What are we doing wrong? If its ugly, please tell us, we can handle it

[dinkhelpneeded]

Hi Mustachians,

We are a husband-wife full time working couple (no kids) living in SF Bay Area, and it drives me batty to see us not saving enough, and I really would like some hard-core mustachians or SF Bay area realists to give us suggestions.

*All numbers are annual numbers.

Total Income: 245,000 (Wife: 80,000 Husband: 165,000)
Annual Expenses: 40,000
Total expected taxes: 66,000
Savings in 2013: On target to save $139,000 (including 401k contributions)


2012 Taxes paid: 66K (Federal and State included - taxable income 217K, 28%)

• Federal Taxes paid Wife      18918.86 (withheld extra taxes in 2012 per double income table)
• FederalTaxes paid Husband      28829.39
• State taxes husband      13,103
• State taxes wife      4973.76

2012 401k contribution was 7k (dismal, I know)

Both of us on our way to max our 401ks in 2013.


My question to you, can we be saving more? and where? And it seems to me that the 66K we pay in taxes is ridiculous, is there any way to whittle it down?

Also none of the accountants who do taxes, give tax advice, who do people talk to get tax advice? Is this a double income, no kids problem? Do double income earners pay around 66K in taxes? am I delusional in thinking this is too high?

[Another Reader]

Generally speaking, you need tax shelter and tax sheltered income.  I know, "duh."  You may want to diversify outside of paper assets.  In your shoes, I would look into some investment real estate.  You also need tax efficiency in your taxable paper investments.  ETF's and index funds that don't trade a lot can help a little.  Anytime you can substitute dividends and capital gains for earned income, you are ahead tax-wise.

Most CPA's are set up to do taxes, some will offer tax planning.  I haven't met one that offered really good tax advice.  Financial planners say they offer it, but I haven't heard much useful from any of them, either.  If you are interested in investment real estate, start by reading Jeff Brown at Bawldguy.com.  Even if his investment properties don't interest you, some of his case studies are about people in your position.

High income W-2 employees are the tax vultures' favorite carcass.  Documented income, few deductions, no shelter.   

[onemorebike]

Dinkhelpneeded,

While I am quite jealous of your savings rate (especially in a large city), I'm not sure you'll get much more advice than you already have without posting the details of your monthly (or annual) spending.

-onemorebike

[jrhampt]

Just by maxing your 401 ks, you lower your taxable income another 28k (vs. the 7k you contributed to them this year), which should lower your taxes by around 8k assuming you're in the 28% tax bracket.  So it is very important that you are both maxing your 401ks.  Not sure if you are able to itemize if you don't own a home, but owning a home can also be advantageous from a tax perspective since deducting the property taxes + interest payments usually puts you above the standard deduction.  I also agree with the suggestions to make sure your investments are set up for tax efficiency.  As another dual-income, high-earning, no kids household, you can still expect to pay a lot in taxes.  I think we pay about a quarter of our income in taxes, spend a bit less than a quarter, and save the rest. 

[destron]

Is there some reason you only saved $7000 in your 401k's last year? That is worse than abysmal, it is criminal! Did you spend all that money last year?

You don't have an income problem, you have a tax (and perhaps a spending) problem. If you are on track to only spend $40k in the bay area this year, you may have tackled the spending problem. However, I think you need to do a detailed break-down of your expenses. If you do not have a detailed break-down of your expenses, getting one is the most important thing you can do. Understanding where your money going really helps you prevent it going away. Once you see how much you spend on restaurants, drinking, clubbing, cars or other activities, you won't be so inclined to part with your hard earned cash.

As for your tax situation, I suggest that you STRAIGHT AWAY max out your 401k contributions for 2013. The max is $17,500 per person, so you and your wife should do it. You have very bad tax exposure and this will save you a lot of money. 28% for the husband, 25% for the wife.

Real estate is one way to reduce tax exposure, but I would think long and hard before buying anything in the insanely overvalued bay area. Your options are probably to buy a closet for $500,000 in the city, or commute an hour each way. Neither option sounds attractive. You need to analyze how long you need to work to achieve FI and whether you will stay in the bay area.

Please check out MMM's face-punch series of budget analysis, create a budget for yourself and post it here if you would like a detailed analysis.

[brewer12345]

If the two of you are living on 40k in SF area, I tip my hat to you.  I would not bother trying to squeeze more out of that stone.

Your biggest expenses are taxes.  Unfortunately, you are in the "kill zone" for the federal tax code, plus you live in an extremely high tax state.  Max the 401ks and start looking for any other shelters you might qualify for: HSAs, flexible spending accounts, etc.  You can do better for sure, but when all is said and done you are going to have to pay a stupidly high tax bill unless you move.

[dragoncar]

I think you're looking good.  It may be possible to decrease your effective housing costs by buying (factoring in tax deductions), but we'd need to see your monthly rent to determine if it's worth attacking.

[CNM]

Where does all of your money go?  We've been concentrating on minimizing taxes, which is all fine and good, but what about the other $100K left over? 

[dragoncar]

By the way, $66/245 = 27%, which does not seem crazy.

[smedleyb]

Where does all of your money go?  We've been concentrating on minimizing taxes, which is all fine and good, but what about the other $100K left over?

245k income = 40k expenses + 66K taxes + 139k savings.

Well done, OP, well done.

[John74]

I think you are doing just fine. Taxes are high for us DINKs who live in CA and make good money. Max out your 401Ks, make sure your investments are tax efficient, and take advantage of the pretax benefits offered by your employer.

[KMMK]

By the way, $66/245 = 27%, which does not seem crazy.

Yes, it seems quite reasonable to me, too. I think as long as the bottom line - what you are saving - is good, and will allow you to early retire if that is your choice, then taxes paid doesn't really matter. Of course, finding ways to legally reduce them is expected. And if you disagree about how your tax money is spent that's a whole other story.

But with that savings rate, taxes wouldn't be a big concern to me. Just for random comparison, where I am in Canada it was 21.6% on $53,500 last year, which I am fine with as I can easily live on half my take-home.

[dragoncar]

I think you are doing just fine. Taxes are high for us DINKs who live in CA and make good money. Max out your 401Ks, make sure your investments are tax efficient, and take advantage of the pretax benefits offered by your employer.

And if you retire at a low income level, feel smugly justified in taking subsidized food/health care/whatever based on the amount you've already paid into the system.

[lifejoy]

I bet that you could bring your phone bills down! Best of luck :)

[CanuckExpat]

Thanks everyone for the tax suggestions, and we are on track to max 401k's for this year, and I am debating not putting more money in the HSA because as I understand it, if I move to another plan (HRA) next year, then I cant use the money, and that HSA money can only be used in the same coverage period.

I would double check this. Aside from maxing out your 401k, and using IRA/Roth (look into backdoor Roth at your income level), the HSA is the only easy way you have for removing some taxable income. IIRC, FSA's are use it or lose it, but the HSA money is always available, so you might want to stick as much money in there as possible, depending on your needs and how costly your HSA plan is. You will be able to get the money back out later for covered medical expenses, or as general income when you are much older.
But in general, good work!

[Tyler]

Other than needing to max out tax-deferred accounts, you're doing nothing wrong. I could nitpick some of the food expenses, but living on 40k in the Bay Area is already pretty impressive. Good for you.

My wife and I were in pretty much your exact situation last year (also Bay Area DINKs, although with higher expenses). We chose to move to Austin (not simply for tax reasons - family, culture, yada yada). Our salaries dropped by 15%, but our expenses dropped in half.  And once you include the reduced taxes (don't forget the state cut of your investment income as well) we're saving significantly more now than we did before.

The Bay Area is beautiful, and I understand the benefit of enjoying the area while building your stache.  For us, it's cheaper to live in TX and fly to CA every month [edit: not that we do that] than it is to live there, and we've reached the point where that's more appealing. So just be aware that every place has a tradeoff, and don't be afraid to reevaluate your priorities from time to time.

[$_gone_amok]

I am also from the Bay Area and I think there are more spending that you could cut:

Car Insurance: $135/mo (this gets put aside for the lumpsum payments). This seems ridiculous high to me. We pay roughly $420 every 6 months for a prius and a CRV
Car payment: $283 (Amount remaining: 5K, we could easily pay this off, but worried about not building credit history, so we kept it). Pay it off, you said you are not buying a house for another 4-5 years, so I'd pay it off if I were you, this will also lower your car insurance.

[rugorak]

Looks good. As everyone said maxing your 401k will help with the taxes. Phone bill could potentially be cut back. Check out the wonderful tips on the forum from  I.P. Daley (https://forum.mrmoneymustache.com/share-your-badassity/communications-tech-isps-voip-cell/). I would pay off the car too. Just using a credit card for regular purchases/bills and paying it off every month will give you the history.

[dinkhelpneeded]

I am also from the Bay Area and I think there are more spending that you could cut:

Car Insurance: $135/mo (this gets put aside for the lumpsum payments). This seems ridiculous high to me. We pay roughly $420 every 6 months for a prius and a CRV
Car payment: $283 (Amount remaining: 5K, we could easily pay this off, but worried about not building credit history, so we kept it). Pay it off, you said you are not buying a house for another 4-5 years, so I'd pay it off if I were you, this will also lower your car insurance.

Can you tell me who is your insurance provider? We have farmers, and have really good coverage because we commute quite a bit. I am kind of afraid to drop coverage incase something bad happens. Like MMM it might make sense to move to minimal coverage once work is close to home, but I dont know if it makes sense now. I have also always wondered how "fear" plays into buying or not buying additional insurance, has MMM done a post on this that anyone knows?

[Bakari]

For every one year you work, you are saving 3.5 years worth of spending.
At that rate, you could retire in 15 years even with ZERO investment returns
and this, in the highest cost of living area in the world!!

What more could you possibly want?

The vast, vast majority of the households of the world can not even imagine making a quarter million every single year - most won't make that much in a lifetime.  So, my own personal opinion, just pay your taxes.  You can easily afford it, and they support an economic/political system that in turn allows you a comfortable life and a comfortable salary.

I am also from the Bay Area and I think there are more spending that you could cut:

Car Insurance: $135/mo (this gets put aside for the lumpsum payments). This seems ridiculous high to me.

I am kind of afraid to drop coverage incase something bad happens... I have also always wondered how "fear" plays into buying or not buying additional insurance...

full coverage insurance never makes sense.  If you total your car, replace it with a used compact, which would be fully covered by the cost of 3 years of full coverage insurance ($4860).  Unless you total your car every 3 years, it is more cost effective to skip the insurance (and if you do total a car every three years, your license 'ought to be revoked!)

[mushroom]

I have also always wondered how "fear" plays into buying or not buying additional insurance, has MMM done a post on this that anyone knows?

Yes: http://www.mrmoneymustache.com/2011/06/02/insurance-a-tax-on-people-who-are-bad-at-math/

Car insurance for me and my husband is about $240 every 6 months with Geico.

[dinkhelpneeded]

I have also always wondered how "fear" plays into buying or not buying additional insurance, has MMM done a post on this that anyone knows?

Yes: http://www.mrmoneymustache.com/2011/06/02/insurance-a-tax-on-people-who-are-bad-at-math/

Car insurance for me and my husband is about $240 every 6 months with Geico.

I read through this post, and comments, and MMM buys car insurance based on the cost of totalling the car, my biggest reason for buying car insurance is the "bodily injury" if in case of an accident. Even a minor fender bender can cost thousands of dollars in injury claims if someone claims whiplash or some such, I dont see that being addressed anywhere. Not that I have ever had an accident, but driving on freeways every single day, you never know what can happen, even if you are a safe driver.

Also is your GEICO insurance liability only?

[dragoncar]

Our salaries dropped by 15%, but our expenses dropped in half.

That's not a trade I would make.

[Another Reader]

If you have substantial assets or high income, in my opinion you need to have substantial liability insurance. 

I will pay for good service when it comes to auto and homeowner's insurance.  In well over 30 years, I have had great results with State Farm.  Having been hit over the years by people with different insurance companies, and knowing other folks with similar experiences, I would never pay less to get the poor service offered by Geico or Progressive.

[Bakari]

I have also always wondered how "fear" plays into buying or not buying additional insurance, has MMM done a post on this that anyone knows?

Yes: http://www.mrmoneymustache.com/2011/06/02/insurance-a-tax-on-people-who-are-bad-at-math/

Car insurance for me and my husband is about $240 every 6 months with Geico.

I read through this post, and comments, and MMM buys car insurance based on the cost of totalling the car, my biggest reason for buying car insurance is the "bodily injury" if in case of an accident. Even a minor fender bender can cost thousands of dollars in injury claims if someone claims whiplash or some such, I dont see that being addressed anywhere. Not that I have ever had an accident, but driving on freeways every single day, you never know what can happen, even if you are a safe driver.

Also is your GEICO insurance liability only?

There are two completely separate types of auto insurance.

One is liability.  This is what you are required to have by law.  Liability pays for the other person's car and/or medical expenses if you cause an accident.

The other is comprehensive and collision, also known as " full coverage".  This pays for your car and/or medical expenses if you are in a crash, no matter who was at fault.  It also covers your car being hit while parked or being stolen.

You can change the dollar coverage of either one independently of the other.  You can also drop comprehensive and collision completely.
Having full coverage DOES NOT increase the amount of liability coverage you have.
If you want greater liability coverage, you need to increase the amount of liability coverage.  That's what will protect the concern you have
At the same time, you can drop comp/collision.  It is only useful for replacing a totaled car, and isn't worth the cost.

Full coverage is what makes insurance expensive, not the liability limit.  You can protect yourself against suits and still pay a lot less than you are paying

[mushroom]

Also is your GEICO insurance liability only?

No, it includes comprehensive coverage, and we increased the liability coverage from the most basic up to limits we felt comfortable with. Now I haven't been in a major accident, but we have been pretty happy with Geico's customer service so far - they fixed a chip in the windshield for free without having to use our $250 deductible.

[dinkhelpneeded]

There are two completely separate types of auto insurance.

One is liability.  This is what you are required to have by law.  Liability pays for the other person's car and/or medical expenses if you cause an accident.

The other is comprehensive and collision, also known as " full coverage".  This pays for your car and/or medical expenses if you are in a crash, no matter who was at fault.  It also covers your car being hit while parked or being stolen.

You can change the dollar coverage of either one independently of the other.  You can also drop comprehensive and collision completely.
Having full coverage DOES NOT increase the amount of liability coverage you have.

Holy smokes, this is completely new information to me. Thank you so much! I think I will dig a little deeper into my policy and see what the liability numbers look like. It also seems like if you have medical insurance, that should cover my medical expenses in case of a crash, in which case the comprehensive and collision is only providing the value of the car! and both our cars are less than 10K. I am definitely planning to research this a bit more. Thanks again!

[rugorak]

I'll give a thumbs up to GEICO as well. I hit a black bear on the Mass Pike in 2009 and they were great through the whole process. Their website allows you to play with numbers as much as you want. I found their rates are good too. I could get cheaper but only from places with horrid reviews of customer service, actually paying on valid claims and the like.

[CanuckExpat]

Monthly Expenses: 
Food NON NEGOTIABLE(all organic, from whole foods): $450
Spring water NON NEGOTIABLE (for health reasons): $80

Hi Dink, since you obviously seem to like organic food I was wondering if you've checked into getting some or all of your produce from a farmers market or joining a community supported agriculture (CSA) program in your area. I've liked Farmers Markets for the variety, and just a fun weekend experience, and the produce is probably comparably priced to Whole Foods, or maybe cheaper.
Now for the last two summers, we've been part of a great local CSA, that delivers a variety of fresh, local, organic produce directly to my workplace (we are a drop off site) once a week. In my experience, it has been great and much cheaper than shopping at the Farmers Market. The downsides (for some people) are that you have to pay for the whole season in advance, but I don't think that's a problem for many people here, and you can't pick and choose particular veggies like you can at a grocery store or market, but you just happen to get what's fresh that week (the surprise and variety is part of the fun for me). We pay about $10-$20/week for our CSA share here, which I think is a great deal.

On another note, if you don't mind me asking, what health concerns force you to drink spring water (and really, what is spring water and how does one buy it?).

[GoStumpy]

No, it includes comprehensive coverage, and we increased the liability coverage from the most basic up to limits we felt comfortable with. Now I haven't been in a major accident, but we have been pretty happy with Geico's customer service so far - they fixed a chip in the windshield for free without having to use our $250 deductible.

LOL, a rockchip is usually $25 to fix :)  Glass shops often give it away if they feel you'll come back to them when you need the windshield replaced!

[Taryl]

As a DINK couple in San Diego I don't have much more to add other than use what you have and stop buying new stuff.  Save every dime you can because it adds up over time. And finally, buy property, "they're" not making it any more.