Author Topic: Seeking Advice for my situation.  (Read 5404 times)

BBV

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Seeking Advice for my situation.
« on: March 27, 2012, 10:40:24 PM »
Hello All,

I'm fairly new to the blog/forum and was wondering what advice, insight, and recommendations the more hirsute readers could provide to my situation.

As for me:  I'm 25 years old and live in Reno, NV.  The table below contains an overview of my projected finances for the upcoming year.  The columns are annual and bi-weekly instead of monthly because I get my paycheck bi-weekly, but the more interesting column is probably the annual. 

I forgot to include current balances in the table, but they are currently somewhere around:
  • Retirement Accounts: 25,000
  • ING Savings E-Fund: 10,100
  • ING Savings: 10,300

I didn't include line item living expenses because that isn't the focus of where I'm seeking advice.  I am aware there is some fat that can be trimmed and am hoping to tackle that sooner than later.

Annual
Bi-Weekly
% of Net
Gross Salary (A):
60,000.00
2,307.69
Taxes (-B):
9,526.86
366.42
Employer Match (+C):
1,800.00
69.23
Net Salary (=D):
52,273.14
2,010.51
100.00%
401k (-E):
16,800.00
646.15
32.14%
Medical (-F):
1,976.00
76.00
3.78%
ESPP (-G):
6,000.00
230.77
11.48%
Take Home (=H):
27,497.14
1,057.58
Living Expenses (I):
13,705.94
527.15
26.22%
Additional Savings (J):
13,791.20
530.43
26.38%
=100%
Total Spending (F+I):
15,681.94
603.15
30.00%
Total Saving (E+G+J):
36,591.20
1,407.35
70.00%
=100%

I guess I'm having trouble phrasing my question, so I'll just outline one plan I had and hope you guys can critique that, and I can provide additional information as requested.

I would like to spend at least part of my FI life travelling around in a van.  The van I already own (you can see it at www.bigbluevan.com, yes, I know the blog is way out of date - it was only a half-baked idea to begin with), but it is nowhere near ready for long term living.  I bought it used from a locksmith with the intention of converting it into a class B RV (think www.sportsmobile.com). My conundrum is that the van is definitely not an investment, and it will be quite expensive to convert, even considering I plan to learn-as-I-go insource as much as possible.

So how do large "Consumer" purchases fit into a mustachian lifestyle?  How do I prioritize the converting the van for gallivanting around during FI with investing so that I can reach FI?

One plan that I have been considering is:
  • Save up a down payment for a small house here in Reno, NV
  • Move in to said house
  • Find a reasonable split of paying off the house, investing, and converting the van
  • Move in to the van and rent out the house

But this leads to other questions I don't know how to answer like:
  • How do I find out if Reno is a good place to own what would eventually be a rental property?
  • MMM seems to recommend shorter mortgages to tackle the principle faster, but if I intend to rent it out should I stick with a 30-year fixed?

So I guess my primary confusion surrounds buying homes (specifically in Reno) and fitting expensive liabilities (The Van) in to a mustachian lifestyle.

I appreciate any resources you can point me to for my own learning, as well as your advice, comments, and criticisms. 

Thanks,

BBV


James

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Re: Seeking Advice for my situation.
« Reply #1 on: March 28, 2012, 08:15:57 AM »
I don't have any great answers, I don't have much expertise in the areas you need information on.

I think your plan is a good one, providing you do the proper research.  The biggest question I have would be whether you are up to managing a rental while traveling.  If not, then paying a business to manage the rental while you travel will eat up part of the profit.  But with the effort you are putting into planning for FI, I have no doubt you can work it out some way when you get to that point.  I wouldn't worry too much about the money you put into the van as long as you make sure you end up with something that will work and provide value back that is equal to what went into the project.  It might be best to simply save the money along with way without fixing up the van, and then using that money to purchase what you need.  There are probably a fair amount of vans for sale out there set up for what you need, or at least close to it.

arebelspy

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Re: Seeking Advice for my situation.
« Reply #2 on: March 28, 2012, 08:33:40 AM »
The biggest question I have would be whether you are up to managing a rental while traveling.  If not, then paying a business to manage the rental while you travel will eat up part of the profit.

No, it won't.  That's not profit.

Management of a rental should always be calculated into the net operating income (NOI).  If you choose to do it yourself, you just hired yourself and got a new part time job as a property manager.  But that extra money you're "saving" by not hiring someone else isn't profit on the rental, it's income from a side gig.

So while it will mean he makes less money (because he won't be able to manage it himself -- though that's debatable, many people manage properties long distance), it won't mean his rental makes less profit itself.

Nitpicky, maybe, but a crucial distinction anyone getting into real estate rentals should know, so worth mentioning.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
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Arbor33

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Re: Seeking Advice for my situation.
« Reply #3 on: March 28, 2012, 08:47:15 AM »
Not trying to hijack your thread, maybe an answer from this will afford you better chances to buy property or work on the van:

I understand the tax benefits of investing into a 401k, but why do you put such a large percentage into an account you can't (can with workarounds) touch until the regular retirement age? I guess this is something I struggle with. Investing to the employer match is great, but I've never really understood why more would be better at our age (24/25) if we could otherwise invest that on our own and have the freedom to withdraw whenever we wish. I mean, 32% is substantial money that could be better suited elsewhere.

arebelspy

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Re: Seeking Advice for my situation.
« Reply #4 on: March 28, 2012, 09:02:19 AM »
Not trying to hijack your thread, maybe an answer from this will afford you better chances to buy property or work on the van:

I understand the tax benefits of investing into a 401k, but why do you put such a large percentage into an account you can't (can with workarounds) touch until the regular retirement age? I guess this is something I struggle with. Investing to the employer match is great, but I've never really understood why more would be better at our age (24/25) if we could otherwise invest that on our own and have the freedom to withdraw whenever we wish. I mean, 32% is substantial money that could be better suited elsewhere.

You can access it penalty free. Don't promote the myth that you can't. Google 72t.  On top of that, if he accumulates enough elsewhere that post-tax accounts get him to that age, he won't need to.

In any case, it is accessible.  It may be the case that he's over contributing to it, but that's a separate question, and the idea that you can't access it isn't true and shouldn't be spread.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Ben

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Re: Seeking Advice for my situation.
« Reply #5 on: March 28, 2012, 09:04:25 AM »
My take on it:

At this point BBV has saved up $25K for life after the 'traditional' retirement age. This money will keep compounding (probably doubling every 10-14 years), but is not enough to provide for those 30+ years. Until he has maxed out his tax-deferred accounts, why would he invest in taxable unless a) he needs the money sooner, b) He can get better after-tax returns with an investment that cannot be conducted in tax-deferred accounts, or c) 'financial independence' means owning/working your own business, e.g. as a landlord.

Think of it this way- he has funded (with compounding) his last couple years of life (say, ages 91-95). Now he's working backwards to fund the rest of his life. When he hits the point where he has saved enough (with compounding) to feel secure at his present age, he is financially independent!

BBV, is this generally your strategy or am I way off?

Ben

PS At some point, it will make sense to throttle back on 'traditional' retirement accounts, but I do not believe he has reached that point yet, nor will he for some time at $16k/year.

BBV

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Re: Seeking Advice for my situation.
« Reply #6 on: March 28, 2012, 10:09:16 AM »
I understand the tax benefits of investing into a 401k...

This pretty much sums it up for me. Every time I consider reducing the contributions I hit the same wall.  Maybe I'm missing something obvious, but for every $1.00 I reduce my 401k contributions, I only see $0.75.  The 25% "return" I get just by putting the money in the 401k seems pretty tough to beat.

...It may be the case that he's over contributing to it, but that's a separate question...

A separate question, but still a great question.  How do I know if I am over contributing?

Think of it this way- he has funded (with compounding) his last couple years of life (say, ages 91-95). Now he's working backwards to fund the rest of his life. When he hits the point where he has saved enough (with compounding) to feel secure at his present age, he is financially independent!

I wouldn't say this was consciously my strategy, but do like this way of wording it!


nondualie

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Re: Seeking Advice for my situation.
« Reply #7 on: March 28, 2012, 12:22:19 PM »
BBV: are you currently single?  If so, do you "plan" to stay such?  Kids a desire?

I only ask because when I was 25 I had a much different outlook on things than I do now.  You may find your hopes/dreams/desires change over time.  Enjoy the freedom of youth, but stay flexible...mentally and physically (assets, etc.)...

BBV

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Re: Seeking Advice for my situation.
« Reply #8 on: March 28, 2012, 01:23:11 PM »
Hi nondualie,

Thanks for chiming in.  I currently have a girlfriend that I live with so I'm not single, but not married yet either.  Right now kids aren't a part of any "plan", but I respect the fact that my opinion on this, as with everything else, may change over time. 

arebelspy

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Re: Seeking Advice for my situation.
« Reply #9 on: March 28, 2012, 02:43:08 PM »

...It may be the case that he's over contributing to it, but that's a separate question...

A separate question, but still a great question.  How do I know if I am over contributing?


That is a great question, but a tricky one.  The problem is that there are several ways of looking at things and planning, so it can be tough to say.

Here's the method I like.  Determine your expenses.  Try to estimate what you will spend in retirement (i.e. will you have kids who move out, lowering expenses, will you travel more, raising them, what about healthcare, etc. etc.).

Use FIRECalc to figure out what size portfolio you'll need to cover those expenses.  Project, based on savings rate and a reasonable rate of return, when you will hit that portfolio size (what age).  Determine at that age (FIRE age) how much you will have in retirement accounts and how much in taxable accounts based on current funding levels and the growth rates above.  See how long those taxable ones will last you based on your SWR and retirement expenses calculated above.

All of that will tell you if you need to decrease the amount going into retirement accounts so you have more in taxable to get you to the normal retirement age, or if you need to increase it because you're not taking advantage of it enough.

Keep in mind that you can access early (via 72t and withdrawing ROTH Principal and such), but you should at least get close (within a few years of normal retirement age) with taxable accounts.

All activities you should be doing anyways if you want to FIRE, but going through the steps will help you figure out exactly what contribution rates to do and tweak and how saving more affects your FIRE age and such.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

AlexK

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Re: Seeking Advice for my situation.
« Reply #10 on: March 28, 2012, 09:22:21 PM »
I'm in Reno too.

Reno area is a great place to buy cash flowing real estate.  I have a few properties and they are doing well.  My best ones are in Fernley and I have a property manager so I can take trips, live in a van some day, etc. I have 50% ownership in a 4-plex in Fernley which cost $105k and is rented for $2150/mo. I recently bought a single family house there for $53k (it is in perfect shape, built in 2005) and it's now rented for $795/mo.  You won't get rich quick but there are solid returns in rentals around here.

I would say you are doing quite well for your age.  I reduced my 401k contributions to the employer match (4%) so I could put more money toward real estate purchases.  I've bought most of mine with cash instead of mortgage, just because the cheapest houses usually don't qualify for mortgages anyway and they have the best rate of return.  It doesn't take that long to save up $50k.

I would say fixing up a van to live in is about as mustachian as it gets.