Reader case study: New homeowner - what now?

[msming]

I've followed the MMM blog for a few months now and would like some Mustachians' thoughts as to what my wife and I are doing right financially and, more important, what we're not and can improve on.  I recognize we're already doing better than most Americans, partly because we make good money and partly because we've avoided some of the obvious pitfalls (credit card debt, student loans, etc.).  But I still feel overwhelmed by being a new homeowner, anxious about how we'll be able to afford to have children, and concerned about whether we're really saving enough to get ahead.

So without further ado...

My wife and I are both 30.  We have no children yet, but would like to have two, probably sometime in the next five years or so.  We just bought our first house in April, moving to the suburbs from a small apartment in the city.  It's a 4-bed, 2.5-bath colonial built in 1978, with about 2,000 sq ft.  I freely admit we've gone way overboard spending money working on the house and buying furniture - a little over $25,000 so far.  We both have stable jobs with the state government.  We own two cars (both given to us used by our parents) and use them to commute to work downtown, which is about 13 miles away.  I have parking near my office; my wife doesn't and takes a free shuttle bus from a satellite parking lot closer to our house.  We can't carpool with each other because our normal working hours are different and my job requires me to work frequent, often unpredictable overtime.

Monthly Income
(Annual salary - $80,000 (me) + $58,000 (wife) = $138,000)
Gross pay - $11,500
Taxes (Federal and State PIT, FICA) - $2,750
Deferred comp/457 plan - $900 (9% of my gross, 6% of wife's)
Other deductions (pension, health insurance, parking, group life, union dues) - $600
Take-home pay - $7,250

Monthly Expenses
Housing and Utilities
Mortgage P&I - $1,080 (30-year fixed at 4.375%)
Property tax escrow - $480 (we live in New York State, so our taxes are pretty high overall, though we live in one of the lowest-tax school districts in our area)
Homeowners' insurance - $60
Electricity/natural gas - $225 (a hopefully conservative estimate, all I know is our first three bills at the house have averaged $115/month)
Water, sewer & garbage removal - $65
Internet w/ Netflix, Hulu - $85
Cell phone - $30 (I recently switched to Ting, while my wife's parents pay for hers through their family plan)
Housing and Utilities Total - $2,025

Transportation
Gas - $205 (average of last four months)
Car insurance - $140
Transportation Total - $345

Other
Life insurance - $120 ($1M 30-year term policy on each of us)
Groceries and household products - $300 (we buy most of our food at Aldi)
Entertainment, dining out, etc. - $300 ($225 average January-August, but I think house stuff suppressed this)
Vacation - $425 (also includes flying to visit the wife's family, who live out of state)
Other miscellaneous - $225 (out-of-pocket medical, clothing, gifts, etc.)
Other Total - $1,370

Total Expenses w/o Home & Car Maintenance - $3,740

Home & Car Maintenance - $1,100 (a plug, since I have no easy way of estimating this, and assuming we rein in the home improvements spending)

Total Expenses - $4,840

Monthly Surplus - $2,410

Current Monthly Automatic Savings
Roth IRA - $915 (maxing out for both of us, invested in VFIFX)
Vanguard non-retirement accounts - $700 (invested in VBIAX)

Assets
Bank accounts - $12,000
Deferred comp/457 plan - $87,000 (June 30 balance)
Roth IRA - $45,000 (June 30 balance)
Vanguard non-retirement - $27,000 (June 30 balance)
Home value - $269,900 (purchase price)
Assets Total - $440,900

Liabilities
Mortgage balance - $215,000

Net Worth - $225,900

I know we're nowhere near MMM's goal of saving at least 50% of our income - we're probably around 25%-30%, backing out this year's excessive house spending - and I don't see much easy room for improvement.  We just bought our house, we do like it and I don't see us moving again anytime soon.  I suppose I could get a bicycle and try to use it to do some errands (our area isn't exactly pedestrian-friendly, but we are within a short bike ride of several big box stores), but I don't think that would save much.  We'd also like to renovate much of it over the next few years (kitchen, two bathrooms, landscaping, new fence). And the cost of having children, particularly child care, will be another drain on our finances in a few years.  Put all this together, and I see it taking us a long time, on our current path, to achieve financial independence.


 

[mxt0133]

The question is how bad do you want FI?  You list two things off that bat that could be done economically, you say you want to renovate, so why don't you learn how to do it yourself.  Give your self a few months to learn, work small projects on the weekends to build up your confidence.  You have a budget for vacation, you can kill two birds with one stone by using your vacation time to tackle the bigger renovation projects that would be more efficiently done on consecutive days.  I know co-workers and family members, with kids, that did their whole kitchen, bathroom, after their normal work hours and weekends, and saved about 60% of the renovation costs.

[msming]

Trying to do at least some of the home renovation myself is an interesting idea, and one I hadn't really considered because I'm not at all mechanically inclined (even had trouble in shop class in high school).  So I suspect it would take me more time to learn than it would for others, and I'm unsure what "small projects on the weekends" I could find and how, since we're not friends with anyone who either is a contractor or works on their own house on the side.  In any case, I think we're pretty much done with house stuff this year.  I just have to buy a snow-blower before winter (we live in upstate New York and I have back problems).

[Chranstronaut]

I'll take a crack at it. First of all, your monthly take home pay is off the hook right now!  Don't let your lifestyle creep any more and don't let that "new furniture" mindset take hold of you.  Also, see my note about tax advantaged accounts at the end.

The expenses that jumped out to me as having room for improvement:

Gas for the car seems high, but not because of your pump prices.  I used to drive 60 miles a day getting 30-32 mpg and spent what you do, so I know your gas prices are not ridiculous.  What kind of cars do you drive?  Can you sell one or both for something with better efficiency?  I know it's not incredibly convenient to carpool every day, but I'm sure you could manage once or twice a week.  It's crazy how much a small change can save you in gas money-- I started carpooling and it's awesome!  Is there a bus route that one or both of you can use a few times a week for those "unpredictable" days?

Car insurance also seems high.  You should look into reducing your coverage or getting competing quotes.  Here's another opportunity to save by changing your vehicle.  Do you and your wife bundle with homeowners insurance?  I'd expect you could easily save $20-50 here.

What's your plan with the life insurance policy?  $1M seems like an insane amount when you are two young able bodied people with no children.  I'm not as knowledgeable about the different types of policies, but I would seriously consider cutting this back in general and cutting it WAY back while still childless.  How many years would one of you truly need to get their feet under them alone?  Isn't your 'stache a form of insurance?

Groceries actually seem fine to me, certainly you could do better, but I don't scrimp here and do about $300 for two adults myself...  HOWEVER, we do not spend another $300 on eating out.  We lavishly spend about half that eating out through the month.  Seriously, this is kind of silly.  Especially considering:

That's a lot of "other miscellaneous" when we already covered eating out and entertainment.  I'd suggest tracking this more carefully and really seeing the breakdown between gifts, clothes, medical, etc.  You especially should look into separating optional misc from non-optional (like medical).

DAMN DUDE!  You're spending over $5,000 a year to see family and vacation?  Do your wife's parents live in Hawaii and only see guests during peak travel season?  *FACE PUNCH*  Are you staying in hotels to see family or in their home?  Are you eating out every meal or helping make dinner?  Where are you vacationing and can you get a place with kitchen for that budget?  I'm planning to pay for three round trip airfares this year out-of-state and it will still cost me less than half of that (~$2000).

Can't speak to home maintenance cost, but car maintenance for me is only about $80-100 a month.  I drive an older domestic car with a lot of maintenance needs, but parts are decently priced.  This has covered oil changes, some tubing, gasket and small part repairs, new battery, tires, brakes and small things like bulbs and wiper blades for the last two years.  I do simple maintenance myself.  This is hard to estimate if you haven't actually had to fix anything yet, but more than $100 a month on a car that is costing you more than $50 a month in insurance is not good math.

My final questions are:

Why are you maxing out a Roth IRA and investing taxable income when you're only putting $10800 in your pre-tax account(s)?  Everyone has their own reasons for the way they invest, but usually people want to max out tax advantaged account first ($35,000 for you and your wife combined).  Your combined income is pretty high, I bet you'd like the tax benefit of moving more money to the 457 and less to the taxed accounts.

What do you do with the surplus money each month?  Your post tax savings only account for $1615.  Is the rest in cash in your bank?  Is this going to an emergency fund?  $800 is a lot of money unaccounted for.


Also, keep in perspective, your net worth is 225k for two folks only aged 30 without prior knowledge of MMM until a few months ago.  You are currently saving 33% of your after tax money and a little pre-tax with plenty of room to improve both.  Make sure to remember that even as your face is being punched.  Like others said, if you want FI more than other things, there's more room to improve.  But if not, then you have to find the balance yourself.

[msming]

Thank you, ChransStache.  You've definitely given me a lot to think about.  I'll try to answer your questions and give some of my thoughts.

Gas/cars: I drive a Pontiac Bonnveville, my wife drives a Honda CR-V.  They each have about 75,000 - 85,000 miles on them.  They don't get good gas mileage (17-21 mpg city, 27-28 mpg highway).  I've considered replacing my car with a small used hatchback.  I would prefer not to liquidate non-retirement investments, so it would take me a few months to accumulate the cash to pay for a new car.  Since my wife's parents gave her her car in January, I don't think we could sell it for a while without possibly offending them (she would never have bought a CR-V for herself, though).  We might be able to make carpooling work on a limited basis, but it would require one of us hanging around for an extra hour or hour and a half.  Taking the bus is also feasible, though not a great option - it would entail walking a mile or two, catching one bus and transferring to another, taking about an hour each way.

Car insurance: We haven't shopped around in years, but we do bundle with homeowners' insurance.  Our deductible is $1,000 if I recall correctly.

Life insurance: The thought was to lock in a premium while we were both young and purchase coverage at a level that would, on its own, be sufficient to allow the survivor to maintain his/her (and the children's) lifestyle for an extended, though not indefinite, period of time.  We may have been overly conservative here, and certainly I'd expect our need for insurance to decline as we age and accumulate more savings.

Groceries, entertainment, etc.: You have a point here.  The second $300 isn't all eating out, of course, but I couldn't easily be more precise.  For what it's worth, the $225/month of "other miscellaneous" includes a plug of $125/month that's just in there as a form of cushion (I try to be fairly conservative in drawing up a budget), so actual spending against that may be a little lower.

Vacation: Again, you have a point.  I concede our lavish vacation spending is a definite luxury.  My wife's parents live in the Midwest.  Since it's about a 13-hour-straight drive, we fly there, often around the holidays.  Roundtrip airfare for the two of us can run to $800-$1,000 each time.  We stay in their house when we visit and generally eat at their home.  The real cause of the high vacation budget, though, is trying to include money for a big trip abroad every other year because it's important to us to see more of the world.  We spent a week and a half in London last year, for example, and between airfare, hotel and everything else, that trip really did cost about $5,000 because London's so expensive.  (Because of the new house, we haven't done much this year, just a weekend trip to Boston to visit friends and a planned trip to visit the wife's family for Christmas.)

Investments: We could step up our 457 contributions - I certainly understand the tax-efficient investing argument - but I value having some savings outside of a bank account that I can tap before age 59.5 if necessary.  If we max out the 457s, we'd lose that flexibility and wouldn't have much left outside retirement savings.  That said, I confess I don't know what the right balance is.  And I don't really know what to do with the remaining surplus that will build up after this year.  I could see investing it or making extra mortgage payments (though our effective rate on the mortgage, after the tax deduction, is only 3.28%).

[mozar]

There are ways to get money out of retirement accounts sooner, like a Roth conversion ladder.

[msming]

Thank you very much, mozar.  I'd never even heard of a Roth conversion ladder before.  It's definitely an option we must consider, and I suspect we'll have to reevaluate our investment strategy as a result.

[Chranstronaut]

There are ways to get money out of retirement accounts sooner, like a Roth conversion ladder.

Yep, there are a couple strategies to doing it, including keeping your retirement income so low that you pay little or no income tax and the 10% penalty from withdrawing early is easily managed.  Check out The Mad Fientist if you want to learn more about the numbers behind financial independence and trade studies on different scenarios:   http://madfientist.com/

Thanks for your replies msming.  I'd definitely shop around and see what you can do with both car/home and life insurance.  Maybe you won't switch, but it never hurts to just run some comparisons and feel assured you are getting what you want.  You might also consider checking out some of the investing books on MMM's reading list-- they might help you better understand the advantages to pre-tax investing or at least help you define an investment plan for that extra cash. 

I also noticed you keep $12k in your bank accounts.  This isn't quite three months of your expenses.  If this is your emergency fund, you might want to consider if that is enough for you.  I prefer 6 months to 1 year expenses in cash since I don't have as much stability in my job right now, but a lot of other people use credit cards or home equity loans as their emergency fund.  Just something to consider as you manage your budgets.

[Stashy McStasherton]

Hello fellow upstate New Yorker! You are being kinda wussypants about biking. I agree that Upstate NY is not the bike-friendliest of places, but step it up! The more of us that do it, the better things will be for us. My husband and I are in a similar situation. We work very close to each other and about 13 miles from our home, but our work hours tend to be a bit unpredictable. Often times, my husband bikes to work and I drive to my office. At the end of the day, I drop the car off at his office and I bike home. It is getting darker earlier, so whomever gets out of work first bikes home to avoid biking in the dark. You can make it work, it just takes a little planning. Once you bike commute a few times, you will be hooked. It feels great! Go to google maps and start planning your route. There may be some bike trails near you that you don't know about. Seriously, get on it. You are going to want to get the bug before it gets cold and you really don't want to do it. Those miles add up and save some serious $$.

[Chicken]

Investments: We could step up our 457 contributions - I certainly understand the tax-efficient investing argument - but I value having some savings outside of a bank account that I can tap before age 59.5 if necessary.  If we max out the 457s, we'd lose that flexibility and wouldn't have much left outside retirement savings.  That said, I confess I don't know what the right balance is.  And I don't really know what to do with the remaining surplus that will build up after this year.  I could see investing it or making extra mortgage payments (though our effective rate on the mortgage, after the tax deduction, is only 3.28%).

Once you leave your job you can withdraw governmental 457 contributions prior to 59.5.  Not an emergency fund if that is the concern (which it probably shouldn't be since you could also just withdraw your roth contributions), but you aren't locked into 59.5 like a 401k or a non-governmental 457. 

[Travis]

Vacation: Again, you have a point.  I concede our lavish vacation spending is a definite luxury.  My wife's parents live in the Midwest.  Since it's about a 13-hour-straight drive, we fly there, often around the holidays.  Roundtrip airfare for the two of us can run to $800-$1,000 each time.  We stay in their house when we visit and generally eat at their home.  The real cause of the high vacation budget, though, is trying to include money for a big trip abroad every other year because it's important to us to see more of the world.  We spent a week and a half in London last year, for example, and between airfare, hotel and everything else, that trip really did cost about $5,000 because London's so expensive.  (Because of the new house, we haven't done much this year, just a weekend trip to Boston to visit friends and a planned trip to visit the wife's family for Christmas.)

I'm going to deliver a jab here on your vacation spending.  My wife and I live 12 hours away from our hometown and visit once a month for a four-day weekend.  We drive through the night going down and get an early morning start on the way back.  Paying west coast gas prices the trip costs us about $80 one way in a 32mpg car.  Over a four-day weekend including meals the trip never goes over $200.  The drive is an ass kicker, but we still get three good days of visiting before making the drive back home.  That change alone will save you a couple thousand dollars a year.  The drive is tiring and a 90 minute flight would physically feel better, but after the drive is over and I see how much we didn't spend on tickets (2 adults and a child) it feels worth it.

[msming]

ChransStache: Thanks for the link.  I think I stumbled on some of those posts last night (after my initial reaction: "A Roth .... what?")  I've seen advice all over the map as to how much to keep in an emergency fund.  We're a little aggressive in keeping $12k in bank accounts, but it still gives us more than enough to cover our monthly cash flow and smaller emergencies (a few thousand dollars, say); for anything over that, we'd likely tap investments.

Stashy: You've sufficiently embarrassed me that I'll at least look into it.  There actually is a bike trail near our house that ends downtown (I have a map of it and have walked part of it).  It seems to be designed for recreation, not commuting, though, so it wouldn't be the most direct route.  Our jobs are southeast of our house, but since the trail follows the river, we'd have to first go west to access it and then head north/northeast on it before it turns southward.

Chicken:  You raise a good point about governmental 457s.  The only downside, as far as I can tell, is that you would still face an early withdrawal penalty if you rolled over 457 money into an IRA.

Travis:  For us, having children may tip the balance more in favor of driving because it increases the potential savings.  As it is, we've already done the drive once, staying overnight at a hotel along the way - it cut into the savings, I know, but we found a cheap hotel on Priceline and still came out hundreds of dollars ahead (though we spent more time on the road and less with family as a result).  My wife still has not-so-fond memories of overly long family road-trips as a child, so she may take some convincing.

[chasesfish]

I think what everyone else said is accurate, you're off to a good start but really need to decide how quickly you want to have kids, another 2-3 years at your savings rate would do wonders for you.

Here are a couple of other thoughts:

You need to can your Bonneville immediately, replace it with a small hatchback.  The CRV is a nice reliable car you can keep for a long time.

Why the heck did you do a 30 year mortgage?  At your income, refi that into a 10 year at slightly over 3% and knock down the principal.  Your 4.3% rate is costing you an extra $1000/yr in interest.

The vacation/travel expenses are entirely a lifestyle choice - do you use a rewards credit cad to try to help offset this?

Max out your tax deferred accounts as soon as possible.

Congrats on your success so far!


Sent from my iPad using Tapatalk

[msming]

Thanks for the kind words and solid advice, chasefish.  A few thoughts of my own.  I could see waiting another 2-3 years, perhaps 5 years at the outside, but any more than that might be pushing it given our desire to have two children.

By my math, a 10-year mortgage at 3% would cost us about $1,000/month more than we're paying now.  This would be doable, but I just can't bring myself to commit so fully to rapid mortgage amortization, rather than additional mutual fund investments, when mortgage rates are so low compared to what I could reasonably expect to earn on stocks even over 10 years.  And even with a 30-year mortgage, we retain the flexibility to make extra payments.  Is this the wrong way to think about it?

I do use my credit card rewards, but it might be worth finding a new card more geared toward travelers.  I admit I have sort of a love-hate relationship with credit cards: love them for the convenience and the occasional rewards, but hate the big financial trap they potentially represent, with the latter often winning out.

[mulescent]

Hi there,

I think others have covered the specific budget line items that could be cut down, and I wholeheartedly agree with them.  However, I wanted to approach your questions about your house.  I bought my first two years ago and, I think, went through very similar feelings.  I initially spent a lot on furniture, which was somewhat justifiable.  I then set about paying people to improve the house. 

A few of these things were clearly beyond my ability and also necessary (e.g. kitchen vent, which involved punching a hole in the roof).  Others I now realize I could easily have done myself (installing a dishwasher).  The projects I was planning kept getting bigger and more involved with costs escalating from 5k to 15k to 35k.  They seemed easy to justify because the house was an investment.

I realized that if it were a rental I wouldn't care that the tile in the hearth isn't quite the right color or that the entryway had old fashioned wrought iron instead of modern steel.  But somehow, in my own house, it did matter to me.  It was as if this whole package of stealth consumer programming labeled "home ownership," just exploded when I moved in.  Stuff I didn't care about before seemed important, with hair-raising dollar amounts attached.

What I came to realize is that I was fixating on stuff that totally didn't matter.  My house is great, but it's not perfect.  It never will be perfect and that is OK.  I let most of those projects go and am focusing on doing the ones that really matter myself.  My advice to you is to wait on your house projects.  Just live there for a while and see what you think in a year or two.  It could save you way more cash than cutting your cell phone bill or optimizing your insurance...

[Stashy McStasherton]

Stashy: You've sufficiently embarrassed me that I'll at least look into it.  There actually is a bike trail near our house that ends downtown (I have a map of it and have walked part of it).  It seems to be designed for recreation, not commuting, though, so it wouldn't be the most direct route.  Our jobs are southeast of our house, but since the trail follows the river, we'd have to first go west to access it and then head north/northeast on it before it turns southward.

Trust me, it was not my intention to embarrass you, but simply motivate you. I was so intimidated by the notion of biking to work or biking at all. Now that I am doing it, I am kicking myself for all the lost time. My husband and I have lost weight and feel healthier than ever. Also, I was held back from biking by an old knee injury that I have since overcome and my knee has never felt better. Start off with baby steps doing local errands and work your way up to a commute. We are here to support you! I am sorry if I came on a little strong. Good luck to you and see you on the streets!