The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: mlov on June 21, 2014, 05:54:56 PM
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NOTE: For some reason, some of the formatting is coming through in plain text. I tried to get rid of it, but it just didn't work out.
Hello Mustachians.
I am a recent joiner of your ranks; a coworker recommended the blog to me two months ago, and it has taken over my life. I feel like I have a pretty basic, normal financial configuration, but for some reason I feel as though I’m not doing something right. So, I turn to you, the community of gnarly mustaches.
Background:
I’m 24, married 5.5 years, have a 1 year old boy. Wife and I moved to our current city (southeastern US) 3 years ago and recently purchased a home in a good area that’s within biking distance of a lot (this was actually not a factor when we decided on the house, it was back in our clean-shaven days). After a tiny 4% downpayment, the loan was for $116k (30 year, 4.75%). After taxes, mortgage insurance, PMI, and dreaded flood insurance, mortgage is $923. More on that later. My wife stays home with our son, and I work a full time job making $50k (gross).
Current Financials:
- [/size]$1k in a savings account for an emergency fund
- [/size]No real extra money in the checking account. Paycheck is direct deposited to my account, I transfer a certain amount for groceries/general household goods to my wife’s checking account and she manages her own money. Anything not invested just sits in the account until it gets used by whatever auto-drafting bill takes it. More on the budget later.
- [/size]Around $2k in Betterment in various goals. Most of it is in a Roth IRA.
- [/size]No credit card debit
- [/size]No car loans (purchased a 2000 Subaru Legacy Outback 2 years ago and paid it off a year early)
- [/size]No student loans
- [/size]Come to think of it, no debt except the house
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Budget:
This is basically copy/pasted out of my budget for next month (July):
Item: $Budgeted
Tithe: $170.00
Investment - General: $400.00
Investment - Roth: $100.00
Mortgage: $1,000.00 (paying ~$75 extra towards principle)
Power: $100.00
Water/Sewer: $80.00
Food: $300.00
Petrol: $180.00
Health Insurance: $255.00 (This is Wife and Baby only, mine is free through work. All plans are HDHP)
Auto Insurance: $30.00
Charter: $40.00 (Internet)
Spending - Wife: $30.00
Spending - Me: $30.00
Household Goods: $55.00
Baby: $20.00
Cell Phones: $50.00
Hair: $20.00
Media OpEx: $20.00 (this is the equivalent of cable TV, but not. It’s Netflix + Usenet subscription)
Clothing: $20.00
Car: $100.00 (General savings for repairs/maintenance, future upgrade)
Entertaining: $10.00 (For random times when we have people over)
Date: $50.00 (This covers restaurant outings)
Gifts: $50.00 (We generally save this up if we don’t use it all and use the delta for Christmas)
Savings: $100.00 (My emergency fund has dipped below $1k this past month because of a few purchases I didn’t want to put on credit. More on that later.
Vacation: $50.00 (Going to Betterment for a summer vacation next year or the year after)
Zoo Renewal: $60.00 (Annual membership that’s up this month)
Unexpected: $10.00
Chiropractor: $30.00
Gym: $10.00
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Budgeted: $3,370.00
Total Income: $3,375.00 (after taxes, $50/month dental insurance for the family, and $50 to an HSA account for health expenses)
Current Mustachian Practices:
- [/size]Opted not to buy a second car (was on the cusp), keeping the single car
- [/size]Purchased a bike off craigslist today. Also learned that I am out of shape.
- [/size]Being very conscious of electricity usage, setting AC to 80 pretty much all the time, except for during the peak afternoon hours of 90+ degree Southeastern US humidity when it’s scheduled to bump to 78. Electricity bill down to $100/month from $150/month.
- [/size]About to purchase a box fan or two to circulate air during the night.
- [/size]Just switched auto insurance providers for the single car with liability and collision (keeping collision until I have enough cash to replace the car if we crash it). Was paying $50/month. This time paid for the 6 month policy in full from my emergency fund and and reimbursing it $30/month.
- [/size]Just switched home insurance providers, saving about $150 per year.
- [/size]Don't buy stupid shit like lattes
- [/size]Bring my own lunch to work, usually leftovers. Only go out for lunch on special occasions, and always accompany it with a punch to the face.
- [/size]Cancelled iTunes Match for me and the Wife - $50 per year annual savings
- [/size]Cancelled Amazon Prime - $99 annual savings (traded an invite to my brother in law’s account for a birthday present. Deeeeal)
- [/size]We cloth diaper our son.
- [/size]Staying on my parent’s family plan with AT&T for cell phones. Works out to $25 per phone per month for essentially unlimited data and everything else, and we can keep our iPhones, so not bad.
- [/size]My company provides me a car to drive with a gas card, so I have $0 in commenting expenses.
- [/size]I did some digging and found that my house is no longer in a flood zone, so I am trying to convince my mortgage company to let me drop the flood insurance. If I can do this, my mortgage payment will go down by $97 per month! I am super excited about this because like most mustachians, I don’t like paying $97/month for useless shit like flood insurance.
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Challenges:
- [/size]Bike: While I don’t need it for the commute, I want to use it for stuff like random trips to the publix around the corner, church, errands, etc. My wife will not, however, be able to use it for grocery shopping. All the stores she shops at that have healthy (but affordable) food are all stuck on one road. This road is insanely busy with no bike lanes or sidewalks and would be a death wish to bike, especially if we have our 1 year old in a trailer behind.
- [/size]Mortgage: Even after reducing the mortgage payment to about $826/month, that is still a shitload of money. Almost a third of my net income!
- [/size]Investing: My current saving rate with these numbers is about 16%. E.g., nothing. Betterment shows a slim chance of reaching my goal. More on my goal later.
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Retirement Goal:
My goal, by the way, is to retire at 40 (16 years from now) with $500k initially. Living on $25k/year, this should last us 20 years when I’ll be able to draw from my Roth IRA for income.
The Problem(s) / Questions:
The above goal assumes we can live off $25k a year. Which, we can, but not with that mortgage. However, if I throw all my investing money towards the mortgage, by the time I pay it off, I won’t have anything invested for retirement. See my predicament? Maybe my goal of 40 is far-fetched. Maybe my mustache needs to grow and my face needs to get punched. That’s cool.
That’s it, mustachians. Tell me what to do.
Thanks,
-mlov[/color][/size][/font]
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I can't comment on IRAs and 401k etc as we don't have them here (not 100% how they work but i know most mustachians use them) but are you using these as best you can? You need to start investing properly if you are going to have your desired income when you retire.
You tithe quite a high proportion of your income, could this be reduced? I know it must be important to you but a balance here is important. If you could reduce that and dispose of the flood insurance, I would build up larger emergency fund, $1k just isn't enough, especially while your wife isn't working. It's a good idea to have at least a couple months worth of expenses tucked away- you could still invest some of that too, just make sure that its something you can access to within a few days just in case. A credit card stashed away for emergencies could be helpful too.
Keep the car for family trips only and groceries etc. Try to get around by bike as much as possible when you don't have the baby with you.
Have you and your wife discussed when she will return to work? Even if it isn't going to be for a couple years it's important to factor into your planning if you want to retire in 16 years. Since you're surviving on one income, if she does go back to work (even just part-time), you should save and invest that income entirely.
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I think your budget is fine and reasonable. It may even be too tight. I think the biggest improvement you could make would be to try to increase your income.
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Petrol: $180.00
If your company gives you a car + gas card, then why are you spending $180/month on gas for non-commuting life? That seems crazy high.
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A few things seem odd, but nothing really appears to break the bank or be a real opportunity that's holding you back from being financially independent.
I agree with Derek, your income is holding you back. Does the wife plan to return to work in a few years after junior is old enough to go to school? If not, are you okay with working a few extra years (read: maybe 5 years) to make up for not having that extra income? If your wife returns to work and earns $35k/yr ($25k after taxes), then subtract maybe $7.5k for additional expenses (extra car, gas, ins, etc), that's easily $17.5k more to savings/investments per year. That's a ton!
The other question is related to your career. Do you see upside in your salary? $50k is barely higher than the nationwide average, and it is enough to live, but will make retiring early and having a substantial financial cushion difficult.
I'd see what you both can do either as some side work, or having the wife return to part-time/full time work once junior is older, as a means to increase your savings rate.
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Tithe: $170.00
- That's 4% of your income. Any way to trade your time versus cash?
Petrol: $180.00
- 4.3% of your income <PUNCH> What the... @ $3.50/gal that's 51.4 gal/mo. The worst rating on your Outback is 21 mpg city or 1080 miles per month or 36 miles per day every day. Does your fuel tank leak or something?
Spending - Wife: $30.00
Spending - Me: $30.00
Household Goods: $55.00
Baby: $20.00
Hair: $20.00
Clothing: $20.00
- $175/mo or another 4.1% of your income
Subtracting your $1,000 mortgage leaves ~$2,400 per month or $28,800 per year, not $25K
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mlov, kudos for a detailed and accurate statement of income and expenses - well presented!
A couple of questions:
1) Does "actual" = "budget", or at least close enough on an annual basis? Just checking....
2) Could you invest $500/mo in a 401k instead of $400/mo in an after-tax account?
See attached if you are interested - based on the detail in your post I'm guessing you have something similar already. It matches your OP if 401k = 0 and "other investment" = $400. Stored numbers have the $500/mo 401k and $0 other.
Comments by other posters that "increased income" is your most probably path to FI seem correct - good luck!
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I'll mention that $300/mo for food for two adults and a baby seems high, especially when one stays home and has the ability to cook in large batches.
Look at your eating habits. If it comes in a box with a cartoon character or a logo, stop eating it. Beans, grains, vegetables, eggs... Keep it basic. You can easily drop $100/mo here.
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Overall, I think your budget looks reasonable. I agree with others - you need more income. What line of work are you in, if you don't mind sharing?
Assuming your wife likes to stay at home, would she be willing to take in some other kiddos during the day for income? I had a friend do that, and she was awesome so she was always, always full, and I think she made anywhere between 1200-2000 a month when she was maxed out. You have to check into your local laws on this, our state will allow up to four without being a licensed daycare. Just throwing this out there. It's something my own mother did off and on, people really like in-home daycares as they are usually less expensive and just feel nicer (to me, at least) than a big daycare.
Otherwise, whatever you can do to fetch more yourself is probably where you need to look. How long has it been since a pay raise? If you are in a field with recruiters, it never hurts to get in touch with one and see what's available if your current position is not going to be able to pay more. Don't forget networking opportunities, either!
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You tithe quite a high proportion of your income, could this be reduced?
This actually is reduced. Used to 10%, now it's 5%. I traded that 5% for more of our time every month, so that's about as low as I'm willing to take it.
Have you and your wife discussed when she will return to work?
She probably will not return to work until halfway into that 16 year period. We plan on having two more kids in the next few years, so she'll be staying home until the youngest is at least old enough for school. So, maybe 8-9 years from now? But you're right, it's something to consider that I didn't think of.
Thank you!
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I think it looks fine. You are saving, investing, paying your mortgage and have every exigency covered and are saving (including every increasing equity in home) just under 50% of your net income, which is pretty darned good on your current income.
Question about tithing: Is this tax deductible for you? If it isn't, I second the suggestion to offer your time and labour instead of your cash. If you absolutely feel the need to provide your religious institution with cash, defer it until you are in a better financial position. Perhaps consider writing them into your will.
Simply put, most churches are absolutely floating with cash and enjoy tax-free status, whereas you are not floating in cash and definitely don't enjoy the luxury of being tax free. $150 per month is far more valuable to your family at this point in time than it could ever possibly be to the church, and you contribute and can accomplish far more with the donation of time. If any of the people in your religions hierarchy live in nicer homes or drive better cars than you do, you really ought to question the donation of money.
I am neither questioning nor mocking your beliefs or religious practices, I just think one ought to be logical and unemotional with money, particularly when one is still financially dependent.
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- That's 4% of your income. Any way to trade your time versus cash?
I actually already did that - this used to be 10%. My mustache wants to reduce it, but my convictions will not allow it.
Petrol: $180.00
- 4.3% of your income <PUNCH> What the... @ $3.50/gal that's 51.4 gal/mo. The worst rating on your Outback is 21 mpg city or 1080 miles per month or 36 miles per day every day. Does your fuel tank leak or something?
Yeah...I know. Honestly I don't know why it's this much. My wife drives the car mostly, and she and my son go to a lot of library programs, grocery shopping, errands, etc. and it just usually ends up being this much per month. Next month or August we plan to buy her a bike and a trailer for the boy as well, so hopefully that will get reduced. However, nearly all the grocery stores and Target are on that un-bikeable road. But at least the nearby errands like the library or church will be biked...hopefully. Thanks for the punch, I need it.
Spending - Wife: $30.00
Spending - Me: $30.00
Household Goods: $55.00
Baby: $20.00
Hair: $20.00
Clothing: $20.00
- $175/mo or another 4.1% of your income
Our spending money could be reduced. It's normally $20 per person, but I increased it this month. Cmd-Tab to Excel, reduced. Hair should say $15, I must have forgotten to change that. I was tipping a ridiculous $8 per haircut, but recently punched myself in the face and reduced to a normal $3 tip for a $12 haircut. Household goods and Baby money goes directly to the Wife, and she usually ends up saving a lot of this every month for larger purchases like more cloth diapers (some of the ones we bought have broken) and random household needs like light bulbs, mouse traps, what have you. Included in that $55 is toiletries (she makes most of our soaps, btw), and cleaning supplies (also mostly made) as well. I could probably get a away with reducing it a little, will have to talk to the Wife. Clothing is for both of us, so I feel like $10 a month per person is reasonable for underwear and shit. But on the months I don't need it, I should be investing it - I'm not.
Subtracting your $1,000 mortgage leaves ~$2,400 per month or $28,800 per year, not $25K
You're right, but I'm also considering that I would not be packing away $500+ per month to retirement savings when I'd already be retired. Is that correct thinking?
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Not big savings, but please consider cutting your own hair. If you go every month, you'll end up with more time and money in your pocket. We bought a WAHL clipper and my husbands hair looks better than what we'd get paying to have it done.
ETA: Also ask your wife is she is grouping errands. With a little one, it's tempting to do one thing a day, because as a SAHM she could just be bored and lonely. Instead, have play dates with other moms at your house, (everyone brings their own lunch!) and have an errand day where she hits all the stores on the busy roads. This should drastically cut down the gas bill - we spend 90 a month and that's mostly for my hubby's commute!
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I'll mention that $300/mo for food for two adults and a baby seems high, especially when one stays home and has the ability to cook in large batches.
Look at your eating habits. If it comes in a box with a cartoon character or a logo, stop eating it. Beans, grains, vegetables, eggs... Keep it basic. You can easily drop $100/mo here.
Wife and I agree with you, but there is a reason it's high. We DO NOT eat shit with cartoon characters on it. The most brand-y thing we have in our cupboards is Cheerios. Our grocery budget is so high because we are now buying organic milk, grass fed/organic meat, stuff like that. Wife makes every meal from scratch and has a small garden. So we do eat really basic, we are just choosing to feed ourselves and our son well instead of genetically modified/inhumane shit. So yeah, you're right, we could reduce this, I just don't think it'd be worth it. My wife constantly goes back and forth between savings dollars on groceries and spending a little extra to properly nourish our bodies - proper nourishment always wins.
Thanks!
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A couple of questions:
1) Does "actual" = "budget", or at least close enough on an annual basis? Just checking....
2) Could you invest $500/mo in a 401k instead of $400/mo in an after-tax account?
1) This is budget, and should be very close to actual.
2) I was investing my $400/month to my Roth IRA (employer does not match 401k yet), but then realized that I wouldn't be able to draw from that until I'm 59.5, so that won't help me for a retirement at 40. That's why I went to a regular investment account. My main question from this post is this - should I be throwing as much into my mortgage as possible, or should I be investing it? Would love your input.
Thank you! I'll look at that sheet.
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I'm still transitioning to a more sustainable grocery budget. For 5 people, we spend $600 including a decent amount of booze and some pantry stocking up, so $300 is reasonable. More vegetarian dishes could reduce the total but I would honestly tackle the miscellaneous gift/dining/etc spending before that.
Not a fan of chiropractic care. I have a long history of pinched nerves and misaligned vertebrae. A spine-focused PT program gave me much better results, without the need for constant maintenance visits. Bonus: insurance covered it at a higher rate to boot.
You'd be surprised what is bikable. Spoiler: everything that's not a restricted freeway.
I would not bother prepaying a mortgage at that rate. Put $100 more pre-tax into your 401(k) and you're far better off in the long run, unless your plan has really really high-cost options.
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That all doesn't sound terribly bad. There isn't much low-hanging fruit, really (aside from how much fuel you're all going through). Your monthly water cost seems kinda high too.
Can you get better rates with switching power providers? Swapping the Outback for something a little lighter on the gas?
Are you able to ditch the work car and take the extra money instead?
Are you able to find higher paying work or a side-gig? Is your wife able to do any work from home?
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2) I was investing my $400/month to my Roth IRA (employer does not match 401k yet), but then realized that I wouldn't be able to draw from that until I'm 59.5, so that won't help me for a retirement at 40. That's why I went to a regular investment account. My main question from this post is this - should I be throwing as much into my mortgage as possible, or should I be investing it? Would love your input.
A couple of things:
1) You can withdraw Roth contributions at any time: http://www.mymoneyblog.com/can-i-really-withdraw-my-roth-ira-contributions-at-any-time-without-tax-or-penalty.html
2) If you have a 401k, then leave your employer, you can roll the 401k into a self-directed IRA. You can then do Roth conversions (if your situation at the time makes that sensible), or at least do SEPP (http://www.72t.net/) to get the IRA penalty-free.
As to your main question, the "correct" answer depends on whether your investment returns will be greater or less than the 4.75% on your mortgage. If greater, invest. If less, pay off the mortgage. Of course, neither you nor anyone can guarantee what the market will do. For some perspective, see http://www.getrichslowly.org/blog/2008/12/16/how-much-does-the-stock-market-actually-return/. Based on historical results (but we know those are no guarantee of future returns), it is probable the market will earn more than 4.75% over time.
I think it depends how important a chance to "retire at 40" is for you. As has been mentioned, status quo is not likely to do it for you. To get higher returns you must accept higher risk. An extreme case would be if you needed $1,000,000 next month: your only legal chance would be to invest in lottery tickets. That would give you a finite, but very low, chance of success. Fortunately your case is not so extreme, but success (i.e., "retire at 40") is not guaranteed. The best you can do at this point is maximize the likelihood of success.
Read A Random Walk Down Wall Street and The Four Pillars of Investing (among others) for more perspective.
ETA: For a less optimistic view on likely market returns, see http://www.cbsnews.com/news/returns-from-the-stock-market-what-to-expect/. Again, no guarantees either way.
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I'll mention that $300/mo for food for two adults and a baby seems high, especially when one stays home and has the ability to cook in large batches.
Look at your eating habits. If it comes in a box with a cartoon character or a logo, stop eating it. Beans, grains, vegetables, eggs... Keep it basic. You can easily drop $100/mo here.
Doc Cyane,
It depends on where you live. In Hawaii, pretty much everything gets shipped from the US mainland. I have found groceries to be about 50% more expensive. For example a gallon of milk is about $5.50. A dozen eggs is almost $4.50. I minimize packaged products as much as I can. I do buy locally grown produce at the farmers market. We are vegetarians and spend about $600/month for two on food, toiletries, household supplies, cat litter etc. Our dining out budget is $150/month.
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You're paying PMI, so my vote is for throwing everything at the mortgage until you have enough principle built up to get rid of it, then reduce your payment to just the minimum, so you can focus on retirement accounts. No need to pay off the house early, since the interest rate is low.
I, too, think the wife should consider taking in a child or two. She makes her own soaps? Can she make some extra and try selling them to other moms, perhaps? Nearby farmers' market?
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Your plan (save $600 a month) is not on track with your goal (retire in 16 years) or your current assets ($3000 in savings and retirement). You seem to want three things:
Spend money on compforts
Have a SAHP
Retire in 16 years
You get to keep two and right now you are choosing the first two. I would talk about priorities with your wife, if you decide that you want to save, I would fully fund two Roth IRAs, one for each of you, that gives both of you well protected assets, and it gives her something that is tangably hers in exchange for spending cuts that will mostly affect her.
The following are luxuries and should be on the cutting block:
$100 Fancy food - you mention organic, not name brand, cooking from scratch and Cheerios. Cheerios are the opposite of the other things you list, I would look into your values here.
$180 Gas
$40 Internet - you have data plans for emergencies and the library for everything else
$20 Hair
$60 spending money - your whole budget is spending money
$55 Household Goods - this seems high, split out disposable (tp, cleaner, printer paper) and new gadgets
$20 MediaOpEx
$10 Entertaining - why does it cost $ when people come over
$50 Dates - it doesn't sound like babysitting is in this, try free dates and cooking dinner for your wife
$50 Gifts - I bet people would love your wife's homemade soup
$50 Vacation
$5 (month) Zoo membership - does your 1 year old get more out of the zoo than the park?
$30 Chiropractor
$10 Gym - now you have a bike
You don't have to cut all of it. I would read this article for a realistic idea of retirement dates
http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/
I would also advise having at least one months expenses accessable, right now you are looking to drain every account you own if you are out of work for a month. Best of luck!
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Senora Savings hit the nail squarely on the head!
Like others, I see some really easy opportunities for savings (well documented above in prior replies), but I cannot emphasize enough growing your earnings. You earn a nice sum..but imagine if you could bring in an extra $25, $30k...or more!?
That is absolutely where I would put my energy, after making the basic cuts. Working with your wife to figure out a powerful side gig for her, for you, and / or gunning for more responsibiity at your current job.
You can't have it all, but you can make the choices for yourself about which priorities are truly important. Right now, you will be able to retire, but likely far later than the timeline you suggested. The question really is...what matters most to you, and what are you willing to do to get it?
Good luck!!
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Your plan (save $600 a month) is not on track with your goal (retire in 16 years) or your current assets ($3000 in savings and retirement). You seem to want three things:
Spend money on compforts
Have a SAHP
Retire in 16 years
You get to keep two and right now you are choosing the first two. I would talk about priorities with your wife, if you decide that you want to save, I would fully fund two Roth IRAs, one for each of you, that gives both of you well protected assets, and it gives her something that is tangably hers in exchange for spending cuts that will mostly affect her.
The following are luxuries and should be on the cutting block:
$100 Fancy food - you mention organic, not name brand, cooking from scratch and Cheerios. Cheerios are the opposite of the other things you list, I would look into your values here.
$180 Gas
$40 Internet - you have data plans for emergencies and the library for everything else
$20 Hair
$60 spending money - your whole budget is spending money
$55 Household Goods - this seems high, split out disposable (tp, cleaner, printer paper) and new gadgets
$20 MediaOpEx
$10 Entertaining - why does it cost $ when people come over
$50 Dates - it doesn't sound like babysitting is in this, try free dates and cooking dinner for your wife
$50 Gifts - I bet people would love your wife's homemade soup
$50 Vacation
$5 (month) Zoo membership - does your 1 year old get more out of the zoo than the park?
$30 Chiropractor
$10 Gym - now you have a bike
You don't have to cut all of it. I would read this article for a realistic idea of retirement dates
http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/
I would also advise having at least one months expenses accessable, right now you are looking to drain every account you own if you are out of work for a month. Best of luck!
Yep. You have to make bigger cuts or bring in more money. If your not maxing out at least your Roth every year your not saving enough to meet your goal.