Case Study: Two professionals with growing family

[WVstache]

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[MDM]

"ER" expenses refers to "Early Retirement" not "Emergency Room."  You're not the first person to read it that way... :)

Answering the only sentence that had a question mark: see Investment Order.

See below if you are looking for more specifics:

Specific Question(s): Providing a detailed breakdown is important, so is asking for specific information so we know what kind of help/advice you are looking for.

The Case Study Spreadsheet (see Case Study Spreadsheet updates for a link to the latest version) can be downloaded and used to help organize your case study posting.

It includes income, expense, and investment categories that will cover most situations.  For "not too complex" cases it will calculate IRS, SS, and Medicare taxes exactly, and state taxes approximately, helping one evaluate the after-tax effects of 401k, HSA, etc.  There is also a simplified section to evaluate "how long to FI?".

See this post and the spreadsheet itself for more details.

However you format your study, don't forget to subtotal each category and total up all major categories (income, expenses, assets, liabilities), rather than expecting the readers to add up your food + cable bill + etc. etc.

[Laura33]

Two big-picture thoughts:

1.  Track your spending.  You are missing a lot of categories, and what you have is largely guesswork.  You can't make a plan to get you where you want until you know what your current lifestyle is costing you.

2.  What is your priority here?  You have a lot of things listed here, and each of them costs money:

-  Second child on the way
-  A third child
-  College funds
-  Another business
-  Both of you changing jobs down the road, including potential paycuts
-  And finally, presumably, FIRE

You make very good money, but not enough to cover everything you want AND still FIRE in the near future.  So you need to get a little more nuts-and-bolts about those priorities.  I am assuming the children are the top priority; more kids = more daycare and clothes and medical and all that, so figure out the buget hit, both short-term and long-term.  What about college costs?  What's your plan there?  Are you going to contribute a set amount and let the kids figure out the rest; are you planning to cover in-state tuition; are you willing to send them wherever they want?  Figure out the goal, then figure out what that requires out of your monthly budget to get there.  What about the storage business -- how much up-front, what are the carrying costs, what's the expected income, how much time and mental energy will it take that you can't devote to other things?  And what about FIRE?  Is the goal to quit entirely, or just to be in a position to walk away from the career track and do your own thing?  If you guys want to go out on your own, including a big paycut for your wife, then you need to have the finances lined up over the next few years -- sufficient savings to tide you over if things go south, low annual expenses so you can keep saving -- so that you are in a position to do that.       

One specific comment:  at your income levels, you should be maxing out your 401(k)s before you fund your Roths.  Ideally you can do both, but if you have to choose, the tax deduction now will benefit more you long-term. 

[tamuaggie2011]

Two big-picture thoughts:

1.  Track your spending.  You are missing a lot of categories, and what you have is largely guesswork.  You can't make a plan to get you where you want until you know what your current lifestyle is costing you.

2.  What is your priority here?  You have a lot of things listed here, and each of them costs money:

I have to echo what @Laura33 said here. You seem to be doing very well for yourselves but this prosperity I believe has contributed to your lack of organization.  Most often in cases like this simply going through and doing an actual estimate of expenses will result in a "pay raise".

Take some time along with DW to sit down and tabulate annual expenses.  Next discuss with each other and set out your priorities that you want to achieve and set goals for each of these priorities.  Once you have a firm handle on what money is going out and to where and what goals you want to achieve most of your questions will answer themselves and you'll find yourselves more productive as well.

Based on the numbers you provided I assume that you are using rental income from property #2 to pay off property #1? Not sure what the break down looks like but with the purchase of the storage unit I presume that will be even more debt you are taking on. I agree that leverage can be a useful wealth building tool but be careful taking on too much especially with a second kid on the way and plans for a third, I guess really the saying "Don't bite off more than you can chew" keeps coming to mind.

[zolotiyeruki]

You've got great income--hooray!  But Laura33 and tamuaggie2011 are right.  You don't (appear to) have a good handle on your actual spending rate.  What you *have* listed is ok in some areas, but cell phones and groceries shouldn't be anywhere near that amount.  C'mon, we feed our family of eight on less than you feed your family of three, and we've got teenagers!

You also seem to be going in all sorts of directions, but you haven't really listed an end goal--you've got lucrative jobs, but you also have rentals, and you're looking to buy a storage place.  That's all well and good, but what's your endgame?

Right now, you've got a lot invested in Roth IRAs, which is awesome, and important for preparing for a Roth Pipeline.  If I were you, I'd shift to maxing out traditional IRAs and 401k's for the tax advantages (you're in the 22-24% bracket), and opening a brokerage account to also contribute to, for those years before age 59.5.

[leighb]

Adjusted Gross Income:  No idea – have a family friend that is a CPA do our taxes.

Even if you have someone else do your taxes you should know a little about their structure. It will help you make informed decisions.  For instance, in my family it made sense one year to contribute to a IRA instead of a Roth so we could lower our AGI number and get access to a healthcare subsidy. And another year our income got really close to the limits for a Roth contribution (which you all are close to) so we sold a stock to realize a loss to bring our income down. Maybe your CPA gives you all this advice as a part of their work.

Anyway your AGI (adjusted gross income) is basically your gross income (add up all the money that has come in) minus any adjustments. Adjustments are things like your contributions to tax deferred savings accounts.

[fuzzy math]

I would definitely look into maxing out your 401k at work. With a combined income of $200k you are spending probably near $30k in federal income tax unnecessarily. Stop the Roth IRA contribution for your wife and have it be a traditional IRA instead.
If you are possibly quitting your job next year, you should front load your 401k immediately too (max it out in the first 3-4 months). You will lose that tax deferred room permanently unless your wife's job starts giving a 401k.
Who provides your health insurance? If her job doesn't have retirement, does it even have benefits?
I'd also pause the 529 account in favor of the 401k.
If you live in WV, you should have Aldi. Start shopping there and watch your bill go down $400 a month.
In the long term if you were able to make your rentals your full time job, create a business and pay yourself, you might regain some ability to contribute to a 401k as a business owner, or have a SEP (self employed) retirement plan. Its worth a shot. Or put it in your wife's name so she can contribute while you still have the 401k at your work.