Author Topic: Reader Case Study--New Hopeful Mustachian, help me get started  (Read 4864 times)

Jags4186

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Reader Case Study--New Hopeful Mustachian, help me get started
« on: January 05, 2014, 06:00:08 PM »
Hello Everyone,

I've been reading many personal finance blogs over the last 4 or 5 months and I've decided to try and become a super saver in order to build up FU money. I wish I had known about this stuff when I first graduated college and lived with my parents for 2 years...could have saved everything...but as I approach 28 years old I feel it's time to get serious.

Income:

Salary: $67000

Bonus: I've received a bonus in October every year for the last 5 years.  Last year I received $16,000, which was the most I've ever received.  My total pay last year was $80800.

My cell phone is provided by my employer.

I drive for work and received $700/month car allowance and a gas card.

Expenses:

Rent: $1100/month (half of $2200, I live with roommate)
Utilities: $30-$40/month
Cable/Internet: $75/month
Car Payment: $500/month (I know..., 36 payments remaining)
Car insurance: $165/month
"Spending Money": $500/month (food, haircuts, dr., pretty much everything)


Assets:

401k plan:  $110,000...just moved to HBIDX which is the lowest fee (by far) mutual fund available to me.  I currently contribute 23% and max out the difference with my bonus.

Roth IRA: $26,800...moving everything to VTI.

Taxable Account: $19,200...moving everything to VTI.

Cash: $6500

Liabilities: 

Car Loan:  $18181.00 balance at 0.9%


Questions:

Ideally what should my savings rate be?  When someone says they save 50% of their income what does that mean? I save money pre and post tax how do you blend those 2 numbers?

Where should I be?  What is the plan to make up "lost ground" from where I am now and where I should be?

How do I fit in expenses/savings for house down payment/wedding ( I hope to be married to my GF in the next 2 years...will propose sometime later this year) etc.

Thanks!



sdp

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Re: Reader Case Study--New Hopeful Mustachian, help me get started
« Reply #1 on: January 05, 2014, 06:09:58 PM »
Haven't finished reading your post, but needed to jump in and say..... SELL THE FUCKIN' CAR!!  as it stands you are going to spend 18,000 bucks over the next three years!! that is EIGHTEEN THOUSAND!! plus the extra in car insurance and registration for such an expensive car.

It doesn't matter if you only sell it for 15,000 or whatever just get rid of it!   then buy a nice used car with CASH for 2,800 or 5,000 or something.  then change your insurance to cover just the basics.  Even if you sell it for 14 or 15K and you owe more than that, it is still WAY cheaper than keeping whatever you got..... TRADE IT IN!!

Anyway so back to reading the rest of your post....
Cheers,
Scott

Jags4186

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Re: Reader Case Study--New Hopeful Mustachian, help me get started
« Reply #2 on: January 05, 2014, 06:33:43 PM »
I understand about the car but at the moment it just doesn't make sense to go through all that headache. As I said I drive for my job a lot (approximately 20-30k a year) so for me to buy a used car for 4/5k with 100k+ miles doesn't really make sense...I'd be risking being in the shop and not working.  To get a low mileage 2008 or 2009 civic or corolla would be just as expensive (if not more so) as selling this, taking the loss, and buying used/new to me.  I'd prefer to drive this into the ground.

sdp

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Re: Reader Case Study--New Hopeful Mustachian, help me get started
« Reply #3 on: January 05, 2014, 06:34:58 PM »
OK finished reading your post......
You income and your spending are NOT RELATED!  don't think of it as a percentage like savings rate, think of it in total doallrs spent for your expenses, and then minimize that number within reason.  What you make has nothin' to do with it.  if you are making 70K-80K your have the opportunity to be FI rather quickly, don't jeapordize it by frivolously wasting money just because you can..... you live with a roomate-GOOD, but 2200 seems like a lot, where do you live? My mortgage is 820/month, my wife and I split that..... given the current environment, most people who can buy a house or condo or apartment and also rent out the extra rooms are living rent free as the roommates pay for all or most of the mortgage.  Do you live with your girlfriend?  if you are serious about marriage within the next coupla years, the roomate you mention might be your girlfriend, we just don't know....  you might want to consider buying a house that you ultimately will live in in several years, but we don't know enough details so it might be the worst thing to do right now.... who knows, tell us more...

Based on your list of expenses, your yearly expenses are just over 28,000.  That is about what my wife and I spend total, so double per person than what I do but you might live in san fran or NYC or somewhere expensive, so who knows..... tell us more.  but I bet if we can delve into the details a little bit more, then we can adjust your yearly expenses down a bit, and get you to FI that much faster! 
Just remember that your income and your expenses are NOT related, jsut because you make a lot of money doesn;t mean you should be spending it on frivolous things that only delay your FI date....  Tell us where you live, what you do, you car loan details, your roomate sitch, and your fiance-to-be details and we can help you better.
Cheers,
Scott

Jags4186

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Re: Reader Case Study--New Hopeful Mustachian, help me get started
« Reply #4 on: January 05, 2014, 06:48:51 PM »
I live right outside NYC which would account for the high rent. I do not live with my GF but we are going to move in together later this year for August. By getting a 1BR apartment further from the city I'm hoping we can get our rent around 1300-1500/month instead of 2200 for the 2br I currently have.

The details of the car are it is a 2012 that was a 30k loan 0 down 0.9% interest. it was for 60 months I have 36 months remaining.  The payment is $499.73/month. I receive a car allowance which covers the payment and the insurance and I also don't pay for gas which is why I'm not rushing to dump the car. 

A starter 2 br 2 bath house/condo in this area would be at least 300k and property taxes are very high in Northern NJ.

Abe

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Re: Reader Case Study--New Hopeful Mustachian, help me get started
« Reply #5 on: January 05, 2014, 07:25:50 PM »
I think you are doing well, given your expenses and where you live. As others noted, the car expenses provide the most opportunity for savings. 
Would you receive the car allowance even if it is not spent on a car? If it is given to you regardless, then do consider a cheaper vehicle only because of the ancillary expenses involved in maintaining more expensive cars (repairs, insurance, taxes). I anticipate you can get a reliable slightly used car for much less than $18k. The costs for repairing/maintaining it will likely be much less, saving you significant amount of money in the decade or more before either car is run into the ground.

Regarding savings rate: Read this post: http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/

I wouldn't get too hung up on the exact percentage you are saving, but the numbers usually refer to % take home that is saved. The important thing to note is your time to retirement is most dependent on your expenses once retired. Figure out how long it would take you to save 25-30x your annual expenses (don't forget health insurance - that's the biggest one that will increase!), and that will give you a rough idea of when you can retire.
« Last Edit: January 05, 2014, 07:34:20 PM by Abe »

Khan

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Re: Reader Case Study--New Hopeful Mustachian, help me get started
« Reply #6 on: January 05, 2014, 09:10:52 PM »
I would advise against putting every dollar you have in equities specifically in VTI.

Here's the thing about equities, there are different markets then the US. Diversification isn't just a matter of stocks and bonds.

There's Europe, asia, emerging markets, small cap, large cap, REITs, MLP's, value.

And there's good index funds for all of them.

Jags4186

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Re: Reader Case Study--New Hopeful Mustachian, help me get started
« Reply #7 on: January 06, 2014, 05:27:22 AM »
Re: the Car Allowance.  It is cash in pocket.  I get in addition to the 67000 and the bonus, I get $700 cash in pocket a month.  I do not pay for gas...it is 100% provided for by employer.

Re: House.  That is a big one I know...I'm hoping to have that down to 900/month by August.  I wouldn't be splitting rent 50/50 with my GF because I make more than she does...so 900/500 or 950/550 will likely be the rent split when we move in together.  Anything less than that and we'd be living in some pretty rough neighborhoods and I am not looking for that.

Re: 401k.  The reason why I have it split that way is because I get an employer match...but I only get it if I contribute to the pay check.  I want to get the match on the bonus so when I make the employee contribution on the bonus I get the corresponding employer match.  If I do not make a contribution at all on the bonus I lose the match.  If I accidentally max out early via the bonus, I lose the match for the remaining pay periods.  I get 1/2% up to 10% so I am leaving the buffer on the match if I do really great this year (20k bonus, fingers crossed) I still get the max employer benefit.

« Last Edit: January 06, 2014, 05:30:39 AM by Jags4186 »

sdp

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Re: Reader Case Study--New Hopeful Mustachian, help me get started
« Reply #8 on: January 06, 2014, 05:43:50 AM »
If the 'car allowance' is a fixed amount, then I would definitely get rid of the car.  In essence it is part of your income that is tax free!  It is cheaper for your employer to create a 'car allowance' because there are no income taxes involved for your employer, that is the only reason most employers do it that way instead of just giving you a raise.  Don't fall into the trap of allocating the entire amount to an expensive car just because your employer labels it as such.  I think you could find a pretty nice car, say maybe a 2010 chrysler 200/sebring with less than fifty thousand miles on it for half of what your current car is costing you.  you could find a Pretty nice used car that was probably a rental for a year or two, and is super cheap and for sale everywhere.

ZiziPB

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Re: Reader Case Study--New Hopeful Mustachian, help me get started
« Reply #9 on: January 06, 2014, 07:16:44 AM »
Contrary to what everyone is saying, I would keep the car but try to see if you can lower your insurance.  Shop around and revisit your coverage and deductible amounts.  Don't be afraid to use an agent.  My agent was able to get me the best price (I shopped around quite a lot on my own first so I knew what I could get from the usual suspects) by going to a lesser known insurance company.  I know car insurance is very expensive in NJ but you should be able to lower your premiums somewhat.  The other thing is rent.  Again, I know northern NJ is expensive but you should shop around for a better deal when you move in August.

As to your investments, I second the advice you got about diversification.  Don't put all your eggs in one basket!

And I hear you about your 401k strategy.  My employer matches in a similar way to yours, so I end up readjusting my contributions throughout the year to take advantage of the maximum match possible.  I set up the contribution percentage at the beginning of the year based on my estimate of my income and bonus for the year (my employer matches the first 6% I contribute dollar for dollar, and I set my contributions at a higher percentage based on my expected total annual income).  Once the bonus is paid and raises given in March/April, I readjust after I get my first paycheck at the new rate and after the bonus to hit my target contribution for the year and get the full match (I look at the amount left to contribute and divide by number of paychecks remaining through the end of the year and then recalculate the percentage based on the new salary).  My employer matches the contributions whether they are before or after tax, so I contribute on after tax basis after I hit the IRS max.  So far it has worked well.

Elaine

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Re: Reader Case Study--New Hopeful Mustachian, help me get started
« Reply #10 on: January 06, 2014, 07:35:28 AM »
It sounds like you want to know where you can cut, I approach my savings rate as "how much can I permanently cut from my budget?" rather than, "what should my percentage be based on my salary?" I'm also working toward early retirement, so my goal is to save as much as possible (which of course only works if my spending stays very low regardless of salary). For reference, I make 60k a year and live in NYC-  my savings rate is between 55%-60%, so typically I am spending $1,300 a month for all my living expenses. I don't have a car (which doesn't seem like an option for you), but I'd like to second that your rent is crazy expensive. My boyfriend and I have a two bedroom apartment in a very nice area of Astoria for $1500 total, or $750 each. I'm about three blocks from the subway in a neighborhood filled with restaurants, night life, grocers, anything else you might need- it takes about 15 minutes on the train to get into Manhattan. Maybe you're apartment is huge, but that seems like an area to cut if you're looking to max out your savings. It sounds like you might want to evaluate your goals more specifically before deciding what/where to cut. Do you want to retire early, build more savings, just save for a house? I think that your end goal will help you determine how much you want to cut. Since I make a mid-range salary and want to retire extremely early I have to really make my budget the bare minimum. I'd also encourage you to look at your "spending money" category- you might be surprised at exactly where your cash is going. For your reference (since we live in the same area) I spend between $45-$100 a month on groceries for just myself (we split all our expenses, so double that to include my bf). It varies based on whether I buy fancier stuff to cook with and I am a big fan of Costco. Hope my numbers help you with your starting out comparisons. Best of luck!

Jags4186

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Re: Reader Case Study--New Hopeful Mustachian, help me get started
« Reply #11 on: January 06, 2014, 08:56:58 AM »
Elaine,

Thanks for the response...it's always good to hear from someone in a similar situation. 

Yes I understand the rent...  It was a casualty of being single and wanting to live in a hot spot.  Now that I'm in a very serious long term relationship I am basically just spending money to have the ability to walk downstairs and go spend more money.  I don't often anymore.

The goal is to move somewhere for 1400-1500/lb month rent. Split 850/550 or 900/600.  That would save me 200-250/month off the bat.

I am also considering in the new place dropping cable and just going for internet, although the sad part is its only $15/month more expensive to get cable than to just get internet by itself. (I'd get the new customer $85/month deal.  Where I live the ONLY option is cablevision so I can't switch every year for savings).

The long term goal is a problem for me to come up with.  FIRE sounds lovely, but I don't see myself just "quitting".  I want to have, as my new favorite blogger jcollinsnh writes, FU money.  Where I have the opportunity to just work an easy job or work a job I love and if I want to do something which is low paying, do it.  Maybe I can't do it in New Jersey due to cost of living.

Do I want to buy a house?  I don't know...it seems to be an awfully expensive vs renting...but the prospect of renting forever isn't that great either.

So maybe my real question is...what should my goals be in order to reach FIRE?  Should I worry more about getting a huge stash before trying to buy, or should I buy and then hope I build up.  It's hard to figure out because my life is sort of in flux right now as I head towards settling down...

Elaine

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Re: Reader Case Study--New Hopeful Mustachian, help me get started
« Reply #12 on: January 06, 2014, 09:10:23 AM »
Yeah I know what you mean, I still go back and forth on what exactly my plan is- our life is still in that early moving around a lot stage (he's in school, I'm in a not so great but good enough job, etc) so it's tough to know exactly what will happen. I've personally always liked the idea of buying property (three unit building) living in one unit and renting the rest out to pay the mortgage. For me buying property is a priority because rent is my biggest expense and I'd love to get rid of that and be able to "live for free". Ideally I'd like to not have to work at all, just have investments saved and passive income coming in (so I could write full time).  I imagine us buying in a lower cost city like Philadelphia or Pittsburgh, but I go back and forth on the details a lot.
I guess I've gotten ok at knowing that my job right now is just to bank as much money as I can (in investments of course) and worry about exactly what to do with it when we're a bit more set on our path. I do know that for us living in the NYC area long term is not something we'll do, though I enjoy it now. The cost of living is just too high for us to ever reach independence with the kind of salaries we have- plus even if we could eventually buy a place here I can't imagine paying 6k a year in just property taxes alone (or more).