.  It's my hobby.  I could probably cut this budget back. There were also quite a few projects after we bought the house, but they are mostly done.  Anyone have a source for free plants?
Major purchase - furniture really.  A good bit of the house is empty.  We could probably live without any more furniture though.  Maybe just some lamps.  Craigslist lamps?
Dining - this is the most embarrassing and kind of difficult category.  I want to cut it below $250... but to be honest that is down from about $6-700/month.  My wife and I love eating out.

I don't think I can do a traditional IRA because I have a 401k.  My income will exceed the limit after my bonus.  I will probably use the bonus (if I get one) to nix the student loans.

Not going to one income?  Sounds great to me.  We're losing our free healthcare and $60k salary.  Could you call my wife? :p  She will return to work when all of the babies are in school and can do some consulting work from home until then, but probably will only earn $7-8000/yr pre-tax.

Thanks again!

[MDM]

I don't think I can do a traditional IRA because I have a 401k.  My income will exceed the limit after my bonus.  I will probably use the bonus (if I get one) to nix the student loans.

Yes, it will depend on the size of the bonus.  You can always contribute $5500 now, then wait on the bonus.  If it is low, you keep all $5500 in the tIRA.  If the bonus is high, you do a backdoor Roth with the non-deductible portion of the $5500.  Or just do Roth if you don't want the hassle.

[StockBeard]

I feel you should be able to cut on restaurants (as many others have said), groceries (we spend $550 a month for a family of 4, and we're not specifically frugal on groceries. My wife likes to keep things organic for the kids' health), "shopping"(assuming those are "wants" and not "needs"), and utilities.
Specifically on utilities:
* $78 sounds like way too much for internet. I pay $33, and I'm a huge video streaming consumer + gamer.  You've probably been sold stuff you don't need?-
* $80 for phone could probably be trimmed a bit too? I switched to the t mobile $30 plan recently - it's focused on data, might not be for you, but my point is there are options out there. Other people often recommend republic wireless

[KCM5]

Also, you're paying for parking? 15 miles round trip may be a nice bike commute. Have you investigated the possibility?

[Dillydally]

How much would you need to pay down to make the PMI go away.? Do the math on the immediate return of eliminating the PMI and the reduced interest burden on the diminished loan vs what else the same money could do for you.

[gReed Smith]

How much would you need to pay down to make the PMI go away.? Do the math on the immediate return of eliminating the PMI and the reduced interest burden on the diminished loan vs what else the same money could do for you.

That is a good suggestion.  I think I am very close to 20% equity and could eliminate this expense, which would be huge.  I could plow it straight into my debt.

As for biking, I like the idea.  I actually live in a fairly bike friendly city, but I need to do some research on how to get to work in a suit without being sweaty and gross.

We will trim cell costs soon.  Almost to the end of a 2 year period.

[KungfuRabbit]

eat ramen and beans until you get rid of pmi.

[Cassie]

When people suggest both people keep working & you pay for daycare this is crazy. When kids are older they are more independent & don't need you f.t. The formative years are ages 0-3 so 1 parent should be home for them.

[AlwaysBeenASaver]

Sources for free plants: I have gotten free plants from freecycle, craigslist, and from local "garden exchange" groups. And if you're interested in plant propagation, that's another way to get free plants, if you're willing to wait while they grow. I've also gotten lower-cost plants at our local nursery, they have an area where they put plants that need TLC, at a big discount.

[ShoulderThingThatGoesUp]

Plants don't need to be free, but if you buy perennial ornamentals the expense gets very low. Also try propagating with cuttings - the success rate is low but it's a tiny amount of effort for a whole new plant. Azaleas and other shrubs like to put roots down on low-hanging branches. Clip those from the main plant, wait a bit, and if it lives you've got a free plant.

I'm going to try saving some seeds from the vegetables we're growing this year, but I know the tomatoes are a hybrid variety, so that might not work out. Not that $20 for all the vegetables it looks like we're going to get is a huge expense.

My municipality provides completely free mulch, compost, and will take yard waste (including huge branches) for free at its compost site. Check out if there's a similar situation near you. I filled in low spots and mulched beds this year for a bit of gas, the cost of a few buckets, and sweat.

[KCM5]

More plant info - yes to craigslist, and perennials. Also, we sometimes organize a plant exchange at my work. And I freely trade plants with neighbors (anyone want some hostas? ;) ) and often get something in exchange. Another thing to do is collect seeds - my grandmother can hardly walk 200 feet without filling her pockets with seeds. And then she forgets what each seed comes from, but regardless, it's a great way to gather some plants freely.

[ShoulderThingThatGoesUp]

Oh man, hostas. I took a chunk out of the side yard last spring, split it up into twelve pieces, and planted them. They all grew, and came back in style this year.

[expectopatronum]

Thanks for the replies.  Couple clarifications: services is mostly vet bills for our two dogs and two cats. We won't be getting rid of those guys. The extra line is actually surplus money, not miscellaneous spending, although it often gets spent on unbudgeted expenses.  Car is all of my gas and maintenance costs for the year, I only pointed out my car and commute because it is the daily expense.

Home improvement - I do a lot of landscaping.  It's my hobby.  I could probably cut this budget back. There were also quite a few projects after we bought the house, but they are mostly done.  Anyone have a source for free plants?
Major purchase - furniture really.  A good bit of the house is empty.  We could probably live without any more furniture though.  Maybe just some lamps.  Craigslist lamps?
Dining - this is the most embarrassing and kind of difficult category.  I want to cut it below $250... but to be honest that is down from about $6-700/month.  My wife and I love eating out.

I don't think I can do a traditional IRA because I have a 401k.  My income will exceed the limit after my bonus.  I will probably use the bonus (if I get one) to nix the student loans.

Not going to one income?  Sounds great to me.  We're losing our free healthcare and $60k salary.  Could you call my wife? :p  She will return to work when all of the babies are in school and can do some consulting work from home until then, but probably will only earn $7-8000/yr pre-tax.

Thanks again!

One thing I wish my husband and I did was NOT fill up the whole house with furniture. It's a much bigger house than we need and now we're looking at moving it all, and it's quite overwhelming. Luckily a good portion came off Craigslist and IKEA...And yes! Look on CL and Freecycle for lamps, check out your local Goodwill, too. There are lots of things you can do to "update" the look of furniture, like paint, refinishing, new lampshades, and more. Once you fill your basic needs (beds, crib, couches, tables, chairs, some basic storage...), home improvement/furnishings is an endless pit you can throw money into. Could you try a 1- or 2-month "no home stuff" period and see where you really NEED those extra items and what things can actually wait?

Eating out: to make it more of a special event, maybe set a date (e.g. we are going to go out every Friday and this week we're going to ______) so you can look forward to it all week? Whatever you end up spending on dining out, make sure it isn't mindless.

Anyway, lots of good feedback on here and you should be able to see some immediate results from just keeping an eye on spending (shopping/home improv/eating out). I'd still look closely at whether making a radical change is realistic (moving closer to work, or establishing a bike route). If she's planning to stay at home for a few years, then maybe you could get within a 5mi radius of the office (not having to consider her work location). Is there a shower in the office? Any kind of locker room? Can you clean up well enough with a wash cloth? Can you leave a week's worth of suits and stuff at the office so that you only have to worry about porting your clothes once a week? A 15mi ride with no shower at the other end isn't realistic in all situation, but get really creative and it might work in some. My thought on moving closer isn't just to make the bike route easier, but that you'll probably soon be even more pressed for time with the new baby and that will make driving every day very tempting.

Also, thought on baby girl expenses: are you all ready to go with books, toys, clothes? Explore your secondhand options 'cause babies don't know the difference! I'd check with friends with young kids and at the local Goodwill, on Freecycle, etc.

[Chesterfield]

Bike in other clothes, get a pannier or backpack for the suit  change into the suit at the office. You may need to wipe off a bit in the restroom.