Case Study – Single income family of 6 – Cut expenses and/or increase earnings?

[Stephanie Stache]

Life Situation:
Married filing jointly (ages 35 & 31), 4 children (ages 8, 6, 3, 0), living in Utah. I'm a SAHM, husband works in IT.

Gross Salary: $78,700

Pre-tax deductions:
health/dental insurance $1,740 ($145/mo)
FSA $750 ($63/mo)

Taxable Gross Income: $76,000

Post-tax deductions:
Roth 401k: $3,800 ($331/mo) (5% to get 4% match)
Supplemental Life Insurance: $288 ($24/mo)

Taxes: $8,700 ($700/mo)

Take Home Pay: $63,500 ($5300/month)

Current expenses: (monthly averages)
Mortgage $1,241/mo
Property Tax: $165
Home Insurance: $37
Home Maintenance/Improvement: $70
Electricity: $85
Water/Sewer: $60
Trash/Recycling: $20
Gas (heat, dryer, range): $45
Internet: $60
Cell phone: $10
Life Insurance: $87
Car Insurance: $59
Car Registration, Maintenance: $60
Car fuel: $130 (including road trips, non travel month averages $60-100)
Tithing/Charitable contributions: $650
Kid expenses (diapers, allowance, sports): $60
Clothing: $30
Gifts: $100
Groceries (food only): $430
Dining Out: $35
Medical Out of pocket: $30
Pets: $35 (1 dog, 6 hens which provide us plenty of eggs)
Travel: $110
Shopping (household necessities, electronics, other misc): $660 (higher this year because bought a trailer, normally $400-500/month)
Total Expenses: $4,269/mo, $51,228/year

Savings
Extra mortgage principal: $132   $1,584/year
IRA: $605            $5,500/year
Kids College Fund: $150      $1,800/year
Car replacement fund: $200      $2,400/year     (will probably need a newer minivan in 6 years)

26% savings rate, 20% towards retirement savings

Assets:
Roth 401k $99,000 (was a preset stock only mix, recently changed to a custom mix to include some bonds and international stocks)
Roth IRA $39,000 (Vanguard total stock market index fund)
Emergency Fund $8,300 (plus $2,000 buffer we keep in checking)
Kids College Fund $5,700
House: $360,000
2006 Odyssey: $5,000
2012 Yaris: $8,000
total assets: $527,000

Liabilities:
Mortgage
original loan $260,000, 30 years, 4%, 1241/mo PITI
current amount $249,000

Specific Questions:
Hoping to reach FI in 20 years, when husband is 55. He may decide to retire, go part time, or start his own business. At the rate we're going, we won't reach paying off the mortgage and having enough in retirement savings until about 22 years from now. Any ideas on where to cut the budget to save more? I think we need to try harder to reign in gifts and shopping/misc. I don't think we'd seriously consider moving. Yes we could survive in a smaller house closer to work, but I don't think it would save us much money. We got a really great deal on this house 3 years ago. There were certain luxuries we weren't really willing to budge on when searching for this house, and it's in a really great neighborhood. Eventually (in 10-20 years?) we would like to move to a house in a more rural area, more land for me to garden and raise animals. Equal or less square footage, more garage space or a shop for husband's hobbies.

Husband is thinking about getting an ebike conversion kit so he can commute to work by bike. He doesn't bike now because it's 11 miles to his work and he's not sure he can commit to biking that far every day. He would still probably keep his Yaris for really snowy days, but it would help cut down gas costs. I have biked in the past to cut down on fuel costs, mainly to the grocery store and library with kids in the bike trailer. Can't do that right now with an infant.

Husband is looking at increasing income. He's applied to a couple positions. It looks like an offer is forthcoming from one company. If he took it he would have a significant pay increase, which would really help accelerate FIRE. But it would almost certainly be inferior benefits, require him to travel more, which is not ideal when the kids are young, but when he's not traveling he would probably be working from home (so we're waiting on the e-bike until we hear about this job offer).

Should we not worry about saving for kids college/post HS expenses? Our original thinking was saving up $10k (in today's money) per kid, enough to mostly cover their first year of college or whatever endeavor they choose post high school.  Husband works for a university (not great pay, but very secure job with great benefits) so assuming he's still working there in 18 years kids get half tuition. They will likely get some scholarships, so maybe no real need to save for college? Should we stop saving towards college and put it towards retirement savings instead?

[acroy]

Hello Stephanie, welcome, thanks for posting! Overall looks like ya'll are doing very well!

10% tithing and big(ish) family leads me to ask - Mormon? Old school Catholic family here.

Couple quick observations:
Taxes $700/mo: with all the kiddos, should be lower, no? $1k tax credit per kid, plus you have significant deductions. Might look at making sure you're optimizing the taxes.

Grocery + 'shopping' $1100/mo: seems rather high. DW got our grocery/household expenses down to about $700 purely by being price conscience. Might be some room there.

Life insurance: should be able to get $1M policy for $200-250/yr, save a few hundreds.

Salary: seems low for IT. Then again you mentioned it is for a school, good stability/bennies.  Good he is shopping around.

Biking to work: I've been doing this for years. Suggest try the bike to work 1-2/wk, and build up from there. It saves some, but not a huge amount, if you're driving a fuel efficient (and reliable) vehicle such as the Yaris.

good luck!!

[LittleWanderer]

On the biking to work thing -- he doesn't need to bike to work every day with a 22 mile round trip.  Start with 1-2 days per week.  After a while try 2-3 times a week.  He definitely don't need an ebike for a 22 mile round trip commute.  He will eventually get into better shape (if that's an issue) the more he does it.  Plus on the days he drives, he can bring in clothes, lunches, etc.  Less to carry. 

I have a 30 mile round trip bike commute and am able to do it 3 times per week during the nicer months.  It doesn't have to be all or nothing. 

[Stephanie Stache]

Thanks for your responses. On the taxes: yeah, I think it's actually lower, probably forgot to figure in the refund for last year. We really tried to adjust our withholding last year to minimize our refund, but we're still going to get nearly $2k back from our federal return.

Our average grocery/household is probably closer to $700 a month, it just averaged higher last year because we spent a couple grand on a pop-up tent trailer.  If we don't use it as much as were hoping to this year, we will sell it at the end of the season, probably be able to recoup much of the cost. Shopping is a big category, I'm not sure how to break it down better to see where exactly it's going. A lot is miscellaneous purchases from Amazon, which includes necessities and more frivolous buys.

Life insurance: I wish we had shopped around when we first bought this. We looked at trying to get cheaper life insurance about a year ago, but since husband was recently diagnosed with sleep apnea, rates are much higher. We are both focused on improving health this year. I think if husband loses weight he might not need the cpap anymore.

Biking: I think part of the issue is he usually leaves for work at 6:30, so to have time to bike, he'd have to leave at 5:30 or earlier. He has been getting up early to go running a few days a week, so maybe I can encourage him to try biking to work at least a few times to see if he can manage it just fine without an e-bike.

[SomedayStache]

You are only saving in Roth type accounts right now, no tax-deferred savings right?  Is that intentional?

It sounds like you are unsure about whether or not to specifically save for college.  You could redirect the college savings into a second Roth IRA (you are currently maxing out one Roth IRA leaving some open space in a second Roth IRA).  Come college time the Roth IRA contributions could be drawn upon.  The drawback is that you wouldn't have access to any of the earnings.  The benefit is that if you don't need the money for college you'll have a bonus Roth IRA account.

[MDM]

Unless you expect a large pension, using the traditional 401k is likely better than the Roth - at least until you build up enough in the traditional account that 4% withdrawals will put you in the 15% bracket.  You'll probably save more than 15% now, due to hitting the first tier of the saver's credit.

See also Investment Order.

Each of the above is just another way to comment on the same things SomedayStache did.

[Stephanie Stache]

Husband's work does provide a good pension. We decided to go all Roth with our retirement savings since we're in the 15% bracket now and expect to be in the same bracket when we retire.  I figure tax rates are more likely to go up by the time we retire, so might as well pay our taxes sooner rather than later. We owed $0 in federal taxes for 2016, actually got money back with all our deductions and child credits. Unless I'm mistaken, we make too much to get the saver's credit. I will have to do some more research into this though.

[MDM]

Husband's work does provide a good pension. We decided to go all Roth with our retirement savings since we're in the 15% bracket now and expect to be in the same bracket when we retire.  I figure tax rates are more likely to go up by the time we retire, so might as well pay our taxes sooner rather than later. We owed $0 in federal taxes for 2016, actually got money back with all our deductions and child credits. Unless I'm mistaken, we make too much to get the saver's credit. I will have to do some more research into this though.

If you are sure you will reach the 15% bracket on the pension alone that might make sense.  Assuming the pension fund stays solvent, husband doesn't stop (voluntarily or involuntarily) working there, etc.

Your current income is indeed too high for the saver's credit - but subtract $18K (perhaps a little less) due to a traditional 401k and suddenly....

See the case study spreadsheet using your own numbers for a chart.

[PJ]

Just wanted to make a quick suggestion about the biking -

In the beginning, is there someplace part-way that your hubby could drive to, with the bike in the car, then bike the rest of the way?  I'm thinking friend, family, co-worker, or even a business that you frequent regularly where you could ask for permission to do that for a couple of weeks, to see how it goes?  It reduces gas, may get you a reduction on insurance if you drop your annual mileage amount, saves wear and tear on the car, reduces maintenance costs, and helps hubby lose the weight too.  It seems worthwhile getting a bit creative, even though it's not a super big ticket item in your budget! 

Another option, if any co-workers live reasonably close, is to bike to work day 1, leave bike at work, ride home with co-worker and back to work the next day too, then bike home from work day 2, etc.  Or just look at whether there are carpooling possibilities in general, which would reduce the car costs, albeit without the exercise benefits!

[waltworks]

I'd say that other than maybe doing a full analysis of where you can best put money to save some taxes, you're pretty much optimized. You have 4 kids, a decent chunk of money being tithed (this is not a criticism, just a statement of fact, let's please not have another stupid tithing debate), and a relatively low income for DH with (presumably at age 35) a few years under their belt in IT.

My assumption is that your costs will rise as the kids get older (or you have more) as well.

Your home maintenance number is laughably low unless you are leaving out capital expenses (new roof, new furnace, paint, etc). I'd budget something like $2000-3000 a year over the long term, though the costs will of course vary wildly from year to year).

So for the long term plan to work, I think side gig for you (or transition to a part time job once all kids are in school) is probably the only plausible path, unless DH can get some raises/promotions/hire on for more money elsewhere.

There's just not a ton of fat to cut from your budget - which is awesome. You don't make enough money to have your plan stand much of a chance, so I'd look at that first and war-game what it would take in terms of extra income to make this happen.

-W

[Stephanie Stache]

If you are sure you will reach the 15% bracket on the pension alone that might make sense.  Assuming the pension fund stays solvent, husband doesn't stop (voluntarily or involuntarily) working there, etc.

Your current income is indeed too high for the saver's credit - but subtract $18K (perhaps a little less) due to a traditional 401k and suddenly....

See the case study spreadsheet using your own numbers for a chart.

The pension would definitely put us in the 15% bracket. Even if we ignore the pension though, I just don't see how contributing to a traditional 401k is really advantageous when we're owing little to 0 federal income taxes due to all our other credits. Why try to reduce my taxable income now when my taxes are already minimal? I can see that it may make sense in the future as our income increases.

Your home maintenance number is laughably low unless you are leaving out capital expenses (new roof, new furnace, paint, etc). I'd budget something like $2000-3000 a year over the long term, though the costs will of course vary wildly from year to year).

So for the long term plan to work, I think side gig for you (or transition to a part time job once all kids are in school) is probably the only plausible path, unless DH can get some raises/promotions/hire on for more money elsewhere.

You're right about the home maintenance, I know we should be setting aside money for when big things come up. The furnace and probably the roof will need replacing in the next 5-10 years. We're focused on saving for our next car right now. We just paid off the Yaris and we really want to avoid another car loan in the future. If the furnace dies before the van, the money can go to that instead.

I have been thinking about a side gig for me, but it's hard to consider it seriously when I'm still sleep deprived with an infant. This is probably our last baby. Maybe next year I can have the time and energy to start a side hustle. I taught high school before I had kids, so I'm thinking I will go back to that once all the kids are in school.

DH has been getting raises every year, sometimes twice a year. They're good raises for the organization he works for, but pittance compared to the broader industry. Between that and office politics, it's looking more and more likely that he will not stay with this employer til retirement. The question is really when can DH find an offer good enough to jump ship.

[Stephanie Stache]

In the beginning, is there someplace part-way that your hubby could drive to, with the bike in the car, then bike the rest of the way? 

That's a good idea. There's a train station kind of on the way, but it's most of the way to work. Not much point to drive 8 miles then bike the last 3. I know he could easily bike 3 miles. I'll have to look into it, see if there's a better half-way point. However, it might be tricky getting his bike to fit in his Yaris. He'd probably have to put the back seats down.

[Stephanie Stache]

It sounds like you are unsure about whether or not to specifically save for college.  You could redirect the college savings into a second Roth IRA (you are currently maxing out one Roth IRA leaving some open space in a second Roth IRA).  Come college time the Roth IRA contributions could be drawn upon.  The drawback is that you wouldn't have access to any of the earnings.  The benefit is that if you don't need the money for college you'll have a bonus Roth IRA account.

This is great, I don't know why I haven't thought of it before. I've been itching to get a second Roth IRA open; I might be able to get the DH on board with this. We'd love to give our kids a little jump start into adulthood (my parents paid for my first year of college), but they can survive without it.

[waltworks]

I wasn't advocating trying to start a side gig with a newborn! :)

I think you basically have to consider yourselves treading water for the time being - you have car and house expenses that you're not accounting for in your case study that I think will basically mean your savings rate going forward is going to hover around 10%, not 25.

To be clear: treading water is great given your large/young family, moderate income, and tithing!

Going forward, I will reiterate - sit down and plan out how much money you need to make/not spend for your long term plan to work. From there you can think about side gigs and jobs (going back to teaching is a great idea once all the kids are in school) that would get you where you need to be. For now, don't stress out about this stuff. Keep being frugal and enjoy your kids. The money can come later.

-W

[MDM]

Even if we ignore the pension though, I just don't see how contributing to a traditional 401k is really advantageous when we're owing little to 0 federal income taxes due to all our other credits. Why try to reduce my taxable income now when my taxes are already minimal? I can see that it may make sense in the future as our income increases.

If we ignore the pension, it is almost certainly to your advantage to use the traditional account now.  It is possible to go "below $0" in federal taxes and have the IRS send you money.  The refundable child tax credit is one example.  IIRC that is exactly what would happen in your situation.

In extreme cases (e.g., someone who could become an MD making $500K/yr but is now a resident making $50K/yr) it can be correct to contribute to a Roth early and switch to traditional later.  If your expected income increase is closer to "inflation plus a little" than "10X current", however, building a traditional balance early is a reasonable choice.

Note that it takes ~$1 million in traditional assets, at a 4% withdrawal rate, before a couple filing MFJ with no dependents begins to pay 15% on that amount alone.  If we bring the pension back into the picture then that $1 million does decrease, perhaps substantially, as the pension amount increases.

[SomedayStache]

To backup MDMs post with some real anecdotal evidence. =)

This year my family got back more in taxes than we paid in.  My first thought was that our tax rate was negative and that maybe I shouldn't be throwing so much into tax deferred savings.

Then I redid our taxes increasing our income by $100 and saw that the tax rate on the last dollars we earned was 15%  federal and 5% state.  (20% overall).

Decreasing our taxable income (by throwing more money into our traditional 401k) could put my family into the range of the Alternative Child Tax Credit (the refundable portion).  So even though we paid zero dollars in federal taxes this year there is actually still room to improve on this scenario and I have decided to continue putting our savings into tax-deferred vehicles.

[Stephanie Stache]

It is possible to go "below $0" in federal taxes and have the IRS send you money.  The refundable child tax credit is one example.  IIRC that is exactly what would happen in your situation.

This is happening in my situation this year. We owed $0 2016 federal income tax and are getting $900 something back with our return. We may end up in a lower tax bracket in retirement, but we will also not have as many deductions and credits (no more mortgage interest, child credits). So it's hard for me to imagine how we could owe even less tax than -$900 in retirement. I guess I'm understanding more why people hire CPAs. Figuring out how much you owe is fairly easy. Figuring out how to optimize your finances to change what you'll owe is a lot more complicated! I've been playing around with the case study spreadsheet, there's still a lot I don't understand, but I appreciate everyone's input to make me challenge my assumptions and learn more. We will wait and see if anything happens job wise before we make any changes in our tax strategy.

[MDM]

We may end up in a lower tax bracket in retirement, but we will also not have as many deductions and credits (no more mortgage interest, child credits). So it's hard for me to imagine how we could owe even less tax than -$900 in retirement. I guess I'm understanding more why people hire CPAs. Figuring out how much you owe is fairly easy. Figuring out how to optimize your finances to change what you'll owe is a lot more complicated! I've been playing around with the case study spreadsheet, there's still a lot I don't understand, but I appreciate everyone's input to make me challenge my assumptions and learn more.

You are asking good questions.  Yes, one should look beyond the tax bracket itself: the marginal rate might be the same as the bracket, but not necessarily.  It is the marginal rate that matters, not the amount of tax (or refund).  See https://www.bogleheads.org/wiki/Traditional_versus_Roth#Taxes:

Traditional = Original_amount * Growth * (1 - withdrawal_tax_rate)
    Roth = Original_amount * (1 - contribution_tax_rate) * Growth
    When the tax rates are equal, thanks to the commutative property of multiplication (i.e., A * B * C = A * C * B) the Traditional and Roth results are equal.

Thus, if you do indeed pay a lower marginal rate in retirement, traditional is better - does that make sense?

In the case study spreadsheet, does your chart look similar to this one?

[Stephanie Stache]

In the case study spreadsheet, does your chart look similar to this one?

No, the chart just shows a flat line at 0. I'm not sure if I forgot to fill in some boxes or what. I've never been great with spreadsheets, and this is a doozy of a spreadsheet, and the instructions aren't really clear to me.

[MDM]

No, the chart just shows a flat line at 0. I'm not sure if I forgot to fill in some boxes or what. I've never been great with spreadsheets, and this is a doozy of a spreadsheet, and the instructions aren't really clear to me.

In that case, you are exactly the type of person who could help make this easier for future users. :)

If you haven't already, make sure you have done:
  Enter filing status and related information in cells G2 through H7.                                 
  Enter current monthly averages (if any) in the green cells in column B, from B2 down through B120.                  
   - For mortgage and personal loans, enter the original principal and length, and interest rate, and Excel will calculate the payment                           

If it still isn't working correctly, would you mind attaching a copy (see "Attachments and other options" below the text window when you "reply" to a post)? That might help us see through the eyes of someone new, and improve the directions.

[Catbert]

Overall I think you're doing great.

I would not buy an e-bike for someone who hasn't do a lot of biking recently.  I think those things are several thousand dollars.  If it doesn't work out you'll definitely lose out when you re-sell. 

Don't worry too much about want to retire in 20 years but having a mortgage for 22.  His salary will keep going up while the mortgage (PI) will stay the same.  When you have a bit more breathing room you could up what you pay monthly so its finished in 20 years. 

[kimmarg]

In the beginning, is there someplace part-way that your hubby could drive to, with the bike in the car, then bike the rest of the way? 

That's a good idea. There's a train station kind of on the way, but it's most of the way to work. Not much point to drive 8 miles then bike the last 3. I know he could easily bike 3 miles. I'll have to look into it, see if there's a better half-way point. However, it might be tricky getting his bike to fit in his Yaris. He'd probably have to put the back seats down.

Given that you are in Utah, somewhere "near a train station" and working for a university I'm assuming you are somewhere near at UTA route. Several of the universities subsidize transit vouchers- do you know if this is an option for him? The bus/trax/train might take a bit longer but it's nice to read rather than sit in traffic and it's potentially much cheaper.

[waltworks]

Yes, good point. When my wife was a postdoc at the U of U, she could ride basically everything UTA had for free (she didn't because we lived right below President's circle so she just rode her bike, but it was available).

I'm not sure if the regional buses or Frontrunner trains were included, but my guess would be that they were.

-W

[AMandM]

I have been thinking about a side gig for me, but it's hard to consider it seriously when I'm still sleep deprived with an infant.

An easy side hustle for a former teacher (not now, but when you have no more newborns!) is tutoring.    There are lots of ways to do it--at a center like Kaplan, online, in-person.