Author Topic: Self employed relatively high earner: How do I hit financial freedom faster?  (Read 3714 times)

thg80

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Here's where I'm at now:

$200k house ($117k mortgage left 15 year 2.75%rate - foreclosure home so we've paid for a lot of stuff to fix it up so far)
Banker said "Don't you want to buy a $750k house you can qualify for that?" no thanks.

SEP IRA Retirement: (Fortunately I can max out at $52k this year [as long as my income exceeds $260k - as you can put a max of 20% in])
$60k Vanguard Index funds
$50k Regular mutual funds (I already paid the front load commission like an idiot so I haven't felt the need to move them)

After tax investments:
This is where I'm lacking... as in basically zero.

Income fluctuates but should be ~$250k+ this year (Haven't been making this every year but did it last year and should do it this year)
Expenses are probably ~$75k per year (I'll be honest maybe closer to ~$100k in expenses).

Bulk of the expenses have been fixes to the fixer upper house and paying off remaining student loans though so not technically gross overspending (please don't stone me).

Should I set up automatic monthly investments into something like WealthFront (for retirement), Betterment (for after tax account) etc so that I don't even see / feel the money come out? Anything else glaringly obvious I should be doing besides trying to spend less? I don't qualify for Roth IRA.

There is likelihood to grow my businesses further and so my income is likely to grow (but who knows it could crash down too)

Thoughts?

surfhb

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You have a spending problem

Make a detailed list of your expenses so we can have a face punch fest :)

With your income you could probably retire in 5 years....unless your business is your happiness

thg80

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You have a spending problem

Make a detailed list of your expenses so we can have a face punch fest :)

With your income you could probably retire in 5 years....unless your business is your happiness

Ran the numbers via Mint looks like $100k spent in 2014 on a pre tax income of $280k.

2014 Breakdown:

Home   $24,535.08 (Mortgage + home improvements e.g. new bathroom supplies etc)
Shopping   $21,336.53 (Gulp)
Food & Dining   $15,776.24 (Organic mostly)
Uncategorized   $10,161.73 (I did best to categorize these but most are checks and I need to get access to older bank records to see the checks)
Health & Fitness   $9,293.15 (Doctor bills out of pocket primarily - this does not include $12k paid via business for health insurance - long story)
Bills & Utilities   $6,738.22 (power, etc)
Auto & Transport   $3,828.79 (no car payment)
Travel   $2,437.50
Kids   $1,861.87
Entertainment   $1,775.22
Business Services   $1,049.32
Pets   $816.57
Education   $633.04
Misc Expenses   $597.50
Personal Care   $417.93
Fees & Charges $115.24

*Does not factor in charitable giving which is typically done via business.

Surplus earnings from 2014 went $32k to student loans (all gone now) then $52k towards SEP IRA and the rest to early mortgage payoff. I did buy a car in cash to replace ailing vehicle. I suspect house pay off by end of Q1 2015 or Q2 2015 at the latest (then no more personal debt).

What I'm doing for 2015:

I set myself on a fixed salary of $65,000 after taxes. In the past we've tried the no credit cards thing, the debit card only thing and now we're trying the envelope system with cash only for non fixed automatic payments for January. The higher income has bailed us out in the past ("oh crap we spent too much better write another check" - yah I know first world problems).

Anything else I'm missing though?

I feel like the fixed salary should help and the envelope system is new. Ultimately I do really get a lot of enjoyment out of my business and feel like it could grow significantly. I could easily see $500k+ pretax take home income from business in 2015 (maybe $1MM+ eventually - which would obviously be a massive increase over 2014. Even with a relatively large personal expense of $100k per year that still leaves a lot left over). I am anticipating "financial independence" before age 35.

But my attitude is that if I'm good at business and at generating wealth why not continue to do so? Perhaps I can take my foot off the gas, but the more I make the more I can give.

Perhaps I need to learn what early retirement looks like, but I feel compelled to work hard still.

One reason why I want to grow income much larger:

Before age 40 charity my goal is 200 wells for Charity Water ($1 million needed). That would be 50,000 people with clean water. If everything goes the way I have things planned for the next 5 years in business this number could be larger.

How should my face be punched in?

deborah

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I really like the "shopping" category - especially when there are "miscellaneous" and "uncategorized" categories as well - and these categories make up just under a third of your spending. I suspect that you need to work out where you are spending your money.

At least you have certain priorities right - getting rid of debt not least. And when you are self-employed and your business is going gang busters, you have a hard time keeping it from getting out of control - let alone your own personal budget. But you really need to change your categories to something meaningful.

former player

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You have kids, and presumably a significant other?  Someone is living high on the hog on that level of spending.  It looks to me as though the house and car spending are under control but everything else is out of control.  Making up for the house and car, maybe?

Even so, you have an amazingly high income.  Set hard limits (can be high given what you earn) to what's available to spend, sock away the excess into investments which will secure your financial independence, and make sure that your business is set up so that you won't start digging into your personal financial independence if income decreases/ceases.  Sorted for life.

FeynmanFan

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I wouldn't be too hard on yourself, as it looks like you are doing well (save for the observations noted above). Plus, your charitable instincts are noble. It's also neat you are fixing up an old home.

(1) Don't forget taxes as a line item in your budget.

(2) I'd open up a Vanguard (or comparable) after-tax investment account. As I look back on my life (I'm substantially older than you are), my primary regret is waiting too long to start making non-Qualified investments. My own FI situation has been complicated by an abundance of Qualified investments but a shortage of non-Qualified investments. I have a ways to go to get to 59.5 years of age, and wish I had more non-Qualified investments to span the gap between my current age and that mile marker.

(3) I cringed somewhat at your "organic mostly" parenthetical, which I read as "we're blowing a lot on food but I'm saving the planet." Call me a cynic, but the "organic" label is largely a gimmick to get otherwise well meaning folks to overpay for food. Don't kid yourself that organic is magically beneficial. There is no such thing as a free lunch -- here, literally. Everything has a cost and benefit.

(4) Do you have 529's for your children? A decent/worst-case rule-of-thumb is $50K/per year/per child for undergraduate education. If you have two children, that's $400K. If graduate school is a possibility, sock away more -- as an example, one year of private medical school education in the United States is currently around $70K. (I accept the position that children should pay for their own education, so all of the above is optional, of course.)

(5) Consult a CPA or tax lawyer about ways to plan for future tax-efficient gifts/contributions to charities.

(6) Make sure you have a will and other aspects of your life covered off (life insurance, health directives, etc.).

thg80

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I really like the "shopping" category - especially when there are "miscellaneous" and "uncategorized" categories as well - and these categories make up just under a third of your spending. I suspect that you need to work out where you are spending your money.

At least you have certain priorities right - getting rid of debt not least. And when you are self-employed and your business is going gang busters, you have a hard time keeping it from getting out of control - let alone your own personal budget. But you really need to change your categories to something meaningful.

Good point. These were just sort of what Mint had automatically and I spent an hour or so trying to get all of the uncategorized separated out (checks mostly). I looked at housing some more and pretty much half of that was stuff for fixing up house which should add value (or at the very least be neutral value).

You have kids, and presumably a significant other?  Someone is living high on the hog on that level of spending.  It looks to me as though the house and car spending are under control but everything else is out of control.  Making up for the house and car, maybe?

Even so, you have an amazingly high income.  Set hard limits (can be high given what you earn) to what's available to spend, sock away the excess into investments which will secure your financial independence, and make sure that your business is set up so that you won't start digging into your personal financial independence if income decreases/ceases.  Sorted for life.

Yah I am the saver. Wife is the spender. The new attempt at the envelope system was her idea as she finds it hard to track how much she has to spend so this way with everything put into buckets hopefully it will be easier.

I wouldn't be too hard on yourself, as it looks like you are doing well (save for the observations noted above). Plus, your charitable instincts are noble. It's also neat you are fixing up an old home.

(1) Don't forget taxes as a line item in your budget.

(2) I'd open up a Vanguard (or comparable) after-tax investment account. As I look back on my life (I'm substantially older than you are), my primary regret is waiting too long to start making non-Qualified investments. My own FI situation has been complicated by an abundance of Qualified investments but a shortage of non-Qualified investments. I have a ways to go to get to 59.5 years of age, and wish I had more non-Qualified investments to span the gap between my current age and that mile marker.

(3) I cringed somewhat at your "organic mostly" parenthetical, which I read as "we're blowing a lot on food but I'm saving the planet." Call me a cynic, but the "organic" label is largely a gimmick to get otherwise well meaning folks to overpay for food. Don't kid yourself that organic is magically beneficial. There is no such thing as a free lunch -- here, literally. Everything has a cost and benefit.

(4) Do you have 529's for your children? A decent/worst-case rule-of-thumb is $50K/per year/per child for undergraduate education. If you have two children, that's $400K. If graduate school is a possibility, sock away more -- as an example, one year of private medical school education in the United States is currently around $70K. (I accept the position that children should pay for their own education, so all of the above is optional, of course.)

(5) Consult a CPA or tax lawyer about ways to plan for future tax-efficient gifts/contributions to charities.

(6) Make sure you have a will and other aspects of your life covered off (life insurance, health directives, etc.).

1. Yah I just don't include because I only roughly know what they will be for the year and won't know final tally until meeting with accountant.

2. Thanks - I think you're right that I need to start generating some money from investments in an after tax account.

3. Heh I think this may be under a to each his own. I can taste a difference between some organic to non organic things. The main thing is I look at the back of the box and see all sorts of chemicals and am like wtf why do they put this in here. Most of the organic is at costco e.g. 30% more for bannanas than non organic.

4. I'm based in a state without an income tax, so there isn't any tax benefit other than that the income can grow tax free and then can be spent without being taxed. I want to do something but not really sure what to do or if there is a better option. There are 15 states without an income tax so still researching this but 529 isn't as great as being able to reduce taxable income on contributions.

5. Yes that's a good point especially in the case of windfall event (e.g. business sale). Maybe need to set up own 503c charity at the time of sale and put some money in there to be used long term and then as I continue to generate more money can continue to fund the charity.

6. Yep. Will was done shortly after kids were born (should have done it before but ah well it's done now)

former player

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3. Heh I think this may be under a to each his own. I can taste a difference between some organic to non organic things. The main thing is I look at the back of the box and see all sorts of chemicals and am like wtf why do they put this in here. Most of the organic is at costco e.g. 30% more for bannanas than non organic.

Not quite sure I understand this.  "Organic" relates to the way in which the basic ingredients of food were produced.  If you are buying those basic ingredients there won't be a "list of ingredients" on the box, because there are no "ingredients", only one type of food which has been produced using either one method (passed by fed and state law as safe) or another (allowed by whatever organisation has certified it as "organic" - assuming that the claim of "organic" is accurate, of course).  I would be most surprised if you could taste the difference between eg organic oats and non-organic oats.   For meat what will make the difference in taste are husbandry and slaughter standards and what if any interventions in the meat have been made after slaughter: both organic and non-organic meat could end up tasting the same, depending on these issues and how carefully you source it. 

The value in buying organic is avoiding pesticide residues which you think could be dangerous to your health (ie you do not trust the fed or state law standards or think they are not being complied with) or you think that organic is better for the environment.  There is a lot of argument as to whether that value truly exists and if it does to which particular ingredients it most applies.

If you are buying a box with a list of ingredients you are buying processed food which has had things added to it, quite probably including a long list of preservatives, colorants, etc.  Not at all the same as whether something is organic or not.   Your problem is not that you need to buy organic, it's that you need to stop buying processed: the highest added value in getting good food at home is in buying single ingredients which have had as little processing as possible and cooking with them from scratch. 

If you are buying "organic processed" food - processed food made entirely from organic ingredients - you will be paying an enormous sum of money, firstly for someone else to have done the job of cooking for you, secondly for the compliance with standards the fed and state authorities don't think is needed and thirdly for being a sucker consumer.

ShoulderThingThatGoesUp

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3. Heh I think this may be under a to each his own. I can taste a difference between some organic to non organic things. The main thing is I look at the back of the box and see all sorts of chemicals and am like wtf why do they put this in here. Most of the organic is at costco e.g. 30% more for bannanas than non organic.

You're being snookered. Organic bananas are possibly the most pointless organic product available, because you don't eat the outside. You probably couldn't tell the difference on a mass spectrometer between the inside of an organic banana and a regular one.

I don't think organic foods are better for the environment, because a big environmental cost of agriculture is land disturbance. That 30% premium is because there's more loss, so you need to disturb more land to bring the same number of bananas to Costco.

If "chemicals" in food disturb you, don't buy processed food. Instants savings.

The set-salary plan seems like a good idea. This may not be possible depending on your business, but I have my paycheck deposited to savings and a set transfer to checking every two weeks. I just adjusted it down after moving a few thousand back to savings.

The biggest money-suck of a fixer-upper is doing things twice, we found. There's always a surprise when you open up a wall. So if I had to do it again, I would only buy something where I could afford to gut each room that had a problem with it other than paint. It sounds like you may be almost done fixing yours up, though, in which case congratulations.

thg80

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Yes I've gotten a little flak for the $100k in annual spending, but I'm most surprised by the hating on organic food vs non organic food.

What we do is buy organic ingredients and then combine them to make a meal.

But either way I appreciate the feedback, it seems like fixed salary + envelop system is what we'll go with. Just wanted to see if people had any other suggestions.

catccc

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Our family also values organic or otherwise sustainably raised food.  But we still spend way less on it.  $5,418 on groceries in 2014, but also $2,710 on dining out.  That includes dining out while vacationing.

Anyway, since you kind of have a "yikes" sentiment on seeing the annual numbers, I would suggest giving YNAB a try.  (YNAB = you need a budget, $60 (or less, search MMM for sale threads) software that happens to have many MMM fans.)  It's basically a cloud syncing envelope system.  So if one of you is a saver and the other is a spender, using this software and having the apps on your phones could really be helpful.  If you both are good at keeping up with it, you'll be on the same page with what you can spend on what.    You've got to break down your "shopping" into more categories; there is probably so much waste here!