Author Topic: Case Study: Just Getting Started with MMM  (Read 5169 times)

PimpMyBankAccount

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Case Study: Just Getting Started with MMM
« on: November 26, 2014, 10:57:35 AM »
Hi folks,

We started following the MMM advice a couple of months ago and have made some pretty decent progress so far, in my opinion.  We have canceled cable, replacing it with streaming services and an antenna.  We have also killed our ridiculous $40 / mo. landline and replaced it with a VOIP solution.  I'm tracking everything through Mint.

Short term plans include replacing the Verizon payment with something cheaper (probably Republic if they ever get new phones almost certainly Republic since they just got the new Moto X) and buying a treadmill off Craigslist so we can stop paying for the gym.  We have also accelerated payment on the student loans, and are saving for a more efficient car (probably a 2005 - 2007 Prius) for my wife.  It's just the two of us currently.

We'd appreciate your advice on where we should go from here.

Income
Me: $75,500
Wife (Job #1): $20,000
Wife (Job #2): ~$14,000

Total Annual Income (before tax): $109,500
Approximate Annual After-Tax Income: $74,400
Monthly: $6,200

Expenses
Grocery: ~$620 // we're trying to reduce this by going to less expensive grocery stores
Restaurants and Fast Food: ~$90 // mostly our weekly Chipotle habit

Cell Phones: $195 // Verizon is currently our biggest bill, and is our current #1 target
Internet: $43 // Negotiated a 50% discount for a year on a one year contract when I canceled cable!
Natural Gas: ~$40 // we bought a programmable thermostat off Craigslist and set it to 55 when we're not home, 62 when we are home
Electricity / Water / Sewer: ~$130 // bought a low flow showerhead, this is slowly going down
Waste Disposal: ~$20
Netflix: $9
Hulu Plus: $8
Amazon Prime: $8

Gasoline: $585 // two one hour commutes in opposite directions... Wife's is non-negotiable since it's her dream job, I like the company I work for
Auto Parts / Repairs: $444 // trying to lower this by learning to change my own oil etc.
Auto Insurance: $104 // full comprehensive, may try to lower this

YMCA Membership: $74 // trying to kill this as mentioned above, facepunches expected, we started this before we knew about MMM
Local Taxes: $58 // quarterly estimated payments, our municipality charges us on worldwide income; we get a credit for local payments to work municipalities but it's not enough to zero it out
Weight Watchers: $15 // wife, e-tools only
Miscellaneous: $500 // currently projects like the antenna, reinsulating the attic, Christmas shopping

Mortgage: $879
Student Loan #1: $300 // accelerated from $165
Student Loan #2: $138

Total Expenses: $4,260

Net Monthly Income: $1,940
Savings Rate: ~31%

Assets
Home: ~$96,000 // slightly underwater vs. the mortgage
Car #1 (2003 Chevrolet Impala): $1,980 // according to Mint
Car #2 (2005 Mercury Sable): $500 // at best, severe body and structural damage from multiple accidents
401K #1: $19,331 // 6% of my paychecks for maximum employer match
401K #2: $8,918
Roth IRA: $1,062 // Charles Schwab, losing value year to year, would like to move these to Vanguard eventually
Money Market: $386 // ditto
Cash (Savings Account): $4,708 // this is currently going toward my wife's new (used) car before anything else

Total Assets: $132,885

Liabilities
Mortgage: $97,448 // original mortgage value was $104,000
Student Loan #1: $7,016 // at 5.5% interest, we are accelerating this one
Student Loan #2: $8,991 // at 5.375% interest
Credit Cards: $0

Total Liabilities: $113,455

Specific Questions
We live in a suburb of Cleveland.  Should I get over my attachment to my current job to find a new, closer one?  I have "phantom stock options" worth 0.75% of the company that only pay out if the company is acquired.  These vanish if I quit my current startup job (even vested ones).  I work as a web developer and would like to work with a team rather than work from home if at all possible.

My wife is approaching full 401K employer match vesting at Job #2 and we have been considering getting her to quit that for some time.  Is this reasonable?  She currently is out for at least 13 hours every day.  Job #2 is almost as far as Job #1 so quitting would not reduce the commute distance / cost.  Job #1 is the dream job that is non-negotiable.

Should we take our current savings to Vanguard?  I want to invest in VTSMX (probably balanced with VBMFX at something like 90% stock, 10% bond, will research allocation more when the time comes).  The problem is that the investor shares have a $3,000 minimum, and my research shows that if I withdraw to a point that the account dips below the minimum, Vanguard will cash out the account and send a check.  Our savings are currently targeted toward a used car for my wife (to replace the one with next to no resale value), so we would need to save $3,000 more than that to be safe.

(I'm posting this through a different account than I normally use because the internet doesn't need to know my finances.)

neo von retorch

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Re: Case Study: Just Getting Started with MMM
« Reply #1 on: November 26, 2014, 11:51:19 AM »
Savings is for short-term needs. If you're trying to build up individual, taxable investment accounts, then you'd want to open them (at Vanguard, for example) and you wouldn't worry about withdrawing below the $3000 minimum because you'd leave the money there as long as possible. But if this is part of a plan to build a big nest egg for financial independence, you'd want to optimize your tax situation by contributing more than just the match to your 401k and also researching Roth IRA options before jumping over the fully taxable accounts.

With a 5%+ interest rate on those student loans, I'd consider dumping nearly 100% of your "savings" ($1900/month) on those loans. In a little over 8 months you could have a savings rate of $2378 instead! That's 38%. Nice. (I also consider debt payoff "savings.")

jda1984

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Re: Case Study: Just Getting Started with MMM
« Reply #2 on: November 26, 2014, 12:09:54 PM »
I second Neogodless' response.  Kill the student loans and invest for the long term.  Vanguard won't kill your account if it drops below $3k due to market losses (we were in this situation with one of our IRAs during the recession), but you don't want to be in the market for short term savings.  Taxes are a huge impact if not taken into proper account.

PimpMyBankAccount

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Re: Case Study: Just Getting Started with MMM
« Reply #3 on: November 26, 2014, 12:19:05 PM »
So, I would love to dump the remainder into debt payoff, but my wife's car is currently barely running.  It has permanently lost AC (we could fix but it would be more than the car is worth) and is making some terrible noises.  The current target of the savings account is to buy a used car with great gas mileage in cash.  She could attempt to keep this thing going but I'm hesitant to recommend that for two reasons: the gas savings on e.g. a Prius would be very significant, and the repair costs to keep this car on the road are mounting (note the $444 auto repair / parts average).

Does that change your outlook, or should we pay off the debt before spending on anything, including a car?

MDM

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Re: Case Study: Just Getting Started with MMM
« Reply #4 on: November 26, 2014, 12:26:55 PM »
We live in a suburb of Cleveland.  Should I get over my attachment to my current job to find a new, closer one?  I have "phantom stock options" worth 0.75% of the company that only pay out if the company is acquired.  These vanish if I quit my current startup job (even vested ones).  I work as a web developer and would like to work with a team rather than work from home if at all possible.

My wife is approaching full 401K employer match vesting at Job #2 and we have been considering getting her to quit that for some time.  Is this reasonable?  She currently is out for at least 13 hours every day.  Job #2 is almost as far as Job #1 so quitting would not reduce the commute distance / cost.  Job #1 is the dream job that is non-negotiable.
Great questions but you and your wife are really the best people to answer them.  You could
  - Maintain status quo.  It's really not so bad and has good points.
  - Do some looking for different jobs so you have tangible alternatives for comparison, then decide.
  - Quit the current job(s) and trust that you will find something better.  Plus, being unemployed will give you more incentive to try harder.

Quote
Should we take our current savings to Vanguard?  I want to invest in VTSMX (probably balanced with VBMFX at something like 90% stock, 10% bond, will research allocation more when the time comes).  The problem is that the investor shares have a $3,000 minimum, and my research shows that if I withdraw to a point that the account dips below the minimum, Vanguard will cash out the account and send a check.  Our savings are currently targeted toward a used car for my wife (to replace the one with next to no resale value), so we would need to save $3,000 more than that to be safe.
+1 to neogodless's comments on investments.  You can use the Reader Case Study spreadsheet (if you don't already have something similar) to see how much more you could afford to put into the 401k.  It's often more than one thinks....

As to the car: if you know it is going to fail next week, buy a replacement this week.  If the repairs are postpone-able (e.g., you won't need AC for many months now) then pay off the loans.  Reading between the lines, I'd vote that you replace the car...but I'd really say you should trust your instincts more than random internet suggestions on this.

Also, the difference between performance of similar investments held in Vanguard vs. Schwab in recent years shouldn't be great.  If you are really losing money at Schwab, simply "moving to Vanguard" isn't likely to change that.  But if you mean "change my investment asset allocation" then you might do better.
« Last Edit: December 03, 2014, 10:39:05 AM by MDM »

PimpMyBankAccount

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Re: Case Study: Just Getting Started with MMM
« Reply #5 on: November 26, 2014, 12:39:08 PM »
Also, the difference between performance of similar investments held in Vanguard vs. Schwab in recent years shouldn't be great.  If you are really losing money at Schwab, simply "moving to Vanguard" isn't likely to change that.  But if you mean "change my investment asset allocation" then you might do better.

Yeah, I should probably look at the options in the Schwab account.  It's more or less static at the moment; I didn't set it up, it was from a settlement made long ago when my wife was bitten by a dog.  I would guess it's very conservative; it's losing money due to "advisor fees".  Funny, neither of us have ever talked to an advisor.

DrF

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Re: Case Study: Just Getting Started with MMM
« Reply #6 on: November 26, 2014, 12:40:45 PM »
Buy a used hybrid as soon as possible! It seems to me that you are putting ~$750 per month into your wife's car.

Close the Money Market, and transfer that into your savings account. Money Markets are for sucka's (until rates are better).

Use all the cash you have on hand, plus all of your 'net income', plus the auto repairs and gas for this month to buy a vehicle. This should add up to ~$7500 based on what you wrote. You could easily buy a nice used prius for that. Added bonus of the Prius is reduced fuel costs!

You are paying a lot of taxes because the 2 of you earn a lot. I would recommend at least getting down to the 15% bracket, which for 2014 was $73,800 taxable income. This means that you want to increase your 401k deductions until you hit that mark.

Then put all of your extra money into paying off student loans. Do not save anything else right now.

If one of you loses a job, reduce 401k contributions, reduce student loan payments to minimums until the other person gets a job again.

You are earning great salaries. Try and reduce in the places you have indicated, cook more at home, and increase your 401k contributions.

Good luck!

DrF

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Re: Case Study: Just Getting Started with MMM
« Reply #7 on: November 26, 2014, 12:44:38 PM »
Also, the difference between performance of similar investments held in Vanguard vs. Schwab in recent years shouldn't be great.  If you are really losing money at Schwab, simply "moving to Vanguard" isn't likely to change that.  But if you mean "change my investment asset allocation" then you might do better.

Yeah, I should probably look at the options in the Schwab account.  It's more or less static at the moment; I didn't set it up, it was from a settlement made long ago when my wife was bitten by a dog.  I would guess it's very conservative; it's losing money due to "advisor fees".  Funny, neither of us have ever talked to an advisor.


Agreed!

I've posted before that Schwab has some of the lowest etf fees in the business right now. You should definitely take a look at what funds you own and switch them immediately. There is not any real need to transfer your account to Vanguard. Vanguard has already changed the game, and forced all the companies to offer low cost funds. If you don't want to mess with the transfer, just leave it with Schwab.

NoraLenderbee

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Re: Case Study: Just Getting Started with MMM
« Reply #8 on: November 26, 2014, 01:36:51 PM »
This is a small thing, but why are you paying full comprehensive insurance on cars that are 11 and 9 years old, one of which is almost dead? If both cars got totaled, insurance would pay you (at best) $2480. Look at what you're paying for comp separate from liability. You should probably cancel it now.

BarkyardBQ

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Re: Case Study: Just Getting Started with MMM
« Reply #9 on: November 26, 2014, 02:15:29 PM »
My 401k is at Schwab and it's all in Vanguard funds, specifically VINIX and VIEIX.

Why a Prius? That's an expensive car even used. A used Toyota Corolla should go for around 10k and get comparable gas mileage. Also check out the Nissan Leaf if you are hellbent on killing your fuel budget, lots of benefits and incentives there.

midweststache

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Re: Case Study: Just Getting Started with MMM
« Reply #10 on: November 26, 2014, 03:08:08 PM »
This is not in response to any of your specific questions, but I saw this and had to ask: why are you paying for Netflix AND Hulu Plus AND Amazon Prime? That's $30/month in three similar platforms for streaming entertainment with very little differentiation in what you can access...

rmendpara

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Re: Case Study: Just Getting Started with MMM
« Reply #11 on: November 26, 2014, 03:53:53 PM »
First priority is to replace one car with a reasonable one.

A Honda Civic, Toyota Corolla, Chevy Cruze, whatever else, can be had for under 10k and probably around 5 years old. These all give highway mpg in the mid-high 30s, and are incredibly cheap to maintain. Do your homework a bit, but a Prius might even be in a similar range.

You are losing money each month with the crap car which has no value anyway. At best, you'll scrap it for a few hundred dollars, but you're repairing it and maintaining it is a -100% return because it doesn't extend the car's life.

Once the car is taken care of, I'd move onto the student loans. It looks like you could knock those out in less than 12 months given your cash saving rate.

1) Fix the car situation
2) Get rid of student loans in the next 12 months

[afterwards]
3) Then start looking for ways to enhance wealth creation and savings.

Likely, a combination of increasing 401k contributions, Traditional IRA or Roth , and other investment stuff can come later.

For now, sell out of your Schwab account and buy VTI in Vanguard (it's the ETF for total market fund). You can buy any amount in whole share increments (~$100/share recently). It's basically the same as VTSMX/VTSAX, but an ETF instead of a mutual fund. Hope that helps!

PimpMyBankAccount

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Re: Case Study: Just Getting Started with MMM
« Reply #12 on: November 30, 2014, 08:22:25 PM »
This is a small thing, but why are you paying full comprehensive insurance on cars that are 11 and 9 years old, one of which is almost dead? If both cars got totaled, insurance would pay you (at best) $2480. Look at what you're paying for comp separate from liability. You should probably cancel it now.

A good point.  We will definitely take this advice.  Thanks!

Why a Prius? That's an expensive car even used. A used Toyota Corolla should go for around 10k and get comparable gas mileage. Also check out the Nissan Leaf if you are hellbent on killing your fuel budget, lots of benefits and incentives there.

We drive almost 20,000 miles per year due to our current commutes.    (I realize that is insane, but that's where we are right now.  Long term, hopefully we can change that.)  The Prius has generally been winning on our spreadsheet scoreboard of used cars.  It tracks gas savings over the current car using EPA highway mileage listings and, using that vs. the purchase price, determines the number of years until the car pays for itself in savings, as well as the mileage at that time (as a sanity check since repair costs go up later in a car's life).  We'll take a look at the other cars mentioned here.

This is not in response to any of your specific questions, but I saw this and had to ask: why are you paying for Netflix AND Hulu Plus AND Amazon Prime? That's $30/month in three similar platforms for streaming entertainment with very little differentiation in what you can access...

We're currently on free trials for Hulu Plus and Netflix.  If we can figure out a good solution for, mostly, The Daily Show (which will probably just be a media PC streaming from the website), we may kill Hulu Plus.  Netflix does have a bunch of choices that Prime doesn't.  Prime also tends to pay for itself over the year in saved shipping costs (usually at Christmas).

Thanks for the advice everyone!

Also, I have been looking into the Schwab account options.  Our account is currently managed by a financial advisor as I mentioned above, who is charging what appears to be 1%.  We are invested in:

DIISX - ~15% - International Stock Index - Net expense ratio 0.60%
HLEMX - ~65% - Emerging Markets - Net expense ratio 1.46%
PTTDX - ~20% - Intermediate Term Bond - Net expense ratio 0.75%

This seems like an odd mix to me, and the expense ratios are concerning.  I can trade directly through Schwab but it does tell me to "contact my financial advisor" before I do.  This is my wife's IRA and only holds ~$1000.

Would it make sense to do any or all of the following actions:

- Fire the financial advisor (and convert accounts to straight Schwab accounts)
- Alternatively, call the financial advisor and seek advice
- Sell out of existing mutual funds
- Switch to something like MMM's recommendation (but using equivalent low-cost Schwab funds as they have no trade cost) or a variation on a Couch Potato portfolio, rebalancing every few months
« Last Edit: November 30, 2014, 08:55:20 PM by PimpMyBankAccount »