Author Topic: SWR For An Active Real Estate Investor  (Read 15711 times)

iris lily

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Re: SWR For An Active Real Estate Investor
« Reply #50 on: June 07, 2015, 05:33:09 PM »
If your goal is to get to the finish line faster and it is worth the lifestyle tradeoff more power to you.

You're restating your fundamental misunderstanding of this website, again.  It's not a lifestyle trade-off, it's a lifestyle improvement to stop wasting money on things you don't enjoy.  Stop measuring your happiness in terms of dollars spent, and look at the actual happiness each activity or possession generates for you.

Example:  I read stories to my daughter every night, and this makes me happy and costs nothing but my time.  If I chose to work late to get a promotion at work, I might make an extra $20k/year but would have to give up story time.  Since the extra $20k wouldn't actually change my life happiness in any significant way, but losing story time with my daughter would, I've decided not to pursue the promotion.  The same logic applies to expenses I can cut, instead of income I forego.  Focus on the important stuff.

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I'm sure there is plenty we can cut.  The question is if we can truly cut things without sacrificing our standard of living.

Yes.  Yes you can.

Sol, I love you. Great example of living an authentic life.

sol

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Re: SWR For An Active Real Estate Investor
« Reply #51 on: June 07, 2015, 06:02:00 PM »
If you do a dual momentum index fund approach you could get the projected SWR to 10.

Even our most fanatical dual momentum advocates wouldn't make that outrageous claim, Bob.  Let's not exaggerate.

mr_orange

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Re: SWR For An Active Real Estate Investor
« Reply #52 on: June 07, 2015, 10:13:19 PM »
Get your family's spending more line with mine by cutting out that $30k in waste I highlighted above, and you're down around the $1m mark, less than you already have.  You could be FI today just by aligning those first four categories I mentioned above with what my (very similar) family already spends.

Thanks for taking the time to look through the expenses.  Yeah....this wasn't very scientific because it is hard work to go line by line with the expenses with all I have going on.  I asked my wife about some of the items tonight and she pointed me to where I can gather all of them.  My plan is to start doing this next week and get better data to examine.  Our AMEX (business expenses....some are "dual use" like food/eating out), our Compass credit card, and our debit card should yield all of our spending for the last few months. 

My accountant sent me a draft of our return for 2014 today and it looks like our bill for last year was roughly $43k in taxes.  I owe about $17.5k right now that I plan to pay in October.  This is easily one of my biggest expenses and I plan to purchase some more rental property to have depreciation expenses to offset some of this since the SoloK didn't help me given our tax structuring and personal situation.  The 2015 tax year will be far worse so that is really where a lot of my focus has gone in the last few months.  I focus A LOT on reducing taxes; which is logical because it is our largest expense. 

Something has to be wrong with the utilities category somehow.  I'd assume this should be gas, electric, water/wastewater, etc., but I am guessing I lumped other stuff in that category to avoid creating too many other categories.  I'll try to make this more precise when I do the deep dive budget scrub in the coming few weeks.  I doubt we spend much more on real utilities than you do, but there is probably some waste to get rid of in that line item once it is examined more .

My guess is our food bill has probably gone down since this budget was run.  We eat at home more now with 5 to feed.  I am pretty sure we only had one child when this budget was run several years ago.  I also can dual use charge some of the meals out because I generally am doing some sort of business when I eat out.  This probably should be segmented somehow so it is clearer.  I'll work on that in the coming few weeks too as best as I can. 

We did buy a minivan for the twins when they were born.  I tried to find something used, but the Odyssey we wanted didn't depreciate much for a few-year-old car so we decided to buy something new.  This is the first new car I have ever purchased.  We're paying it off next month about 3 years ahead of schedule.  This should free up a lot of cash and also cash flow going forward.  Much of the car expense is in gas.  I do a lot of traveling checking on my development projects so this probably needs to be broken out too.

Shopping plus uncategorized is definitely something worth attacking.  These categories are probably pure laziness on my part.  I need to do a better job tracking things.  We admittedly spend too much on the kiddos right now, but I rarely buy any material goods for myself.  I haven't shopped for cloths in several years.  The family generally buys me new clothes for birthdays and Christmas to keep me from wearing stuff with holes in it ;-)  Fortunately the grandparents buy the kids clothes all the time so that is covered.  Toys and such are a line item here, but we generally buy them on Craigslist or Facebook groups from nearby neighborhoods. 

Financial is probably contributions to retirement accounts.  Yeah....these shouldn't be expenses.  I was just trying to account for dollars out so I'll clean up this slop on the better-tracked report in the coming few weeks.  We currently contribute 18% or so to our Roth 401(k) accounts and $400/month to each of the kid's 529 plans.  This is probably up some from when this report was run. 

Not sure what the $50 in fees was for.  I do pay to maintain my SoloK, but I'll probably drop that now that I know it isn't helping me much presently.  I wrote a scathing email to Wells Fargo last week about junk fees they have been charging for a while and I was too busy to notice until recently.  This is something I need to take a look at and I agree that it is shameful that they're being charged.  No....we don't bounce checks.  This item is dumb/laziness tax right now.  I'll work on cleaning it up if it persists. 

Business services need to be broken out....I'll work on that. 

I do pay for a trainer at the gym, but $81 is not the correct number any more.  My gym membership is dirt cheap via my employer, but the trainer is more expensive.  This expense is something I feel like is a good investment though. 

It would be awesome to carve out $30k/year.  Let's see if that is something worth doing when I get the better budget in the coming few weeks.  Given our anticipated income this year ($300kish development income plus $200kish W2) $30k is only about 6% of our gross income.  That's nothing to sneeze at, but I hope folks can see why the focus has been elsewhere recently.  I have had more focus on growing income and working new projects.  Since we'll be in sell mode for the next several months it is a logical time to work on cutting spending.   

mr_orange

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Re: SWR For An Active Real Estate Investor
« Reply #53 on: June 07, 2015, 10:24:35 PM »
If you subtract out your home expenses, taxes, business services that I'm assuming aren't personal expenses, and financial services that I'm assuming are transfers to investments, your actual daily expense rate is more like $5k/month, not the $11k you previously quoted us.

The real number is probably between $5k and $11k; probably closer to $5k.  It is pretty bad that I haven't tracked it well enough to know.  I'm going to work on correcting that in the coming few months. 

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Even by traditional 4% SWR metrics, you should be able to support your current lifestyle with 1.25m and a paid off house, without making ANY changes to your extravagant spending.  If you believe in your ability to sustain more than a 4% SWR (I do, though for different reasons) then your nut shrinks even further.
Our house is pretty far from being paid off and I question the utility in paying it off if I can get better yields elsewhere.  It would be nice to own something they can't take away though.  In Texas your primary residence survives bankruptcy. 

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Get your family's spending more line with mine by cutting out that $30k in waste I highlighted above, and you're down around the $1m mark, less than you already have.  You could be FI today just by aligning those first four categories I mentioned above with what my (very similar) family already spends.
We'll easily top $1.25M very soon.  I would be very surprised if we don't get there this year.  With what is in our real estate pipeline I am projecting about $600k - $650k in profits from July of 2015 to July of 2016.  Our projects are in Austin and the city has been booming of late; hopefully it will continue. 

This was a primary motivator to start posting on this site.  There are many potential uses for this cash:

1.  Pay off mortgage....not a fan of this one, but it is worth considering
2.  Buy more development projects (currently planned with part of this cash)
3.  Get W2 employees to help scale up development business...not a fan...we're scaling back and owning more equity on new projects
4.  Pay off debt on rentals we own (currently planned with part of this cash)
5.  Keep cash for liquidity and to satisfy compensating balances or covenants for guidance lines with small regional lenders (currently planned with part of this cash)
6.  Buy other assets outside of tax-advantaged accounts.  Of late I have increased our contributions here, but given that our SoloK won't help our tax situation it is better to keep the cash outside of retirement accounts because I can grow it actively at a higher yield than I can investing in projects passively with others (Not currently planned, but I am interested in exploring this one)

mr_orange

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Re: SWR For An Active Real Estate Investor
« Reply #54 on: June 07, 2015, 10:28:07 PM »
And for the non-accredited?  After all, that's the rub: if you're accredited and on this forum, you're probably already retired.

Non-accredited investors would have to find someone operating under the old 506(b) rules or some other exemption that allows for up to 35 non-accredited investors in the offering.  These do exist, but admittedly take much more energy to find. 

Even if you're already retired there is nothing wrong with getting more yield.  If your yield outpaces whatever SWR you selected you could increase your standard of living over time.  I can definitely see how the perceived risk would outweigh the benefit if you're already independent though. 

ShoulderThingThatGoesUp

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Re: SWR For An Active Real Estate Investor
« Reply #55 on: June 08, 2015, 05:25:26 AM »
Why are you keeping your day job if you'll make $600k on your development projects this year, which seems to be what you enjoy doing?

mr_orange

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Re: SWR For An Active Real Estate Investor
« Reply #56 on: June 08, 2015, 08:05:29 AM »
Right now because I haven't hit my target stache number and and I haven't actually sold them yet.  This time next year may be a different story. 

waltworks

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Re: SWR For An Active Real Estate Investor
« Reply #57 on: June 08, 2015, 08:07:17 AM »
Yeah, you need to be thinking hard about life goals. Your finances are solid to quit anytime, and certainly will be in a year assuming you're right about your projected income.

I'd probably quit the day job now, though. You aren't going to get any of those days back.

-W

mr_orange

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Re: SWR For An Active Real Estate Investor
« Reply #58 on: June 08, 2015, 01:38:47 PM »
Hence the reason why I am posting and trying to figure out my real monthly expenses.  With a lot of dough flooding in for the next 12-14 months we are trying to figure out how to allocate it and how to best position ourselves for a more flexible arrangement running our own business.  Not that my current arrangement isn't plenty flexible enough.  However, the job is really starting to get in the way of our business growth so we're starting to spend more time figuring out how to be less reliant on it or completely free. 

My wife also wants to spend more time with our young children.  Making the right decisions should allow her to do this sooner while balancing it with maintaining the lifestyle necessary in order to fund college accounts and live comfortably. 

waltworks

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Re: SWR For An Active Real Estate Investor
« Reply #59 on: June 08, 2015, 01:52:35 PM »
Just allocate it all to boring/safe stuff. There is zero need for you to do anything high risk/yield. You are at the 4% SWR nut already. Win game = stop playing.

-W

mr_orange

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Re: SWR For An Active Real Estate Investor
« Reply #60 on: June 08, 2015, 02:02:52 PM »
Well the game can only be won if I know my run rate....and I don't currently know that very well.  That is an exercise for June.  I'm working on gathering all of the data right now. 

I also think funding the kid's accounts, etc. may keep me in the game longer.  7.5% is fine, but there are skillsets I have that can get me more with some portion of my portfolio.  The question is how much of it to risk seeking the yield to hopefully increase living standards during FIRE. 

Retire-Canada

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Re: SWR For An Active Real Estate Investor
« Reply #61 on: June 08, 2015, 02:09:51 PM »
... to hopefully increase living standards during FIRE.

You life isn't going to improve with more money. You are drowning in wealth and have no clue. More water in the pool ain't going to help.

mr_orange

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Re: SWR For An Active Real Estate Investor
« Reply #62 on: June 08, 2015, 02:14:20 PM »
Using some napkin math with a $100k annual living standard (~8k/month) these were our "freedom point" (% toward FIRE goal) totals for the past decade and a pro forma for this year:

2005   1.83%
2006   3.73%
2007   3.08%
2008   3.76%
2009   4.47%
2010   3.84%
2011   -1.19%
2012   4.47%
2013   5.67%
2014   6.39%
2015   20.42%

2016 should be pretty similar to 2015.  The total above is 56.46% and 2016 would put us at roughly 3/4 to FIRE with $2.5M in assets needed to maintain a 4% SWR, which would yield $100k annually.  Choices:

1.  Cut monthly spending and lower annual expenses needed
2.  Grow income from business and discard job
3.  Work longer and grow both business income and W2 income
4.  Pay off mortgage for personal residence
5.  Pay off debt on rentals
6.  Invest in other assets (real estate, alternatives, boring old index funds, etc.)
7.  Buy rentals to increase depreciation expenses and decrease tax liability

Short term goals (Feedback welcome)
-Cut item 1 10% from whatever our current spending turns out to be
-Eliminate $50k for item 5
-Invest ~430k in items 6 and/or 7 in some allocation (some of the $600k will go to the tax man and some will go for the bullet above)

Appreciate any feedback. 

MDM

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Re: SWR For An Active Real Estate Investor
« Reply #63 on: June 08, 2015, 02:24:48 PM »
4.  Pay off mortgage for personal residence
5.  Pay off debt on rentals
For debt, you may get a better answer looking at it with a different perspective;
  - Don't include debt payments (P&I) in your annual expenses
  - Do add your current principal due to your calculated (annual expenses minus guaranteed income)/(Safe Withdrawal Ratio) and compare that total with your invested assets.

This assumes you will earn more by investing than by paying off the debt, and gives a conservative result under that assumption.

thd7t

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Re: SWR For An Active Real Estate Investor
« Reply #64 on: June 08, 2015, 03:15:26 PM »
What are you looking for out of FI?  You've discussed strategies for building wealth, but you haven't mentioned this.  The reason that I ask is that you mentioned reducing expenses, but you haven't had a chance to track them closely, yet.  I think that this is why you have been concerned about reducing your quality of life.  As you closely look at expenses, you might find things that you're surprised at or just not actually interested in.  Things fall through the cracks all the time.  Knowing why you want to be FI could help you decide what you really value in your quality of life.

In addition, you've mentioned the poor payoff of reducing expenses vs. increasing your income.  In doing this, you've created a false dichotomy (which may have just been for argument's sake), but you also haven't looked at the real value of reducing expenses.  At 4% SWR, reducing expenses by $1000/month is the equivalent of gaining $300k.  Not something to turn your nose up at.  At higher SWR, it is a little less generous, but still not too shabby.  I know that you are open to reducing expenses, but you should consider the full value of it before making it a lower priority.  I believe that tracking your expenses (as you've said you plan) will make this easy.

MidWestLove

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Re: SWR For An Active Real Estate Investor
« Reply #65 on: June 08, 2015, 08:27:48 PM »
"What are you looking for out of FI?  You've discussed strategies for building wealth, but you haven't mentioned this"

+1. I am not sure if you already described (or at least thoughts) on what _you_ want. what is that you desire? what makes you happy - time with your family/wife/children, travel, specific hobby, activity, something else?  money, investments, real estate, index funds, hedge funds ,etc - all means to an end, to fund some goals you may have. what you like doing, like _really_ like doing? what do you don't like doing? how can you do more of the former and less of the later?


for reference -I am your age (one year older at 37) , one kid and second one to be born this month, probably 2x liquid assets, no debts of any kind, and have been asking myself the same questions . financially we do not have to work anymore but still are figuring our own answers...

mr_orange

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Re: SWR For An Active Real Estate Investor
« Reply #66 on: June 08, 2015, 10:34:43 PM »
Fair enough folks...I accidentally posted this in the other thread because I am pretty wiped out from working on it all evening.  I'll post more on the details tomorrow, but here is some fodder for now:

I ran detailed budget tonight and there are a lot of things I had to estimate given how all of our spending is set up.   It appears we spend about $9900/month right now; or right around $10k/month.  This does not include federal taxes because a lot of my tax burden comes from my business dealings and thus it is hard to separate this from my W2 taxation.  I also did not include FICA + FUTA tax because absent a W2 these taxes won't be levied.  I also removed some other one-time things that came up during the evaluation of the last 2 months like the air conditioner going out, the tires needing to be replaced on a car after a flat, etc. 

When I get more energy I'll post in greater detail so folks can lecture me on how to reduce spending.  These are the top run rate items:

(Percentages Throw Taxes Back In Below)
1.  Federal Taxes - 24% of all expenses
2.  Childcare - 17% of all expenses (should go down later this year...woot!)
3.  Mortgage - 16% of all expenses
4.  Groceries - 8% of all expenses
5.  FICA + FUTA Taxes - 5% of all expenses

Those 5 items alone are 70% of all expenses I pay monthly.  Item 1 I'd like to get rid of ;-)  Item 2 is necessary if I keep working and the wife does too.  Item 3 can probably be eliminated within the next year, but it seems sub-optimal given the other things I could do with the cash.  Item 4 definitely has slop in it.  My wife does a lot of the shopping on the days she works from home (Mondays and Fridays) and I don't really participate in this activity much weekly.  Item 5 will go away when we stop working and having earned income, but it is here to stay for now.

I listed 32 total items for expenses.  The other 27 items make up 30% of the overall expenses.  I start to see slop immediately we could pare back:

6.  Entertainment, broadly grouped (think Amazon Prime, movies, UT football tickets, Redbox, Shutterfly, etc.)
7.  Gas for the car
8./9.  Dining out personal and business (our main vice)
10. Spending on the kids (swim class, activities, etc.)
11. Home supplies/maintenance
12. Car maintenance (oil changes, stuff breaking, etc.)
13. Maid
14. Health
15. Cable TV
16. Water/trash (utilities)
17. Medical (kids going to doctors, wife going to doctor/chiro)
18. Electricity
19. Home insurance (We have a lot of other insurance for the business so I had to estimate this)
20. Diet/health products
21. Lawn maintenance
22. Cell phone (mostly covered by the business...I estimated here)
23. Gas - house
24. Gifts
25. Pest control
26. Internet
27. Security system for house (I hate this one, but wife won't let me get rid of it)
28. Haircuts....probably priced wrong in my sheet...wife did some one-time stuff that is skewing this number some
29. Government fees (tolls, DMV)
30. Dry cleaning
31. Phone
32. Clothes

Regarding what I want.  I want:

-To be financially independent to have more time to work on my business
-To allow my wife to spend more time with the kids

Those are the main wants.  I am sure there are others, but just like the top 5 items above are 70% of expenses those 2 items above are at least 70% (probably more) of my motivation. 

Full Beard

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Re: SWR For An Active Real Estate Investor
« Reply #67 on: June 08, 2015, 10:57:44 PM »
Walt and several others......

You can lead a horse to water, but you can't make him drink.  It seems like the same things are pretty much being said on the other SWR for accredited investors thread.

thd7t

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Re: SWR For An Active Real Estate Investor
« Reply #68 on: June 09, 2015, 06:49:32 AM »
I'm glad you ran the detailed budget.  It appears to have clarified that you can make some cuts without impacting your quality of life.  It appears that some discussion with your wife will probably bring this further into reach. 

Regarding your goals, I'd say that, if you are confident in your business continuing to generate the kind of income that you've described, you should make the jump.  I think that that's all it would take.  If your wife wants to spend more time with the kids, she can do this.  You are in a position that you should be willing to go for it.  If you make some small steps, you should be able to control the safety of this move.

mr_orange

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Re: SWR For An Active Real Estate Investor
« Reply #69 on: June 09, 2015, 08:42:22 AM »
Regarding your goals, I'd say that, if you are confident in your business continuing to generate the kind of income that you've described, you should make the jump.  I think that that's all it would take.  If your wife wants to spend more time with the kids, she can do this.  You are in a position that you should be willing to go for it.  If you make some small steps, you should be able to control the safety of this move.

Agree on this pretty much.  We're close to taking the leap.  My W2 job is pretty flexible and posh though so it isn't an easy decision to take the plunge.  I probably work 20 (W2) hours/week at random times throughout the day, weekend, etc.  I support a lot of stuff overseas so it gives me flexibility to run our business during the day.  Things get very busy at times, but overall the average workload is probably 20 real hours per week. 

The other issue is that real estate development is cyclical and thus it isn't really a warm-fuzzy setup.  Things are going well now, but we have no confidence it will continue in perpetuity.  The positions we bought into post crisis are solid, but prices for dirt have gone up and thus we're diversifying to other types of income...like hard money loans and other asset types.  We intend to monetize our current assets and deploy them in a balanced fashion over the next 12 - 18 months. 

My accountant and I are working on reducing item 1.  Buying some more free and clear property would give me some extra depreciation expense.  My plan is to control anything we end up buying.  The last $200k in income will increase my effective tax rate roughly 6-7 points so this is definitely something I plan to focus on in the coming several months to reduce our largest expense. 

Childcare will be reduced by roughly a factor of 30% in August of this year when the school year starts.  The next 60%ish will go away in 3 years.  We'll probably continue to have some expenses here for a brief after school stretch unless we can convince the grandparents to watch 3 kids every day; which seems unlikely ;-)

The mortgage has a big fat bullseye on it, but it is pretty cheap debt.  Item 3 in my list is PITI so only the PI would go away if we paid it off.  The TI will persist.

Groceries can definitely be optimized.  We'll invest some effort there.

FICA taxes start phasing out after $118k or so (too lazy to look up exact figure) so any lift we get in earned income will eliminate either half of this expense or all of it depending on whether it comes from W2 or our personal business W2. 

Other items from 6-32 worth investing energy in reducing in the short term seem to be:

-Item 6....Not sure how this will go over with the wife, but we can check it out
-Item 7....A lot of this is business related so I am not sure it can be reduced a ton
-Items 8/9....huge bullseye here.  Worthy of study
-Item 10...Would lower our standard of living if we cut it
-Item 11....hard to get rid of the AC breaking on the house and stuff lik ethat
-Item 12....would probably go down in FI, but we use our cars now so they need to be supported.  We could probably change our own oil, but this is a low payoff activity IMO
-Item 13....could clean our own house during FI
-Item 14....could exercise more flexibly during FI so this could probably be chopped a lot
-Item 15...I don't plan to get rid of cable
-Item 16...Utilities would probably increase slightly if we were at home more
-Item 17...Darned kids getting sick really puts a constraint on my FI plans ;-)
-Item 18...Electricity would definitely go up if we were home more during FI
-Item 19...There is probably money to be saved on insurance.  Worth investigating
-Item 20...Money to be saved here for sure
-Item 21...Could cut our own grass if we had more time to do it.  Could probably do it now, but that would decrease time with kids on the weekend more
-Item 22...Mostly driven by business....hard to cut much here without sacrificing a lot more income
-Item 23...Would probably increase in FI
-Item 24...Pretty small expense.   I guess we could stop giving people gifts ;-)
-Item 25...This is a good cut target.  The wife likes this stuff....a battle worth fighting
-Item 26...Need internet access for our business
-Item 27...I'll try fighting this battle again....may lose
-Item 28...Pretty minor expense in the grand scheme of things.  May be worthy of energy later on, but probably not worth focus now
-Item 29...This will go down during FI
-Item 30...This was really an anomaly...I rarely have things dry cleaned
-Item 31...Ooma service is pretty bare bones and saves on cell costs
-Item 32...We spend very little on clothes.  I am surprised it even made the list

So....on the immediate hit list:

1.  Tax planning - Working on this right now....was working with accountant today on planning here
2.  Childcare reduced 30% in August
3.  Grocery reduction or optimization with eating out
4.  Investigate insurance in detail
5.  Investigate diet/health items
6.  Argue with wife over pest control expense
7.  Argue with wife over security system

I think we can pretty easily buy a few rentals to save $2k annually in federal taxes using depreciation expenses.  This will trade a bit of cash for this, but it can be minimized if we are patient.  Childcare is going down roughly $600/month using napkin math in August.  So these two items should trim $767/month or so from the budget. 

So to start out with I just need to find another $233/month to hit my 10% reduction initial target using items 3-7.  Estimates:

-Can probably save that alone looking at groceries and dining out.  Need budgets here and this is worth the effort given how much we spend here
-Can probably easily trim 10% off insurance costs.  We spend a lot on insurance for the business too so this is worth investigating
-Diet/health can probably be trimmed.  I already trimmed this some last month, but we can probably do more going forward
-Have battle with wife over items 6-7.   These two line items alone averaged $94.14/month in the last two months, which is almost half of the remaining savings needed

So this would get us from roughly $9900/month to closer to $8900/month as a first step.  As someone mentioned in either this thread or another one this would be the equivalent of roughly $300k in stache needed for FI assuming we can keep the budget monthly.  That's another just over a year's worth of managing development projects and is pretty low hanging fruit so the energy required won't be that high. 

All of this will likely take a few weeks to implement.  I'll report back on what I can work through or actually save so the numbers are more detailed and less fuzzy.