Author Topic: Reader Case Study: Safe and Secure to Finding Freedom (Help Please!!!!)  (Read 4238 times)

fishingman88

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Iíd like to think that Iíve lived quite a different life from the standard normal in this society, but Iím sure there are quite a few people out there who have walked in similar shoes like mine.  However, despite reading numerous financial blogs (including MMM) and various books on investing, I have absolutely NO IDEA what I steps I should be taking in my financial future as my career aspirations have changed. 

A quick background about my lifestyle and finances to help you understand the conundrum I am currently in.  I live in Richmond, VA and started out my college career going to University of Virginia in 2006.  However, one semester into school I decided that I didnít want to burden my parents with tuition payments to this school and decided to drop out and do things on my own.  I received a LOT OF criticism for this supposedly reckless decision of leaving a top tier university.

Following that first semester, I ended up taking a retail job and going to a local community college.  Making $8.50/hour, I made just enough to afford the tuition (roughly $1800 a semester while still earning credits that could be transferred to any Virginia college as long I met a GPA requirement).  I felt like this was the smartest education and financial decision because of Virginiaís unique education agreement with its community colleges and 4 year colleges which allowed you to transfer all credits. 

It was a really trying time in life living in a really dump of an apartment with 2 friends from high school.  I paid $250/month for rent and utilities and had to live a super Mustachian lifestyle (even though I didnít know I was at the time). 

During this time, I caught a really really big break in life.  While I was working this retail job, I realized that I needed to get out of the job and working towards building a better financial future.  I was pretty talented at computer trouble shooting and had even worked on building servers during high school.  Therefore, I applied to around 50 IT jobs at a local military base.  I was rejected from all 50 of those jobs and never heard back because I had no degree and no working experience (Iíll admit I was VERY ambitious back in those days).  However, 3 months after receiving 50 rejections, I received a call out of the blue for an interview from one of the companies I had submitted an application too.  I went in for an interview and the hiring manager had me sit down with the top level Systems Administrator who asked me a barrage of questions.  I was able to answer all his questions and the hiring manager offered me an IT Specialist position on the spot. 

At 19, I just entered my first salary job.  I wanted to negotiate salary as I had read in so many articles but I felt I had no leverage.  I had no degree, no experience, and just felt super grateful to have a job.  On a site note though, I did receive something more beneficial than a higher salary in my personal opinion.  Since the job required a 4 year degree, I had to complete my 4 year degree while working the IT Specialist job.  Therefore, my job agreed to pay my tuition and books for the remaining 2.5 years of schooling I had left to do. 

So whatís the catch?  There had to be one to all this goodness.  I had to work 40 hours a week from 11 PM to 7AM working on server maintenance.  This meant that I had to go to work, then go leave for school at 8AM (I transferred to a local 4 year college after I received the job) and stay on campus until around 5PM usually.  Once I came back home, I had to do homework and then sleep for 4 -5 hours before heading back into work. 
So what was the result of taking this job? 

1)   Graduated at 21 with a 4.0 GPA and no student debt
2)   I saved up enough to purchase a house at age 22 with a 20% down payment on a $215,000 house. 
3)   I had a 401k worth about $15,000 at the time.
4)   I had emergency savings for 6 months and my car was paid off as well. 

*Just to note, I was making about $45,000/year from my salary job throughout my college years.  I was underpaid in relativity to my co-workers, but my tuitions/school expenses amounted to about $10,000/year (which was all paid for).

Iíll a quick summary that fast forwards to the present day where things have gotten a little weird.

After graduating, I met this super anti-Mustachian woman who loved the high life, eating out every meal, etc.  It went against all my principles but I was blinded and dated her.  I went from living a Mustachian lifestyle to buying fancy cars (OUCH!), eating out every meal (instead of cooking at home), and just buying fancy gifts and whatever I pleased.  She convinced me that life was too short to save money and that we should both spend all our paychecks on enjoying life.

That relationship should have ended very quickly but it went on too long before I finally came to my senses.  When I came to my senses, I was 24.  3 years of anti-Mustachian living had taken a huge toll.  I had a car I couldnít afford, no additional money saved up, and I hadnít made any career advancement.  Thankfully, I hadnít dipped into home equity or 401k (what a disaster that would have been).

I made a decision that day age 24 that I needed to play catch up.  So I did something kind of crazy.  I applied for a second job IT job (day shift) since I was still working my first IT job that was (night shift).   Due to my degree and years of experience, I landed a second IT job. 

So at age 24, I was working a night shift IT job ($50k/year salary) and a day shift IT job ($65k/year salary).  I worked from 11PM Ė 5PM, 80 hours a week.  Although I had no life, I was able to go back to a Mustachian lifestyle and build up savings. 
Things I did to go back to a Mustachian lifestyle:

1)   Rented out 2 bedrooms to friends in my house which covered my mortgage payment.
2)   Sold my fancy pants car and bought a used reliable car (Yay for no car payments!)
3)   Maxed out my 401k contribution.
4)   Re-financed my home to a lower mortgage interest rate.
5)   Re-built my emergency savings and started stockpiling cash for my next investment moves
6)   Went back to eating at home, not going out every weekend, and just enjoying cheap activities like running, biking, and tennis.

So after a year of working, I felt like I was on the right track to a better financial future.  However, hereís where things changed.
I met another woman.  Sheís the most amazing woman who takes after my own heart.  Super Mustachian lifestyle.  We love exercising together, share the same core values and beliefs, enjoy spontaneity, and love living a minimalistic lifestyle.  After spending a lot of time with her, she asked me one day if I enjoyed working so much and if I loved my job.  To be honest, I hadnít really thought of it too much.  I was kind of a robot who went to work and just came back home and then lived my life.  I didnít hate work, but I didnít enjoy it either. 

After reflecting and thinking about this for a while, I realized that I had forgotten my dreams and passions.  Ever since Iíve been young, Iíve had a heart for helping those who are underprivileged or have special needs.  However, I was so caught up in school and working that I just forgot.  So long story short, we both decided to do some researching into various organizations out there who would allow for both of us to have an opportunity to serve and help underprivileged children. 

We found an organization where we could work in Southeast Asian volunteering and teaching younger children in rural areas.  It was a very spontaneous move, but we applied to work for this organization and accepted positions in this organization.  We only had one month to prepare, so hereís what happened.

1)   I hired a property management company to find tenants and manage my house
2)   I quit both jobs
3)   I sold my car and any other possessions that I felt I wouldnít need to store away
4)   Moved all possessions that I had to my parents house

So letís do another quick time lapse, I had an amazing and enlightening experience while volunteering in Southeast Asia for one year.  I loved every moment of it.  However, during this time I had an epiphany that I wanted to start my own business.  I spent months developing a business plan, developing websites, and have launched my business.  Now that I am running my own business, I love every moment of it.  I love my business, I love having freedom to spend time with my significant other/family/friends, and I simply enjoy life. 

This is where I need your help now.  I want to basically restructure my assets and invest in the right areas to properly set myself up for retirement by age 45.   I need your advice on holding/selling rental property, investing in IRA/Roth IRA/taxable accounts, and what to do with my surplus cash. 

Hereís the present day breakdown:

Age: 25

Assets:
ē   Rental Property Value - $225,000
ē   IRA (Rolled over from 401k when I quit jobs) - $25,000
ē   Roth IRA - $3,000
ē   Taxable Investment Account - $2000
ē   Cash Savings - $18,000
ē   Car - $8500

Debts:

ē   Mortgage on Rental Property - $168,000 (30 year at 3.75% Fixed)

Net Worth:

Assets Total:  $281,500
Liabilities Total: $168,000

Net Worth: $113,500

Income:
After Tax Income from Business per month (currently): $2600
Rental Income: $1485 (after 8% property management fees)

Total: $4085

Expenses:
Mortgage: $1027 (Interest Rate
Rent (living in an apartment with roommates): $500/month
Utilities and Internet: $70/month
Cell Phone Bill: $35/month
Car Insurance: $65/month
Health Insurance: $70/month
Groceries: $200/month
Eating Out/Restaurants: $40/month
Gasoline: $50/month ( hooray for biking around town)
Car Taxes: $12.50/month ($150 yearly)
Donations/Tithe: $260/month
Personal Purchases: $35/month

Total: $2364.50

Monthly Savings: $1720.50
Estimated Yearly Savings: $20,646

So here is where I am confused with what to do in terms of investing/asset allocation:

1)    Do I contribute to my Roth IRA or IRA?  I want to do a max contribution of $5500.

2)   Do I keep the rental property or sell it? (Would my home equity be better in a taxable investment account?) *I havenít made additional principal payments yet because I havenít made a decision yet.

3)   I currently have my cash savings in a checking account producing 0.45% interest, how can I maximize my cash savings benefit while still retaining liquidity for emergencies?

4)   With additional savings should I prepare myself to purchase a primary residence in the future which will then be turned into a rental property down the road? *My apartment lease will be ending next May Ė I have the option to rent another place or purchase a home possibly.


At the end of the day, I am kind of torn between purchasing rental property or putting that money into a taxable investment account.  During the year that my rental property has been active, there have been too many repairs and miscellaneous things that have arisen which have just been stressful.  Although the rental property still produces positive cash flow with continual home equity building up, the added stress sometimes takes away from my livelihood. 

Maybe Iím getting too caught up in making the best investment decisions possible, but I do want to set myself up for an early retirement without having any worries.

Please help!!  I would love any input/advice/life experience from fellow Mustachians.

Ambitious but Confused in Virginia.








MrChubbles

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If you have your own business, you should be able to start your own company 401K through Vanguard. That raises the max contributions enormously:
https://investor.vanguard.com/what-we-offer/small-business/overview

Basically, if you think you will be in the same tax bracket when you retire as the bracket you are in now, it's pretty much the same if you go ROTH or non ROTH, if you will be in higher tax bracket when you retire, go ROTH. If you will be in lower tax bracket, go non-ROTH.

If you are unsure...go 50-50.

MDM

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So here is where I am confused with what to do in terms of investing/asset allocation:

1)    Do I contribute to my Roth IRA or IRA?  I want to do a max contribution of $5500.

2)   Do I keep the rental property or sell it? (Would my home equity be better in a taxable investment account?) *I havenít made additional principal payments yet because I havenít made a decision yet.

3)   I currently have my cash savings in a checking account producing 0.45% interest, how can I maximize my cash savings benefit while still retaining liquidity for emergencies?

4)   With additional savings should I prepare myself to purchase a primary residence in the future which will then be turned into a rental property down the road? *My apartment lease will be ending next May Ė I have the option to rent another place or purchase a home possibly.

Nice life story - best wishes for continued success.  To your questions:
1) Appears you make enough now that the tIRA would be better.  That's a "bad" choice if you end up so wealthy that your retirement tax bracket is higher than current - not the worst problem to have.

2) Can't answer this for you.  Some questions to ask yourself: What is the rental ROI (not clear if the $1485 is before or after expenses, e.g. mortgage and maintenance, other than the 8% mgmt fee)?  Do you like owning rental property?  Would you like to have more than one property?  Why or why not?

3) There are some banks (e.g., Ally, GE Capital, etc.) paying ~0.9% on savings.

4) See responses to #2.  Also, see http://jlcollinsnh.com/2012/02/23/rent-v-owning-your-home-opportunity-cost-and-running-some-numbers/ - renting isn't so bad....

Have you looked into a self-employed 401k?  $17,500 (401k limit) is a big improvement over $5,500 (IRA limit) if you can swing it. (Basically what MrChubbles said while I was typing this.)

Good luck!

bugbaby

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Wow that's some insane badassity of a life. At 25 I was drifting about wondering what to do in life... So you have huge advantage of youth, experience etc. congrats....

Why don't you do a SEP-IRA. ,  its really easy via Vanguard or Schwab etc. Max pretax is 51k I think , you can keep it no matter how much you contribute for now coz income will go up in future so you can increase contribution as you like later.. And Roth too, split as you like...

Sent from my Lenovo S6000L-F using Tapatalk


fishingman88

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If you have your own business, you should be able to start your own company 401K through Vanguard. That raises the max contributions enormously:
https://investor.vanguard.com/what-we-offer/small-business/overview

Basically, if you think you will be in the same tax bracket when you retire as the bracket you are in now, it's pretty much the same if you go ROTH or non ROTH, if you will be in higher tax bracket when you retire, go ROTH. If you will be in lower tax bracket, go non-ROTH.

If you are unsure...go 50-50.

Thanks for the great reply Mr. Chubbles.  Since I haven't operated a full year of my business yet, I've been waiting to speak to my accountant about starting up a company 401k after the first year of business is complete.  The company 401k sounds like a great option though since I could theoretically put in up to $17,500 in contributions. 

fishingman88

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Nice life story - best wishes for continued success.  To your questions:
1) Appears you make enough now that the tIRA would be better.  That's a "bad" choice if you end up so wealthy that your retirement tax bracket is higher than current - not the worst problem to have.

2) Can't answer this for you.  Some questions to ask yourself: What is the rental ROI (not clear if the $1485 is before or after expenses, e.g. mortgage and maintenance, other than the 8% mgmt fee)?  Do you like owning rental property?  Would you like to have more than one property?  Why or why not?

3) There are some banks (e.g., Ally, GE Capital, etc.) paying ~0.9% on savings.

4) See responses to #2.  Also, see http://jlcollinsnh.com/2012/02/23/rent-v-owning-your-home-opportunity-cost-and-running-some-numbers/ - renting isn't so bad....

Have you looked into a self-employed 401k?  $17,500 (401k limit) is a big improvement over $5,500 (IRA limit) if you can swing it. (Basically what MrChubbles said while I was typing this.)

Good luck!

1) Thank you for the well wishes.  I honestly don't have any idea whether I will end up in a higher tax bracket or lower one which is why it makes the decision so difficult between Roth and tIRA.  I am thinking that having a company 401k down the road will allow pre-tax contributions, so maybe I could hedge my bets and put 50% of my savings into the 401k, make no further contributions to my tIRA, and make the max $5500 contribution to a Roth IRA.

2) I net about $3820 a year after management, expenses/repairs, mortgage, etc.   Considering my initial down payment is about $43,000. 

I'd say that my ROI is about 8.88% a year on that initial investment.  However, looking down the road, I could pay the rental property mortgage down in probably about 13-15 years.  After that, I'd be bringing in about $14,000 after fees/taxes and expenses (rough estimate). 

3) Thanks for the input, I'll have to open up an account with Ally or another bank that offers a higher interest rate.

4) I've looked at rent vs buy calculators and everything I read points to renting since I don't plan on living in Virginia for longer than 2-3 more years.  However, the rent vs buy calculators don't take into account of whether you will be turning that primary residence into a rental property. 

I guess I just can't make up my mind if putting down the down payment for another residence next year (which will turn into a rental property 2-3 years from that point) is the better decision or if I should invest the remaining cash I have into taxable accounts.  I know the ROI on in the rental property matters and I should do more research into it to make a better educated decision, but the idea of putting the money into a taxable account and diversifying into different stocks is just more "convenient" per se.




fishingman88

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Wow that's some insane badassity of a life. At 25 I was drifting about wondering what to do in life... So you have huge advantage of youth, experience etc. congrats....

Why don't you do a SEP-IRA. ,  its really easy via Vanguard or Schwab etc. Max pretax is 51k I think , you can keep it no matter how much you contribute for now coz income will go up in future so you can increase contribution as you like later.. And Roth too, split as you like...

Sent from my Lenovo S6000L-F using Tapatalk

Thanks for the encouragement.  I am trying to keep up the work and I couldn't do it without the help of information I've gained from reading MMM and other blogs.  I will continue to do more research to see the differences between a company 401k, SEP-IRA, etc. as I am new to all this since my company is still in its infancy stage. 


shotgunwilly

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Wow dude! You are a busy beast.  To me, your badassity level is expert.

DoubleDown

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Holy crap, what a life already! I'm exhausted just reading it :-)

Good for you on your success so far and taking life by the balls. I'd say:

1. I agree to invest in a 401k and/or traditional IRA in order to take advantage of tax breaks, and to diversify (instead of purchasing another rental property right now).

2. You'll have to go through the NY Times Rent vs. Buy calculator to decide if you are better off buying a home to live in or continuing to rent.

3. As far as keeping the current rental property or selling, have you gone through some of the info in this forum in the Real Estate section, or www.biggerpockets.com? You should consider the totality of your expenses (not just PITI, but repairs/maintenance, vacancies, legal costs, etc.), and see what your true return on investment is. Some very general/introductory rules of thumb are the "50% Rule" and the "1% Rule" -- see if your property at least meets those basic criteria, then do a more in-depth analysis if needed to decide if you'd be better off selling and investing elsewhere. Personally, unless I'm getting 10%+ ROI on a rental home, I'd rather put my money in stocks that take zero work or maintenance.

4. Sounds like you've got it perfect with your current business. Make sure that the totality of your self-employment experience is better than working for a traditional employer. Working for yourself is awesome if it's meeting your goals, just make sure you aren't passing up better benefits overall. I'm not talking just about financial benefits, although those are very important, and I'm not suggesting giving up a life you enjoy for a paycheck. Just periodically make sure you don't end up working for low wages when you consider all the hours you are putting into a business, and perhaps even better opportunities that could be available with a traditional employer.

5. To answer your question about how much to keep in savings for an emergency fund, see MMM's post on "Springy Debt." Basically, he keeps just a month or two in savings to cover usual expenses, and uses a HELOC to cover any unexpected large expenses.

6. Avoid women that lead you down bad financial (or other) paths

Gerard

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I'd like to take a different approach to this. You're awesome at going pedal-to-the-metal on everything you do, but those things change all the time. If I've got this right, in about seven years you've gone to university, dropped out, worked low-wage jobs and gone to community college, worked a night job and gone to university in the daytime, fallen for and then dumped an expensive partner, worked two jobs full-time, become a landlord, fallen for a not-expensive partner, quit work to volunteer, and started your own company.

My only possibly useful advice to you (aside from obvious and ignorable things like "slow down, dude!") would be to make financial choices now that are flexible enough that they don't mess you up when you do your next 180. Protect yourself from yourself.

fishingman88

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Holy crap, what a life already! I'm exhausted just reading it :-)

Good for you on your success so far and taking life by the balls. I'd say:

1. I agree to invest in a 401k and/or traditional IRA in order to take advantage of tax breaks, and to diversify (instead of purchasing another rental property right now).

2. You'll have to go through the NY Times Rent vs. Buy calculator to decide if you are better off buying a home to live in or continuing to rent.

3. As far as keeping the current rental property or selling, have you gone through some of the info in this forum in the Real Estate section, or www.biggerpockets.com? You should consider the totality of your expenses (not just PITI, but repairs/maintenance, vacancies, legal costs, etc.), and see what your true return on investment is. Some very general/introductory rules of thumb are the "50% Rule" and the "1% Rule" -- see if your property at least meets those basic criteria, then do a more in-depth analysis if needed to decide if you'd be better off selling and investing elsewhere. Personally, unless I'm getting 10%+ ROI on a rental home, I'd rather put my money in stocks that take zero work or maintenance.

4. Sounds like you've got it perfect with your current business. Make sure that the totality of your self-employment experience is better than working for a traditional employer. Working for yourself is awesome if it's meeting your goals, just make sure you aren't passing up better benefits overall. I'm not talking just about financial benefits, although those are very important, and I'm not suggesting giving up a life you enjoy for a paycheck. Just periodically make sure you don't end up working for low wages when you consider all the hours you are putting into a business, and perhaps even better opportunities that could be available with a traditional employer.

5. To answer your question about how much to keep in savings for an emergency fund, see MMM's post on "Springy Debt." Basically, he keeps just a month or two in savings to cover usual expenses, and uses a HELOC to cover any unexpected large expenses.

6. Avoid women that lead you down bad financial (or other) paths


Thanks for the information.  I've been utilizing the NY Times Rent vs Buy calculator and everything points to renting, but I guess that part of me that wants to invest in real-estate keeps telling me to buy property.

I've actually been reading the Real-Estate section of the forum and it appears that I really need to do more researching/studying before I commit to any more rental properties. 

In regards to employment, I have a self-imposed plan that if I ever come across an employment opportunity that fits my values/passions and provides a better income then I will take up on it.  However, I am loving the aspect of being my own boss.  Although my current income isn't where I want it to be, I do expect it to increase over the next couple years.

Thanks again for the encouragement and information on "Springy Debt."  I'm going to try and reduce the amount of cash that I hold onto and have it in better investments.

fishingman88

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I'd like to take a different approach to this. You're awesome at going pedal-to-the-metal on everything you do, but those things change all the time. If I've got this right, in about seven years you've gone to university, dropped out, worked low-wage jobs and gone to community college, worked a night job and gone to university in the daytime, fallen for and then dumped an expensive partner, worked two jobs full-time, become a landlord, fallen for a not-expensive partner, quit work to volunteer, and started your own company.

My only possibly useful advice to you (aside from obvious and ignorable things like "slow down, dude!") would be to make financial choices now that are flexible enough that they don't mess you up when you do your next 180. Protect yourself from yourself.

Gerard,

You definitely understand me.  I am 100% pedal to the metal.  I truly believe in doing things to my best and pushing myself to "reasonable limits."  Although my life changes directions 180 degrees quite often, it has definitely made for a crazy awesome life experience.  I've learned a lot from the many many mistakes and unique life experiences which has helped me to arrive to the point that I am today.

Thank you for the advice in relation to setting myself up for a flexible financial future.  I am definitely considering this aspect of making my financial choices more flexible.  I think that with the kind of life I have/pursue, I want to not be tied down to certain financial investments which would hold me back.  I've visualized myself moving cross country possibly down the road and even living in different countries further down my life.  As a result, sometimes I think that having most of my finances tied up in virtual accounts rather than physical tangible assets (i.e. property) might be a better choice for managing my financial future. 

For myself, I find that living by my personal mission statement really pushes me.  I know I should slow down a bit, but having had friends/family pass away at a young age, I want to make sure that if my time comes before I want it to that I will have spent my time on this Earth wisely :)


ch12

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I'd like to take a different approach to this. You're awesome at going pedal-to-the-metal on everything you do, but those things change all the time. If I've got this right, in about seven years you've gone to university, dropped out, worked low-wage jobs and gone to community college, worked a night job and gone to university in the daytime, fallen for and then dumped an expensive partner, worked two jobs full-time, become a landlord, fallen for a not-expensive partner, quit work to volunteer, and started your own company.

My only possibly useful advice to you (aside from obvious and ignorable things like "slow down, dude!") would be to make financial choices now that are flexible enough that they don't mess you up when you do your next 180. Protect yourself from yourself.

Gerard,

You definitely understand me.  I am 100% pedal to the metal.  I truly believe in doing things to my best and pushing myself to "reasonable limits."  Although my life changes directions 180 degrees quite often, it has definitely made for a crazy awesome life experience.  I've learned a lot from the many many mistakes and unique life experiences which has helped me to arrive to the point that I am today.

Thank you for the advice in relation to setting myself up for a flexible financial future.  I am definitely considering this aspect of making my financial choices more flexible.  I think that with the kind of life I have/pursue, I want to not be tied down to certain financial investments which would hold me back.  I've visualized myself moving cross country possibly down the road and even living in different countries further down my life.  As a result, sometimes I think that having most of my finances tied up in virtual accounts rather than physical tangible assets (i.e. property) might be a better choice for managing my financial future. 

For myself, I find that living by my personal mission statement really pushes me.  I know I should slow down a bit, but having had friends/family pass away at a young age, I want to make sure that if my time comes before I want it to that I will have spent my time on this Earth wisely :)

Get more sleep. Your story reads like my dad's when he arrived in America with the clothes on his back and was working minimum wage to feed 12 people. You don't have 12 people depending on you for food and shelter. People consider me really ambitious and driven, but buddy I am not a patch on you. You can/will drive yourself into an early grave. Working the late shift is correlated with cancer. http://www.nbcnews.com/id/22026660/ns/health-cancer/t/graveyard-shift-linked-cancer-risk/